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Daily Newsletter, Tuesday, 04/09/2002

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The Option Investor Newsletter                 Tuesday 04-09-2002
Copyright 2001, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.

Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************ 
      04-09-2002           High     Low     Volume Advance/Decline
DJIA    10208.67 - 40.41 10304.99 10201.13 1.21 bln   1741/1375
NASDAQ   1742.57 - 43.30  1795.62  1742.40 1.49 bln   1588/1924
S&P 100   558.83 -  5.12   565.21   558.20   Totals   3329/3299
S&P 500  1117.80 -  7.49  1128.29  1116.73             
RUS 2000  503.01 -  0.00   505.44   502.70
DJ TRANS 2767.96 + 14.66  2778.85  2751.02
VIX        21.05 +  0.31    21.25    20.64
VXN        42.45 +  2.17    42.46    41.05
TRIN        1.40 
PUT/CALL    0.86
************************************************************
Rumors Tank Techs, Again!

The big kid on the tech block, Cisco, was hit by the same rumors
that plagued IBM last week. Fears of an earnings warning after 
the close and memories of the huge hit taken by IBM on Monday
prompted investors to dump CSCO now and avoid the rush. Cisco
dropped nearly -9% or -1.36 to a two month low of $14.82. The
continued demise of the telecom sector is prompting the rumors.
Nortel warned again today to emphasize this point.



 



 

Cisco was not the only tech giant to suffer on Tuesday but was
probably the biggest drag on the Nasdaq. RBC cut estimates and
talked down their outlook. Cisco was the most actively traded
stock in after hours. They report earnings on May-7th. 

Microsoft also was a drag on the Nasdaq and Dow with a -2.35
drop for the day. Lehman Brothers warned that Microsoft may 
lower guidance when they announce earnings on April-18th. 
Despite market share gains by the XBOX game system the lack
of business software sales is weighing on the company according
to analysts. 

Intel completed the big cap trio by dropping -1.47 to $28.46
and a six month low. Intel is falling on similar worries that
business buying has fallen to near zero with no changes in sight.
SunMicro also lost ground on slow server sales and dropped to
$8.12 and only a quarter away from a six-month low. 

Rounding out the Nasdaq tech wreck was a new low on WCOM at $5.40
and a two month closing low on QCOM. If you are playing the 
downside you should be very happy. Still not every tech was 
negative. MCHP actually gained ground after upping their guidance
for the next two quarters. It did close well off its high of
$45.34 at $42.16 but it did manage to close positive. 

Other notables included Eastman Kodak, which was upgraded by 
SSB to "outperform", not a big upgrade but bulls are grasping at
any straw here. Lands End (LE) also raised its guidance for the
quarter and possibly for the year. The problem for the market is
of course small gains by sideline companies and large losses by
the big caps. Traders do not seem to care if Widget Inc, Podunk
Corp and Junk-R-us Co. are raising their revenue guidance by a
couple million if the big caps could miss earnings by a hundred
times that much. Can't say I disagree! However let one of those
smaller companies lower guidance and they are punished severely.
KRON for instance lowered guidance to $.26-$.27 cents per share
instead of the $.29 cents analysts were expecting and the stock
dropped -10.42 or -22% on Tuesday. 

The collective refrain appears to be, "don't worry the market is
falling on low volume". And the point is? Seems to me if IBM
drops -$10 on ten million shares or 100 million shares the result
is still the same. Everyone knows that the conventional wisdom is
that a market drop on low volume shows less conviction than a
blow out on twice the normal shares. Our problem appears to be
that the low volume is due to lack of interest more than eager
sellers. With a gradual roll over since January it does not take
a market wizard to see that the trend is accelerating into the 
normal spring earnings sell off. Institutional traders are going
short with abandon once again. The COT numbers show near historical
levels of institutional shorting. 

Retail traders are trying to find the next IBM and load up on
front month puts. OIN readers saw a -$15 drop in IBM from the
price when recommended on March 26th. Who will be the next 
warning candidate? MSFT, INTC, who knows? Everybody is willing
to bet against the leaders by shorting them or buying puts but
nobody appears to willing to bet with the companies by buying
their stock. Remember earnings runs? During the late 90s and
into the Y2K bubble, companies typically saw strong price gains
as earnings announcements approached. Just the opposite is
occurring now. Warnings and earnings misses have become so common
place that shorting into earnings is becoming the trading rule.

Analysts almost unanimously agree that earnings for this quarter
will be terrible. Put this together with no investor interest and
it should be pretty clear what the market direction will be. Until
there is a clear trend of improving earnings there is no reason 
to rush into the markets, especially into tech stocks. With 
companies like INTC, MSFT, CSCO, SUNW and others closing in on
six month lows it is clear the majority of investors are just
not buying the recovery story yet. 

Granted this will all change and it could be soon. It is possible
that the light earnings warning season could mean companies are
going to meet or exceed estimates beginning next week, but just
not probable. If we did see a stronger than expected earnings
parade then cash on the sidelines could come back into the markets.
The real question is "would it?" With the summer doldrums ahead of
us would investors take the bait here or wait on the sidelines for
more confirmation from the July earnings cycle? I suspect they will
want to wait for confirmation. 

The Dow came within 24 points of my 10100 target on Monday before
traders bought the intraday IBM dip. Shorts covered, longs bought
and everybody made money. Those same traders reversed their positions
on Tuesday as the Dow began a slow roll again. I still think 10100
could provide some support for the week. After earnings begin in
volume next week that number may not be low enough. The Nasdaq 
broke my target of 1750 and now appears to have risk to 1710. A
bounce there could be expected as traders anticipate a double bottom
rebound. The S&P appears to have risk to 1105. Notice all the targets
are down, not up. We could be building a bottom here but bottoms
are typically built on high volume, not low volume. 

Positive factors are a rising VIX, better advance/decline numbers
than you would expect from the Dow/Nasdaq losses and rising put/call
ratios and TRIN. These numbers could continue to go up before
the next bounce but at least they are trending in the right direction.
The put/call ratio at .86 is indicating that some of the complacency
is evaporating from investor sentiment. Investors who were sure the
only possible direction was up several weeks ago are now not quite
so sure. The index put/call ratio was 1.21 at the close on Tuesday.
This implies substantially more put activity than calls and worry 
that the selling may not be over. With fear coming back into the 
markets we are finally making progress in the right direction. 

The last week has seen some interesting resistance levels develop 
on the three major indexes. These levels could produce some significant
short covering if a surprise rally broke out. I am lowering my entry
points for AGGRESSIVE traders to 10350/1800/1130. I would remain
short/flat below those levels and consider going long should we
break above them. The markets have moved into a new range and we
should take advantage of any breakout/breakdown from here. FYI, the
QQQs hit my target of $33.50 for the Editors Play from last week. I
suggested taking profits there but based on the charts I would just
tighten the stops and see what happens. We already have more than
125% gain in both puts but we could see more.

Enter Passively, Exit Aggressively!

Jim Brown
Editor


********************
INDEX TRADER SUMMARY
********************

NO CONVICTION IN TECHLAND.
by Leigh Stevens


The rally oversold rally potential that made for a nice bounce 
off some support areas in some indices yesterday, was nowhere in 
evidence today as market weakness reasserted today. Bargain 
hunters that bid the dips yesterday, turned to the sell side 
remembering the bear market mood and on renewed earnings jitters 
related to technology stocks.

Chart action is still bearish to mixed. More mixed to bearish 
with the S&P, just bearish with the Nasdaq. Price action in the 
key tech stocks say that the Nasdaq drifts lower again tomorrow.   

S&P 100 (OEX) feature:


 

The bounce of yesterday was the extent of the decline today.
We're still not back above the broken trendline (at the red 
arrow), so today's action puts the bear train back on track.  The 
lower envelope points out that this index often gets a bounce 
from being this far under its 21-day moving average. Sometimes 
the index just follows that line lower. The only thing that 
suggests some caution on pressing the short side is the bullish 
declining wedge on the daily chart and the up trending 21-bar 
stochastic.  

A declining bullish wedge forms when the hourly, daily or weekly 
price range keeps getting narrower, suggesting that there is some 
scale down buying and there is what I call "compression" -- this 
is where buying and selling get more and more in balance.  This 
is within an overall downtrend of course, but the pattern can 
precede a sharp reversal.  I can show an example in the reverse, 
to demonstrate a rising (bearish) wedge: 



    

By the way, we should have been filled on the May 65 puts 
suggested at 2.00 per the sector-trader wrap up last night.  
These options opened at 1.80. 

OEX trade strategy: 

Countertrend - For anyone with a yen to go against the trend, 
longs on a rally above near resistance at 563-565 may work, but 
watch for a tendency for the rally to fall apart as they have 
been doing for 3 weeks. 

Trend play - If not already in puts, I would suggest new 
positions only on a rebound back up into the 575-580 area. 
Shorting a somewhat oversold market is part of the risk when the 
trend rules, as it's doing.  

Long puts: The trend favors you and so far so good.  Some caution 
is in order as Monday showed how a short-covering rally can 
evaporate put profits pretty fast. 

Long Calls: OEX risk is at least down to 545-546, and if you are 
holding call positions you may not want to hang in that long. 
Better to wait and see if a bottom forms.  

S&P 500 (SPX): Daily


 

Only place the S&P 500 has been going to on the upside is to, but 
not above, the upper channel line.  Once there, a trade with 
predictable success has been to short or buy puts on a move up to 
the line, which comes in currently at 1132-1133. This area looks 
to be the place to go short and buy puts again, if reached, but 
with a suitable exit point; e.g., SPX gets above this upper 
channel line by 3-5 points. 

Potential support and a place for active traders to exit puts if 
they want to take the money and run, is down around 1105-1107 at 
the low end of the price channel. By the way, a bull case can be 
made if SPX does NOT dip any, or much, lower than it already has, 
as the Index has already retraced as much of the prior rally as 
it usually would -- unless it's headed back to the last rally 
starting point under 1080.  Stay tuned.           


QQQ Daily/Hourly charts: 


  


If support is going to develop, it may do so in the area of the 
prior late-Feb./early-March bottom at 33-33.60 per the daily 
chart above. The index is extended to the downside, as it will 
often rebound from the area of the lower band.  

However, suggesting that it will go lower is the negative action 
today in key Nasdaq stock, Cisco systems (CSCO) which was quite 
weak.  Support in CSCO may or may not develop a bit lower, at 
14.25, around the early-Mch bottom. With bellwether or predictive 
Nasdaq type stocks, Intel (INTC) and Microsoft (MSFT) also 
looking weak, QQQ will sink with them.

The hourly chart is simple in terms of the upper channel line 
highlighting probably resistance in the 35 area, and the lower 
trendline suggesting possible support in the 33 area.  Of course 
over time, prices can just keep following this nice little 
trendline down.  

Given today's weakness in key Nasdaq techs I am no longer 
suggesting any further probing for a bottom in the Q's, unlike 
yesterday when the market looked like it had found a temporary 
bottom. 

QQQ trading strategy: 

Countertrend - Those long QQQ at 34.30, either in the stock or 
calls, should adhere to the suggested stop -- a QQQ break of 33 
(stop at 32.50). If the 33 area does develop as near support, the 
best we may get is an upside pop up toward resistance in the 35-
35/50, based on the weak picture presented by our 3 bellwether 
Nasdaq stocks.   

Trend play - It has to be stay with existing short and put 
positions.  You may want to consider taking some profits around 
33 and re-shorting in the 35 area, if reached.   

Ability of QQQ to hold in the 33-34 area probably hinges on 
whether CSCO can form a double bottom near 14. The bulls need 
something to spark some buying as buyers are scarcer than polar 
bears in August. Meanwhile, bearish sentiment continues to build 
as bears are smelling fresh meat. 

Current bearish sentiment has lead me to anticipate the upside 
trade that I know is coming and for places to buy the indexes, as 
bearish conviction is always pretty high at decent bottoms. This 
said, the next time I want to suggest bottom picking in the 
indexes in this bearish earnings climate, I'll lay down until the 
feeling passes, or I have more confirming signs of a reversal.  

PLAYBOOK: 

Long/Call Positions:

Long QQQ at 34.30 
Stop: 32.50.  
Objective: 38.00  

The objective is based on the prospects for a move back up to the 
longer-term Dec.- Feb.- early-March down trendline on the daily 
charts, which would be a normal recovery type bounce.   


Leigh Stevens
Chief Market Strategist 
lstevens@OptionInvestor.com 


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****************
MARKET SENTIMENT
****************

Delayed Reaction
By Eric Utley

A day later, tech bulls are feeling blue.  It's a wonder things
didn't turn sour Monday.  The rally in tech shares following IBM's
(NYSE:IBM) warning Monday morning had me perplexed.  It didn't
make sense, not one bit.  Such is the nature of the market.  As
it turned out Tuesday, fading what became the short covering rally
proved intelligent.

The sector scorecard Tuesday revealed all nine of the technology
sectors that I track finishing decidedly negative.  Two and three
percent drops were next to ubiquitous.  And forget about
telecom.  The North American Telecom Index (XTC.X) broke the 600
level.  If you want to see what pain looks like, pull up a weekly
of the XTC.X tonight.  Ouch.

Earnings are failing to materialize in the information technology
businesses, it's as simple as that.  Forget about beating
expectations, these companies will be lucky to meet numbers for
the first quarter judging by the first round of warnings.  In
case you missed it yesterday, IBM hasn't warned since late 1999.
Yesterday's revelation said a lot, in my opinion, about the state
of IT spending.

Meanwhile, the less sexy sectors of the market in health care,
transports, cyclicals, and consumer stocks continue to act as
if the economy is, indeed, recovering.  The bifurcation of the
market is remarkable.  We saw the new high/new low index reveal
as much yet again Tuesday.

The only bullish sign that I see in Tuesday's sentiment data is
the extreme reading in the short-term ARMS Index.  But even
that indicator only hints towards another minor short covering
rally, nothing more.  I would dare wager that selling is
growing exhausted given the drops in price we've seen, but the
volume just isn't there to support that thesis.  From where I
sit this evening, the downside remains the path of least
resistance.

-----------------------------------------------------------------

Market Averages


DJIA ($INDU)

52-week High: 11350
52-week Low :  8062
Current     : 10209

Moving Averages:
(Simple)

 10-dma: 10302
 50-dma: 10179
200-dma:  9960



S&P 500 ($SPX)

52-week High: 1316
52-week Low :  945
Current     : 1118

Moving Averages:
(Simple)

 10-dma: 1133
 50-dma: 1127
200-dma: 1137



Nasdaq-100 ($NDX)

52-week High: 2071
52-week Low : 1089
Current     : 1345

Moving Averages:
(Simple)

 10-dma: 1412
 50-dma: 1457
200-dma: 1521



Airline ($XAL)

The XAL was the best performing sector in Tuesday's session.  The
index gained 1.90 percent on the day.  Strength in the broader
Dow Jones Transportation Average ($TRAN) helped boost the airlines.

Leading components included America West (NYSE:AWA), NorthWest
(NASDAQ:NWAC), Continental (NYSE:CAL), and United (NYSE:UAL).

52-week High: 153
52-week Low :  59
Current     : 100

Moving Averages:
(Simple)

 10-dma: 101
 50-dma:  99
200-dma: 101


Software ($GSO)

The GSO continued to get hammered in Tuesday's session, losing
3.49 percent on the day.  That was enough to earn the day's
worst performing sector spot.

Leaders to the downside included Citrix Systems (NASDAQ:CTXS) --
on its warning --, PeopleSoft (NASDAQ:PSFT), Manugistics
(NASDAQ:MANU), and Veritas (NASDAQ:VRTS).

52-week High: 246
52-week Low : 112
Current     : 144

Moving Averages:
(Simple)

 10-dma: 155
 50-dma: 166
200-dma: 172

-----------------------------------------------------------------

Market Volatility

The VIX opened above its 50-dma Monday morning, but reversed
on the strength in stocks.  Tuesday, it rebounded from its
10-dma.  The tightening of these two moving averages may lead
to an explosive move in volatility (fear).

The VXN also traded up to its 50-dma in Monday's session, then
reversed.  The NDX measure bounced back to the tune of 5.38
percent in Tuesday's session.  I would consider a breakout
above the 50-dma a significant development on the fear front.
The 50-dma finished Tuesday at 42.85.

CBOE Market Volatility Index (VIX) - 21.01 +0.27
Nasdaq-100 Volatility Index  (VXN) - 40.82 +0.60

-----------------------------------------------------------------

          Put/Call Ratio  Call Volume   Put Volume
Total          0.86        438,103       376,759
Equity Only    0.81        385,808       313,298
OEX            0.82         11,305         9,270
QQQ            1.61         24,334        39,187
 
-----------------------------------------------------------------

Bullish Percent Data

***Tuesday's Data Was Delayed, Monday's Data Is Displayed***

           Current   Change   Status
NYSE          64      + 0     Bull Confirmed
NASDAQ-100    41      - 4     Bull Correction
DOW           63      - 3     Bear Alert
S&P 500       72      + 0     Bull Confirmed
S&P 100       70      - 2     Bull Correction

Bullish percent measures the number of stocks in an index 
currently trading on a buy signal on their point and figure 
chart.  Readings above 70 are considered overbought, and readings 
below 30 are considered oversold.

Bull Confirmed  - Aggressively long
Bull Alert      - Cautiously long
Bull Correction - Pause or pullback in upward trend
Bear Alert      - Take defensive action if long
Bear Confirmed  - High risk if long, good conditions for shorting
Bear Correction - Pause or rebound in downtrend

-----------------------------------------------------------------

 5-Day Arms Index  1.59
10-Day Arms Index  1.37
21-Day Arms Index  1.20
55-Day Arms Index  1.20

Extreme readings above 1.5 are bullish, and readings below .85 
are bearish.  These signals don't occur often and tend be early, 
but when the do, they can signal significant market turning 
points.

-----------------------------------------------------------------

Market Internals

        Advancers     Decliners
NYSE      1741           1375
NASDAQ    1588           1924

        New Highs      New Lows
NYSE      254             36
NASDAQ    219             58

        Volume (in millions)
NYSE     1,218
NASDAQ   1,490

-----------------------------------------------------------------

Commitments Of Traders Report: 04/02/02

Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the 
Chicago Mercantile Exchange and Chicago Board of Trade. COT data 
can be found at www.cftc.gov.

Small specs are the general trading public with commercials being 
financial institutions. Commercials are historically on the 
correct side of future trend changes while small specs tend 
to be wrong.  

S&P 500

S&P commercials grew even more bearish during the most recent
reporting period, although by a smaller rate than the period two
weeks ago.  The group shed more longs than shorts for a small
increase in the group's net short position.  Small traders didn't
get any more bullish since reaching their yearly high, but they
didn't get any more bearish neither.  The group's position
remained near the yearly bullish high.

Commercials   Long      Short      Net     % Of OI 
03/19/02      322,938   410,494   (87,556)  (11.9%)
03/26/02      317,671   410,186   (92,515)  (12.7%)
04/02/02      313,294   406,337   (93,403)  (13.0%)

Most bearish reading of the year: (111,956) -   3/6/01
Most bullish reading of the year: ( 36,481) - 10/16/01

Small Traders Long      Short      Net     % of OI
03/19/02      145,262     43,066  102,196     54.3%
03/26/02      148,111     40,409  107,702     57.1%
04/02/02      149,449     43,139  106,310     55.2%

Most bearish reading of the year:  36,513 - 5/01/01
Most bullish reading of the year: 107,702 - 3/26/02
 
NASDAQ-100

Nasdaq commercials grew less bearish last week by reducing
their net short position by about 3,000 contracts.  Small
traders went in the opposite direction with a significant drop
in their net bullish position.

Commercials   Long      Short      Net     % of OI 
03/19/02       24,792     33,699    (8,907)  (15.2%)
03/26/02       25,275     33,880    (8,605)  (14.5%)
04/02/02       26,211     31,840    (5,629)   (9.7%)

Most bearish reading of the year: (15,521) -  3/13/01
Most bullish reading of the year:   7,774  - 12/21/01

Small Traders  Long     Short      Net     % of OI
03/19/02       11,637     5,527     6,110     35.6%
03/26/02       12,760     6,264     6,496     34.1% 
04/02/02       10,615     7,769     2,846     15.5%

Most bearish reading of the year:  (9,877) - 12/21/01
Most bullish reading of the year:   8,460  -  3/13/01

DOW JONES INDUSTRIAL

Dow commercials grew slightly more bullish last week by adding
a few longs and maintaining their short position.  The net long
position increased by fewer than 1,000 contracts.  Small traders
dumped a few longs, resulting in an increase to the group's net
short position.

Commercials   Long      Short      Net     % of OI
03/19/02       20,858    13,283    7,575     22.2%
03/26/02       17,973    12,539    5,434     17.8% 
04/02/02       18,717    12,549    6,168     19.7%

Most bearish reading of the year: (8,322) -  1/16/01
Most bullish reading of the year: 15,135  - 10/16/01

Small Traders  Long      Short     Net     % of OI
03/19/02        4,651    10,367    (5,716)   (38.1%)
03/26/02        5,818     9,308    (3,490)   (23.1%) 
04/02/02        5,192     9,007    (3,815)   (26.9%)

Most bearish reading of the year:  (8,777) - 10/12/01
Most bullish reading of the year:   1,909  -  1/16/01

-----------------------------------------------------------------


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

Financials Si, technology No
by Leigh Stevens
 

The stocks comprising the New York Financial Index (Symbol – 
"$NF.X") which is all the financial stocks and that I discussed 
yesterday, continued to push higher today.  At the rate it's 
going, we should see a weekly chart breakout.  Meanwhile the daily 
chart is presented here, and it is at the cusp of where it will 
confirm more bullish upside for the financials -- favorable 
bullish action tends to bode well for the future direction of the 
NYSE stocks as a whole. 



 

SECTOR plays based on the strength of the financials - none 
currently, so plays are on individual stocks.

Not surprising the bank index (BKX.X) was one of the top sector 
gainers.  Others included the Airline Index, Heathcare and Retail 
stocks.     

Losers were tech sectors like the Software Index, the Internet, 
computers and networking.  

NEW TRADE PLAYS AND GUIDELINES: 

1. XAU (PHLX Gold & Silver Index)
Bought May 65 puts at 1.80 at the opening  
Stop: .85 or to no value on the option
Objective: 6.00
Time frame: 4 weeks.


OPEN LONG TRADES: 

2. UTH - Utilities Holders trust (AMEX) 
Bought at 95.25 area; 
Stop: 91.00
Objective: To 105 (revised) 

My revised upside objective is based on the current sideways 
consolidation being likely to be about half way in a total 
advance, which would suggest that UTH will get to the 105 area.  
That is also the area where the stock would complete a 62% 
retracement.    


OPEN SHORTS:

RTH (AMEX: Retail sector trust stock)
SHORT at 99.00 from 4/8/02  
Objective: 90; Stop: 102 
Time frame: 3-6 weeks.

This sector has rebounded strongly, but is right at resistance 
implied by a return to the previously broken up trendline as shown 
in the chart.  Either RTH will turn lower from here, or it will 
regain the trendline, thereby electing the stop. Objective is 
based on a typical retracement amount of 38% of the multimonth 
advance dating from Sept.- Oct. 



 

Sector: XLB (Basic Industrial Sector SPDR) at 23.75
Stop: 24.50

Sector: XLP (Consumer Staples SPDR) at 26.00
Stop: 26.25

Sector: IYD (US Chemical Index iShares) at 45.25
Stop: 46.60

Sector: IYE (US Energy Index iShares) at 49.70
Stop: 52.00 

RISK to REWARD guidelines:  
Determining an objective is important, even if it is a moving 
target, as this is the reward potential.   Determining reward 
potential is critical to establishing whether a stop that makes 
“sense” (e.g., a sell stop that was placed under a key support 
level) would, if triggered, result in a dollar loss that is in 
proportion to profit potential; e.g., 1/3 of it.  (On occasion, 
when the purchase price of call or put is equal to 1/3 or less of 
the estimated reward potential, there may not be a specific exit 
suggestion, as the cost of the option is equal to the amount that 
is being risked.)   


Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com


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The Option Investor Newsletter                  Tuesday 04-09-2002
Copyright 2001, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.



****************
PICKS WE DROPPED
****************

When we drop a pick it doesn't mean we are recommending a sell
on that play. Many dropped picks go on to be very profitable.
We drop a pick because something happened to change its
profile. News, price, direction, etc. We drop it because we
don't want anyone else starting a new play at that time.
We have hundreds of new readers with each issue who are
unfamiliar with the previous history for that pick and we
want them to look at any current pick as a valid play.


CALLS:
*****

BRCD $24.00 -2.32 (-2.90) BRCD was knocked down early yesterday
morning off of the IBM warning.  The stock did display signs
of strength in yesterday's session, but that short covering
rally late yesterday failed to follow through into today's
session.  The stock steadily fell throughout today's trading,
taking out our tight stop at the $25.75 level.  If you weren't
stopped out during today's decline, look to cut losses on any
short covering rally later this week.

VARI $36.59 -0.40 (-0.19) VARI just can't get out of its own
way with the weakness in the broader technology sector of the
market.  The stock closed bearishly in today's session and is
in danger of breaking down tomorrow.  Traders with open
positions should tighten stops up to today's intraday low, or
look to exit on any bounce early tomorrow.


PUTS:
*****

IBM $87.74 +0.33 (-9.51) Well, we're pretty happy with what
happened Monday morning.  The reason for our play was
realized and there's not much more to write about.  We hope
that all of our readers were in last week before Monday's
smash down.  As far as we're concerned, we're booking profits.
Those who wish to hold onto positions should set a stop above
today's high at $88.52.


***********************************************************
DAILY RESULTS
***********************************************************

Please view this in COURIER 10 font for alignment
*************************************************

CALLS              Mon    Tue

COF      63.00    1.30   0.24  Financials trading well, rangebound
THC      70.05    1.26   0.73  New high Mon and Tue, very nice!!!
UNH      77.30   -0.36   0.22  Ticking higher with the HMO.X
HLIT     11.19    0.27  -0.32  Still relatively strong, needs NWX
VARI     36.59    0.21  -0.40  Dropped, can't do it without tech
WLP      67.00    0.60   0.38  Tracking higher on active volume
BRCD     24.00   -0.58  -2.32  Dropped, IBM warning knocked it down
HIG      69.75    0.02   0.61  New, earnings run ahead, breakout!!!


PUTS

TMPW     31.88    0.82  -0.75  Rolling lower along its 10-dma
GNSS     21.76   -0.37  -0.94  Aggressive descending trend line
IBM      87.74   -9.84   0.33  Dropped, Success!  Don't be greedy
CDWC     49.49    0.07  -0.16  Another magical rollover at $51
VRSN     24.03    0.58  -0.92  Perfect rollover from the 10-dma
RETK     25.85    0.26  -0.05  Giving it another chance, rolled
SGP      27.82   -0.32  -0.97  Regular weakness makes easy trades
BRCM     32.79    1.30  -1.10  Networking news not favorable at all
WPI      24.20   -0.10   0.10  Consolidating sell-off, next leg???
HGSI     16.88   -1.47  -0.70  Biotechs trading terribly, breakdown
ENZN     38.88   -1.37  -2.12  New, breakdown in BTK opens selling
GS       84.60   -0.09  -1.46  New, broker business is very bad!


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********************
PLAY UPDATES - CALLS
********************

UNH $77.30 +0.22 (-0.14) With the broad markets weak again this
week, it is no surprise that the Health Care index (HMO.X) is
trekking to new highs again, topping the $530 level for the first
time on Tuesday.  In the midst of this bullishness, the action
in shares of UNH have been a bit disappointing, as the stock has
been consolidating sideways now for over a week.  But the lows
are continuing to creep higher, keeping bullish hopes alive.  So
long as the bulls can blast through resistance after each period
of consolidation, all looks good for our play.  Continue to use
intraday dips to support near the $76.50 level or even down in
the $75.75-76.00 area for new entry points.  We're raising our
stop to $75.50 tonight.

COF $63.00 +0.24 (+1.54) COF continues to trade very well so
far this week.  We can only speculate that the stock's strength
is coming from renewed bullishness for the financials.  The
broader measures that we've been writing about have bucked the
broader market this week, including today's session.  However,
we can't ignore COF's reversal in today's session.  Although
the stock did finish fractionally higher, it gave back most of
its earlier gains as the broader market worsened into the close
of trading today.  Its reversal might have traders with open
positions snugging up stops to protect against further market
pressure this week.  As for new entries, as long as it keeps
working, we'll look to enter on relatively lighter volume
pullbacks to the $61 support level, using tight stops just
below entry points to manage risk.  Our stop remains set at the
$61 level.  For exit points, we'd like to see a trade up to the
$65 level for an opportune level to book short term profits.
Beyond that level, we still favor exits at the $67 mark, but
feel that the level might be unattainable until the broader
market starts cooperating with bullish plays.  Watch for a
breakout in the Bank Sector Index (BKX.X) above the 900 level to
possibly get COF moving to the upside.

THC $70.05 +0.73 (+1.99) Zacks Investment Research issued a buy
rating on THC this morning, which may have contributed to the
stock's continued strength.  The report highlighted the details
that we've been focusing on since initiating coverage; namely,
quality earnings, higher admissions, and increased efficiency
revealed by a boost in revenue per patient.  Those attributes
continue to carry the stock higher today, when THC topped the
$70 level.  Those traders who took that most favorable entry
at the $66 level during the pullback late last week should be
thinking about locking in partial gains after the $4 move in
the space of four days.  At the very least, traders should with
open positions should raise stops to above breakeven so as to
not give back the gains in the last four days.  From a broader
perspective, the sector continues to trade very well.  The
HMO Index (HMO.X) hit another all time high in today's session,
bucking the weak trend in the broader market.  The HMO.X,
however, is looking a bit toppy, which is all the more reason
to raise stops on open positions to protect against a natural
pullback on profit taking.  Two levels for focus on for stops
are today's low at $69.16 and Monday's low at $67.91.  Either
can be used to protect profits, depending on entry points and
specific risk tolerance.  Additional upside may be used as an
exit point from open positions.  We'll look for new entries on
a pullback to and rebound above the 10-dma now around $67.70.
Our stop is at $67.50.

HLIT $11.19 -0.32 (-0.05) HLIT continues to hold up this week
despite the weakness in the broader networking space.  The
stock is lower by only five cents this week, which is saying
a lot when we consider the damage in the Networking Sector
Index (NWX.X).  The stock's ascending wedge has now turned
into more of a neutral wedge, hinting that a breakout in one
direction or another is on the way.  Given its relative
strength, we're betting that the stock will breakout to the
upside.  But we can't emphasize enough that this stock needs
the participation of the NWX.X for it to move higher.  Relative
strength alone won't cut it.  That said, we're raising our stop
to Monday's intraday low to protect against the downside risk.
That low as traced at $10.91.  We're playing it tight.  If
the NWX.X gets some legs, then HLIT should breakout above $12
over the short term.  On the other hand, if the NWX.X continues
lower, we'll most likely get stopped out of HLIT.

WLP $67.00 +0.38 (+0.98) WLP continued higher for the fourth
consecutive session today on strength in the broader health
care sector.  The HMO Index (HMO.X) continued along its path
of record highs, while the Drug Index (DRG.X) traded fairly
well throughout the day.  Unlike the HMO.X, the stock didn't
trace a new yearly high in today's session.  We don't feel
that reveals any signs of relative weakness, chiefly because
the stock hit a fresh 52-week high yesterday.  What we are
impressed with is the active volume that continues to
accompany higher prices.  The increase in volume yesterday
and continued active trade today revealed further
institutional accumulation, putting the stock in strong hands,
which is a big positive for traders.  In terms of trade
entries and exits, we continue favoring entering new call
plays on intraday pullbacks to support and looking to flip
those positions for a quick trade on a move to a new relative
high.  Judging by the last few weeks of price action, a trade
of this sort could last anywhere from two to four days.  In
other words, think short term and nimble entries and exits.
Otherwise, if you have a longer time frame, look to get in
on this strong stock during an extended profit taking pullback.
Our short term coverage stop has been raised to $65.50.


**************
NEW CALL PLAYS
**************

HIG - Hartford Financial Services $69.75 +0.61 (+0.63 this week)

Hartford Financial Services Group, Inc. (the Hartford) is a
diversified insurance and financial services company. The Hartford
is a provider of investment products, individual life, group life
and group disability insurance products, as well as property and
casualty insurance products in the United States. It writes
insurance and reinsurance in the United States and
internationally, and is organized into two major operations: Life
and Property & Casualty.

Insurance stocks have been among the leaders since the market
bottom last fall.  That's because rates continue rising.  The
events of last fall only helped to exacerbate that trend.  In
addition to rising rates, the stabilization of the stock market
will boost the investment returns generated by the cash heavy
insurers.  These catalysts, plus others, are expected to
contribute to a healthy first quarter earnings seasons for the
major plays in the group.  HIG is certainly a major player.  The
company is expected to report its first quarter results on April
22.  We're expecting the stock to run into its report for a good
old fashioned earnings run.  We've just under two weeks for this
play to work in our favor, as the earnings should begin in that
time frame.  Judging by today's action, the run could be just
getting underway.  HIG broke to a yearly high and looks to be
heading higher after consolidating its rally from last fall
during the past month.  With the consolidation completed and
today's breakout, the upside looks promising.  Look to enter
bullish plays at current levels early tomorrow if the market
supports such a strategy.  If you'd rather wait for a dip to
remove some of the downside risk, look for the stock to pullback
between the $68 and $68.25 level, which is reinforced by the
10-dma.  Our stop is initially set at $68.00.

***April contracts expire next week*** 

BUY CALL APR-65 HIG-DM OI=  76 at $5.10 SL=3.75 
BUY CALL APR-70 HIG-DN OI=1279 at $1.00 SL=0.50 
BUY CALL MAY-70*HIG-EN OI= 187 at $2.10 SL=1.00 
BUY CALL JUN-70 HIG-FN OI= 420 at $2.90 SL=1.75 

Average Daily Volume = 857 K



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*******************
PLAY UPDATES - PUTS
*******************

BRCM $32.79 -1.10 (+0.19) It sure hasn't been a great start to
the week for the Semiconductor sector, with the SOX index failing
to hold support and falling to the next level of congestion near
$550-555.  Networking stocks haven't fared much differently,
with the NWX index breaking last week's lows and looking like it
wants to challenge the September lows down near the $200 level.
In that environment, it is no surprise that yesterday's rally
attempt in BRCM failed to garner any conviction in the
marketplace.  Once again rolling over near the $35.50 resistance
level, BRCM provided us with a solid entry to the play this
morning.  As long as the SOX and NWX continue to weaken, it is
going to be difficult for the bulls to mount anything approaching
a sustained rally in BRCM.  That means we can continue to short
the rallies, entering on rollovers near the $35 level, in
anticipation of the eventual breakdown below the $30-31 support.
Lower stops tonight to the $35.50 level.

GNSS $21.76 -0.94 (-1.31) Consistency is a wonderful thing,
especially when we are playing the trend.  For shares of GNSS,
the trend is clearly down, as it has been ever since the failed
attempt to rally in early March.  Since then it has been one
failed rally attempt after another, yielding several solid
bearish entry points.  With the Semiconductor index (SOX.X)
continuing to weaken as hopes for robust recovery dim, GNSS
doesn't look like it is going to break out of its funk any time
soon.  With a month-long descending trendline capping the
rallies, we have some solid actionable points that we can
monitor.  A failed rally at the trendline (currently $24) would
make for an ideal entry point, although we may have to settle
for entering on a rollover from intraday resistance, currently
$23.25.  Lower stops tonight to $24.50.

HGSI $16.88 -0.70 (-2.06) There doesn't seem to be any end to
the pain that is currently being inflicted on the Biotech stocks
with the FDA becoming more and more stingy about issuing new
drug approvals.  This is making investors nervous about the
long-term viability of their Biotechnology investments and the
effect can be seen in the daily chart of the Biotechnology index
(BTK.X) which once again is down at the critical $450 support
level.  If that level fails, then look out below.  Shares of
HGSI had their big breakdown last week, puncturing the $20 level
for the first time since 1999.  More weakness over the past 2 days
has been accompanied by heavy selling volume, and today's late
afternoon breakdown below the $17.25 lows from Monday does not
bode well for the bulls.  Use any sort of failed rally near the
$18 level as an opportunity to initiate new positions, or else
enter on renewed weakness as the stock falls below the $16.75
level.  We are lowering our stop tonight to $18.50.

SGP $27.82 -0.97 (-1.29) Apparently analyst ratings can still
move the markets, but in this case investors are motivated to
sell rather than buy.  Fulcrum Partners initiated coverage on
SGP with a Sell rating on Tuesday morning and that added some
serious additional weight to the stock, sending it down for a
more than 3% loss and bringing the four-day total loss to 9.5%.
Those violations of all time lows (for SGP it came at the $30
level) create waves of selling and this one doesn't even look
like it has crested yet, with selling volume still on the rise
and coming in at more than double the ADV on Tuesday.  The DRG
index has fallen through the $365 support level and if the $357
level gives way, we could see the selling in the sector become
even more vicious.  While the daily Stochastics are already
deep in oversold territory, that doesn't mean they can't stay
there awhile longer.  Use a drop below the $27.50 level to
initiate new positions, especially if the DRG index continues
falling.  Alternatively, wait for a failed rally at resistance
before initiating new positions.  Resistance levels to watch
are $28.75, $29.25 and $29.75.  Lower stops to $30.

TMPW $31.88 -0.75 (+0.07) Even though support failed last week
at the $33 level, shares of TMPW are actually performing better
than the broad market this week.  That doesn't mean our play is
in trouble, just that it appears that the stock is consolidating
for the next downward leg.  With the employment picture
continuing to worsen, so are the earnings prospects for companies
like TMPW that make their money by connecting prospective
employers with prospective employees.  With the fewer jobs to
fill, profits are bound to suffer.  Look to initiate new
positions on a failed rally near the $33.50 level (just like we
got on Tuesday) or else wait for the stock to fall below the
$30.75 level on strong volume before playing.  Note that the
combined effect of the 10, 20, 30 and 50 dmas are about to club
TMPW on the head, making the $34 level a very formidable
resistance level.  So that makes it a great level to keep our
stop.

VRSN $24.03 -0.92 (-0.32) The attempted rally in the Software
sector (GSO.X) on Monday came to an abrupt end on Tuesday as
selling came back with a vengeance.  That selling extended to
the Internet Security stocks once again, and VRSN was under
pressure, giving up all of Monday's gains and then some.  The
10-dma (currently $25.49) has been pressuring VRSN throughout
the past 3 weeks, and bearish entries taken on failed rallies
near this level continue to prove profitable.  In addition to
that, we have the solid resistance in place at the $26 level,
making that a logical place to leave our stop.  Take advantage
of failed rallies below resistance to initiate new positions
in advance of a decline to new lows.  Keep in mind that there
is significant support near the $22 level, and momentum-based
entries should not be contemplated until VRSN falls below that
level.

WPI $24.20 +0.10 (+0.00) After last week's sharp drop below the
$26.50 support level, it appears as though the bears are giving
shares of WPI a rest so far this week.  While volume has
remained heavy (2-3 times the ADV), there hasn't been enough
pressure to push the stock lower, despite the fact that it is
trading at new all-time lows.  Helping to put a bit of a floor
under the stock was news on Monday that the FDA approved the
firm's new Alora line of female hormone replacements.  Despite
the good news, WPI hasn't really been able to advance.  And with
the BTK index looking like it is going to break down under the
$450 support level, WPI looks susceptible to more weakness
straight ahead.  Use a failed rally at the $24.75 intraday
resistance level, or possibly as high as $25.50.  Alternatively,
look for a breakdown under the $24 level to usher in new
entries.  Lower stops to $26.50.

CDWC $49.49 -0.16 (-0.09) This week's action has been remarkably
similar to last week's.  CDWC traded down to the $47.50 level in
yesterday's session, just above its 200-dma at $47.15, making
last week's entry on the rollover from the $51 level very sweet
indeed.  The repeat rollover today could've allowed for another
entry point below the $51 level as the stock sharply sold off
into the close of trading today.  We think that this stock will
eventually breakdown below its 200-dma given the deterioration
in the technology sector, but the trading range action might
persist this week.  If so, that calls for careful position
management, as well as nimble entry points.  The best entry
point as it's turning out is a rollover from the $51 level.
Continue looking for such a move this week, and manage the risk
in such an entry with a tight stop just above the $51 mark.
Use weakness down to the $47 area to book partial profits or
lower stops to protect against another short covering rally.
Getting in early on a rollover near resistance will better
position traders for a breakdown below the 200-dma.

RETK $25.85 -0.05 (+0.21) We're giving RETK one more day on the
put play list after the trade up above the $26 level today,
then the rollover and close back below.  The stock's rally
today came on the favorable guidance issued by JDA Software.
This morning, CS First Boston said that the positive news from
JDAS would be a positive for RETK as well.  The bulls took that
news to heart as the stock sharply rallied.  But the tech
weakness caught up with RETK, dragging it lower into the close
of trading.  If we see some follow through to the downside in
tomorrow's trading, we'll get comfortable again with the
downside potential.  From there, we'll look for the stock to
trade down to its 50-dma at the $24 level.  New entries can
be taken on a break below today's intraday low at the $25.70
level on weakness in the broader software sector ($GSO.X).


*************
NEW PUT PLAYS
*************

GS – Goldman Sachs Group $84.60 -1.46 (-1.55 this week)

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

It is an accepted rule that Financial stocks need to participate
if a market advance is going to have any staying power.  The
recent retreat in the Brokerage sector (XBD.X), reflecting the
fact that trading volumes continue to languish, is not boding
well for the broad Financial arena, nor the broad markets.
After running out of steam near the $538 level last month, the
XBD index has been heading south and is now at a critical
juncture, threatening to break below the 50-dma at $498.  So
now that we've got another weak sector, all we need to find is
a weak stock within that sector and GS gets the nod.  It's
relative strength line (relative to the XBD) has been
deteriorating for the past 2 weeks and is threatening to a new
2-year low.  Throw in the fact that GS recently posted a
double-bottom breakdown on the PnF chart, with a bearish price
target of $78, and we've got ourselves a solid downside play.
The best entries will come from failed rallies near $86.50 or
even near $87.50.  Alternative entries can be considered as GS
falls below the $84 level (also the site of the 38% retracement
of the fall rally).  We are initiating coverage with our stop
set at $88.

*** April contracts expire in less than 2 weeks ***

BUY PUT APR-85*GS-PQ OI=7449 at $2.20 SL=1.00
BUY PUT MAY-85 GS-QQ OI= 391 at $4.00 SL=2.50
BUY PUT MAY-80 GS-QP OI= 371 at $2.10 SL=1.00

Average Daily Volume = 3.17 mln


ENZN - Enzon $38.88 -2.12 (2.49)

Enzon, Inc. is a biopharmaceutical company that develops and
commercializes enhanced therapeutics for life-threatening
diseases through the application of its two proprietary
platform technologies: polyethylene glycol (PEG) and single
chain antibodies. The Company applies the Company's PEG
technology to improve the delivery, safety and efficacy of
proteins and small molecules with known therapeutic efficacy.

The Biotechnology Sector Index (BTK.X) has taken it on the
chin in the last several weeks.  The downside momentum
appears to be gaining strength.  The BTK finished down by
2.91% in today's trading, out pacing the weakness in the
broader market as measured by the S&P 500.  The BTK is in
danger of taking out its February lows tomorrow morning.  Any
downside follow through from today's selling will have the BTK
breaking down in a big way, setting the index up for a
retest of the September lows, which are about 30 points lower
from current levels.  The weakness in the sector has us turning
our attention to the weakest components of the group.  ENZN
popped up on the scan as the stock broke to a new yearly low on
heavy trading volume.  The breakdown is a momentum trader's
delight as the stock doesn't have any meaningful support below
the $40 level.  In fact the closest historical support for this
stock rests below at the $33 level.  A trade down to that level
in the coming weeks is probable, especially if bearish sentiment
continues building in the biotechs.  Look for the BTK to break
below the 450 level in tomorrow morning's trading.  Use such
weakness to enter new bearish plays into ENZN at current
levels.  If the sector pops on short covering, look to enter a
rollover in ENZN between the $41.50 to $42.25 range.  Just above
that resistance zone rests the 10-dma at $42.79, which could be
another rollover level.  Our stop is set at $43.

***April contracts expire next week*** 

BUY PUT APR-40 QYZ-PH OI= 457 at $2.50 SL=1.25
BUY PUT MAY-35*QYZ-QG OI=2239 at $1.50 SL=0.75

Average Daily Volume = 1.25 mln



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**********
DISCLAIMER
**********

Please read our disclaimer at:
http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html


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Contact Support
The Option Investor Newsletter                  Tuesday 04-09-2002
Copyright 2001, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


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

CDWC - CDW Computers $49.49 -0.16 (-0.09 this week)

CDW Computer Centers, Inc. is a direct marketer of microcomputer
products, primarily to business, government, educational,
institutional and home office users in the United States. The
Company sells a broad range of multi-brand microcomputer products,
including hardware and peripherals, software, networking and
communication products and accessories through knowledgeable sales
account managers. 

Most Recent Update

This week's action has been remarkably similar to last week's.
CDWC traded down to the $47.50 level in yesterday's session, just
above its 200-dma at $47.15, making last week's entry on the
rollover from the $51 level very sweet indeed.  The repeat
rollover today could've allowed for another entry point below the
$51 level as the stock sharply sold off into the close of trading
today.  We think that this stock will eventually breakdown below
its 200-dma given the deterioration in the technology sector, but
the trading range action might persist this week.  If so, that
calls for careful position management, as well as nimble entry
points.  The best entry point as it's turning out is a rollover
from the $51 level.  Continue looking for such a move this week,
and manage the risk in such an entry with a tight stop just above
the $51 mark.  Use weakness down to the $47 area to book partial
profits or lower stops to protect against another short covering
rally. Getting in early on a rollover near resistance will better
position traders for a breakdown below the 200-dma.

Comments

IBM's warning reinforced our bearish stance on CDWC.  It's only
a matter of time before the stock breaks down below its 200-dma.
In the meantime, use its short term trading range to gain a
favorable entry into new put plays.  Look for another rollover
below the $51 level as the sellers seemed determined to keep
CDWC below that level.  Look for a breakdown below today's low
at $49.16 to set up a test of the 200-dma later in the week.

***April contracts expire next week*** 

BUY PUT APR-50*DWQ-PJ OI=1910 at $2.25 SL=1.25
BUY PUT APR-45 DWQ-PI OI= 711 at $0.60 SL=0.50

Average Daily Volume = 1.13 mln



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TRADERS CORNER
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Do You Have Trader Status, Part IV?
Buzz Lynn
buzz@OptionInvestor.com

Welcome back from our scenic detour last week where we learned 
from our fellow trader, reader, and CPA, Gary Young about how to 
find and select a good tax advisor.  This week, in honor of that 
traditional day we all love to hate - Tax Day - which happens 
every April 15th, we're going to pick up our "interview" with Jim 
Crimmons of Tradersaccounting.com (www.tradersaccounting.com) 
where we left off two weeks ago.  He had just finished the final 
three benefits of trading through an LLC.  

Me:  Jim, any last words on the LLC?  For instance, we've heard a 
bunch about favored tax states.  Where would a trader set that up?

Jim:  Any entity that is carrying on an active business needs to 
be registered with the state where the business is conducted.  As 
a general rule, when an entity has revenue and/or takes business 
deductions, it is carrying on an active business, and will need to 
be registered in that state.  If you pay payroll to fund your 
retirement account or medical insurance you must register your 
business within the state where you live.  In many cases, it is 
best to set up the entity in the state where you live.  In some 
cases, however, you might want to consider a state that does not 
tax income (e.g., Nevada).

Me:  OK, I want to get back to this thing called "Mark to Market" 
we briefly touched on earlier.  What is that and why is it good?

Jim:  Recently, the IRS decided to allow active traders to use the 
Mark to Market method of accounting.  The Mark to Market method of 
accounting is where you would treat all of your positions as 
closed out for purposes of gains and losses as of December 31 each 
year.  Any subsequent gains or losses on the positions would be 
reflected on the next year’s tax return.

There are two big benefits to utilizing the Mark to Market method 
of accounting.  The first is that the wash sales rules will no 
longer apply to you, which could make your record keeping a lot 
easier.

The other big benefit is that any losses you incur in the market 
can be used without limitation to offset any other income you 
have.  This is in contrast to the limit $3,000 of your capital 
losses to apply against your other income if you are a “regular” 
trader.

There are two different ways you could elect to use the Mark to 
Market method of accounting.  If you have already filed a tax 
return for your trading business, you would have to file a form 
3115 with the IRS, asking to be allowed to use the Mark to Market 
method.

However, if you haven’t filed a return as of yet you have until 
the later of the annual filing deadline (on or about April 15) or 
two months after the creation of your business to place a note in 
the books and records of the business stating that the business 
will use the Mark to Market method of accounting.
Me:  Cool!  Deduct more than $3000 in losses for a year (too bad 
we sometimes have to do that - it's more fun to make money) and 
forget about wash sale rules.  Sounds good.  

Changing gears again, a big competitor of yours (and probably 
others that I'm not familiar with) has you set up what seems like 
a Byzantine web of entities.  Is all that necessary?

Jim:  An LLC is merely the starting point, a foundational entity 
to which other tax strategies can be added.  Different people need 
different strategies to accomplish what their goals are.  You must 
have a pro-active relationship with your tax professional so that 
periodically throughout the year you are mapping out the 
strategies that will help you the most.  TradersAccounting.com 
thinks that tax strategies are like clothing.  To defeat the 
elements you layer your clothing, but only as needed—so, too, with 
tax strategies.  Our competitors have tried to sell from their 
seminars, a multitude of entities, which generally do not make 
sense at the time they are trying to sell them.  They may or may 
not make sense in the next ten years, but at the time of the 
seminar they generally do not.  We at TAC want you only to have 
the business entities that are going to benefit you right now.  
This is why we feel that you need to check in with your tax 
advisor on a regular (quarterly) basis.  Trading is a very 
volatile business, where swings in profitability happen quickly.  
Tax strategies thought of in January after the year is finished do 
no one any good, so visit with your tax advisor on a quarterly 
basis, and add the tax strategies in a timely manner which make 
sense for you to use.

Me:  All right, so now we're talking tax strategies.  Let's hear a 
few.

Jim:  How about Almost Tax Free Trading?  The power of compounding 
interest is truly amazing [near and dear to Fundamentals Guy's 
heart].  What is even more incredible is the power of compounding 
interest in a tax-free environment.  As an example, here is a 
chart of $1,000 invested one time at 40% per annum in two 
different tax scenarios; scenario 1 is a fully taxable account, 
taxed at 40% annually, scenario 2 is a tax-exempt account.  



 

I’ll let you guess which is the tax-free account.  We limited the 
example to just ten years as the difference is so great in later 
years that you can’t even see the taxable account in a reasonably 
sized chart.

Because of the dramatic power of compounding interest in a tax-
free account, we feel strongly that most traders should fund 
retirement accounts as quickly as their trading profits allow.  
You can put away from nothing to $40,000 per year per employee 
(read “family member”).  This money is generally an expense to the 
business, and is not income to the employee.  As soon as it is in 
a tax-deferred account you can start trading this money also.  
Your gains grow as the chart shows above because of the deferred 
status of the retirement account.

Here's another.  Supercharge your Retirement Accounts.  There are 
at least two reasons that most active investors would want to look 
into retirement accounts.  Number one:  A good percentage of our 
wealth is commonly contained in an IRA or pension plan of some 
type or both.  Our ability to access them for the investments we 
would like to make is limited; generally we find that even though 
the retirement accounts are our property, we have little say about 
how the money is invested.  The control is generally vested in the 
trustees our retirement or IRA account, who will invest our money 
in what they consider to be “safe” investments, such as mutual 
funds and money market accounts.  

Unfortunately, over the past couple of years most of us have found 
our “safe” investments to be another name for “how I lost 30% of 
my retirement account this year.”  Different people have different 
approaches to both the word “safe” and “investment.”  We do not 
believe that an investment should be classified as an investment 
unless it returns money on equity each year; if it does not do 
this, it is more of a liability than it is an investment, because 
if we could use it the way we want to we would insure that there 
was a ROE.  

No one cares as much about my retirement funds than we do—they are 
just a few dollars added to some gigantic mutual fund and the 
manager of that fund doesn’t even know what we want to do when we 
retire, or that we want to use some of my money to help others, he 
just trades it because that is what he is paid to do.  (Say did 
you see the salaries some of these guys are commanding even though 
they lost money?  It is outrageous!)

The second reason:  Setting up a retirement account sponsored by 
your trading business will allow your business to deduct (business 
expenses directly reduce the amount of tax you pay) all monies 
contributed to the Pension Plan for the employee!  The 
contribution the business makes to the retirement account is for 
the employees of your trading business, generally your family 
members that you have hired to help you with your business.  With 
a qualified retirement account you may expense up to $40,000 per 
employee per year into the retirement account, and be in complete 
control of the money!

A qualified pension plan offers one of the most attractive tax 
shelters available today.  If you are self-employed or have your 
own business entity and you want to grow your retirement account 
as fast as possible, you need a pension plan.  If you invested 
$10,000 per year for 30 years in a pension at a rate of return of 
15%, you would end up with $5,000,000 after 30 years compared to 
only $1,500,000 if the money you made was subject to taxes. 
Me:  That's interesting and potentially very lucrative.  I've 
never considered a "pension plan" per se.  Tell us more.

Jim:  When a business contributes money to a Pension Plan, the 
money is deductible to the business.  The fundamental nature of 
the funding by the business is an expense.  In essence, the 
business is funding the retirement of its employees with pre-tax 
dollars.  This results in the business paying fewer dollars in 
taxes.  Funding an employee pension plan is one of the best ways 
to reduce business taxes and increase employees’ retirement 
monies.  Imagine loading up your retirement assets with pre-tax 
dollars.  What a fantastic way to ensure a great retirement!

No Tax Liability To The Employees:

Perhaps the best part of having your business set up a pension 
plan is that the money put into the plan is not considered income 
to the employee until he or she withdraws it upon retirement.  
Instead of the retirement money growing slowly while subject to 
capital gains taxes, your retirement assets grow exponentially 
within the tax-deferred pension plan.  Setting up a Pension Plan 
minimizes the business tax liability while you, and your family, 
(the employees) reap the benefits of tax-deferred growth for your 
retirement or children’s college expenses.

Up To $40,000 Can Be Contributed:

Beginning in the year 2002, subject to regulation, the business 
can contribute as much as 25% or $40,000 of an employee’s salary 
(whichever is greater) into a pension plan.  Just imagine how that 
amount would grow if it were not subject to taxes.  Also imagine 
how much expense this will provide to your business, on which no 
tax will have to be paid!

Supercharge Your Yearly Investment:

In 2002 using a 401K Profit Sharing plan for your trading business 
you will be able to contribute more than 25% of your earned 
income.  The rules for a 401K are the same for the maximum 
contribution of $40,000; however, while the company can contribute 
up to 25% of employee wages, the employee also can contribute up 
to $11,000 per year.

In the following example Sam Hedge, an employee of Magnificent 
Options, LLC takes $40,000 from the LLC in the form of payroll.  
Magnificent Options, LLC can contribute up to 25% of Sam’s income 
to his 401K.  This would equal $10,000.  In addition Sam can 
contribute up to $11,000 as a 401K contribution.  The result?  On 
an earned income of $40,000 Sam’s 401K retirement account has 
gained $21,000, or over 50% of earned income.  

The other result?  Sam gets an $11,000 reduction in income and 
pays income taxes on only $29,000, and Magnificent Options, LLC 
gets a $40,000 expense for payroll, and a $10,000 expense for the 
contribution to the retirement fund, to lower its taxable income 
by $50,000.

Maximize your 401K Profit Sharing Plan:

Example two has Susan Cover, an employee of Straddle Option, LLC, 
taking $116,000 in salary from the LLC.  The company contributes 
25% or $29,000, and Susan contributes her maximum of $11,000.  The 
net result?  A total input to the plan of $40,000 or 34.5% of 
Susan’s salary.  

Tax wise what have we accomplished?
We now have $40,000 in a tax-deferred account to trade with.  It 
will grow each year without paying any taxes, so the result is 
supercharged!

We have lowered the income of the LLC by $145,000 in expenses, 
$116,000 in payroll and $29,000 profit sharing contribution.  
Basically at a 30% Federal Tax Bracket just using the $29,000 as a 
reduction to income we would save $8,700 in Federal Income Tax
We have lowered the earned income of Susan by $11,000.  If she is 
in the 30% tax bracket we have just saved $3,300 in federal income 
tax for her.

There are other considerations of course, but I know you are 
sometimes limited by page space.  What say we continue this later 
and I'll walk your readers through some Q&A, detail the benefits 
of creating a formal retirement plan, and talk about some aspects 
of the living trust, which is probably the greatest tax-saving 
tool there is?

Me:  You've got a deal.  We'll finish this off on Thursday prior 
to April 15th, Tax Day.


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

No triggered plays so far this week.  We're bringing two more to 
watch, including a familiar four-letter friend.


To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://members.OptionInvestor.com/watchlist/040902.asp


**************
MARKET POSTURE
**************

It's been a busy two days for Market Posture.  Several sectors 
lost key support levels in the last two sessions.


To Read The Rest of The OptionInvestor.com Market Posture Click Here
http://www.OptionInvestor.com/marketposture/040902_1.asp


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DISCLAIMER
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