A Blessing In Disguise?

March 8, 2002
Tony Saliba

The market is set to open sharply higher on the
back of much better than expected non-farm payroll numbers. February non-farm
payrolls increased by 66k vs. expectations of a slight rise, and the headline
unemployment rate dropped to 5.5% vs. expectations of a rise to 5.7%. This
morning’s opening will send the major indices to new highs, and it will be
important to see if they can hold. Credit markets are reacting negatively as
bonds make new lows (new highs in yield). Fed Fund futures are already
discounting a tightening in the late spring, and this could eventually prove to
be a negative for some sectors of the market.

Strong doses of news, whether good or bad, provide great tests for the market
and can reveal a lot. Right now, the news couldn’t be any better, therefore we
should watch for any signs of weakness that may develop.

If the
(
SMH |
Quote |
Chart |
News |
PowerRating)s close higher on the day, we will liquidate the April 40 puts.

Volatility

Volatility was firm ahead of today’s February non-farm payroll numbers. It
should now take a solid beating if the market continues to move higher.
Yesterday the VIX lost .08 to 21.95, while the VXN climbed 1.03 to
43.76 and the QQV fell late to 36.50, down .67. Volatility remains low. If
implied volatility gets massacred today, it might provide good long option
opportunities.

Trade Updates (3/07/02)

We were busy today

(
AHC |
Quote |
Chart |
News |
PowerRating) — We sold the May 70 calls at $6.00, booking a $2.50 profit.

(
CPN |
Quote |
Chart |
News |
PowerRating) — We bought the April 12.5 calls at $1.20 (50%).

(
SLB |
Quote |
Chart |
News |
PowerRating) — We sold the May 55/60 call spread at $3.50, booking a $2.00 profit.

Current Recommendations

AutoZone
(
AZO |
Quote |
Chart |
News |
PowerRating) –Sell an additional 25% of the March 55/65 put spread at
$4.00.

Exxon Mobil
(
XOM |
Quote |
Chart |
News |
PowerRating) — Buy an additional 25% of the July 40 calls at $3.50 or
better.

Biotechs are getting interesting. We still like Gilead (GILD). Also, CHIR, DNA
and MLNM have caught our eye. If volatility gets pounded today, we will likely
be buying some calls in some or all of these stocks. We’ll keep you posted.

Rolls/Adjustments

Disney (DIS) – Investors long the April 22.5/ 25 reverse collar (long
the April 25 calls, short the April 22.5 puts) at a $1.15 credit (75%) may want
to consider the following roll: Buy the Disney April 22.5 put/ April 27.5
collar (buy the April 22.5 puts, sell the April 27.5 calls) for zero. This will
"roll" you into the DIS April 25 / 27.5 bull call spread at a $1.15
credit.

Recap of open trades

Long-term

Reverse Collars

(
DIS |
Quote |
Chart |
News |
PowerRating) — April 25/22.5 reverse collar (long
the April 25 calls, short the April 22.5 puts) at a $1.15 credit (75%).

Buy-writes

(
HAL |
Quote |
Chart |
News |
PowerRating) — long the July 20 buy-write at $15.00
(50%).

Proxy buy-writes

None.

Complex Strategies

(
WMT |
Quote |
Chart |
News |
PowerRating) — Long the March 60 straddle at $3.30
(100%). We have begun converting the calls into puts by selling stock against
the position.

Short-term

Call Positions

(
AHC |
Quote |
Chart |
News |
PowerRating) — Long the May 70 calls at $3.50 (25%). Sold at $6.00 on 3/7/02.

(
XOM |
Quote |
Chart |
News |
PowerRating) — Long the July 40 calls at $3.00 (25%).

Call Spread Positions

(
DYN |
Quote |
Chart |
News |
PowerRating) — Long the March 30/40 1:2 call ratio spread @ $1.50.

(
SLB |
Quote |
Chart |
News |
PowerRating) — Long May 55/60 call spread at $1.50 (50%). Sold at $3.50 on 3/7/02.

(
QCOM |
Quote |
Chart |
News |
PowerRating) — Long the April 40/50 call spread at $2.50 (100%).

(
TLAB |
Quote |
Chart |
News |
PowerRating) — Long the March 17.5/22.5 call spread at $.80 credit average (50%).

Note: This spread is a result of a reverse collar roll.

Put Positions

(
SMH |
Quote |
Chart |
News |
PowerRating) — Long the April 40 puts at $2.11 average cost.(75%).

(
QQQ |
Quote |
Chart |
News |
PowerRating) — Liquidated remaining April 35 puts 3/05/02
at $1.05 per alerts. Calculation of net P&L from recent put scalping
program in progress…

Put Spread Positions

(
AZO |
Quote |
Chart |
News |
PowerRating) — Long the March 55/65 put spread @ 2.125 (75%). Sold 25% on 3/5/02
at $3.00

Stops

None.

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Options trading involves substantial risk and
is not suitable for all Investors.
Also note that spread strategies involve
multiple commissions and are not risk-free. Most spreads must be done in a
margin account.
Because of the importance of tax
considerations to all options transactions, the investor considering options
should consult with a tax advisor as to how taxes may affect the outcome of
contemplated options transactions.
Supporting documentation for claims,
comparisons, recommendations, statistics or other technical data will be
furnished upon request. One or more of the contributors to these
commentaries may have a position in one or more of the securities mentioned.
It is important to note that the options
strategies discussed herein are not suitable to all investors. Options are
complex investment tools and involve substantial risk. Moreover spreading
strategies do not eliminate risk and involve multiple commissions.
Note: All individuals must have read the ODD
carefully before trading options. To obtain the document, click on the OCC
link: https://www.theocc.com/publications/risks/riskchap1.jsp

A Blessing In Disguise?

BUY THE FEAR, SELL THE GREED

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