Option Investor
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Daily Newsletter, Wednesday, 03/20/2002

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The Option Investor Newsletter                   Monday 03-20-2002
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)
*******************************************************************
      03-20-2002           High     Low     Volume Advance/Decline
DJIA    10501.57 -133.68 10626.98 10496.04 1.28 bln   1013/2142
NASDAQ   1832.87 - 48.00  1861.79  1832.87 1.38 bln   1370/2163
S&P 100   582.17 -  9.92   592.09   581.89   Totals   2383/4305
S&P 500  1151.85 - 18.44  1170.29  1151.85             
RUS 2000  499.09 -  5.69   504.73   499.04
DJ TRANS 2894.11 - 36.53  2930.06  2878.10
VIX        20.70 +  0.35    21.18    20.21
VXN        38.05 -  0.94    39.98    37.20
TRIN        1.21 
PUT/CALL    0.73
*******************************************************************
Volatile Times, Despite Low VIX

Strong housing sector for the past few months has been great 
news... proof the economy is expanding. Strong housing reports 
today is bad news... proof that the Fed will soon raise interest 
rates. So we ask the obvious: would a slowing real estate sector 
be bullish for the market these days?

If that isn't enough proof to how irrational & emotional equity 
markets truly are, wait a few days and we'll have better examples. 
But for now the fear of rising interest rates, INTC downgrade and 
dead-fish technology stocks (third-tier box resellers) imploding 
had the markets moving lower before the bell.

Add to that the specter that General Electric, beyond question or 
reproach while Jack Welch ran the show is now coming into question 
over at PIMCO. Bill Gross, manager of the largest bond fund stated 
today that they would no longer own any GE corporate paper at this 
time. Something smells fishy with the growth model GE operates 
under according to Bill. I'll spare us all the mundane details as 
anyone interested can read it all at www.pimco.com for free. 

First Jack Welch publicly admits to having a fling with some 
reporter who interviewed him for a magazine expose'... looks like 
that's not all what was exposed! Now we have questions about the 
pillar of capitalism, the ultimate Wall Street bellwether's modus 
operandi for earnings. Is anything sacred around here? 

Are you as tired of INTC upgrades & downgrades as I am? Land sakes 
that stock barely moves and seemingly thousands of analysts cover 
every wiggle and squiggle it makes. Ditto for CSCO. I realize they 
are widely held and all, but how dynamic can their long-term 
outlooks possibly be? 

On another note, we're hearing & reading plenty of explanation and 
excuses why the VIX is low, pegged to current levels and likely to 
move lower. I don't disagree at all. The same tired argument goes 
that the VIX can or will move lower yet and stay there while the 
new baby bull grows fat, sassy and long in the legs. Trust me: 
that fantasy will never happen!

(Monthly Charts: Dow & VIX)


 

We've heard this mantra for three years straight each time the VIX 
falls to 20 area and stays there a bit. Many of the bigger names 
in our profession took their turns at bat to explain why the VIX 
this low is no big deal THIS TIME around. It's always 
different every time. For nearly two months in mid-2000 I scaled 
into distant-month puts and warned every other night in Market 
Sentiment about the VIX at 19, 18 and 17+ before September and my 
ultimate payday arrived. You would not believe the email flames I 
endured during that time, but they abruptly ceased in the fall of 
2000 when raging bubble bulls learned for their final time not to 
load up on calls during low VIX.

Latest rationale is that VIX levels are trending lower to 
historical levels. That idea began when Tony Saliba, one of the 
most respected pros in the option trading world said the VIX 
MIGHT be moving into a lower range. Looks like others took 
his words and rearranged them to suit bullish bias to me. Charts 
suggest that may not be true. Note thru most of the 1990s how 
smooth and deliberate uptrends were? These are monthly charts, and 
quite deliberate for years. Then from late 1998 to this very day 
we've seen monthly price action go hog wild. Up & down in 
unprecedented volatile fashion, yet the VIX still trades down near 
20? Not a theory I'm buying, thank you very much! 

(Weekly/Daily Charts: Dow)


 

What I have been buying plenty of are DJX May 103 puts. Each time 
the Dow bangs it head off 10,600 level or better I've bought a few 
more. Why? Look at the charts above. See where the 50 and 200 
month moving averages converge near 10,100 level? See how price 
action is banging its head on that ascending channel? See where 
the lower channel (red) line offers support near 10,000? See how 
the recent bear flag near solid resistance broke down today? see 
how both weekly and daily stochastic values are turning bearish? 
see the VIX at 20? I've seen all this many times before. We are 
still in a bear market, this is a bear-market rally and countless 
signs point to lower levels ahead. 

My May puts (DJX and SMH) have two months of time value to wait, 
but they might not need all of it from the looks of things 
tonight. Are they sure-thing trades? Heck no... that does not 
exist. But how many obvious technical signs do we need before 
acting upon them in rational fashion? The Dow may rally to 12,000 
by then and my position will expire worthless, but that's not how 
we must bet 'em from here.

(Weekly/Daily Charts: Comp)


 

Nasdaq's tired, too. I actually thought the NDX and SOX amongst 
other tech sectors were poised for one more quick pop higher. That 
does not seem evident right now. This recent channel in the 
monthly chart isn't very defined but we have enough contact points 
to play with here. The bottom of that channel may be the next leg 
down when it comes, and 1800 level is likely to be visited 
tomorrow.

Very Weary
Like many of you I'm tired of the whipsaw markets. Intraday 
volatility makes my role triple-tough trying to pre-guess market 
action when we don't see back to back sessions of continuation. 
The Dow posted more than +500 index points of the recent rally 
within two session's time. One of them was a gap-higher event and 
option traders had no chance to capture that one, either. Miss 
both and upside opportunity is gone. That's the world we play in 
right now, like it or not. I wish the days of gentle, deliberate 
trends as depicted in the historical Dow chart were here but 
they're not. Either we adapt & survive or perish, because it is 
distinctly possible our yearly highs for this stock market will be 
posted by Memorial Day.

(10-Min Charts: S&P 100 - Nasdaq 100)


 

I took three trades today, which was two more than needed. The 
first was a sell-limit at 1170 in the S&P overnight. I woke up too 
early this morning to see we were already in the black. I got out 
on the first higher low posted and waited for further action from 
there.

Here we have charts of the S&P 500 and Nasdaq 100 futures. No 
matter what stocks we are playing, these are the symbols that lead 
action in the cash market. GE, IBM or MSFT going up or down? 
Chances are it will happen on buy or sell programs over here 
first. Light blue wedges show where early action tried to bounce. 
Prices posted higher lows while 60/30 min chart signals turned 
early bullish reversals up from oversold. The aggressive call play 
entries came on a break of those tiny wedges and I gamed SMH April 
calls on that move.

Faked out... the real wedge (purple) extended a bit longer before 
price action rolled over from there. What to do? Hold my calls and 
pray the charts are lying? Nope... we dumped them at "bid" and 
went short again from 1161 to 1152 over the next two hours. Three 
trades when the first one left to run would have worked nicely by 
itself. But these are volatile times. We see profits come & go at 
the speed of program trading. Who dares leave real money twisting 
in the breeze out there like that? Arm-chair analysts without a 
penny in their trading accounts (or no accounts) cannot understand 
why we don't simply buy & hold these days. Peers in the trenches 
getting math lessons at warp speed know all too well what I'm 
talking about.

Summation
Indexes should be going higher soon on the back of quarter-end 
window dressing, IRA contributions and earnings season ramps. They 
should be going higher because every analyst and our wise Fed 
tells us better times are ahead. They should be going higher 
because buyers want to buy and have been doing so on every dip. 
but that does not mean they will. Recall last March 23rd and early 
April for some of the biggest smashdown sessions all year. 

If you are reading these words I truly care about you & your 
financial future. Please don't bet the farm on either direction, 
give yourself plenty of time premium to be right and for gosh 
sakes switch horses in mid-stream when adverse direction appears. 
Easier times to trade certainly lie ahead, but possibly not 
tomorrow or the next day.

Best Trading Wishes,
Austin P


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

Varying Views on Volatility
By Mark Phillips
mphillips@OptionInvestor.com

It seems that hardly a day goes by where we don't hear some
comment on CNBC or here in the various columns in our own
newsletter talking about the low levels of broad market
volatility, VIX.X for the S&P 100 (OEX.X) and VXN.X for the
NASDAQ-100.  Eric has been making a series of interesting
observations on these two measures of market volatility in his
Market Sentiment column recently, including the possibility that
these measures may be moving into a new, lower range.

But our interest in volatility has been more focused on the micro
level in this column, where we are looking at equity-specific
volatility levels, using that information to formulate a workable
trading plan.  It took us awhile to get through it all, but in my
mind, we have now covered the basics on all the Greeks that
influence the pricing of options.  We've gone through some
examples of how to utilize the data on Delta, Gamma, Vega and
Theta to formulate a solid trade, but we've really just focused
on the basics up to this point.  If you missed any of my prior
ramblings on the subject of the Greeks, all of the articles are
stored for posterity in the Options 101 archives.  Since I'm such
a nice guy (BIG GRIN), I'll give you a shortcut, listing all the
links to the articles in the series right here.

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
A Greek Encore

We've talked a lot about the theory and practice of using
volatility analysis to pick attractive options to buy or sell,
but while perusing some old articles over the weekend, I found
an example that I think really illustrates the concept of
volatility.  Let's look at two different stocks, both trading
near the $50 level, Philip Morris (NYSE:MO) and Applied
Materials (NASDAQ:AMAT).  Assuming we are bullish on both stocks,
let's look at option prices for the two stocks.

As I write this, MO is trading at $52, and AMAT is trading at
$51.35, so that should be close enough to make a fair comparison.
The May $55 Call for MO is currently trading for $0.70, while
the May $55 AMAT Call is fetching $2.50.  What's going on here is
little more than volatility.  AMAT has a far more volatile
trading pattern than MO, and this "risk premium" is factored into
the option price through volatility.  This isn't to say that MO
would make a good call play and AMAT would make a bad one.  In
order to make that kind of determination, we would first have to
go look at the historical volatility charts over on
www.iVolatility.com, which show that both AMAT and MO are
currently near the lower edge of their historical volatility range.



 



 

While both AMAT and MO are currently trading near the bottom of
their historical volatility ranges, note the difference in their
respective ranges over the past year.  IV for MO has ranged
between 20% on the low end and 47% on the high end, while AMAT
has a much higher range, between 42% and 116%.  That difference
in volatility is the reason for the large discrepancy between
the slightly OTM options on the two stocks.  This volatility
information tells us that odds favor the option buyer here,
rather than the option seller, due to the fact that the options
will be relatively cheap.  Any increase in volatility would
increase the volatility premium of the options -- good if you
bought those options, but bad if you sold them.  We've gone into
that issue in some of our prior articles, so I won't belabor the
point here today.

Coming back on track, the way to think of volatility in terms of
its impact on option prices is that it represents the factoring
in of statistical probabilities into the option pricing model.
AMAT has a higher probability of moving a given distance (either
up or down) due to the fact that it has done so in the past.  Now
we know that past performance is no guarantee of future results,
but we have to start somewhere.

There are probability calculators available online that will
allow us to use the current price and volatility of a given stock
to calculate the odds of success (profit) and we'll delve into
some of those tools next week.  For those of you that would like
to get a headstart, here are a couple of the tools I'll be
talking about next.  First up will be the options calculator on
the iVolatility.com site, which can be accessed from the
Calculators menu selection across the top of the home page.
After covering the use of that tool, I want to delve into what I
think will be an even more eye-opening tool, an actual
probability calculator.  Don't you think it would be useful,
before opening an option trade, to see what the odds of success
are?  Tune in next week and we'll have some more fun!

And don't worry, I haven't forgotten my promise to delve into the
topic of volatility skew.  I just think it is a fairly complex
concept and I want to finish laying out some of the more basic
concepts before tackling that one.  

Questions are always welcome!

Mark


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

Index Trader Swing-Trade Game Plan: Wednesday 03/20/2002 
-------------------------------------------------------------
Downside Break!


News & Notes: 
-------------
From last night's Summation: "Most technology sector charts look 
poised for an upside pop soon. Very mixed picture and hard to 
read, but my GUESS based on looking at too many charts today is we 
go higher from here for now."

Dead wrong. I couldn't have been further off as the clear wedges 
instead broke lower on a gap-down open and never looked back. 
Traders who played the downside break enjoyed minimal gains in put 
options today judging from the low-high price range I've scanned. 
When gap-open moves inflate extrinsic value four weeks out from 
expiration, it's tough to post large option gains on a day like 
this.


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


 

OEX broke below the wedge support, consolidated and fell lower 
from there. I personally passed up put plays today but they might 
have worked when held over into Thursday. We'll see at the open.

[60/30-Min Chart: SPX]  


 

SPX broke lower, consolidated and continued. Two weeks or less 
until expiration and these are the type of days we fantasize 
about. Right now it was just a mild day in actual option value 
change from bell to bell this session.

[60/30-Min Chart: QQQ]  


 

Qs broke support at the blue line, consolidated in space and fell 
lower to break mid-line support as well. Next stop seems to be 35 
area or lower (red line).

Summation: 
---------
Some traders entered long puts on the break lower Tuesday post 
FOMC and held into today. They would be up quite nicely in gains 
over that 8+ market hour stretch but most option traders shook out 
of their plays when the indexes bounced late Tuesday to finish 
near those entry points. These are tough conditions to trade in 
while avoiding loss to reversals and whipsaw action. We will most 
likely see downside continuation at the open Thursday but no 
guarantees... dipsters might appear to snap up current "bargains" 
here. 

I'd wait until past 10:00am before trading either direction and 
could see another large-range session tomorrow. If so, my guess is 
lower based on weekly/daily charts but need to see it develop live 
in front of me first. I strongly suggest you consider doing the 
same!


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
Apr Calls: 38 (QQQ-DL)            Apr Calls: 106 (DJV-DB)  
Long: BREAK ABOVE none            Long: BREAK ABOVE none
Stop: Break Below                 Stop: Break Below 
                                

Apr Puts: 37 (QQQ-PK)             Apr Puts: 105 (DJV-PA) 
Long: BREAK BELOW none            Long: BREAK BELOW none
Stop: Break Above                 Stop: Break above 


=====


         OEX                         SPX
Apr Calls: 600 (OEY-DT)           Apr Calls: 1175 (SPT-DO)
Long: BREAK ABOVE none            Long: BREAK ABOVE none
Stop: Break Below                 Stop: Break Below 


Apr Puts: 590 (OEB-PR)            Apr Puts: 1150 (SPT-PJ)
Long: BREAK BELOW none            Long: BREAK BELOW none
Stop: Break Above                 Stop: Break Above 



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


Index Trader Sector-Trade Game Plan: Wednesday 03/20/2002 
-------------------------------------------------------------    
More Of The Same


News & Notes: 
-------------
Needless to say none of the long-play candidates were given the 
chance to test any triggers today! Volatility still reigns.


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


Summation: 
----------
Other than our PPH short enjoying the BMY plunge today, nothing 
much has changed. Weekly/Daily charts are looking weak to bearish 
while intraday charts need to release from oversold to short, so 
we'll hold short plays tracked and remain idle on new entries 
right now.


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


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


Open Short Plays
----------------
XLB **          XLP **          
Short: 23.75    Short: 26.00    
Stop:  24.50    Stop:  26.75    

XLV **          XLY **          
Short: 29.00    Short: 29.90    
Stop:  30.25    Stop:  31.00    

IYD             IYK             
Short: 45.25    Short: 45.90    
Stop:  47.00    Stop:  47.00    

IYR             UTH **          
Short: 84.75    Short: 93.25    
Stop:  86.00    Stop:  95.00    

RTH **          PPH **          
Short: 98.00    Short: 98.75    
Stop: 102.00    Stop:  97.00    

DIA **[DJX]     IYM
Short: 105.90   Short: 42.00 
Stop:  107.00   Stop:  43.00

IYE
Short:  49.70
Stop:   52.00

IJJ
Short:  97.00
Stop:   99.00


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The Option Investor Newsletter                   Monday 03-20-2002
Copyright 2001, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.



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

COF  - call
Adjust from $58 up to $60

GENZ - call
Adjust from $47 up to $48

EOG  - call
Adjust from $38 up to $38.50

CTX  - put
Adjust from $59 down to $58

NVDA - put
Adjust from $54.50 down to $51.50

RYL  - put
Adjust from $90.50 down to $89.50

ISSX - put
Adjust from $31.25 down to $29.50


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

None


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

XAU.X $65.67 +1.10 (+3.75) The XAU.X continued higher in
Wednesday's session along with bond yields.  The growing
belief that inflation or higher short-term rates is lending
strength to gold and gold stocks.  Plus the reversal in the
major market averages is pushing capital back into the
defensive segments of the market.  When combined, those
factors pushed the XAU.X to the upper-end of its descending
trend.  Aggressive bears can still look to take entries on
rollover from the $66 level, where a breakout above could be
used as a tight stop.  Traders with open positions can use the
same level for a stop.  If the index does rollover, we'd be
looking for a revisit of recent lows.  With the close above our
coverage stop, though, we're dropping coverage on this play and
looking to cut losses on further upside.

EMLX $28.76 +0.30 (+0.90) Thomas Weisel upgraded shares of
Emulex Wednesday morning.  The firm raised its investment
rating to a buy from an attractive.  The news caused the stock
to rally in the early going, but the familiar sellers showed up
at the converged 10-dma and 200-dma.  In yesterday's session,
we saw the stock rebound from its bullish support line on the
point & figure chart, which was more likely the reason the
stock rallied into today's trading and not because of he upgrade.
Nevertheless, the stock closed a penny above our coverage stop
and we're letting discipline dictate removing the play from the
put list.  Looking forward, with the first test of the bearish
resistance line out of the way, traders might look for the
ultimate breakdown in the coming sessions as the stock remains
weak.  Those looking to book gains can do so on weakness below
today's intraday low at $28.52.


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

CCMP - Cabot Microelectronics $63.73 -2.54 (-0.90 this week)

Cabot Microelectronics is a supplier of high performance
polishing slurries used in the manufacture of advanced
integrated circuit (IC) devices, within a process called
chemical mechanical planarization (CMP).  CMP is a polishing
process used by IC device manufacturers to flatten many of the
multiple layers of material that are built upon silicon wafers
and necessary in the production of advanced ICs.  CMP enables
IC device manufacturers to produce smaller, faster and more
complex IC devices with fewer defects.

Most Recent Update

After such a sharp fall, shares of CCMP were due for a bit of a
bounce, and that's just what we saw on Friday and Monday, as the
stock saw a bit of buying, along with the Semiconductor index
(SOX.X).  But on Tuesday, CCMP started to show its relative
weakness again, posting a fractional loss, even though the SOX
rose again.  Even though the SOX is starting to show signs of
life, it is finding some resistance near the $615 level.  If the
SOX rolls over again, CCMP should lead the charge to the downside
once again.  Note that intraday resistance is building again near
the $67.50 level, which just happens to be the location of our
stop.  The rollover that began this afternoon could have been
another good entry point, but in the absence of volume, we'd
prefer to see another rejection from resistance or a drop below
the $65.50 level before opening new positions.  Momentum traders
will want to focus on the $63 level, as a drop below there
(recent support) will set CCMP up to retest its 62% retracement
near $60.

Comments

Look for the SOX.X to decline below 575 in tomorrow's session.
If that happens, aggressive bears can look to enter new
positions in CCMP at its current level.  Those who'd rather
wait for more confirmation can look for the selling pressure to
build in the SOX.X and wait for CCMP to breakdown below the $62
level on heavy volume.  If that action point is triggered, look
for a quick exit at the $60 level.  It would take extended
weakness in the SOX.X to pressure CCMP below the $60 support
level.

BUY PUT APR-65 UKR-PM OI= 677 at $5.30 SL=3.25
BUY PUT APR-60*UKR-PL OI=1053 at $3.40 SL=1.75
BUY PUT APR-55 UKR-PK OI= 733 at $2.00 SL=1.00

Average Daily Volume = 1.21 mln



*****************************************
BIG CAP COVERED CALLS & NAKED PUT SECTION
*****************************************

The Official End Of Winter Brings Little Joy To Investors
By Ray Cummins

Stocks retreated on the first day of spring, despite the renewed
"optimistic" outlook for the economy.

The major equity averages moved lower on weakness in drug and
semiconductor shares just one session after the central bank
told investors the economy was "expanding at a significant pace."
On Tuesday, the Federal Reserve left interest rates unchanged
and offered Wall Street an upbeat assessment of the economy,
saying that economic weakness and inflation are evenly balanced.
The Fed's commentary paves the way for rate increases later this
year but most analysts don't expect any changes until the summer.
Not surprisingly, investors ignored the upbeat economic data and
instead began to focus on the strength and shape of the recovery,
which will become more obvious in the quarterly revenue reports
and forecasts.  The first major event in that category came today
when shares of chip giant Intel (NASDAQ:INTC) led the Dow and the
NASDAQ lower after a Salomon Smith Barney analyst cut his profit
estimates for the company's second quarter, based on a "modest
seasonal decline" in revenues.  Rival Micron Technology (NYSE:MU)
also slumped after creditors of South Korea's Hynix Semiconductor
tentatively agreed to provide Micron with a $1.5 billion loan to
help the chipmaker finance its purchase of Hynix assets.  In the
broader market, pharmaceutical issues came under pressure after
Bristol Myers Squibb (NYSE:BMY) plunged on disappointing results
for one of its drugs.  Researchers unveiled unsatisfactory data
for Vanlev, a drug being tested for heart failure and high blood
pressure, and said some patients experienced a life-threatening
allergic reaction.  The drug is crucial to Bristol-Myers, whose
profits have been badly hurt in the past two years by generic
competition for several key medicines.  In other S&P 500 sectors,
airline, biotechnology and cyclical shares slumped and brokerage
stocks retreated in spite of better-than-expected earnings news
from Bear Stearns (NYSE:BSC) and Lehman Brothers (NYSE:LEH).  On
a positive note, selective buying was seen in gold, natural gas,
retail and oil service shares.

***************
Summary of Current Positions
***************
(As of 3-19-02)

Naked Puts:

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

COF     APR     50   48.60   63.81   1.40    5.6%
CEPH    APR     50   48.35   67.84   1.65    7.9%
KLAC    APR     55   53.30   66.77   1.70    6.9%
PHTN    APR     45   43.30   51.90   1.70    7.0%
GILD    APR     27.5 26.75   38.54   0.75    6.4%
ACS     APR     47.5 46.60   56.00   0.90    4.4%
COF     APR     50   49.10   63.81   0.90    4.9%
SYMC    APR     35   34.35   42.40   0.65    5.2%


Naked Calls:

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

PSFT    APR    42.5  43.30   37.98   0.80    7.2%
NVDA    APR    70    71.00   51.65   1.00    5.6%
QLGC    APR    60    60.85   47.26   0.85    5.8%


"Bullish" Credit Spreads:

Stock Pick   Last   Month  S/P   L/P  Credit  C/B   G/L   Status

BGEN  57.07  51.89   APR   45    50    0.60  49.40  0.60  Closed
BBY   75.27  79.95   APR   60    65    0.55  64.45  0.55   Open
CI    96.38  96.70   APR   80    85    0.60  84.40  0.60   Open
FRX   83.65  84.10   APR   70    75    0.50  74.50  0.50   Open
TOL   53.00  51.36   APR   40    45    0.55  44.45  0.55   Open
VLO   47.85  48.61   APR   42.5  45    0.40  44.60  0.40   Open

Our recent position in Biogen (NASDAQ:BGEN) is still struggling
after the recent unfavorable ruling from the FDA concerning
Avonex.  Although the position is currently profitable, we noted
last week that it might be best to close the play on any strength
and that opportunity emerged Friday as the issue traded above $53.


"Bearish" Credit Spreads:

Stock Pick   Last   Month  S/C   L/C  Credit  C/B   G/L   Status

LXK   50.48  55.90   APR   65    60    0.60  60.60  0.60   Open
BRCM  40.24  37.83   APR   55    50    0.55  50.55  0.55   Open
LEH   63.49  66.23   APR   75    70    0.60  70.60  0.60   Open
QLGC  48.96  47.26   APR   65    60    0.65  60.65  0.65   Open

 
Debit Straddles: 

Stock  Position    Debit  Target   M/V      Gain     Status

NTRS   APR60C/60P  4.00    5.00    3.50    (0.50)     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

***************
CYMI - Cymer  $49.66  *** Chip-Equipment Leader! ***

Cymer (NASDAQ:CYMI is a supplier of excimer laser illumination
sources, the essential light source for deep ultraviolet (DUV)
photolithography systems used in the building of semiconductors.
DUV lithography is a key enabling technology, which has allowed
the semiconductor industry to meet the exacting specifications
and manufacturing requirements for volume production of today's
most advanced semiconductor chips.  Cymer's lasers are used in
step-and-repeat and step-and-scan photolithography systems for
the manufacture of semiconductors with critical feature sizes
below 0.35 microns.  Cymer believes its excimer lasers constitute
a substantial majority of all excimer lasers incorporated in DUV
photolithography tools.  Cymer's various products consist of
photolithography light sources, replacement parts and service.

Cymer has definitely been one of the best performing issues in
the chip-equipment sector over the past few weeks and traders
say the reason for the rally is the company's solid earnings
outlook.  Cymer recently announced that it expects first quarter
operating results to exceed a prior guidance as a result of new
technology drive revenue, and said it now anticipates sequential
revenue growth of 8% to 11%.  Based on the revised estimate, the
company expects first quarter revenue of $59.2 million to $60.8
million and analysts are optimistic that CYMI will achieve those
numbers.  Traders who want to speculate on the future movement
of the chip-equipment sector can use one of the best performing
stocks in the group with these positions.

CYMI - Cymer  $49.66
 
PLAY (sell naked put):

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

SELL PUT   APR 40  CQG PH  195       0.50    39.50       4.7% "TS"
SELL PUT   APR 45  CQG PI  419       1.30    43.70      10.5%


***************
GILD - Gilead Sciences  $37.31  *** Post-Split Rally! ***

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 (split adjusted)
highs in recent sessions after the company split its stock to
increase market interest in the company.  In reality, investors
have been very interested in the company since it was announced
that studies showed its Viread drug reduced the hepatitis B virus
levels in patients who already were infected with HIV.  Viread, a
one-tablet, once-daily antiretroviral agent, has already received
marketing approval for HIV treatment in the United States and it
also received European approval last month.  Traders who agree
with a positive outlook for the company and its drug products can
use these positions to profit from future upside movement in the
issue.

GILD - Gilead Sciences  $37.31

PLAY (sell naked put):

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

SELL PUT  APR 30   GDQ PF  578       0.45    29.55       5.7% ***
SELL PUT  APR 32.5 GDQ PZ  355       0.80    31.70       7.4%
SELL PUT  APR 35   GDQ PG  236       1.40    33.60      10.1%


***************
ROOM - Hotel Reservations Network  $69.01  *** New High! ***

Hotel Reservations Network (NASDAQ:ROOM) is a consolidator of
hotel and other lodging accommodations.  The company contracts
with lodging properties in advance for volume purchases and
guaranteed availability of rooms at wholesale prices, and sells
these rooms to consumers often at significant discounts to
published rates.  The company's supply relationships also often
allow it to offer customers accommodation alternatives for
otherwise unavailable dates.  In addition, through its wholly
owned subsidiary, TravelNow.com, the company offers customers
the ability to book hotel rooms, airline travel and car rentals.

ROOM traded at a new, all-time high today, despite the selling
pressure in the broader market and based on the performance of
the sector, the issue may have further upside potential.  There
is no overhead resistance to limit the stock price and the only
selling pressure will come from traders who are taking profits
along the way to higher share values.  Although the issue is
certainly overbought, there is no reason for it to experience a
major decline (without significant news or other events) so the
stock is one of the best candidates for traders who favor the
outlook for the travel industry.  We will attempt to achieve an
acceptable premium in the APR-$55 put with a "target-shooting"
order of $0.65-$0.70.

ROOM - Hotel Reservations Network  $69.01    
  
PLAY (sell naked put):

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

SELL PUT  APR 55   URD PK  297       0.55    54.45      3.9% "TS"
SELL PUT  APR 60   URD PL  579       1.00    59.00      5.2%
SELL PUT  APR 65   URD PM  668       2.40    62.60      9.4%


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

Credit Spreads

All of these positions are based on the current price or trading
range of the underlying issue and its recent technical history
or trend.  The probability of profit from these positions may
also be higher than other plays in the same strategy based on
disparities in option pricing.  However, current news and market
sentiment will have an effect on these issues so review each
play individually and make your own decision about the future
outcome of the position.

***************
CI - Cigna  $98.80  *** New 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  $98.80

PLAY (conservative - bullish/credit spread):

BUY  PUT  APR-85  CI-PQ  OI=233  A=$0.55
SELL PUT  APR-90  CI-PR  OI=329  B=$1.00
INITIAL NET CREDIT TARGET=$0.50-$0.60  PROFIT(max)=11%


***************
NKE - Nike  $63.99  *** Hot Sector! ***

Nike (NYSE:NKE) principally is engaged in the design, development
and worldwide marketing of footwear, apparel, equipment and
accessory products.  Nike sells its products to approximately
17,000 retail accounts in the United States and through a mix of
independent distributors, licensees and subsidiaries in over 140
countries around the world.  Virtually all of Nike's products are
manufactured by independent contractors.  Most of the company's
footwear products are produced outside the United States, while
apparel products are produced both in the United States and abroad.

NKE - Nike  $63.99
  
PLAY (conservative - bullish/credit spread):

BUY  PUT  APR-55  NKE-PK  OI=2143  A=$0.30
SELL PUT  APR-60  NKE-PL  OI=635   B=$0.70
INITIAL NET CREDIT TARGET=$0.50-$0.55  PROFIT(max)=11%


***************
WFMI - Whole Foods Market  $47.09  *** New "All-Time" High! ***

Whole Foods Market (NASDAQ:WFMI) owns and operates a chain of
natural and organic foods supermarkets.  The categories of
products the company offers include: produce, grocery, meat and
poultry, seafood, bakery, prepared foods, specialty (beer, wine,
cheese), nutritional supplements, body care, pet products, floral,
household products and educational products such as books.  On
average, the company's stores carry approximately 20,000 SKUs
(stock-keeping units) of food and non-food products.  The company
has a broad product selection with a heavy emphasis on perishable
foods that appeals to both natural foods and gourmet shoppers.

WFMI - Whole Foods Market  $47.09

PLAY (conservative - bullish/credit spread):

BUY  PUT  APR-40  FMQ-PH  OI=47  A=$0.25
SELL PUT  APR-45  FMQ-PI  OI=13  B=$0.80
INITIAL NET CREDIT TARGET=$0.60-$0.70  PROFIT(max)=14%


***************
WSM - Williams-Sonoma  $49.05  *** Solid Earnings! ***

Williams-Sonoma (NYSE:WSM) and its subsidiaries are specialty
retailers of products for the home.  The retail segment sells
its products through its four retail concepts, Williams-Sonoma,
Pottery Barn, Pottery Barn Kids and Hold Everything.  The direct
to customer segment sells similar products through its six major
direct-mail catalogs, Williams-Sonoma, Pottery Barn, Pottery Barn
Kids, Pottery Barn Bed + Bath, Hold Everything and Chambers, and
three e-commerce Websites.  The principal concepts in both retail
and direct-to-customer are Williams-Sonoma and Pottery Barn, which
sell cookware essentials and contemporary tableware and home
furnishings, respectively.

WSM - Williams-Sonoma  $49.05

PLAY (conservative - bullish/credit spread):

BUY  PUT  APR-40  WSM-PH  OI=40   A=$0.30
SELL PUT  APR-45  WSM-PI  OI=774  B=$0.80
INITIAL NET CREDIT TARGET=$0.55-$0.60  PROFIT(max)=12%


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

BEARISH PLAYS - Naked Calls & Combinations

***************
BRCM - Broadcom  $34.96  *** Elevator Going Down! ***

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.

We offered this issue as a bearish candidate last week and with
today's bearish activity in Intel (NASDAQ:INTC) and the chip
sector, it appears stocks in the group are headed for lower
prices.  From a technical viewpoint, BRCM has a significant
resistance area at our target strike price ($45) and with the
less than favorable outlook for the semiconductor segment in
the coming weeks, the probability of a significant upward move
seems rather small.

BRCM - Broadcom  $34.96

PLAY (aggressive - sell naked call):

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

SELL CALL APR 45   RCQ DI  5,853     0.45    45.45      6.1% ***
SELL CALL APR 40   RCQ DH  5,978     1.25    41.25     12.4%
SELL CALL APR 35   RCQ DG  2,629     3.20    38.20     18.9%


***************
SEBL - Siebel Systems  $31.58  *** Software Slump! ***

Siebel Systems (NASDAQ:SEBL) is a provider of unique eBusiness
applications software.  Siebel Business Applications comprise a
family of Internet-based applications software designed to meet
the sales, marketing and customer service information system
requirements of even the largest multinational organizations.
Siebel eBusiness Applications enable organizations to sell to,
market to, and service their customers across multiple channels,
including the Web, call centers, field, resellers, retail and
dealer networks.  By employing complex eBusiness applications
to better manage their customer relationships, the company's
customers achieve high levels of customer satisfaction and also
continue to be competitive in their markets.

Shares of SEBL slid today on rumors the stock is going to be
downgraded, based on valuation concerns.  There was no further
(public) information on the downgrade by the end of the session
but investors chose to play it safe, selling the issue down to
a recent low near $32.  Trading volume was heavy and with the
overhead supply near $36, the share value has little chance of
moving beyond our target strike price in the next month.

SEBL - Siebel Systems  $31.58

PLAY (aggressive - sell naked call):

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

SELL CALL APR 37.5 SGW DU  6,021     0.55    38.05      7.7% ***
SELL CALL APR 35   SGW DG  10,382    1.15    36.15     11.3%
SELL CALL APR 32.5 SGQ DZ  5,968     2.10    34.60     15.4%


***************
CCMP - Cabot Microelectronics  $65.73  *** Rolling Over! ***

Cabot Microelectronics Corporation (NASDAQ:CCMP) is a supplier
of high performance polishing slurries used in the manufacture
of advanced integrated circuit (IC) devices, within a process
called chemical mechanical planarization (CMP).  CMP is a unique
polishing process used by IC device manufacturers to planarize
(or flatten) many of the multiple layers of material that are
built upon silicon wafers and necessary in the production of
advanced ICs.  Planarization is a polishing process that levels
and smoothes, and removes the excess material from the surfaces
of these layers.  CMP slurries are liquid formulations that
facilitate and enhance this polishing process and generally
contain engineered abrasives and proprietary chemicals.  CMP
enables IC device manufacturers to produce smaller, faster and
more complex IC devices with fewer defects.

Shares of Cabot Micro were upended last week on worries over
a competitive threat from a foreign slurry maker.  Rumors of
potential declining sales were rampant after the company's
annual stockholder's meeting and traders turned defensive
ahead of Intel's recent (NASDAQ:INTC) supplier recognition
awards.  One item of concern was a press release issued by
Intel listing Fujimi as one of 25 companies that would receive
Intel's Preferred Quality Supplier award.  Market speculation
is that Fujimi's slurry has become the new standard in the CMP
industry and there are concerns a major displacement is taking
place.  In 2001, Intel accounted for almost 15% of Cabot's
revenues but investors are worried that number could change
for the worse in the coming year.

Based on the high-volume selling pressure, it appears the
issue will spend some time in a consolidation pattern before
resuming its bullish trend.  Those who agree with a neutral to
bearish outlook for the stock in the near-term can speculate
on the issue's future movement with this conservative position.

CCMP - Cabot Microelectronics  $65.73

PLAY (conservative - bearish/credit spread):

BUY  CALL  APR-80  UKR-DP  OI=750   A=$0.40
SELL CALL  APR-75  UKR-DO  OI=824   B=$0.85
INITIAL NET-CREDIT TARGET=$0.55-$0.60  PROFIT(max)=12%


***************
RE - Everest Re Group  $66.00  *** Technicals Only! ***

Everest Re Group (NYSE:RE), through its subsidiaries, principally
provides reinsurance and insurance in the United States, Bermuda
and international markets.  The company underwrites reinsurance
both through brokers and directly with ceding companies.  Everest
underwrites insurance mainly through general agency relationships.
Everest Reinsurance company specializes in property and casualty
reinsurance and insurance.  Everest Reinsurance (Bermuda), Ltd.,
established in 2000, principally writes property and casualty
reinsurance and also offers reinsurance and insurance with respect
to life and annuity classes of business.

There's no news to explain the recent sell-off in RE shares but
investors are certainly expressing their displeasure with the
company through the sale of its stock.  In addition, the decline
has come on increasing volume and the issue has fallen to a key
support level near the current price.  A violation of this range
would signal further downside activity and traders who want to
speculate on that outcome in a conservative manner can use this
position.

RE - Everest Re Group  $66.00

PLAY (conservative - bearish/credit spread):

BUY  CALL  APR-75  RE-DO  OI=227  A=$0.25
SELL CALL  APR-70  RE-DN  OI=82   B=$0.80
INITIAL NET CREDIT TARGET=$0.60-$0.65  PROFIT(max)=14%


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

BULLISH PLAYS:

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

ESI    46.51  APR 45P  1.20   APR 40P  0.40   0.80    19%
DGX    79.7   APR 75P  1.35   APR 70P  0.65   0.75    17%
HIT 	 73.00  APR 65P  1.20   APR 60P  0.65   0.60    14%
LMT 	 58.04  APR 55P  0.75   APR 50P  0.20   0.60    14%
PFCB 	 64.95  APR 60P  0.90   APR 55P  0.35   0.60    14%
SII 	 67.90  APR 60P  1.00   APR 55P  0.45   0.60    14%
ROH    41.35  APR 40P  0.80   APR 40P  0.25   0.60    14%


BEARISH PLAYS:

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

SII 	 67.90  APR 75C  0.90   APR 80C  0.35   0.60    14%
BGEN 	 51.04  APR 55C  0.70   APR 60C  0.15   0.60    14%
CDWC 	 49.34  APR 55C  0.85   APR 60C  0.30   0.60    14%
FRE 	 63.46  APR 65C  0.75   APR 70C  0.20   0.60    14%
OSIP 	 40.52  APR 45C  0.90   APR 50C  0.35   0.60    14%
TDS 	 85.33  APR 90C  0.80   APR 95C  0.30   0.55    12%
IDPH   67.62  APR 80C  0.90   APR 75C  0.45   0.50    11%

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


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


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

"Dude, You're Gettin' a Dell!"

Buzz Lynn
buzz@OptionInvestor.com

Pity poor Compaq (CPQ) and Hewlett Packard (HWP), as today marks 
the day they possibly accelerate their slow-burn transformation to 
ashes with Carly Fiorina presiding as coal tender.  Shovel, Carly!  
Shovel!  Coal tender or presiding CEO of Hewlett Packard?  The 
latter may not be an option following a negative merger vote.  If 
the merger vote fails, Likely Ms. Fiorina will be asked to resign 
or face a firing by the board.  So coal tender looks pretty good 
by comparison.

One thing is for sure.  Michael Dell must be rubbing his hands 
with glee.  In chatting about this subject with leaps editor, Mark 
Phillips, he wondered tongue-in-cheek how many HWP shares Michael 
Dell was able to vote in favor of the deal?  In an ironic twist, 
we surmised that Dell may have bought shares just to vote them in 
favor of the merger.  My guess?  He voted with all he could get 
his hands on.  Only kidding!  (He'd have a hard time selling 
without suffering a loss) But recall Dell's prognostication from 
three years ago. . .

Presiding over an earnings report in 1999, Dell highlighted a 
graph showing the competitor's business model cost structure 
compared to his own.  It showed a graphic chart line of profits 
that clearly reflected demise of the competitor while DELL's chart 
line continued to grow following his own business model.  Dell 
stopped short of actually using the words, but the implication was 
clear that he meant Compaq (CPQ) and that it would be out of 
business in five years.  Smart guy, that Mikey.

While the final HWP tally may take weeks to sort out (it was that 
close), CPQ shareholders vote today, which will likely end in 
favor of the merger.  So why has Dell got to be smiling?  He'll be 
the hands-down winner in the PC battlefield, no matter what the 
outcome (but it won't be an easy, golden path to profits).  That's 
a bold statement.  So let me put on my Fundamentals Guy hat and 
back up with facts.

First of all - about that golden path to profits. . .it's no 
secret that the PC industry has been beat up pretty hard.  After 
Y2K, sales went downhill and while a new ordering cycle may be 
upon us, upgrading to the next generation machine will not be as 
critical to the smooth operation of business.  That said, don't 
look for sales to skyrocket this year or next, or until the next 
killer application is discovered (the latter may prove to be the 
domain of the wireless business).  In fact, sales volume is still 
shrinking, even for Dell, though just not as much.  More on that 
in a minute.

Let's quickly examine pure play box makers for just a minute.  
First, Apple computer (AAPL) holds a small market position - 3% of 
the market by some estimates.  While there is an argument that it 
is superior, it has never been able to out-market or outsell the 
unstoppable mediocrity of the "Wintel" platform.  AAPL's sales for 
the last six quarters have been $1.007 bln, $1.431 bln, $1.475 
bln, $1.450 bln, and $1.375in the most recent estimates of $1.4 
bln for this quarter.  AAPL has a loyal brand following, but 
despite the introduction of new products like the cube, the new 
iMac and iPod, sales growth has been nonexistent.

Gateway has bigger troubles and appears doomed to the silicon 
scrap heap.  Sales have slowed to a trickle.  Just look at the 
drop off in their sales over the same period - $2.373 bln, $2.033 
bln, $1.500 bln, $1.409 bln, $1.135 bln, and $992 mln estimated 
this quarter.  AAPL now outsells GTW by 50%.  Profits are nowhere 
to be found.  Ads featuring Founder Ted and the talking family pet 
(the dairy cow) have not helped sales a bit.  Forget the threat of 
good competition.  GTW will struggle with its own inefficiencies 
to stay alive over the next year.

IBM is exiting the box-making business in favor of services.  CDW 
(CDWC) took down guidance in a warning for lower than expected 
revenue - probably reasonable since they are a reseller of HWP and 
CPQ products.  Trying to survive as a reseller of Dell would be 
tough.  But I sure wouldn't want to be a reseller of CPQ and HWP, 
as CDW has set itself up to be.

Speaking of CPQ, their sales too have been in a tailspin, though 
not nearly as bad a GTW's.  CPQ's six quarters of history look 
like this:  $11.526 bln, $9.197 bln, $8.453 bln, $7.476 bln, 
$8.456 bln, with $7.6 bln anticipated this quarter.  I leave HWP 
out because a big chunk of its revenue comes from printers.

All of these except AAPL have suffered significant double-digit 
declines from their same quarters in the year preceding.

Now look at Dell.  $8.674 bln, $8.028 bln, $7.611 bln, $7.468 bln, 
$8.061 bln, and $7.7 bln expected this quarter.  In its worst 
quarter, it was down "only" 11.8% from the previous year, while 
CPQ is down 26-33% and GTW is down 32-53%.

Distilling this all down, or using these threads to make a rope 
from which Dell's competitors will swing, though the market is 
clearly shrinking, Dell is gaining market share.  They are 
garnering a larger piece of a shrinking pie through marketing 
skill, more efficient fulfillment (EMC recently looked to Dell to 
help it lower its production cost), and all the while maintaining 
margins.  Dell's model works better than anyone else's and I would 
expect it to continue to gain share as weaker (GTW) and slower 
(CPQ) competitors duke it out on price.  

Furthermore, if the CPQ/HWP merger plan is ultimately voted to 
happen by shareholders, look for integration issues and animosity 
to permeate both businesses.  Disgruntled employees at HWP will 
not help Carly's cause.  Nor can I see CPQ gaining anything of 
synergistic value from marrying up with HWP.  I wouldn't want to 
own either of them.

Some say this is a great deal for CPQ and HWP because together 
they can rival IBM in size.  But size alone in the hardware 
business is not the solution.  A better, more profitable business 
model is the solution.  And Michael Dell at the helm of DELL 
currently owns that model.  Heck, he invented it.

All that said, this is not a plug to buy DELL at current prices.  
It's downright rich at 57x earnings, pro-forma or GAAP, either 
way.  However, it is a reminder that betting on the jockey wins 
more races than betting on the horse (or so the platitude goes).  
There are none better than Michael Dell, whom I would put in the 
same company as Bill Gates and Steve Ballmer of Microsoft (MSFT), 
Jack Welch at his previous position as Chairman of GE, and perhaps 
John Chambers of CSCO (though I wouldn't want to him right now in 
a sagging market with no profits).  Yes, I omitted Intel, Oracle, 
Sun Micro, Disney, Citigroup, Philip Morris, and General Motors on 
purpose.  Their managements are all a varying degree of "good", 
but I think the above have them all beat.  

Back to Mikey and the PC business.  DELL still sports $4 bln in 
cash and has a 24% return on equity with very little debt.  It 
also has a profit margin of 4%.  While that isn't great, it is a 
far cry better than any of its money-losing competitors.  Even 
AAPL, it's nearest profitable competitor, only musters 1.3%.  
DELL's sales model is simply the best and most efficient.  My 
personal experience is that customer service (hand-holding) is top 
notch too.  That's an unbeatable combination as competitors have 
learned or are learning in this economic environment.  If Michael 
Dell continues to run the company as he has in the past, 
competitors will indeed be road kill on the hardware highway.

With GTW and CPQ relegated to extinct or at least insignificant in 
the 12-24 months to come, it may not be long before folksy ad 
character and surf dude, "Steven" pops up in your life to remind 
you, "Dude, you're gettin' a Dell!"  And with a CPQ/HWP merger, 
Mikey couldn't be happier.

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


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