Option Investor

Daily Newsletter, Wednesday, 04/24/2002

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The Option Investor Newsletter                Wednesday 04-24-2002
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)
        04-24-2002        High      Low     Volume Advance/Decline
DJIA    10030.40 – 58.80 10163.40 10027.70 1355 mln   1507/1645
NASDAQ   1713.30 - 17.00  1746.52  1711.11 1735 mln   1599/1945
S&P 100   541.86 -  3.94   549.98   541.47   totals   3106/3590
S&P 500  1093.14 -  7.82  1108.46  1092.51  
RUS 2000  507.32 -  2.97   514.57   506.76
DJ TRANS 2674.74 – 23.31  2741.91  2674.59
VIX        22.67 +  0.54    23.08    21.39
VXN        40.20 +  0.27    41.08    39.36
Put/Call Ratio      0.78

Beige, green and red were the colors of the day

It was seesaw action today with market participants not knowing 
what to do as the market averages whipsawed from green, then to 
red, back to green and then red again into the close.  The 
"culprit of uncertainty" looked to be the Fed's Beige Book survey 
of Federal Reserve Districts.

I won't go into great detail as the Beige Book survey is simply a 
report of various observations (not a finite number) of economic 
activity taking place in different financial districts in the 

In brief, the survey showed that signs of economic improvement or 
increases in economic activity were present among the various 
districts since late February, with the sole exception being 
Boston, which described economic activity as mixed.  While the 
overall tone was positive, a few districts expressed 
"qualifications" about the pace of the recovery or strength of 
their regional economies. A link to the Beige Book summary can be 
found at the Federal Reserve website at 

Both the Dow Industrials (INDU) 10,030 -0.58% and the S&P 500 
(SPX.X) 1,093 -0.71 were holding gains 30-minutes after the 
release of the Beige Book report, while the NASDAQ-Composite 
(COMPX) 1,713 -0.97 has edged lower just ahead of the report.  
NASDAQ losses were lead by semiconductors, which had been showing 
some technology leadership in recent weeks, but soon after the 
report was released, the Semiconductor Index (SOX.X) broke 
sharply from the 550 level and lost ground into the close, 
finishing down 3.76% at 534.  For technology bulls, seeing 
weakness in one of the stronger segments of technology became 
disheartening and other groups turned more bearish.

Semiconductor Index Chart - Daily Interval


Yesterday's break of upward trend and inability to rally with 
other sectors in the market earlier in the day, sure has the look 
of determination that semiconductor bulls were and perhaps 
broader technology bulls were going to need a blow out type of 
Beige Book report to bring them to the table.  

We had a bullish play set up with a trigger in shares of Applied 
Materials (NASDAQ:AMAT) $24.96 -3.62% just in case there were 
some upside surprises from today's Beige Book report.  For weeks 
we've been looking for an entry point on the stock for a pullback 
and it looks like we're going to get it.

Applied Materials Chart - Daily Interval


Technology bulls have learned that waiting for a pullback and 
then taking some heat into levels of support has been the best 
way to attack a trade.  With the Semiconductor Index (SOX.X) 
breaking firmly below trend, expect some risk management in 
inventories to be underway.  The greater the pullback in AMAT to 
the December-March consolidation range the better the chance to 
find committed longer-term bulls and institutional sponsorship.

With the Beige Book report depicting a still growing economy, but 
perhaps not at the rapid pace of some momentum investors, expect 
technology stocks to get very volatile.  The MARKET hates 
uncertainty and investors are beginning to question just how 
"robust" the economic turnaround is.

Other technical damage taking place

While a stronger group of technology like the Semiconductor Index 
(SOX.X) has fallen below an upward trend and experienced a 3.7% 
decline, one of our "key" economic sectors in the deep cyclicals 
and the Morgan Stanley Cyclical Index (CYC.X) 559 -1% also has 
broken below our upward trend and gives hint of a market's 
willingness to sell.

Morgan Stanley Cyclical Index Chart - Daily Interval


Today's "firmer" break of bullish trend is an alert to weakness 
in the scenario of more robust economic growth.  While it is 
"tempting" to look for bearish opportunities in the group, there 
are undoubtedly some eager bears from lower levels looking for a 
pullback to get back to break even in their trade.

It's my view that if the Cyclical Index (CYC.X) is going back to 
the lows, then yes this group would be a good short.  However, if 
that were to happen (I don't think it will, but won't rule it 
out), then look out for many technology stocks that have lacked 

Another piece of mentionable "technical damage" came in the Dow 
Industrials (INDU) 10,030 -0.58% with a trade at the 10,050 
level.  On the 50-point box chart of the point and figure chart, 
this was a triple-bottom sell signal and this sell signal came 
below trend.  In essence, on three previous declines, there had 
been enough buyers to prevent a trade at the 10,050 level, but 
today we saw more willing sellers than buyers at that level and 
this too is considered a technical breakdown in the Dow 

I now have resistance firming at 10,300.  There may be some 
"psychological" support at the 10,000 level, but bulls most 
likely should begin assessing downside risk to the 9,800 level 

Seeing rotation into Treasuries

While the Treasury market closed at 03:00 PM EST today (it 
normally closes at that time every day) there was still an hour 
left in trading after the Beige Book numbers were released.  
Bonds saw buying across the maturities and here too we see a 
break of trend (from our regression) in the 10-year YIELD 

10-year YIELD Chart ($TNX.X) - Daily Interval


Today's action in the bond market was quite "defensive" looking.  
Note the rather "sharp" decline in YIELD.  This hints to me that 
Treasury bulls are getting more aggressive with their buying in 
the bonds, despite a lower YIELD than found near our "YIELD top" 
of March 21st of 5.452%.  While the difference between 5.45% and 
current YIELD of 5.095% may not seem like that much, imagine 
you're moving several million dollars a day among various 
investments (stocks or bonds).

With the information currently at hand, I will go on record as 
saying I don't think the 10-year YIELD will break below the 
4.854% level (50% retracement).  I think there is enough 
underpinning economic strength to have an unfavorable risk/reward 
trade in bonds versus stocks (not all stocks) at that type of 
YIELD level.

We will deal/monitor with this one day at a time.  Just like we 
always have, but for now this bond action looks more defensive.  
I've "benchmarked" the March 21st date on the YIELD chart.  Use 
it if you will to perhaps understand how this YIELD may have 
impacted securities you're trading, have bought, shorted, etc.

It isn't all bad news!

Bulls and bears that have been with us awhile know that there are 
opportunities to make money from both the bullish and bearish 
side of a trade.

It's interesting to note that the Dow Jones US Home Construction 
Index (DJUSHB) 382.24, gave back just fractions of recent gains.  
All of a sudden, the "higher YIELDS driving mortgage rates 
higher" than may have priced buyers out of the housing market 
have started to come down a bit haven't they? (see 10-year YIELD 
chart above).

A month ago, there was plenty of chatter that the higher YIELDS 
would have an adverse impact on mortgage rates and homebuilders 
would get crushed.  So far this week, homebuilders have been 
reporting some stellar earnings and guiding estimates higher.

True!  A bear will now turn the table and talk about consumer 
confidence and how a "not so robust" economic picture will put a 
damper on consumer confidence and buyers for new homes will dry 

The bull will simply ask, "then explain what the heck happened to 
that scenario over the past two hears?"  

Look, arguing points of economic philosophy can be left for those 
that have a lot of time on their hands.  What you and I need to 
do is stick with our disciplined methods of trading.  Identify 
good action points where we can properly assess risk/reward and 
take it from there.

Let's quickly review this morning's New Home Sales report that 
came in at 878,000, which was below the consensus number of 
884,000.  In an effort to perhaps "clear things up" we must 
understand that the consensus estimates were bumped higher to 
"account" for higher revisions to the February data.

In February (prior report), the New Home Sales numbers were 
reported as 875,000.  However, those numbers showed a higher 
revision (based on more complete data) to 906,000.  Part of the 
reason the homebuilders saw some selling near the opening of 
trading was that the "3.1% decline" was taken from the 906,000 
revised number, not the previously reported 875,000 data.

Who knows.  Next month, "today's" New Home Sales data can be 
revised (up or down).  Again, if you and I are going to trade the 
homebuilders, we simply need to stay disciplined in our trading 
and let the stock tell us what to do.

New Subscribers and those that have been with us!

I get a lot of questions from subscribers regarding our play list 
and why we're doing the things we're doing with stops, targets, 

Let it be the first priority that YOU do what is right for your 

If you feel a stop of ours (as outlined) is too tight and you 
want to give it more room, then you have the right and the 
priveledge to make the adjustments you feel are warranted.

If you've got a nice gain going in the trade and want to exit the 
position, I STRONGLY advise you to do so!  Hey, I will never tell 
an investor/trader that they shouldn't have taken a profit.  
That's what we're here for.

By golly, that Amazon.com (NASDAQ:AMZN) $16.79 +19.4% is 
something else isn't it?  If you would have told me at the 
beginning of the month that I had to pick one stock that might 
just end up representing the biggest gain from profiled entry, 
you'd have had to twist my arm to make the one bet on Amazon.com 
(AMZN).  I can't say that I'm "surprised" that the stock has 
acted well, but 19% gains in a single day are very hard to find, 
especially from a bullish trade under current/recent market 
conditions.  That gain should be protected and any subscriber 
taking partial positions or full positions off the table today 
should be proud that they sucked it up, traded their plan, and 
now have the opportunity to reap the benefit.  Don't let it slip 

You can also bet there are some bears out there in other stocks 
on our play list that have also "sucked it up" and are playing 
the downside of things.

I think we've got some stocks profiled on both the bullish and 
bearish side of things that have some good potential.  A trader 
that will stay disciplined and true to the trading strategy will 
not only survive, but thrive!

AOL earnings

If you thought that earnings from Microsoft (MSFT) $53.02 -1.79% 
last week were "confusing" then you'll most likely find tonight's 
earnings report from AOL Time Warner (NYSE:AOL) $19.30 +0.99% an 

After the close of trading, AOL reported Q1 earnings (excluding 
charges) of $118 million or $0.18 per share, which was 5-cents 
better than Multex consensus of $0.13.  Q1 revenues came in at 
$9.76 billion versus consensus of $9.5 billion.  AOL said it sees 
"light at the end of the tunnel" and sees Q2 revenue growth in 
mid to signle digits year-over-year, with full year revenue 
growth of 5-8%.

While the numbers were reported concise and clear, many were 
shocked that INCLUDING CHARGES, AOL lost $54.2 billion in the 
first-quarter, the largest quarterly loss reported in U.S. 
history.  AOL said the charges/losses stemmed from expenses in 
the aftermath of the January 2001 merger between America Online 
and Time Warner.

My advice on AOL?  Stay clear.  There are too many other stocks 
to trade or invest in with less uncertainty surrounding the 
stock.  Let things settle down and let the MARKET digest this 
earnings report.  Gamblers only at this point, and 
PremierInvestor.com attempts to avoid "gambling" when risk/reward 
is so difficult to assess.

Jeff Bailey


by Leigh Stevens


Today, you could find some cautiously optimistic traders as the 
market rallied from the area of its prior lows, but by day's end 
the bears were BAACK! There were some cross currents early as 
Durable Goods were down, a first in 5 months. Feel good spill 
over from Amazon's earnings rebound or, we should say a narrowing 
of it's loss, keep the dip short and the morning climb continued, 
especially in the beaten up tech darlings -- the COMP (Nasdaq 
Composite) actually briefly got above pivotal daily resistance at 
1740. Not for long and this was the only Index to get back above 
its down trendline. It was downhill after that as ALL indices 
made new closing lows.   

Hourly stochastic indicators turned up briefly and achieved an 
upside crossover, but this was short-lived.  As Austin restated 
the old maxim, in his Trader's Corner article this week, the 
trend is your friend -- easier to trade on the same side of it, 
most of the time. This should not be surprising to the Tech bulls 
who bought every dip in Nasdaq on the way up to 5000 and who 
thought they had discovered a way to print money.

Today's action suggests even more to me than yesterday, that the 
next downside targets have to be gauged by the Indexes that have 
NOT taken out their Feb. lows -- that sets up 1080 on SPX and the 
9600 area in the Dow, as targets.  

If we get to these areas, past the current earnings season and 
given any reason to hope for improved earnings, there could then 
be a lift from those levels -- or, cause the market to simply 
drift sideways.  We can see, in the case of Amazon today, what an 
improving earnings and profits picture will do.  

Repeating my thought of last night, a stock market break of the 
prior lows, could shock the economy and even imperil the recovery 
- how?  Consumer spending is driving our GNP and positive 
consumer sentiment supports the public's tendency to keep 
spending. A dive in the value of stock holdings tends to make 
people grumpy.  Grumpy is not the mood of spenders.   


New closing lows all around relative to the current downswing.  
No more pointing to indexes holding ABOVE their prior lows, 
except the S&P 500 -- reflecting the recent months strength in 
the mid caps -- and the Dow Jones 30 stock average (INDU). '

Speaking of the mid caps, every fund manager talking head in 
creation, or at least interviewed of late, talks about how the 
small cap and mid cap(italization) stocks are doing well, going 
to new highs, etc.  As if all you have to do is invest in these 
sectors -- well, they are not business sectors, but I suppose we 
could call them SIZE sectors.  

Well, as far as investing, you may have experienced a "different" 
stock market this year if you held the iShares small cap Index 
fund (symbol: IJR) or the iShares Russell 2000 ($RUT.X) Index 
fund and those stocks have done very well.  But, lets take a look 
at these charts on a weekly basis.


Both of these iShare stocks, the S&P 600 small caps and the 
Russell 2000 index of smaller companies, which reflect the most 
representative indexes comprised of the small and mid cap miracle 
stocks look pretty toppy to me.  



I've been recommending trading the ranges, but trading BOTH sides 
has stopped working for most option players on this latest part 
of the current decline, as trying to play even a short-term 
bounce has been best left to day and floor traders. Rallies have 
been short-lived and you need be a day trader almost. 

Again today we saw the stochastic oscillators reversing from even 
mildly elevated levels in the oscillator type indicators like 
stochastics.  When this has occurred from an area of chart 
resistance, the short side has been easier to trade. A put play 
today did occur but it was tricky to play.  

There was a minor run up in the stochastic model on a short-term 
basis (length at 5), COUPLED with a move up to a likely trendline 
resistance area was in the Nasdaq Composite (COMP). From this 
bearish set up, you would have some clue about a place for a 
bearish play on the NDX options or to shorting QQQ or buying the  

Nasdaq Composite (COMP.X) - Hourly:


The peak in the 1820 in the COMP reversed with high readings in 
both settings on the slow stochastic -- the "long" setting at 21 
(below) and the "short" setting (upper) at 5.  The 21 setting 
could have helped keep you on the short side through most of the 
down move.  The quick moving "5" setting was a help when the COMP 
hit the resistance trendline and got up to about the area where 
this index topped the other day, but not from a fully overbought 

Since many are enamored of the stochastic model, I keep them on 
these charts usually.  Those who try trading off them do learn 
that hindsight is better than the foresight with them, as traders 
watch apparent crossovers evaporate in real time, due to the 
shifts in price action -- especially on the short trigger ones 
set to 5 or even 10.    

S&P 500 (SPX) - Hourly: 


The S&P 500 Index has been the key chart to follow for the big 
cap and NYSE stocks in terms of seeing resistance.  The short 
setting is "5" on the stochastic (upper) and the long setting of 
"21" is below.  A downside reversal at the trendline was, coupled 
with the stochastic reversal at their own trendlines -- 
trendlines being a definite help sometimes on the indicators too.  

The place to exit any bullish plays was at the deflection at the 
upper trendline once again on the hourly chart ABOVE. And, as 
suggested last night, playing the long side has taken ability to 
watch the market closely!

Meanwhile, longer-term option plays continue to work well and 
holders of puts that are taking the longer view has little to do 
but watch their profits accumulate. 

I doubt that we will see much occurring to shake the content felt 
by the longer range bears until we re-test the area of the Feb. 
lows, which looks like it will happen.  It's like the man that 
climbed the mountain because it was THERE.  Potential buyers are 
just not going to get too interested until stocks find buying 
interest again in a prior area of perceived "value".  

The blue bands on the daily chart BELOW, "float" 4 percent above 
or below the 21-day moving average. They tend to be areas where 
the trend will slow down or reverse. The 21-day moving average is 
the single best average on the indexes to determine a kind of 
pivot point -- index trade above this line/value and the average 
is tends to define a support area for bullish price action and  
below this area the 21-day average tends to define a deflection 
point or a resistance area.        

S&P 500 Daily chart:


OEX support now looks like it comes in around 534, a guesstimate 
based on the low end of the downtrend price channel on the hourly 
chart. Key or pivotal resistance is in 550 area.  

DJX has next support in the 99 area, in my estimation. Key 
resistance is at 101.7-102. 

I don't see it on the chart as a key area on this current 
decline, but 10,000-10,050 in the Dow Industrials (INDU) is where 
all the media talking heads will get excited, if this area is 
penetrated or broken. No doubt it is an important psychological 
area.  9938 is the level of the current 200-day moving average 
and is an important level, especially followed by institutional 
and fund managers, who don't follow a lot of technical indicators 
-- this one they do.    

QQQ looks like its next key support area is around 31. Key (pivot 
point) resistance is at 34.0.   


My sentiment, Advance-Decline oscillator and Upside volume 
indicator are not into bullish territory by being at oversold 
readings, also suggesting that the market has lower to go. I'll 
show one of the charts each night for this and my next two Index 
Trader wraps.   

For example, bearish sentiment as measured by option put/call 
ratios, or the way I use mine, CBOE equities call to put daily 
volume readings, are not suggesting a high level of bearishness 
on this latest decline.  On my indicator BELOW, there have been 
some bullish readings marking a lot of put buying relative to 
call volume (approaching 1 to 1), but not on this latest shot 


AND, as been written about lately on Option Investor by Eric 
Utley, the CBOE market volatility index (VIX.X) shows volatility 
at an unusually low level -- unusual for a market that may be 
nearing a low. VIX levels are tending to suggest that we need to 
break 10,000 in the Dow perhaps to break the complacency that is 
implied by VIX or as Eric put it to "scare" them.  

As good "contrarians" know, market bottoms are most often 
associated with a high degree of bearish conviction and we are 
not there yet!  

Long/Call Positions:
Long QQQ at 34.30 
Stop: 32.50.  


Leigh Stevens
Chief Market Strategist 


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Is Anybody Still Interested in Volatility?
By Mark Phillips

If it seems to you like we've been beating on the topic of
volatility for forever, I apologize.  If it is any consolation,
we are nearing the end of this educational path -- at least to
the degree that I can guide you.  Since we've been covering other
issues for the past few weeks, I needed to scan back through my
old articles and see where we left off.  I was amazed to see that
we began this educational process on the option Greeks more than
3 months ago!  When I started down this path, I had no idea that
I had so much to say on the topic.  For those of you just joining
us, you can go to the Option Investor site and look in the Options
101 archives beginning with the January 16th, 2002 article.  For
your convenience though, I've pasted the links to each of the
articles in the series below.  Aren't I a nice guy?  (BIG GRIN!)

Paying Attention to Option Pricing
The Greeks, Part 1 - Delta and Gamma
Application of Gamma and Delta to Strike Selection
Back to the Olympians of Old
Oh, That Vexing Volatility
Volatility - Part Deux
The Greeks - Putting It All Together
A Greek Encore
Varying Views on Volatility
A Primer on Online Volatility Tools - Part I
A Primer on Online Volatility Tools - Part II

That's a lot of writing (for me) and a lot of reading for you.
Now that you're up to speed with the old stuff, it's time to dive
into the complex use of Volatility that I've been promising for
more than a few weeks, that of Volatility Skew.  But before I get
started, I must doff my hat to a fellow trader and former writer
in these pages, Lee Lowell.  Lee resides in the sunny Aloha state
(makes you envious, just thinking about it, eh?) and as I've
gotten deeper into the details of how to apply volatility studies
to more complex trading strategies, I've had to rely on Lee to
keep me headed in the right direction.  He has likely forgotten
more about Volatility than I'll ever know, so Lee, if you're
listening, thanks for your time and patience!

Alright, on with the show!

We've spent a fair amount of time looking at volatility using
online sources, so I'm not going to reiterate how to find the
information we're going to focus on here.  Rather, I'll point
you to the articles listed above, as all the "How To" information
is located within.

What Is Volatility Skew?
In an ideal world, all of the various strikes for a given option
series (either puts or calls) will have the same volatility.  But
as you and I both know, we don't live in an ideal world.
Volatility levels end up being different both for different
strike prices and for different expiration months.  

If we were so lucky as to get an ideal example with what we would
call a flat skew, here's what it would look like for a $50 stock
with a nominal implied volatility (IV) of 55%.

Strike   40    45    50    55    60    65
IV(%)    55%   55%   55%   55%   55%   55%

Strike   30    35    40    45    50    55
IV(%)    55%   55%   55%   55%   55%   55%

That's pretty boring, but we have to start somewhere.  No matter
what strike we select, the IV will be 55%.  Where things get a bit
more interesting is when we have different IVs for different
strike prices, creating a simple "sloping skew".  This effect
normally occurs in more volatile stocks and here's what the IV
picture would look like for the same $50 stock with a sloping

Strike   50    55    60    65
IV(%)    51%   54%   58%   63%

Strike   35    40    45    50
IV(%)    61%   58%   54%   51%

You can see that as the call strikes increase from the ATM strike,
so does the IV of the options.  Likewise, as the put strike
decreases from ATM, the IV rises.  And if we listed more strikes
for both the puts and calls we would very likely see that the
"sloping skew" becomes a "smiling skew" as shown below.

Strike   35    40    45    50    55    60    65
IV(%)    61%   57%   53%   51%   54%   58%   63%

Strike   35    40    45    50    55    60    65
IV(%)    61%   58%   54%   51%   54%   57%   62%

If you use your imagination, you can see that a graph of
volatility (using either the puts or the calls) relative to the
strike price will produce a "smiling" shape, from which the skew
pattern gets its name.  For those of you (like me) that have a
rather poor imagination, here is what the graph would look like
for the calls.


It doesn't take much imagination to see where the Smiling Skew
gets its name, now does it.  Unless I miss my guess though,
you're all champing at the bit asking the following question:
"So what the heck am I supposed to do with this information?".
I'm glad you asked, because utilizing this information on
volatility skew can dramatically skew (sorry, I couldn't pass
that one up) the odds of success more sharply in our favor.  This
topic will be of particular interest to those traders that prefer
to trade using various spread strategies.

I wrote several articles late last year detailing how and when
to use various spread strategies, but now that we are armed with
this information on the skew effect, we can utilize it to improve
our trading results yet again.  I think we've gotten far enough
into this discussion that you understand the basic premise behind
the skew.  Besides, most traders find this sort of information
rather dry and uninteresting (Big Mistake!) and as we get deeper
into the topic, I want to keep our weekly visits brief and easy
to process.  There's no need to try and go through everything in
one sitting.

Next week, we're going to abandon the sterile hypothetical example
and tackle a real live stock with a smiling skew.  Then we'll look
at how utilizing the volatility skew can enable us to place a
spread trade with reduced risk and enhanced opportunity for

With a teaser like that, I know I'll see you next week!




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by Leigh Stevens

Given the continued weakness of the market and the breakdown or 
continued weakness of some of the sectors that were being 
recommended for a trading rebound, I revaluated today any sector 
trading ideas where I was suggesting a call play in 
representative stocks within particular sector that seems to be 

Healthcare Sector ($HMO.X) stocks continue to hold up -- this 
index appears to consolidating the recent strong run up, but time 
will tell if this sector can resist a deeper correction. Many 
funds are throwing money at them.  Would like to play this 
sector, but have been reluctant to chase a runaway train.  


>> Oil Services ($OSX.X) - Daily highs since 3/20 keep hitting 
the same levels at 104-105 and this sector may be forming a top. 
An upside penetration of this level is needed to achieve a 
bullish breakout and suggest a new up leg. 

Looks to me like there is another down leg coming in crude oil 
prices. Sector play on oil service stocks by shorting or buying 
puts on those that appear they might be topping or at top end of 
a range, looks interesting: e.g., Haliburton (HAL), Nabors 
Industries (NBR), Schlumberger (SLB), Smith International (SII), 
and Global Industries (GLBL).


This trading pattern probably has something to do with the chart 
picture for crude oil now trading at 26.29, as nearby crude 
futures have not been able to climb back to the prior highs in 
the $28 area.


>> NYSE financial index ($NF.X), is still holding up pretty well, 
at least going sideways in a weak market.  Some of these stocks 
should outperform when we do reach a tradable bottom.

Per the charts shown in yesterday's Index Sector wrap, I'll be 
looking at some of the property causality stocks, like Chubb 
(CB), St. Paul Cos. (SPC), for possible call plays. NO SPECIFIC 

>> DRG, the Pharmaceutical sector index ($DRG.X), (4/22). 
Rebounding from low end of a probable trading range and oversold.  
This sector is playable by the purchase of the May 60 Merck (MRK 
EL) calls, a prominent stock in this sector, especially on a 
pullback in the stock to the 54 area -- 4/24 close: 54.84. 

The May 55 calls (MRK EK) closed at 1.20 (4/24).    


>> Internet Sector index ($INX.X) - 4/17 Sector Trader 
OPTION play: $INX sector stock, JNPR (Juniper Networks)

Buying the May 15 Call (JUX EC) at 4/18 opening was suggested.  
4/18 open: .35; JNPR objective: to $18

Yesterday, INX closed under the lower channel line, but today's 
bounce back has it back in its channel, but just barely. 

Juniper May 15 (JUX EC)calls, today trading as low as .05, 
recently as high as .80. The May 12.5's (JUX EV) are .25. Stock 
has held, barely, an emerging up trendline dating from its early-
March low.

>> Telecom ($XTC.X) index - 4/15 suggestion:
OPTION play: Sector stock, Level 3 Communications (LVLT)-
1)June 5 Call (HGY FA) suggested: 4/16 open: .60
2)LVLT outright purchase, with stock under $5, also suggested: 
4/6 open: 4.16; Objective on LVLT stock: to 5.5/6.

>> Semiconductor Index ($SOX.X) - 4/15 Sector Trader suggestion:
May 650 calls suggested -- at 2.35 on 4/23 close, these calls 
have come down to a more attractive level, assuming SOX holds it 
prior recent low in 545-548 area -- still think the SOX sector is 
a play for a rebound in next 3-4 weeks, if index can hold these 
prior lows.  Otherwise, I will exit.

SOX slipped BELOW the early-April lows at 548-548,suggesting 
beginning of a new down leg. There is a "line" of support, formed 
by numerous lows over Nov.-Jan.-Feb. at 497-498 - this area looks 
like it'll be re-tested. THIS SUGGESTS NO NEW CALL PLAYS.

Better to play the PUTS, but the SOX premiums are too rich for my 
blood. Instead, play the downside in SOX-member stocks like 
Micron (MU), KLA Tencor (KLAC), Teradyne (TER), Applied Materials 
(AMAT) or Intel (INTC). Among the biggies, only Texas Instruments 
(TXN) is holding up some here.

>> Cyclical sector ($CYC.X) - 4/15 suggestion:
1.) iShares Cyclical Trust (IYC)  - 4/16 open: 56.95
Objective: new high above 63.00
2.) OPTION play: CYC Sector stock, - Alcoa (AA) 
May 40 calls (AA EH) - 4/16 open: .60  

4/23 Note: Holding any existing calls only, as stock has broken 
technical support.  

Cyclical group outlook is not as rosy as reflected by recent 
price levels of the stocks in this sector as sector got hit 

Looks like CYC will test support beginning around 559, extending 
down to 552. 552 is key support, the area where CYC topped in 
early-Jan.- what was resistance "becomes" support on the way back 

I had suggested buying Alcoa (AA) May 40 calls, now at 35, as a 
way to play this sector.  I'll stay with the calls as they aren't 
worth selling, but the stock pattern is bearish -- key test of 
support would be in $33 area.

>> Airline sector ($XAL.X) - 4/15 Sector Trader suggestion:
OPTION PLAY: XAL sector stock Southwest Airlines (LUV) 
Sept. 20 (LUV ID) call suggested - 4/16 open: 1.25  
OBJECTIVE: $22 near-term in the stock; $24, longer-term. 

LUV is hold technical support, but just. Retreat in the stock to 
BELOW 17.25, on a closing basis, would cause me to exit calls. 

Rebounding today (close: 97.24) on a Merrill Lynch upgrade of 
some key airline stocks (they believe in a cylical earnings 
recovery), appears to be too little too late, judging by the 
technical picture for XAL -- now looking bearish -- not unlike 
the Cyclical Index ($CYC.X). 

The other day, XAL broke below its Nov-Feb-Apr up trendline, 
which also took it under its 50 and 200-day MA's. Doubt that XAL 
will regain its uptrend line and a return to it could be the kiss 
of death - to regain its uptrend XAL needs to get north of 101. 


A rally to this area looks like a sell via playing some airline 
puts. Southwest Airlines (LUV), which has been bouncing around 
the low end of a broad uptrend channel, looks in danger of 
falling below this $18 support - if so, support at 17-17.25 is 
critical. Re Sep 20 LUV Calls suggested at a buck or under 
(at.95) Tough to make a buck on the long side these days! 

>> Utilities Index - Holders trust shares (AMEX: UTH) 
Long at 95.25 
Stop: 91.00; Longer-term objective: 105 


>> RTH (AMEX: Retail sector trust stock)
SHORT at 99.00 
Objective: 90; Stop: 102 


>> XAU (PHLX Gold & Silver Index)
Reiterated purchase of the May 65 puts; 4/19
STOP: Exit puts if XAU moves to new closing high above 72.33


At 75.09 today, XAU achieved technical break out and is no longer 
showing a double top. Threw in the towel on XAU puts, on 
yesterday's opening -- after Mon. close that exceeded prior 
closing high at 72.33. While the per ounce price of gold, based 
on the nearby futures contract, has not exceeded ITS possible 
double top in the $307-309 area, the mining stocks, etc. are 
still holding up or rising, suggesting that this sector may be 
still going on based on possible production cutbacks or other 
supply-related fundamentals. 



NOTE: 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



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The Option Investor Newsletter                Wednesday 04-24-2002
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AET - call
Adjust from $40.75 up to $42

ADI - put
Adjust from $42.50 down to $41.50

EBAY - put
Adjust from $55.10 down to $54.25

MU - put
Adjust from $52 down to $31

MXIM - put
Adjust from $55.25 down to $53.25

NVDA - put
Adjust from $40.50 down to $36.25




JDEC $11.99 +0.09 (-0.27) Despite being given plenty of time and
a bearish market, shares of JDEC just refuse to break down.  In
fact they've been creeping higher so far this week despite the
weakness seen in the Software sector (GSO.X).  Rather than hope
for the eventual breakdown, we're pulling the plug tonight to
protect against a broad market rebound.  Use any weakness in the
morning to exit existing plays and then focus on better

VRSN $18.00 -3.58 (-6.53) A beautiful end to a winning play, VRSN
delivered in spades over the past 3 days and capped its decline
off with a nice 20% intraday decline on Wednesday, pressured by
sellers that piled on following a downgrade from SoundView
Technology ahead of its earnings report tomorrow night after the
closing bell.  There should be no question about closing this
play out ahead of the report as it has given us a very nice gain.
Sure the earnings report could be negative, leading to more
selling, but with 6 down days in a row (for a 34% loss), it
is entirely possible that the bad news has already been reflected
in the price.  Aggressive traders can still try and scalp another
gain on a failed rally tomorrow, but make sure all positions are
closed before the close.


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MXIM – Maxim Integrated Products $50.03 -2.58 (-4.89 this week)

MXIM designs, develops, manufactures and markets a broad range
of linear and mixed-signal integrated circuits, commonly
referred to as analog circuits.  The company also provides a
range of high-frequency design processes and capabilities that
can be used in custom design.  MXIM's objective is to develop
and market both proprietary and industry-standard analog
integrated circuits that meet the increasingly stringent
quality standards demanded by customers.

Most Recent Write-Up

Weakness in the Semiconductor sector (SOX.X) has been hammering
shares of MXIM lower again this week.  The sharp drop in the
stock on Monday found buyers waiting near the $53 level and it
was able to recover in the afternoon.  But the story wasn't quite
as rosy on Tuesday, as selling drove the stock as low as $52.35
towards the end of the day before recovering to close above the
critical $52.50 support level.  With the heavy selling volume in
the stock and the technical breakdown in the SOX today, it looks
like MXIM will finally violate this support level ahead of its
earnings release next Tuesday.  An oversold bounce tomorrow is
definitely possible in the wake of a series of positive earnings
reports tonight.  Use that bounce to initiate new positions on a
rollover from the $54.00-54.50 resistance area.  Should that
bounce fail to materialize, consider new positions on a collapse
below the $52 level.  Lower stops to $55.25.


Tuesday's breakdown in the SOX below its long-term ascending
trendline promised to deliver great things for the bears and
that promise was fulfilled on Wednesday, with the SOX breaking
the $550 support level, as well as the 200-dma.  MXIM took its
time chewing through the $52 support level, but in the end
couldn't withstand the sector weakness and broke down in a big
way.  Closing just above the $50 level (at the low of the day)
MXIM looks like it could indeed have further to fall ahead of
earnings next Tuesday, especially if the SOX remains weak.  Use
a failed oversold bounce near the $52 level to initiate new
positions or else wait for a drop below the 200-dma (currently
$49.89) on continued heavy volume.  We are lowering our stop to
$53.25 tonight.

BUY PUT MAY-50 XIQ-QJ OI=8606 at $3.00 SL=1.50
BUY PUT MAY-45*XIQ-QI OI=7578 at $1.40 SL=0.75

Average Daily Volume = 5.62 mln



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Strategy Selection: Index Credit Spreads
By Ray Cummins

One of our readers submitted some great questions about a very
popular technique among conservative spread traders.


MAILBAG - Reader's Comments & Questions


ATTN: OIN Spreads/Combos Editor

Dear Mr. Cummins,

I have been a subscriber to your site for a couple of years now,
as well as a reader of many financial publications.  Through much
trial and error, I am trying to settle on and become proficient
in a single type of trading.  Recently, I have been involved in
nothing but credit spreads on the OEX.  I try to follow all the
rules, yet without question, one bad spread which has to be
closed out will more than wipe out the total of all of the other
spreads combined, usually for an overall loss.  I just have some
general questions concerning this.

Since there seems to be so much volatility, do you recommend both
call and put spreads at the same time, or trade only one type?
I know that one must constantly be aware of support and resistance
lines in order to place trades, and then possibly bail out when
they are broken.  First, what is the easiest manner in which to
determine these lines on the OEX?  What seems to occur is that I
will set a stop loss, it will be broken which closes out a spread
for a loss, and then reverses course whereas I didn't need to
close it out at all.  This happens all the time and it is so
frustrating.  I have to believe that I am not looking at the
correct lines to place my stops, or maybe I'm setting them too
loose or tight.  Lastly, your articles seem to highlight very
few OEX credit spreads, but when you do, they are very welcome
and seem to always work out.  Is there a possibility that an
ongoing selection of these types of spreads will be included in
your article in the future?  I realize I have asked a lot of
questions, but I would appreciate any help you could offer in
placing these types of trades.  Again, thank you for your time.


Regarding OEX spreads and Position Management:

In reading your questions and comments, it sounds as if you have
thoroughly considered these issues in your own mind, and it's
obvious you are willing to acquire the knowledge and skills
necessary to succeed in this unique game we play.  The truth is,
losses cannot be avoided in any type of trading, but they can
almost always be minimized to the extent that they do not cause
catastrophic damage to your portfolio balance.

As you know, it is considered very beneficial for the credit
spread investor to use index options rather than equity options.
An extreme movement in one component of an index will not unduly
affect that index, while a stock that gaps sharply in the wrong
direction (such as often occurs after an earnings report) gives
you much less ability to manage risk in equity-option positions.
To be successful in this strategy, you must master a number of
skills:  First, you must correctly assess the direction of
movement (and the magnitude of that movement) in the underlying
stock or index.  For credit spreads, the only objective is for
the sold option to stay "out-of-the-money."  This means you can
be far less precise in your forecast for the underlying, but it
does not relieve you of the requirement for sound judgment about
the overall character of the market and the potential for future
volatility.  Considering the current outlook, it is fortunate
that credit spreads are profitable in a range-bound environment.
It is very important, however, to make sure there is technical
support above the sold put in a bullish spread (such as a moving
average, the bottom of a established trading pattern or a commonly
recognized trend-line) to increase the probability that both
options finish out-of-the-money.  Of course, the opposite would
be the case for a bearish spread using calls: overhead resistance
or supply or a technical "top" formation below the strike price
of the sold option.  Second, it is important to establish spreads
that are sufficiently distant from the price of the underlying,
so the position can withstand a substantial (unexpected) market
movement without undue risk.  If excess volatility is a concern,
you should consider establishing a larger cushion than normal (a
greater margin for error) to avoid getting "whip-sawed" out of
the position.  Successful credit-spread traders learn to identify
periods of extreme volatility and avoid those periods unless they
can be used to one's advantage in a position's set-up (based on a
longer-term timeframe and confirming technical indications).
The basic questions related to position (strike) selection are:
How much downside are you willing to risk in return for the
(relatively small) profit achieved, and are you the type that
manages his plays more aggressively, with a focus on limiting
losses before they become substantial?  In addition to defining
the fundamental style of your trading, the first question also
relates directly to option pricing theory because we know that
prices are determined from historical and statistical data, and
that in all but the most unique cases, the market trades inside
the 2nd standard deviation of a normal distribution.  Strangely,
that area is roughly equivalent to the 3%-5% monthly (annualized)
return in strategies such as deep-OTM credit spreads.  So, if you
want to have a very high probability of making a low profit (just
one way, but not necessarily the best method of option trading),
target plays that are in that range.  The second part of the
question is probably more important since it relates to the fact
that success with a low profit-high probability approach to the
market is based on limiting losses to a minimum.  As I have said
before, there are never any big winners to offset the big losers,
so there simply can't be any big losers.  Strategies such as OTM
credit spreads (as well as many common option-trading techniques)
need to have some type of exit point in case the market, stock,
or sector turns in the opposite direction from that which is
expected.  Obviously, a gapping issue will occasionally wipe out
a portion of previous gains and there is nothing you can do about
it.  At the same time, you must manage the remaining positions
effectively or there will be no profits to offset the (rare)
catastrophic losers.  My point is, the key to success with a
strategy such as OTM credit spreads is the position management
that follows the initial trade and in all cases, you should
remember the popular adage: Traders become successful when they
learn to take small profits regularly and they don't let losing
plays significantly erode capital.

As far as the OEX credit-spreads strategy and my sections of the
OIN: I try to offer a variety of plays in the most popular
categories of option trading (as determined by the readers) so
I won't always a position of that type in the current portfolio.
However, that does not prevent you from trading the strategy on
a regular basis and if you want to be successful in the long run,
that is likely the best approach to take.  As you mentioned, one
way to hedge your positions is through the use of simultaneous
bearish and bullish spreads (that is a tactic of many professional
traders) and in some cases, you can benefit from the reduced
collateral requirements of a neutral-outlook position.  I suggest
you read some of the material written by traders who use this
technique frequently (Don Fishback and Jay Kaeppel come to mind)
and try to focus more on the probability aspect of this approach,
rather than the technical indications (which don't seem to be
working for you anyway).  I am not saying charting and technical
analysis isn't important, rather I am simply pointing out that
there are other ways to make price forecasts and volatility

I hope these comments will provide you some direction to help
improve your trading skills and I wish you much success in the


Summary of Current Positions
(As of 04-23-02)

Naked Puts

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

ACF      MAY    35   34.45  46.13   0.55    5.9%
MXIM     MAY    45   44.30  52.61   0.70    5.9%

Naked Calls

Stock  Strike Strike Break Current  Gain  Potential
Symbol  Month  Price  Even  Price  (Loss) Mo. Yield

MRVL     MAY    47.5 48.00  39.00   0.50     5.1%
TER      MAY    40   40.75  34.68   0.75     6.7%
ICOS     MAY    55   55.50  42.70   0.50     5.7%
CCMP     MAY    75   75.90  56.53   0.90     6.9%
MXIM     MAY    65   65.90  52.61   0.90     5.8%

Put-Credit Spreads

Stock                                          Gain
Symbol  Pick  Last Month L/P S/P Credit  C/B  (Loss) Status

ACDO   60.79 61.97  MAY   50  55  0.65  54.35  0.65   Open
ASD    74.24 73.40  MAY   65  70  0.60  69.40  0.60   Open
BSC    65.65 64.32  MAY   55  60  0.55  59.45  0.55   Open
FAST   81.99 81.84  MAY   70  75  0.55  74.45  0.55   Open
KSS    75.00 74.15  MAY   65  70  0.65  69.35  0.65   Open
PCAR   77.34 72.16  MAY   65  70  0.50  69.50  0.50   Open
WLP    67.79 70.70  MAY   60  65  0.80  64.20  0.80   Open
IGEN   41.10 40.15  MAY   30  35  0.50  34.50  0.50   Open
PGR    59.27 57.14  MAY   53  55  0.20  54.80  0.20   Open

Call-Credit Spreads

Stock                                          Gain
Symbol  Pick  Last Month L/C S/C Credit  C/B  (Loss) Status

RE     66.00 69.20  MAY   80  75  0.00  75.00  0.00   Open
CSC    44.82 46.22  MAY   55  50  0.65  50.65  0.65   Open
SMH    44.38 44.00  MAY   55  50  0.55  50.55  0.55   Open
PFE    37.85 36.70  MAY   42  40  0.35  40.35  0.35   Open

Debit Straddles/Strangles: 

Stock  Position    Debit  Target   M/V      G/L      Status

DST    MAY50C/50P  3.90    5.50    4.10     0.20      Open
SPC    MAY50C/50P  3.90    5.50    3.75    (0.15)     Open
The neutral position in St. Paul Companies (NYSE:SPC) did
not offer our target entry price debit on a simultaneous
order basis, however we will track the position through the
company's quarterly earnings (on 4/25/02) for traders who
participated in the position.

Synthetic Positions:

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

APOL   65.80   61.92   MAY65C/45P  (0.20)  44.80   0.70  Closed
GM     64.95   66.00   MAY70C/60P   0.45   59.55   0.55   Open
BA     45.37   42.46   MAY40P/50C  (0.40)  49.60   0.10  No Play
Apollo Group (NASDAQ:APOL) continued to rally this week, easily
exceeding our maximum profit target as the company's share price
moved to a new all-time high.  The speculative synthetic play in
General Motors (NYSE:GM) has also performed well and with the
higher-than-expected initial credit, the position offered a small
"early-exit" profit after only two days.  The bearish-outlook
synthetic position in Boeing (NYSE:BA) was correctly forecast
but due to the sharp downward movement, the target credit was
not available on a simultaneous order basis.

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

ADRX - Andrx Corporation  $44.50  *** Recovery Underway? ***

Andrx Corporation (NASDAQ:ADRX) commercializes controlled-release
oral pharmaceuticals using proprietary drug delivery technologies.
The company has nine proprietary controlled-release drug delivery
technologies that are patented for certain applications or for
which it has filed for patent protection for certain applications.
Andrx uses its proprietary delivery technologies and formulation
skills to develop bio-equivalent versions of selected controlled
release brand name pharmaceuticals, and other controlled release
formulations of existing immediate-release or controlled-release
drugs.  The company is also developing bio-equivalent versions of
specialty, niche and immediate-release pharmaceutical products.

Shares of Andrx began a long-awaited recovery last week as news
of AstraZeneca's (NYSE:AZN) setbacks in their battle to fend off
copycat versions of the best-selling ulcer pill Prilosec spread
among traders.  Some analysts suggested the activity reflects a
shift in favor of generic drug companies in the fight over the
$6-billion-a-year market for the popular product.  Andrx has been
battling AstraZeneca in court since last December over the right
to sell a generic form of the medicine and experts believe that
a possible launch of the generic version may occur as soon as the
third quarter of this year.  Apparently investors agree with that
optimistic outlook as they have been steadily moving back into
ADRX over the past two weeks.  Traders who believe the rebound
will continue in the near-term can profit from that outcome with
these positions.

ADRX - Andrx Corporation  $44.50

PLAY (sell naked put):

Action   Month &  Option  Open   Opt Bid  Cost    Target
 Req'd   Strike   Symbol  Int.   Premium  Basis  Mo. Yield

SELL PUT  MAY 35  QAX QG  1,744   0.50    34.50     7.0% ***
SELL PUT  MAY 40  QAX QH  949     1.55    38.45    13.8%

PHTN - Photon Dynamics  $49.15  *** Optimistic Outlook! ***

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

On Tuesday, computer display test equipment maker Photon Dynamics
posted quarterly results that were in line with the consensus
forecasts and said their flat-panel display business was doing
well, considering the slow recovery in the industry.  Revenues
were $17 million, down from $23 million a year earlier but up
from the $14 million earned in the first quarter.  Bookings rose
for the fourth consecutive quarter and orders exceeded sales,
driven mostly by the flat panel display business.  The company
also forecast revenue for the fiscal third quarter rising 10 to
20% from the second, with earnings between break-even and $0.08
per share.

Investors who agree with a bullish outlook for PHTN can establish
a low risk cost basis in the issue with our target position.

PHTN - Photon Dynamics  $49.15

PLAY (sell naked put):

Action   Month &  Option  Open   Opt Bid  Cost    Target
 Req'd   Strike   Symbol  Int.   Premium  Basis  Mo. Yield

SELL PUT MAY 42.5 PDU QV  56      0.75    41.75     7.2% ***
SELL PUT MAY 45   PDU QI  454     1.40    43.60    10.9%
SELL PUT MAY 47.5 PDU QW  496     2.15    45.35    14.1%


Credit Spreads

EXPE - Expedia  $80.56  *** A Big Day! ***

Expedia (NASDAQ:EXPE) is a provider of branded online travel
services for leisure and small business travelers.  The company
operates full service travel agency Websites targeted at a wide
range of customers in a number of geographies.  Expedia operates
Expedia.com in the United States; Expedia.co.uk in the United
Kingdom; Expedia.de in Germany; and Expedia.ca in Canada.  The
company also operates the Travelscape.com, VacationSpot.com,
LVRS.com, and Rent-a-Holiday.com Websites.  In addition, the
company operates a private label travel Internet site under the
Worldwide Technology Enterprises brand.

Shares of online travel firm Expedia jumped $10 today after the
company reported a quarterly profit of $0.46 per share, nearly
double that of analysts' expectations.  The company's sales of
$116 million were almost twice those reported in the same period
a year ago, due to strong sales of vacation packages and hotel
bookings.  EXPE has also been popular among "short-selling"
traders and the rush to cover sold shares helped boost today's
upside activity.  Those who believe the rally will continue in
the near-term can speculate on that outcome in a conservative
manner with this position.

EXPE - Expedia  $80.56

PLAY (conservative - bullish/credit spread):

BUY  PUT  MAY-65  UED-QM  OI=84    A=$0.60
SELL PUT  MAY-70  UED-QN  OI=1366  B=$1.25

TRMS - Trimeris  $49.15  *** New HIV Drug! ***

Trimeris (NAASDAQ:TRMS) is engaged in discovery and development
of a unique class of antiviral therapeutics called viral fusion
inhibitors (FIs).  Trimeris' most advanced product candidates,
T-20 and T-1249, are for the treatment of human immunodeficiency
virus, type I-HIV.  T-20 is a first-generation FI that prevents
HIV from entering and infecting cells.  T-1249 is a rationally
designed second-generation FI in an earlier stage of development.
Through its study and knowledge of the HIV fusion process, the
company has developed a proprietary technology platform aimed at
discovering compounds that identify potential fusion targets in
certain viruses that rely on fusion to penetrate host cells.
Using its proprietary viral fusion platform technology, the
company has identified and filed patent applications disclosing
numerous discrete peptide sequences that appear to inhibit fusion
for several viruses.

The share value of Trimeris soared last week on stellar results
from pivotal tests on an experimental AIDS drug which could help
patients who are resistant to currently available treatments.
Trimeris is co-developing the drug, dubbed T-20, along with the
U.S. subsidiary of the Swiss healthcare giant Roche Holding AG.
In the phase III test, patients who got a combination of T-20
and other drugs already approved by the FDA enjoyed a greater
reduction of HIV in their blood than patients who were taking
only the approved drugs.  Using the results of that test and
another currently underway, Trimeris and Roche plan to apply
for FDA approval later this year and hope to have T-20 on the
market next year.

Traders who have a positive outlook for TRMS in the near-term
can profit from upside activity in its share value with this

TRMS - Trimeris  $49.15
PLAY (conservative - bullish/credit spread):

BUY  PUT  MAY-40  RQM-QH  OI=536  A=$0.60
SELL PUT  MAY-45  RQM-QI  OI=570  B=$1.20

XAU - PHLX Gold & Silver Sector  $74.07  *** Gold Hedge! ***

The PHLX Gold & Silver Sector is a capitalization-weighted index
composed of the common stocks of 9 companies involved in the gold
and silver mining industry.  XAUSM was set to an initial value of
100 in January 1979 and options on the index commenced trading on
December 19, 1983.  More information on the index and its options
can be found at: http://www.phlx.com/products/xau.html

The technical indications of the XAU are favorable and traders
who agree with a bullish outlook for gold and silver prices can
profit from that activity with this conservative position.

XAU - PHLX Gold & Silver Sector  $74.07
PLAY (conservative - bullish/credit spread):

BUY  PUT  MAY-65  XAU-QM  OI=2401  A=$0.50
SELL PUT  MAY-70  XAU-QN  OI=2157  B=$1.15


BULLISH PLAYS - Synthetic Positions

KBH - KB Home  $49.76  *** Hot Sector! ***

KB Home (NASDDAQ:KBH) is a homebuilder with domestic operations
in Arizona, California, Colorado, Florida, Nevada, New Mexico
and Texas, and through a majority owned subsidiary, KB Home has
international operations in France.  KB Home builds homes that
cater primarily to first-time and first move-up homebuyers,
generally in medium-sized developments close to metropolitan
areas.  Kaufman & Broad S.A., KB Home's majority-owned French
subsidiary, builds single-family homes, high-density residential
properties such as condominium complexes and commercial projects
in France.  KB Home also provides mortgage-banking services to
domestic homebuyers through its wholly owned subsidiary, KB Home
Mortgage Company.

Despite the recent decline in equity values, the Residential
Construction sector has performed very well over the past few
sessions and KB Home has been one of the more popular issues
in the group.  Much of the activity is related to the recent
new-home sales data, which fell slightly in March but was also
revised upward for February and January.  KB Home's total net
order for March rose 5.3% to 2,245 and the company's orders in
France during March rose 75% to 358, well above the industry
average.  The fundamental outlook for KBH is excellent and its
stock is in a long-term bullish trend, suggesting additional
upside potential in the near-term.  Traders who agree with that
outlook can attempt to profit from future upside activity with
this speculative position.

KBH - KB Home  $49.76

PLAY (conservative - bullish/synthetic position):

BUY  CALL  JUN-55  KBH-FK  OI=30  A=$1.15
SELL PUT   JUN-45  KBH-RI  OI=10  B=$1.20

Note:  Using options, the position is similar to being long the
stock.  The collateral requirement for the sold (short) put is
approximately $1,650 per contract.


Neutral Plays - Straddles & Strangles

GS - Goldman Sachs  $79.49  *** Big Mover! ***

The Goldman Sachs Group (NYSE:GS) is a global investment banking
and securities firm that provides a range of services worldwide
to a substantial and diversified client base.  The company has
operational offices in over 20 countries and its activities are
divided into two segments: Global Capital Markets, and Asset
Management and Securities Services.  The Global Capital Markets
segment, which represented 64% of the Goldman's 2001 net revenues,
consists of Investment Banking, Trading and Principal Investments.
Goldman Sachs' Asset Management segment offers various investment
strategies and advice across all major asset classes: global
equity; fixed income, including money markets; currency, and
alternative investment products.  Goldman's Securities Services
activities include prime brokerage, financing services and
securities lending.

Goldman Sachs has been very active in recent sessions and based
on analysis of historical option premiums and the issue's share
price movement, the stock is a favorable candidate for a debit
straddle.  In addition, the issue has a history of multiple
cycles through a sufficient range in the required amount of time
to justify the overall risk of the position.  As always, review
the play individually and make your own decision about its future

GS - Goldman Sachs  $79.49

PLAY (speculative - neutral/debit straddle):

BUY  CALL  MAY-80  GS-EP  OI=1259  A=$2.60
BUY  PUT   MAY-80  GS-QP  OI=2248  A=$3.20


BEARISH PLAYS - Naked Calls & Combinations

CCMP - Cabot Microelectronics  $53.75  *** Earnings Play! ***

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

Cabot Micro is set to announce quarterly earnings results in
the morning and based on today's selling pressure in the issue,
investors are not expecting a positive surprise.  The report
is due before the market open, but there may be an opportunity
to initiate the spread after the start of trading, due to
volatility from the announcement.  Traders who agree with a
neutral-to-bearish outlook for the company's stock in the
near-term can speculate on that outcome with this conservative

CCMP - Cabot Microelectronics  $53.75

PLAY (conservative - bearish/credit spread):

BUY  CALL  MAY-70  UKR-EN  OI=800  A=$0.35
SELL CALL  MAY-65  UKR-EM  OI=613  B=$0.80

KLAC - KLA-Tencor  $60.31  *** Look-Out Below! ***

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

KLA-Tencor, one of the leading makers of equipment used in the
production of microchips, recently disappointed investors with a
weaker-than-expected forecast for orders, as it reported sharply
lower quarterly revenues and profits.  Now the company's stock is
in a steep downward trend and the heavy-volume selling pressure
suggests further bearish activity in the near-term.  Traders who
agree with that outlook can attempt to profit from future downside
movement with this position.

KLAC - KLA-Tencor  $60.31

PLAY (very speculative - bearish/synthetic position):

BUY  PUT   MAY-50  KCQ-QJ  OI=1158  A=$0.65
SELL CALL  MAY-70  CKV-EN  OI=3660  B=$0.40

Note:  Using options, the position is similar to being short the
stock.  The collateral requirement for the sold (short) call is
approximately $1,500 per contract.





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

DFXI   42.00  MAY 40P  1.15   MAY 35P  0.40   0.80     19%
OHP 	 45.63  MAY 42P  0.55   MAY 40P  0.30   0.30     14%
NBR 	 44.00  MAY 40P  0.60   MAY 37P  0.35   0.30     14%
PLMD 	 40.26  MAY 35P  0.90   MAY 30P  0.40   0.55     12%
RYL   108.31  MAY 100P 1.25   MAY 95P  0.75   0.55     12%
PHM    54.25  MAY 50P  0.65   MAY 45P  0.15   0.55     12%


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

ADBE 	 36.77  MAY 40C  0.75   MAY 45C  0.20   0.60     14%
BOL 	 37.24  MAY 40C  0.75   MAY 45C  0.20   0.60     14%
SYMC 	 34.65  MAY 40C  0.80   MAY 45C  0.25   0.60     14%
SII 	 68.26  MAY 75C  0.75   MAY 80C  0.25   0.55     12%
BRCM 	 34.01  MAY 40C  0.60   MAY 45C  0.15   0.50     11%




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