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Daily Newsletter, Wednesday, 03/27/2002

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The Option Investor Newsletter                Wednesday 03-27-2002
Copyright 2001, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.

Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
      03-27-2002          High     Low     Volume Advance/Decline
DJIA    10426.91 + 73.55 10453.90 10337.86 1.17 bln   2113/1033
NASDAQ   1826.75 +  2.58  1832.01  1811.64 1.45 bln   1923/1543
S&P 100   577.49 +  2.32   579.24   573.16   Totals   4036/2546
S&P 500  1144.58 +  6.09  1146.95  1135.33             
RUS 2000  505.85 +  4.19   506.05   501.16
DJ TRANS 2906.67 + 31.30  2913.68  2863.15
VIX        19.25 -  0.50    20.40    19.23 
VXN        37.16 -  0.52    39.66    36.75
TRIN        0.82 
Put/Call    0.53
*******************************************************************
Long Holiday

We get three days of from flashing screens this weekend, but it 
might as well have been five or six. Most traders are just 
mailing in their effort or not even showing up to the floor. 
volume is thin and action is directionless with anticipated chop 
each day. 

(Weekly/Daily Charts: Dow)


 

It must be noted that the Dow has closed roughly +150 index 
points above intra-session lows this week. We've got mixed 
signals in the picture here again, which pretty much suggests 
price action will remain directionless and choppy until they 
realign in harmony again. I feel like the weatherman forecasting 
a week of inclement weather saying such a thing, but looks that 
way from here tonight.

(Weekly/Daily Charts: NDX)


 

Compounding confusion is the Nasdaq picture here. Both weekly and 
daily charts are still in full-bear mode with no signs of turning 
higher for a trend move right now. Eric and Jeff have both been 
touting “sell tech” for days now and I tracked short the QQQ, 
SMH, BBH and others in Sector Share model first of this week. All 
of them are faring fine right now and may very well continue that 
pace into next week. As the NDX remains pinned in that steep 
wedge of descent, ride out the shorts and keep stops just above 
the upper line depicted here. Simple as that.

(Weekly/Daily Charts: OEX)


 

So the Dow doesn’t look to bearish while the NDX does. Blend them 
together and we get S&P indexes... notably the OEX depicted here. 
This is far from a bullish picture but with daily charts in 
oversold terrain, who wants to buy & hold new shorts? By the same 
token, weekly chart signals, moving averages etc, negate waving 
the bullish pompoms either. When things looked mixed on a longer 
term basis, I prefer to simply look elsewhere for clearer 
pictures than persist in squinting to see something that just 
isn’t there.

(Monthly/Daily Charts: ADLAC)


 

Speaking of something that just isn’t there any more, that 
describes the business future of Adelphia Communications. Bailey 
has been profiling this one for many days now and “she” broke 
down beautifully into the hands of OI shorts this afternoon. Huge 
volume (not shown) traded as investors fled for the exits on news 
that all isn’t well with their math. As noted by Eric in the 
Market Monitor 3:20pm post today:

[Eric] “In the conference call this morning, questions were 
raised about the company's borrowing practices and its ties with 
a spin-off. Jeff Bailey was right on the money when he suggested 
that a rat was lingering around. That rat, as it turns out, is 
ADLAC's Business Solutions (NASDAQ:ABIZ) subsidiary. ABIZ filed 
for chapter 11, which leaves ADLAC with about $500 million of 
debt to deal with. When asked about the debt, a company official 
said, "We...will have to figure out what it all means..." 
Investors didn't like that response as the stock is now trading 
20 percent lower!

I've been doing some technical work trying to find an intelligent 
downside target, but am having difficult spotting a short-term 
downside target. I believe that emotion is taking over, thus 
negating any technical levels. By all means, if you've been 
shorting this stock or buying puts, use this massive move to take 
some money off the table. I don't want to put words in Bailey's 
mouth, but I think he'd suggest taking some gains in here.”

Thanks Eric... that saves me from restating what you already 
said! Based on these two price charts above I’ll happily toss in 
my five bucks about price targets ahead, which is exactly the 
downside goal. Next level of support in the daily channel is $14 
area, but dialing up to a monthly chart (left) going all the way 
back to lows in 1997 may be where this stock ends up. The word 
“communications” in there pretty much sums up a crowded sector 
where many will fall by the wayside ahead and I think we’re 
seeing Darwin at work right here. 

I personally have never traded this symbol myself, but if it 
consolidates sideways from here I’ll be investing in some back-
month puts myself! July 15s are bid 2.10 right now and if this 
one dares pop higher in relief, I’ll try a few of those. Most 
likely to continue lower for awhile, though. Screaming short for 
any who were looking back at the $25 area but I wasn’t one of 
them scanning this, sad to say.

Conclusion
Not a whole bunch to say tonight. Jim’s weekend piece will 
elaborate on next week and beyond but right now we have Thursday 
clogging up our view. Expect plenty of intraday chop and possibly 
a real strong move on light volume as the pile is easily pushed 
right now. Current action is somewhat artificial as program 
trading has a greater effect on markets as usual. Our job is to 
sell the weaklings dragged higher on the backs of S&P programs or 
buy the strong ones dragged lower on program selling. Thursday is 
an intraday trader’s market likely rife with noise. Trade with 
care or better yet, enjoy a four-day weekend!

Happiest Of Holidays!
Austin P


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

Are You A Nervous Bull?
by Mark Phillips
mphillips@OptionInvestor.com

You don't need to be.  So you were one of the prescient few that
bought LEAPS or shares on your favorite index, stock or HOLDR in
early October and you are sitting on nice fat profits right now.
I know exactly what is going through your mind.  "Well, that's a
nice profit, but things are starting to look kind of weak and I
don't want to give it back to the market.  So maybe I should sell
and take my profit.  But I think there could be some more upside,
and I'm not quite ready to close the position.  But I don't want
to be greedy and end up giving my profits back to Mr. Market."
And the debate rages on...

I know we were planning to delve into the topic of online volatility 
tools tonight, but in light of the weakening in the broader market 
recently, I think this is a topic that is much more timely and 
hopefully useful to many of you.  We'll go back to the topic of 
volatility next week.

So, coming back to the debate I framed in the opening paragraph,
what if there was a solution that would allow you to have your
cake and eat it too.  Translation: stay in the long position,
but remove the risk of evaporating profits.  This is your lucky
day, because we've got just the strategy you're looking
for.  It's called a Collar, and the simplicity is almost poetic.

Here's the basic strategy.  You have a long position (let's
assume for the sake of discussion that you bought shares of the
QQQ in early October at $30), and following the recent weakness,
you want to insure against a further drop in price, which could
wipe out what is left of your gains in a hurry.  So, figure out
how much of a loss you are willing to accept, and buy a protective
put at that level.  Let's assume that we don't want to absorb any
further loss below the $35 level.  In that case, we would want to
buy a $35 put to protect against potential downside risk.  If the
QQQ falls below that level, we will make money on the protective
put at the same rate that we are losing it on the long shares,
meaning that our loss on the long position stops as soon as the
price drops below $35.  The QQQ can go all the way to zero, but
we only lose $0.89 on the position (Current price = $35.89 - $35
strike).  But that costs money, cutting into your paper profits.
So let's sell a higher call, to finance the purchase of the put.

Effectively what we are doing is turning the long position into
a covered call and using the proceeds from the covered call to
finance the purchase of a protective put.  Sounds great, huh?
The best part is that due to differing timeframes and our
associated expectations, we can create all sorts of different
scenarios, tailored to meet our needs.

I think the best way to demonstrate the concept is through
examples, so let's go.  Start with 1000 shares of the QQQ with a
cost basis of $30.  The QQQ is now trading at $35.89, giving us
a paper profit of $5890.  We are concerned about near-term
weakness causing the price to drop below $35.  We don't want to
incur a loss below the $35 level, so we will buy protective puts
at the $35 strike price.  Since March is almost over, let's buy
May puts to protect our position for the next 7 weeks, protecting
us through the upcoming earnings season.  The May $35 Put
(Symbol: QQQ-QI) is currently selling for $1.45, making our net
insurance cost $1450 (10x$145).

Now we need to pick a call to sell that will allow us some
upside in our underlying QQQ shares, but one that has enough
premium to offset the cost of the puts we want to buy.  There
seems to be significant resistance waiting overhead in the
$39 area, so let's sell strikes in that area to minimize our
chances of getting called out of our shares.  The June $39 calls
are a little too cheap to get my attention (currently priced at
$1.20, so now I need to make a decision.  I can either sell a
lower strike, limiting the upside of my long position in the
event that my fears are ungrounded, or I can sell the call with
a longer timeframe.  

Selling a longer term call is the approach that appeals to me,
because it gives me more potential upside on the play.  So I
decide to sell the September $39 calls for $2.15 each, bringing
in a total of $2150.  I could have just as easily picked the $40
or $41 strikes to sell, as both of them would bring in enough
premium to cover the cost of my puts that I bought for insurance.
It is a matter of personal preference, whether to take in more
premium now, or give the position more potential room to run to
the upside.  Since I'm primarily concerned with protection at
this point, I want to pocket the cash now.  If I'm called out of
my QQQ position in September, then so be it.  I will have
protected my gains and ended up with a solid gain for the overall trade.

So let's review.  I own 1000 QQQ shares with a cost basis of
$30,000, and a current profit of $5890.  Selling the SEP-39
calls brings in $2150, and buying the MAY-35 puts costs $1450.
Adding it all up, gives me a hedged, profitable position with
$190 (890-700) of downside risk and $3110 of upside potential.
That's a reward-to-risk ratio of 16 to 1; a situation that will
definitely allow me to sleep at night!

Just in case the math isn't clear, let's run through some
possible outcomes, so you can check my math.

Case #1: The bottom falls out of the Tech sector, and the QQQ
craters, falling back to $25 at July expiration.  The long
position has lost all of its profits,...and then some!  What
originally cost me $30,000, is now only worth $25,000.  I gave
up over $5000 of profits and then lost another $5000 from
there.  So from the time of initiating the trade, my long
position lost $10,890...OUCH!  Aahhh, but don't forget about
that little insurance policy.  Those 10 $35 strike puts (that
cost us nothing because of the covered calls we sold) are now
$10 in the money, meaning each of them are worth a cool grand.
Total profit on the puts is $10,000.  The calls are so far out
of the money now that they are next to worthless, and we could
likely buy the whole lot back for about $100.  So the worst
thing we could imagine came to pass and our loss is limited to
$890, or 2.5% of the position value when we initiated the
collar.  Here's the math:

Cost Basis = $30,000(QQQ shares)+$1450(Puts)-$2150(Calls)
           = $29,300

Expiration Value = $25,000(QQQ shares)+$10,000(Puts)-$100(Calls)
                 = $34,900

That leaves us with a total profit of $34,900-29,300 or $5600.
The best part is that we still own the QQQ shares, and unless
the NASDAQ looks like it is headed much lower, we are set to
enjoy another nice and profitable rally.

Case #2: Every Tech company under the sun announces blowout
earnings and the NASDAQ goes vertical, rocketing the QQQ up to
$60 at May expiration.  Needless to say, our puts will expire
worthless, and we are in a position to pocket a portion of the
gains from our long position.  The QQQ shares are worth $60,000
now, but it will cost us $21 to buy back each of those covered
calls.  They are so deep in the money that all the value is
now intrinsic...no time value.  So if we buy back the calls, it
will cost us $21,000, leaving us with a profit on the long
position of $9700 (60,000-21,000-29,300).  That's a profit
increase of $3810 for an additional 7 weeks in the trade.
Seems to me like the collar was a good idea.

Case #3: Finally, the most likely scenario.  The NASDAQ
continues to waffle in its current range, coming to rest at May
expiration at the $37.50 level.  Our puts expire worthless and
we are left with a nice little covered call position.  We could
then evaluate the current market condition and decide what to do
next.  By now we are through earnings season, and if things
are starting to look healthier, I might just hold the position
through September expiration.  Ideally the QQQ would end at
$38.99 and I wouldn't be called out of my shares.  If they
closed above that level, I would likely be called out, ending
the play and locking in my profits.  If the current cycle of
earnings was looking weak and Greenspan was starting to make
noises about raising interest rates, I might decide to just
close out the play early, buying back the calls and selling the
shares, also locking in my profits.  Either way, the collar
served its purpose, allowing me to stay in the position a
little longer without putting all my profits at risk.

There are innumerable variations to this strategy.  While we
didn't cover half the possibilities, hopefully this little
discussion gives you a glimpse of how combining options can
allow you to obtain a free insurance policy, giving yourself a
little more staying power in an uncertain market.

Until next time, protect your profits.

Mark


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

Index Trader Swing-Trade Game Plan: Wednesday 03/27/2002 
Thinning Out


News & Notes: 
From last night’s summation: “Volume is thin, investors are out 
of the market and big traders are pushing the pile around at 
will. Only fit for adept intraday traders with advanced risk 
management skills and trading vehicles. Nothing but day trades 
until next Tuesday or so in my opinion.”

Nothing changed that opinion today. Index option trades are a 
challenge right now with markets going nowhere at all. 


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


 

We redrew our channel lines yet again as price action refuses to 
trade within defined zones. Hence, we keep adjusting until the 
right measure of resistance/support is found. Current wedge in 
the 30-min chart along with rising stochastic values suggest 
higher markets from the open on Thursday.

[60/30-Min Chart: SPX] 


 

Same picture for the SPX. A break above these wedges is probably 
a call-play to be exited before the closing bell rings, while a 
dip to support on the bottom line of either OEX/SPX wedge would 
be a call-play gift for daring traders.

[60/30-Min Chart: QQQ] 


 

Flaw in this plan? QQQ and other techs are weak, forming bearish 
triangles and not looking to pop higher right now. A break above 
the 36 area would boost markets intraday, while a continued tech 
drag would suppress major indexes instead.


Summation:
---------
Thursday is for intraday traders only. Monday should begat a 
return to “normal” market action, whatever that is these days!


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. 


Index Trader Sector-Trade Game Plan: Wednesday 03/27/2002 
Marked Up


News & Notes: 
Markets bobbed up and down topday in usual holiday fashion.
Nothing unexpected this session.


Featured Plays: 
None


Summation: 
We've tightened the screws down on trailed stops closely. A few
stops were hit for slight loss or modest gain, and we expect more
of the same on Friday. Could be a volatile session with large
price swings on light volume. Monday & beyond should continue any
trend beneath current "noise".


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


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             IJJ
Short: 45.25    Short:  97.00
Stop:  47.00    Stop:   99.00
     
IYR             IYE
Short: 84.75    Short:  49.70
Stop:  86.00    Stop:   52.00


DIA **[DJX]     IYM
Short: 105.90   Short: 42.00 
Stop:  103.50   Stop:  41.00
[hit]   +2.40   [hit]  +1.00


03/25 Listings
--------------
QQQ **          SMH **          BBH **         
Short: 36.60    Short: 46.25    Short: 126.25  
Stop:  36.00    Stop:  46.00    Stop:  122.00

OIH **          MKH **          RTH **         
Short: 65.50    Short: 58.50    Short: 100.00  
Stop:  69.00    Stop:  58.50    Stop:  100.00 

TTH **          FFF **          IWD         
Short: 38.50    Short: 82.25    Short: 57.50 
Stop:  38.00    Stop:  82.25    Stop:  57.75

IWM             IWS             IYC         
Short: 99.75    Short: 82.75    Short: 57.00 
Stop: 100.75    Stop:  83.50    Stop:  57.50

IWW             IYY             IVE         
Short: 73.70    Short: 53.00    Short: 55.50 
Stop:  74.70    Stop:  54.00    Stop:  56.00

XLE              IYM            XNG (options only)
Short: 28.40     Short: 41.50   Short: 193.25
Stop:  29.40     Stop:  42.50   Stop:  203.00


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


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The Option Investor Newsletter                Wednesday 03-27-2002
Copyright 2001, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


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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!

http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN
**************************************************************


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

THC  - call
Adjust from $62 up to $63

EOG  - call
Adjust from $38.50 up to $38.75

KLAC - call
Adjust from $62.75 up to $63

LH   - call
Adjust from $89.50 up to $91

MIL  - put
Adjust from $46 down to $45.25

GNSS - put
Adjust from $29.25 down to $27.50


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

None


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

None


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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.

http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN
**************************************************************


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

IBM - IBM $103.39 +0.49 (-2.21 this week)

International Business Machines Corporation (IBM) uses advanced
information technology to provide customer solutions. The
Company operates using several segments that create value by
offering a variety of solutions, including, either singularly or
in some combination, technologies, systems, products, services,
software and financing.

Most Recent Update 

Electronic Data Systems has been the target of bearish analyst
actions in recent days.  Sanford Bernstein cut its investment
rating on shares of the information technology company.  Analysts
raised concerns over EDS' ability to realize its sales goals
for the current quarter, citing the continued weakness in
corporate spending.  If the analysts are correct about EDS'
weakness, then that brings into question IBM's current quarter.
The company relies heavily on its services division, which is
a bigger version of EDS.  Not to mention the fact that IBM
continues to trade poorly relative to the broader market and
the narrow-based technology segments of the market.  The stock
traded heavy all day during today's session and actually closed
lower, one of the few Dow Jones Industrial Average components
that finished in negative territory during today's session.  The
rebound in tech shares near the close of trading today couldn't
even inspire a bounce in IBM, which finished just off of its
intraday lows.  Traders could be fearing a warning from IBM in
the coming week as warnings season is underway for the first
quarter.  The stock certainly trades as if investors are
fearful of further deterioration in IBM's core businesses.
Traders looking to capitalize on that fear can look to take
entries into further weakness below the $102 level.  Below there,
the $100 level can often act as psychological support, so the
technical downside may be limited in the very short term barring
a major rollover in tech stocks or an actual warning from IBM.
Those who'd rather get bearish plays at higher prices can wait
for an intraday rally on relatively lighter volume up to the
$105 to $106 resistance level.  The 10-dma, which is declining
and converged with the 50-dma, may reinforce that resistance
zone and prevent IBM from rallying much above that level.  Our
stop is in place at the upper-end of that zone at $106.

Comments

Wednesday's session was another that saw IBM under perform the
broader market averages.  The stock's underperformance came in
spite of a solid day in the Dow.  Its heavy trading could be a
product of investor fears that the company could warn for Q1.
Traders can look to enter put plays on a rollover from the
$105.50 level or on a breakdown below $102.

BUY PUT APR-105*IBM-PA OI=20861 at $3.90 SL=2.00
BUY PUT APR-100 IBM-PT OI=36179 at $1.70 SL=1.00

Average Daily Volume = 7.84 mln



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

Blue-Chip Stocks Rally On Positive Housing Data
By Ray Cummins

Industrial shares edged higher today as bullish economic news
bolstered investor optimism of a recovery in the stock market.

The Commerce Department released a report showing that new home
sales rose 5.3% last month, following an unexpected 16% plunge
in home sales in January.  The upbeat data comes on the heels
of Tuesday's increase in consumer confidence, providing further
evidence the economy is slowly rebounding.  Despite the positive
statistics, trading volume remained light due to the end of the
quarter and the shortened (the financial markets are closed for
Good Friday) holiday week.  Analysts also noted that investors
had moved to the sidelines in anticipation of the next batch of
earnings news from corporate America.  The quarterly reporting
season begins in April and some experts say it will be less than
favorable.  The Dow average rose 73 points to 10,426 on strength
in blue-chip financial and cyclical stocks.  Among the Dow's
best performers were Boeing (NYSE:BA), Caterpillar (NYSE:CAT),
United Technologies (NYSE:UTX), General Motors (NYSE:GM) and
AT&T (NYSE:T).  The NASDAQ was less upbeat, ending only 2 points
higher at 1,826 as optimism faded in software and network storage
stocks while Internet issues fell on the heels of an Amazon.com
(NASDAQ.AMZN) downgrade.  Lehman Brothers analyst Holly Becker
said in a research note that the stock's valuation remains "rich
on every level" even as the Net firm "appears to be running on
all cylinders" in the current quarter.  In the broader markets,
gold, oil service, natural gas, financial, defense and cyclical
shares generally moved higher while biotechnology issues edged
lower.  Analysts from Trim Tabs noted that heavy equity fund
inflows from individuals were providing the cash to buy the new
shares Corporate America sold in the first quarter.  The fund
flow tracker estimated that U.S. equity funds received about $50
billion in new cash during the first three months of 2002.


Special Notice:  My wife and I are expecting our first child in
the next few days, so it is unlikely I will be publishing this
section next week.  The break from the market will certainly be
refreshing, however I will return sometime in the near future,
after our daughter is well established in her new home (and we
have recovered from the initial shock of becoming new parents!)

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

MAILBAG - Reader's Comments & Questions

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

Hi Ray,

I noticed that in your supplemental credit-spread candidates
(3/20/02), you have SII on both the bullish and bearish lists.
If traders were to put on both positions, they would, in effect,
be establishing a "condor" spread.   If they were able to get
the target credit of $.60 on each side, they would have taken
in $1.20 on a $5.00 exposure and SII would have to finish
between 60 and 75 to keep all of the premium.  However, the
percentage return has improved substantially.  With a potential
$1.20 on a $3.80 risk, the percent return is up to 31.5%.  And,
you can only be wrong in one direction.  It's a great play.

Secondly, since you can only be wrong in one direction, do you
know what brokerage's software will recognize a "condor" and
only hold $500 per contract in maintenance instead of holding
$500 for each side of the spread?  I use Preferred and have
inquired at others, but, so far, they all want maintenance held
on both sides.

Any thoughts?

Sincerely,

MP


MP,

You are absolutely correct in your application of a "Condor" to
benefit from both credits while risking only the potential loss
of one spread.  In the past, I offered Condors (on indexes) on
a regular basis but the question that began to surface all too
often was exactly the same as the one you submitted: "Which
brokers allow participation in this strategy without the
requirement for collateral in both spreads?"  Unfortunately,
last year's abrupt end to the long-term "bull market" and the
volatility that followed the decline forced most brokers to
change their stance on this unique approach.  The majority (if
not all) of equity/index/option brokerages now require margin
maintenance for both sides of the position.

I am also very interested to know if there any brokers with the
(older) collateral requirements necessary for this technique and
I will submit the question to the OIN's vast readership for
further research.  If we can find a brokerage that allows the
use of the Condor (with reduced margin) by retail traders, I will
offer some new candidates for the strategy in future editions of
the newsletter.

Good Luck!

***************
Summary of Current Positions
***************
(As of 3-26-02)

Naked Puts:

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

COF     APR     50   48.60   62.75   1.40    5.6%
CEPH    APR     50   48.35   64.34   1.65    7.9%
KLAC    APR     55   53.30   65.13   1.70    6.9%
PHTN    APR     45   43.30   49.39   1.70    7.0%
GILD    APR     27.5 26.75   36.52   0.75    6.4%
ACS     APR     47.5 46.60   53.50   0.90    4.4%
COF     APR     50   49.10   62.75   0.90    4.9%
SYMC    APR     35   34.35   39.83   0.65    5.2%
CYMI    APR     40   39.50   48.48   0.50    4.7%
GILD    APR     30   29.55   36.52   0.45    5.7%
ROOM    APR     55   44.25   60.00   0.70    5.9%

Hotel Reservations Network (NASDAQ:ROOM) slumped over 10%
this week as profit-taking finally overcame the recent
rally.  Our target-shooting position was easily filled on
the way down but unfortunately, there will likely be more
selling in the coming sessions.  The first level of buying
support is near $60 and another level exists at $55, but
we will have to monitor this one closely in order to limit
losses on any further downside activity.


Naked Calls:

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

PSFT    APR    42.5  43.30   34.78   0.80    7.2%
NVDA    APR    70    71.00   47.00   1.00    5.6%
QLGC    APR    60    60.85   46.90   0.85    5.8%
BRCM    APR    45    45.45   35.11   0.45    6.1%
SEBL    APR    37.5  38.05   31.64   0.55    7.7%


"Bullish" Credit Spreads:

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

BGEN  57.07  49.93   APR   45    50    0.60  49.40  0.53  Closed
BBY   75.27  78.86   APR   60    65    0.55  64.45  0.55   Open
CI    96.38  98.77   APR   80    85    0.60  84.40  0.60   Open
FRX   83.65  81.05   APR   70    75    0.50  74.50  0.50   Open
TOL   53.00  52.51   APR   40    45    0.55  44.45  0.55   Open
VLO   47.85  48.50   APR   42.5  45    0.40  44.60  0.40   Open
CI    98.90  98.77   APR   85    90    0.50  89.50  0.50   Open
NKE   63.99  60.50   APR   55    60    0.50  59.50  0.50   Open
WFMI  47.09  47.00   APR   40    45    0.60  44.40  0.60   Open
WSM   49.05  46.56   APR   40    45    0.55  44.45  0.55   Open


Nike (NYSE:NKE) was pummeled last week after the company posted
a dim short-term outlook for revenue growth, even as it reported
better-than-expected third-quarter results.  Traders were quick
to sell the issue down to a recent support level and it will be
interesting to see if the buying support resumes near the current
price.  On a positive note, it was nice to Whirlpool (NYSE:WHR)
back at the sold strike in last month's bearish credit spread.
Some of our readers have commented on the favorable effects of
Murphy's Law when we close a position early and indeed that rule
has again played in their favor.


"Bearish" Credit Spreads:

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

LXK   50.48  55.29   APR   65    60    0.60  60.60  0.60   Open
BRCM  40.24  35.11   APR   55    50    0.55  50.55  0.55   Open
LEH   63.49  63.30   APR   75    70    0.60  70.60  0.60   Open
QLGC  48.96  46.90   APR   65    60    0.65  60.65  0.65   Open
CCMP  65.73  64.83   APR   80    75    0.60  75.60  0.60   Open
RE    66.00  67.93   APR   75    70    0.60  70.60  0.60   Open

 
Debit Straddles: 

Stock  Position    Debit  Target   M/V      Gain     Status

NTRS   APR60C/60P  4.00    5.00    3.50    (0.50)     Open
     
The recent activity in NTRS has been rather restrained and
with the time premium starting to dwindle, we will monitor
the position closely for any favorable exit opportunity.  Of
course, determining when to exit a debit straddle is a matter
of personal preference but in most cases, if the underlying
issue performs poorly, the straddle should be closed before
time-value decay erodes the entire value of the position.
Since the end of this straddle's life is approaching, you must
begin to plan an exit.  Study the daily movement of NTRS and
use it to your advantage to exit the position, selling each
individual option when the chart (not emotion!) tells you it's
right.  It's very difficult to learn to close out losing plays
early but the simple fact is, there is no reason to hang on to
a losing position when there are so many other profitable
plays that deserve your time and money.
 

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

***************
GILD - Gilead Sciences  $37.40  *** Same Play - Different Week! ***

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 in a relatively stable range
in the wake of the recent 2-for-1 stock split, which was intended
to increase market interest in the company.  However, investors
were already interested in Gilead, especially since it 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  $37.40

PLAY (sell naked put):

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

SELL PUT  APR 32.5 GDQ PZ  3,542     0.40    32.10       5.1% ***
SELL PUT  APR 35   GDQ PG  2,074     0.90    34.10       8.8%
SELL PUT  APR 37.5 GDQ PU  260       1.85    35.65      14.5%


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

Credit Spreads

***************
GD - General Dynamics  $95.24  *** New High! ***

General Dynamics (NYSE:GD) is engaged in the businesses of
shipbuilding and marine systems, business aviation, information
systems, and land and amphibious combat systems.  Each of these
businesses involves design, manufacturing and program management
expertise, advanced technology, and integration of complex systems.
The primary customers for the company's businesses are the United
States military, the armed forces of allied nations, and various
government organizations as well as a diverse base of corporate
and industrial buyers.

Shares of General Dynamics traded at a new, all-time high today
as investors moved into "defense-ive" issues for safety during
the upcoming earnings season.  From a fundamental viewpoint, the
company is performing well and the recent awards of new Defense
Department contracts has been a bonus to its long-term revenue
outlook.  In addition, the company's stock has solid short-term
buying support above our cost basis, making this position a
relatively safe combination play for conservative investors.

GD - General Dynamics  $95.24

PLAY (conservative - bullish/credit spread):

BUY  PUT  APR-85  GD-PQ  OI=457   A=$0.40
SELL PUT  APR-90  GD-PR  OI=4190  B=$0.95
INITIAL NET CREDIT TARGET=$0.60-$0.65  PROFIT(max)=14%


***************
SLM - USA Education  $98.01  *** Another New High! ***

USA Education (NYSE:SLM) is the nation's largest private source
of funding and servicing support for higher education loans for
students and their parents.  The company provides a wide range
of financial services, processing capabilities and information
technology to meet the needs of educational institutions, lenders,
students, and guarantee agencies.  The company's managed portfolio
of federally insured student loans exceeds $60 billion (including
loans owned and loans securitized).  SLM also has commitments to
purchase over $15 billion of additional student loans.  Primarily
a provider of education credit, the company serves a wide range of
clients, including approximately 5,500 educational and financial
institutions and state agencies.  The company has in excess of 7
million borrowers through its ownership and management of student
loans.

USA Education traded at an "all-time" high during today's session
and based on the recent buying support, the bullish trend shows
little sign of weakening in the near-term.  Analysts say it is a
"stock picker's" market and investors are definitely looking to a
variety of industries for the most favorable issues.  SLM appears
to be one of those stocks and traders can attempt to profit from
future upside movement in the issue with this conservative spread.
Target a higher credit initially, to allow for some consolidation
in SLM's share value.

SLM - USA Education  $98.01

PLAY (conservative - bullish/credit spread):

BUY  PUT  APR-90  SLM-PR  OI=268  A=$0.45
SELL PUT  APR-95  SLM-PS  OI=359  B=$0.85
INITIAL NET CREDIT TARGET=$0.50-$0.60  PROFIT(max)=11%


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

BULLISH PLAYS - Synthetic Positions

***************
APOL - Apollo Group  $53.30  *** Hot Stock! ***

Apollo Group (NASDAQ:APOL) provides higher education to working
adults.  The company operates through its subsidiaries: The
University of Phoenix, Institute for Professional Development,
The College for Financial Planning Institutes Corporation and
Western International University.  The company offers its many
programs and services at 58 campuses and 102 learning centers
in 36 states, Puerto Rico, and Vancouver, British Columbia.  The
company's combined degree enrollment is over 125,000 students.

Shares of APOL climbed to a new, all-time high today after the
company posted a 72% increase in quarterly profits.  Apollo
Education posted net income of $28.1 million, or 23 cents per
share, for the second quarter, compared with $16.3 million, or
14 cents per share, a year earlier.  Analysts were expecting
profits of 18 to 19 cents per share, with an average forecast
of 18 cents.  Parent Apollo Group also said earnings at another
publicly held unit, University of Phoenix Online more than
doubled and it expects full-year earnings at the two companies
to exceed previous expectations.

The trend in this issue is definitely bullish and traders who
want to speculate on future upward movement can use this low
risk play to attempt to profit from a continued rally in APOL.
Target a credit in the position initially, to allow for a
brief consolidation in the issue.

APOL - Apollo Group  $53.30

PLAY (very speculative - bullish/synthetic position):

BUY  CALL  MAY-60  OAQ-EL  OI=10    A=$0.65
SELL PUT   MAY-45  OAQ-QI  OI=1012  B=$0.35
INITIAL NET CREDIT TARGET=$0.00-$0.10  TARGET PROFIT=$0.50-$0.75

Note:  Using options, the position is similar to being long the
stock.  The collateral requirement for the sold (short) put is
approximately $1,350 per contract.


***************
NUE - Nucor Corporation  $65.18  *** Hot Sector! ***

Nucor Corporation (NYSE:NUE) and its subsidiaries are engaged in
the manufacture and sale of steel products.  Nucor's principal
steel products are hot-rolled (angles, rounds, flats, channels,
sheet, wide-flange beams, pilings, billets, blooms, beam blanks
and plate), cold-rolled sheet, galvanized sheet, cold finished,
joists and joists girders, deck, fasteners and pre-engineered
buildings.  Hot-rolled steel, cold-rolled steel, galvanized and
cold finished steel are sold primarily to steel service centers,
fabricators and manufacturers.  Steel fasteners are marketed to
distributors and manufacturers.  Steel joists, joist girders and
deck are sold to general contractors and fabricators throughout
the United States.  Pre-engineered metal buildings are marketed
through a builder distribution network.

Here's a great "speculation play" for traders who want to hedge
against the broader markets with a position in the steel sector.
The issue has rallied in recent sessions on optimism for industry
price hikes due to President Bush's new tariffs, and an upgrade
from Solomon Smith Barney.  Traders who think the upside activity
will continue can attempt to profit from that outcome with this
speculative position.  Target a credit in the position to allow
for a brief consolidation in the issue.

NUE - Nucor Corporation  $65.18

PLAY (very speculative - bullish/synthetic position):

BUY  CALL  APR-70  NUE-DN  OI=17   A=$0.65
SELL PUT   APR-60  NUE-PL  OI=835  B=$0.45
INITIAL NET CREDIT TARGET=$0.05-$0.10  TARGET PROFIT=$0.40-$0.70

Note:  Using options, the position is similar to being long the
stock.  The collateral requirement for the sold (short) put is
approximately $2,100 per contract.


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

Neutral Plays - "Earnings-Related" Strangles

One of our readers suggested we offer some "earnings-related"
speculation plays, where the underlying stocks have discounted
option premiums and the potential to move significantly upon
announcement of their quarterly profit results.  Here are three
favorable candidates, based on analysis of historical option
pricing and the underlying issue's technical background.  Each
stock has a history of multiple movements through a sufficient
range in the required amount of time to justify the overall
risk of the straddle.  However, you should review each position
on an individual basis and make your own decision about its
potential outcome.

***************
DST - DST Systems  $49.90  *** Probability Play! ***

DST Systems (NYSE:DST) is a worldwide provider of information
processing and computer software services and products to the
financial services industry (mostly mutual funds and investment
managers), video/broadband/satellite television industry,
communications industry and other service industries.  The
company's business units are classified into three operating
segments: Financial Services, Output Solutions and Customer
Management.  Certain investments and interests are grouped in
the Investments and Other Segment.  The company's quarterly
earnings are due April 18, 2002.

DST - DST Systems  $49.90

PLAY (speculative - neutral/debit straddle):

BUY  CALL  MAY-50  DST-EJ  OI=357  A=$2.00
BUY  PUT   MAY-50  DST-QJ  OI=100  A=$2.00
INITIAL NET DEBIT TARGET=$3.75-$3.85  TARGET PROFIT=25-40%


***************
EMLX - Emulex  $31.42  *** Earnings Speculation! ***

Emulex Corporation (NASDAQ:EMLX) is a designer, developer and
supplier of a broad line of storage networking host bus adapters,
application-specific computer chips and software products that
provide connectivity solutions for storage area networks, network
attached storage and redundant array of independent disks storage.
The company's products are based on internally developed ASIC,
firmware and software technology, and offer support for a wide
variety of SAN protocols, configurations, system interfaces and
operating systems.  Emulex's architecture offers customers a
stable applications program interface that has been preserved
across multiple generations of adapters, and to which many of the
original equipment manufacturers have customized software for
mission-critical server and storage system applications.  The
company's quarterly earnings are due April 18, 2002.

EMLX - Emulex  $31.42

PLAY (very speculative - neutral/debit strangle):

BUY  CALL  APR-32.50  UMQ-DZ  OI=3228  A=$1.90
BUY  PUT   APR-30.00  UMQ-PF  OI=5445  A=$1.90
INITIAL NET DEBIT TARGET=$3.50-3.65$ TARGET PROFIT=15-25%


***************
VRTS - Veritas Software  $42.27  *** Earnings Speculation! ***

Veritas Software (NASDAQ:VRTS) is a supplier of data availability
software products. Its products are designed to enable continuous
productivity for computing environments ranging from the desktop
computer to the large enterprise data center, including storage
area networks.  Veritas offers a wide range of data availability
software products to manage the growth of available data and the
increasing complexity and size of networked environments that its
customers face.  Its unique products allow businesses to improve
the management of their data, to protect data and to increase the
availability of their data.  Veritas also develops products for
operating systems, including versions of UNIX, Windows NT and
Linux.  Its software solutions are used by customers across a
broad spectrum of industries, including many global corporations
and e-commerce businesses.  The company also provides a range of
services to assist its customers in planning and implementing
their data availability solutions.  The company's quarterly
earnings are due April 16, 2002.

VRTS - Veritas Software  $42.27

PLAY (very speculative - neutral/debit strangle):

BUY  CALL  APR-45  VIV-DI  OI=12600  A=$1.30
BUY  PUT   APR-40  VIV-PH  OI=11725  A=$1.60
INITIAL NET DEBIT TARGET=$2.70-$2.75 TARGET PROFIT=15-25%


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

BEARISH PLAYS - Naked Calls & Combinations

***************
BRKS - Brooks Automation  $44.32  *** Technicals Only! ***

Brooks Automation (NASDAQ:BRKS) is a supplier of integrated tool
and factory automation solutions for the global semiconductor
and related industries.  Brooks is also a global supplier of OEM
(original equipment manufacturers) tool automation and factory
management software for the semiconductor, data storage and flat
panel display manufacturing industries.  Brooks' hardware and
software automation technologies include vacuum and atmospheric
robots, cluster tool platforms, ultra-clean mini-environments for
isolating processing equipment and wafers, and factory and tool
automation software and integration services.  The company has
ISO 9001 certification, is headquartered in Massachusetts, and
has direct operations in the United States, Canada, Europe, Japan,
Korea, Malaysia, Singapore, Taiwan and China.

This position was discovered with one of our primary scan/sort
techniques; identifying recently failed rallies on issues with
bullish options activity.  In this case, the premiums for the
(OTM) call options are slightly inflated and the potential for
a successful (technical) recovery is significantly affected by
the resistance at the sold strike price; a perfect condition for
a bearish credit spread.

BRKS - Brooks Automation  $44.32

PLAY (conservative - bearish/credit spread):

BUY  CALL  APR-55  BQE-DK  OI=62   A=$0.25
SELL CALL  APR-50  BQE-DJ  OI=739  B=$0.70
INITIAL NET CREDIT TARGET=$0.50-$0.60  PROFIT(max)=11%


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

BULLISH PLAYS:

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

HIT 	 71.81  APR 65P  0.90   APR 60P  0.35   0.60     14%
CERS 	 52.19  APR 50P  1.00   APR 45P  0.45   0.60     14%
VLO 	 49.44  APR 47P  0.60   APR 45P  0.35   0.30     14%
EXPE 	 66.73  APR 60P  1.05   APR 55P  0.55   0.55     12%
PGR 	164.05  APR 155P 0.95   APR 150P 0.45   0.55     12%
APA 	 57.56  APR 55P  0.65   APR 50P  0.20   0.50     11%


BEARISH PLAYS:

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

EDS 	 57.33  APR 60C  0.65   APR 65C  0.10   0.60     14%
INVN 	 39.03  APR 45C  0.90   APR 50C  0.35   0.60     14%
PSFT 	 35.41  APR 40C  0.45   APR 42C  0.20   0.30     14%
ICOS 	 45.89  APR 50C  0.70   APR 55C  0.20   0.55     12%
CLS 	 35.51  APR 40C  0.70   APR 45C  0.20   0.55     12%
BRCM 	 34.93  APR 40C  0.75   APR 45.0 0.25   0.55     12%
ADRX 	 39.03  APR 45C  0.70   APR 50C  0.25   0.50     11%

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




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


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


Do You Have Trader Status?
Buzz Lynn
buzz@OptionInvestor.com

Greetings and welcome back!  It was only 24 short hours ago that 
just getting to the meat of the matter, we stopped short on the 
specifics of trader status.  As promised, we're back today to 
continue our discussion on taxes as they relate to traders.  Since 
none of us around here are accountants, we'll be better served 
with the advice of experts, and our expert is none other than Jim 
Crimmons of TradersAccounting.com (www.tradersaccounting.com).

If you missed yesterday's article, you can catch up here:  
http://www.OptionInvestor.com/traderscorner/032602_1.asp

Jim had just finished explaining the benefits of trading within a 
business entity when we ran short on time and space.  Besides 
that, it's hard to stay focused when we go much past four pages!  
With that, let's pick up our mock interview where we left off.  

Me:  So Jim, when we left off last night, you were just about to 
outline "trader status", how we can get it and how we can benefit 
from it.  Tell us what that's about.

Jim:  In recent years there has been a lot of talk about the 
benefits of achieving trader status under the tax code.  The 
biggest benefit of trader status is the ability to deduct all 
expenses that are both necessary and ordinary for your trading 
business.

However, there are two problems with trader status.  The first is 
that there is no clear-cut definition of who is or is not a 
trader.  The most recent guidance from the IRS has come in the 
form of two Field Service Advisories (issued by IRS attorneys to 
give guidance to agents out in the field).

In these recent advisories, the IRS has said they are looking at 4 
key factors:

The holding period of your trades:  In the absence of clear-cut 
guidance in this area, the IRS has said (in FSA 199947006) that 
the holding period must be less than 12 months.  "You must seek to 
profit from daily market movements in the prices of securities and 
not from dividends, interest, or capital appreciation".  
(Publication 550 Investment Income and Expenses, page 64 Internal 
Revenue Service.)

Trading activities must be frequent, regular and continuous:  
There are two different aspects to this rule.  The first is the 
actual number of trades made for the year.  The FSAs say that at 
least 300 trades must be made a year.   However, the trades must 
also be regular and continuous.  This means that you can’t trade 
for just the first 3 months of the year, make your money, and then 
take the rest of the year off.  "You must carry on the activity 
with continuity and regularity."  (Publication 550 Investment 
Income and Expenses, page 64 Internal Revenue Service.)

The extent to which you pursue the activity to produce income for 
a livelihood:  While there are no guidelines available, there are 
some accountants who recommend that a trader hold no outside 
employment.  We find this a little harsh, as we do know that any 
other sole proprietorship can be owned and managed by someone who 
also holds a full time job with an employer.  It is fair to say, 
"Your activity must be substantial."  (Publication 550 Investment 
Income and Expenses, page 64 Internal Revenue Service.)

The amount of time you devote to the activity:  If you cannot 
demonstrate that you spend significant time trading, then the IRS 
will not allow you to call it a business, and will disallow the 
benefits usually available to a business.

Me:  Just so the readers and I have this straight, adopting trader 
status is not a matter of filing a "trader status" form with the 
IRS because there is no such thing.  Rather it is a consistent 
series of actions using the above guidelines that define a 
behavior, which confers the status.  If I recall correctly from 
previous discussions, those guidelines came from actual tax court 
cases rather than a set of IRS written rules.  OK, got it - no 
forms; behave "as if".

Back to LLC's for a minute.  You talk a lot about that.  Why is it 
such a great vehicle from which to trade?

Jim:  In the United States, the LLC stands as a unique alternative 
to five traditional legal and tax ways of doing business: sole 
proprietorships, general partnerships, limited partnerships, C 
corporations and S corporations.  The business press has heralded 
the arrival of the LLC with enthusiasm and hyperbole, because you 
can establish a business entity with the limited liability of a 
corporation while retaining a level of tax simplicity that 
resembles a partnership.  Is this fanfare justified?  We believe 
that it is, at least for traders who generally are smaller start-
up businesses.  The LLC is the only form of legal entity that lets 
all of its owners off the hook for business debts and other legal 
liabilities, such as court judgments and legal settlements 
obtained against the business.  In other words, an investor in an 
LLC normally has at risk only his or her share of capital paid 
into the business.

The IRS allows the LLC to be regarded as a “pass through” type of 
tax entity (like a Limited Partnership).  That is, the profits or 
losses of the LLC pass through the business and are reflected and 
taxed on the individual tax returns of the owners, rather than 
being reported and taxed at a separate business level (as with a 
regular Corporation). [The Tax Code permits an LLC to elect one of 
the following basic tax treatments: as a corporation, a 
partnership, or a sole proprietorship (i.e., to be disregarded).  
Seek expert advice before making your election.]  The members 
(owners) of the LLC pay tax on their individual share of income of 
the LLC, and generally use any losses [Without using the Mark to 
Market method of accounting, a trader would be limited to 
deducting only $3,000 in capital losses from trading.  There are 
other limitations based upon passive activities within an LLC.] 
from the LLC to offset other personal income.

Me:  What about taking a salary for myself or paying others and 
funding retirement accounts?  Any benefit there?

Jim:  Any salaries that your trading business pays out to 
individuals who legitimately provide services for the business are 
fully deductible.  If salaries are paid out, you can also set up 
some sort of retirement plan for your business.  The benefit here 
is that contributions made to the retirement plan are fully 
deductible to the business, and yet not taxable to the individual.  
Also, once the money is inside the retirement plan it can grow tax 
free.

For instance, if you wanted to help a brother, sister, or child 
you could pay them a salary for the legitimate services they 
provide to your LLC (research, record-keeping, bookkeeping, etc.).  
This would be fully deductible for the LLC.  At the same time, if 
they did not have any other earned income, the first $4,700 of 
this salary would be offset by their standard deduction.  In 
effect, the only taxes being paid on this salary would be the 
employment taxes.  To take this a step further, you could pay them 
up to $11,700 a year in salary for 2002 without their having to 
pay income taxes.  The first $7,000 could be placed into a SIMPLE 
retirement plan for them, with the remaining $4,700 being covered 
by the standard deduction.  If 50 years or older, add another $500 
to the salary total and SIMPLE IRA contribution.  If you were in 
the 40% tax bracket, each $10,000 salary would lower your taxes by 
$4,000!  Due to the “pass through” nature of the LLC, you don’t 
have to pay employment taxes on the profits it distributes.

Me:  I like that part about not having to pay employment taxes on 
the distribution.  There's another reason to do this in an entity 
and not just as a sole proprietor.  Tell us some more about 
expenses that are deductible against the business.

Jim:  Your LLC can deduct (before it figures its net income) “all 
ordinary and necessary expenses” for the business you are in.  For 
a trader this can be significant, as such expenses as seminars, 
books, fees, and equipment can add up quickly.

Business Equipment:  Under section 179 of the tax code you can now 
deduct immediately up to $24,000 worth of tangible business 
equipment placed into operation for the year.  This would apply to 
desks, chairs, phones, office decorations (pictures, tables, 
statues, etc.), CNBC monitors (TVs), video recorders, palm pilots, 
and all other equipment that you need to operate your trading 
business.

Home Office:  If your home office is used exclusively for your 
trading, and is the location from where you manage your trading 
business, you are entitled to deduct all the expenses associated 
with the home office. [Certain deductions are problematic, so seek 
expert advice on which items you claim as a home office deduction.]

Workshops and Continuing Education:  One of the main areas the IRS 
looks at to determine if you are truly operating a business is if 
you have attended continuing education courses for your particular 
profession.  All of the expenses for attending these classes are 
fully deductible.  Also, nothing in the tax code says that you 
have to attend the classes in your back yard, which brings up the 
next area.

Business Travel:  If you have to fly to Maui to attend a class to 
further your education, all the expenses are tax deductible so 
long as the trip is primarily for business purposes.  Also, if you 
find that you are flying a lot to Atlanta to determine if your 
future business plans were viable, those expenses would be 
deductible as well.

Interest Expense:  As a trader, all your interest will now be 
fully deductible.  As an investor, you are only allowed to deduct 
margin interest to the extent that you have net investment income.

Moving Expenses:  If in the future you decide to move your 
business, or a portion of your business, the expenses you incur 
for the move will probably be deductible as a business expense.
Those are just some of the expenses that are deductible as an 
active trader.  You really are only limited by your imagination.  
We have a list of approximately 50 different expenses a trader 
might take as “ordinary and necessary.”

Me:  Sounds great, especially for all those with a day job.  Now 
all out of pocket costs can become legitimate business expenses 
that reduce taxable income.  

Before we wrap it up here, anything else about the LLC that we 
missed earlier that you think is an important benefit?

Jim:  Three things.  First, asset protection.  If you trade as a 
sole proprietor (i.e., in your own name) and you lose a lawsuit, 
the winner could potentially take over your entire portfolio.  

For example, you have $100,000 in your trading business that is 
operating as a sole proprietorship.  When you lose a lawsuit 
because your teenager caused harm in an auto accident, you could 
lose the $100,000!

However, if your trading business is in an LLC, and you lose a 
lawsuit, the most the winner could take would be your share of 
any net earnings distributed, but not the assets inside the LLC.  
Furthermore, you would still be the manager and in control of the 
assets of the LLC.  Conceivably at that point, as the manager, 
you would renew your practice of not declaring a distribution 
from the LLC during the time a claimant had a “charging order” 
against you.  Nonetheless, you could take your money out, if 
needed, as a salary.

Another example, you have $100,000 in your trading business that 
is operated as an LLC.  You lose a lawsuit and the winner is 
entitled to stand in your shoes until you pay the amount owed to 
the winner.  You still control the assets inside the LLC.  You 
decide it would be in the best interests of the LLC to build its 
trading account and therefore as a business decision determine 
not to declare a distribution of funds from the LLC.  The taxes 
on any gains will have to be paid, and since the lawsuit winner 
is standing in your shoes he/she gets the tax bill that goes with 
the gains.

Second, flexibility.  If you decide to split income with someone 
or something else, you can do so without creating a general 
partnership and all of its problems.

Finally, losses.  With a corporation or sole proprietorship, if 
you lose your entire portfolio, the loss will be considered a 
capital loss, subject to the $3,000 ceiling on using capital 
losses to offset ordinary income (unless you have personally 
chosen to utilize the Mark to Market method of accounting).  With 
an LLC, if you lose the entire value, you can be given ordinary 
income treatment and thus able to fully deduct the loss.  This is 
a massive benefit all by itself!

Me:  Jim as always, we're limited by time and space.  Your 
response to the original question in part I was more than we 
could print in two sections.  So that can only mean one thing - 
we'll keep running the column until it's completed!  

Q-charts tomorrow with questions welcome!


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