Capitulation Begins…

The payroll numbers came in at 41k, well short of consensus, with a headline
rate coming in at 5.8%. Hourly earnings came in up 0.2%, slightly worse than
expected. Overall, the payroll numbers were slightly bearish, but with the
avalanche of poor corporate news hitting the market, the data has faded into the
background.

Not Short Enough

I should have anticipated this type of sell-off. In recent days, nearly
every trader I spoke with said that they were waiting for a bounce in order to
"load" up on puts. Well guess what? The bounce never came, and we are
not short enough.

Volatility

Volatility quickly spiked back up to its recent highs yesterday, and I
would expect an explosion today. The VIX gained 2.75 points to 27.46, the VXN
picked up 1.74 to 49.76, and the QQV rose 1.88 to 44.03. After the battering
that implied volatility took in late March, all three of the major volatility
indices have now reverted to their 200-day moving averages. Look for volatility
to spike significantly higher.

Bear Market

When (if?) this market does put in a temporary low and begins to bounce,
we are going to alter our put buying strategy going forward, using combinations
of long-dated and short-dated puts. The long-dated puts will be used as
investment vehicles, while the short-dated puts will be used as trading
vehicles.

Trade Updates (6/06/02)

(
GM |
Quote |
Chart |
News |
PowerRating) — We sold half of our January 60 puts at $6.60. We now own the
balance for free. Hold.

(
TGT |
Quote |
Chart |
News |
PowerRating) — We completed the sale of half of our June 40 puts at $1.70. We now
own the balance for free. Hold.

New Actions (New Recommendations)

(
MER |
Quote |
Chart |
News |
PowerRating) — Buy a 25% allocation of the July 40 puts at $1.70 or
better.

Working Orders (Old Recommendations)

(
CHIR |
Quote |
Chart |
News |
PowerRating) — Sell all CHIR July 50 calls at $1.00 to close.

(
GM |
Quote |
Chart |
News |
PowerRating) (1) — On a test of the $64.00 -$65.00 area, buy another 20% of the
January 60 puts.

GM (2) — Sell half of the GM January 60 puts at $6.60 — Filled 6/6/02.

TGT — Sell half of the June 40 puts at $1.70 — Filled 6/6/02.

(
DYN |
Quote |
Chart |
News |
PowerRating) — Holders of the DYN January 15 call/June 20 call proxy
buy-write (long the January 15 calls, short the June 20 calls at $3.20),
buy the June 15 calls (to open) and sell the September 17.5 calls (to open)
for $1.00 credit (to you).

Buy-writes

Proxy buy-writes

(
DYN |
Quote |
Chart |
News |
PowerRating) — Long the January 15/June 20 proxy buy-write at $3.20 (50%).

(
CHIR |
Quote |
Chart |
News |
PowerRating) — Long the July 50 calls at $3.30 (50%).

Call Spread Positions

None.

Put Positions

(
BAC |
Quote |
Chart |
News |
PowerRating) — Long the August 65 puts at $1.50 (50%).

(
MER |
Quote |
Chart |
News |
PowerRating) — Long the July 40 puts at $1.50 (25%).

(
SMH |
Quote |
Chart |
News |
PowerRating) — Long the July 37.5 puts at $2.50 (25%).

(
TGT |
Quote |
Chart |
News |
PowerRating) — Long the June 40 puts at $.85 (75%). Sold half at $1.70 on 6/04/02
and 6/6/02.

Spread Positions