Paying Tuition

The market is slightly higher at
the moment,
but there are some
interesting
developments:

Core CPI came in much higher than expected at +.4% vs.
.2%, not good.
Although the
headlines will tell you about the dollar making a new high
vs.
the yen, the important thing is that the dollar is getting pounded

vs. European currencies, not good.

With interest rates below the inflation rates, commodities
may become attractive alternative investments to stocks — just something to
keep in
mind.

Yesterday, the market closed below several key technical
levels as well.
There should be
another rally coming, however, on the possible capture
/death
of bin Laden — look to liquidate longs into that rally.

Important levels to watch today:


(
DOW |
Quote |
Chart |
News |
PowerRating)
— 9706 is the 50% retracement of the May to
Sept. decline.


(
QQQ |
Quote |
Chart |
News |
PowerRating)
— 39.42 is the 50% retracement of the May to
Sept. decline; 36.50 is the 38.2%
retracement
of May to Sept. decline.


(
$COMPQ |
Quote |
Chart |
News |
PowerRating)
— 1937 is the 200-0day MA; 1857 is the
50% retracement of the May to Sept. decline.


(
$SOX.X |
Quote |
Chart |
News |
PowerRating)
— 527.10 is the 50% retracement of the
May to Sept. decline.

Calpine/Dynegy Revisited

As I’m sure you are all aware, two days ago, Calpine
(
CPN |
Quote |
Chart |
News |
PowerRating)

and Dynegy

(
DYN |
Quote |
Chart |
News |
PowerRating)
, along with
much of the energy production/natural gas sector,
bottomed
on heavy volumes (6-10 x average) and astronomical implied
volatilities.
We exited our buy-writes for a loss of 2.49. This was
obviously
the wrong strategy for stocks with the current hysteria level
of
this sector. You do not want to have a buy-write on when much of the

market believes that the stock could go to
zero.

However, for those who are not afraid to go back in the
water, there is
another way to
play an oversold stock and high volatility without
exposing
yourself to huge downside risk.

A call ratio spread is another way to approach these types
of markets.
Since the implied
volatility will have a high negative correlation to
stock
price (stock goes down, volatility goes up; stock goes up,
volatility
goes down), a call ratio spread will take advantage of the
declining
volatility that will accompany a rally without leaving your
rear
end hanging out on the downside.

However, since a call ratio spread involves selling more
calls than you
are buying, a
large move to the upside could expose your position to
unlimited
risk. These can be difficult to manage.

With that in mind, I am going to embark on
a semi-tutorial. We are going to buy the Dynegy (DYN) Jan. 30/40 1:2 call spread
at a debit of
$1.00, and the
March 30/40 1:2 call spread at a debit of $1.00. We
will
need a sell-off/volatility pop to get these done, but I think we
will.

Once these spreads are on, we are going to track their
behavior and make
adjustments.
They will be the subject of an ongoing dialog in the alerts
and
commentary section, and I welcome any questions or comments from
readers.

As always, I try to answer questions as fast as I can, but
please
understand that I am
trading during the day and don’t always have time
to
answer right away.

Updates:

*
(
TLAB |
Quote |
Chart |
News |
PowerRating)
— We re-established our TLAB position,
buying back
the 50% of the March
17.5 call/March 15 put reverse collar that we
sold
at $1.05. We repurchased it at a $1.00 credit.
We
are now long the March 17.5 call/March 15 put
reverse
collar for ~$1.50 credit.

*
(
TGT |
Quote |
Chart |
News |
PowerRating)
— We bought the remaining TGT Jan. 35 puts @
1.20. This brings us up to a 100% position for an average cost of ~1.15.

Current Recommendations:

We recommend scaling into ONE of the following
short positions in retail
stocks:


(
WMT |
Quote |
Chart |
News |
PowerRating)
— Buy the Jan. 55 puts @ 2.35, 50% position.


(
BBY |
Quote |
Chart |
News |
PowerRating)
— Buy the Jan. 60/70 put spread @ 3.50 or
better, 50% position.


(
TGT |
Quote |
Chart |
News |
PowerRating)
— Buy the remaining Jan. 35 puts @ 1.1.0-1.20,
go to a 100%
position.


(
AZO |
Quote |
Chart |
News |
PowerRating)
— Buy an additional 25% of the March 55/65 put
spread @ 2.00. This
will bring
us up to a 50% position.

Buy-writers in general — scale purchase protective puts.
Complete by
Christmas.

Rolls/Adjustments:


(
AMR |
Quote |
Chart |
News |
PowerRating)
–Those of you with Jan. ’02 25 calls from the
calendars you may:

A) Put a $1.50 offer in for the Jan. 25 calls to
liquidate

B) Put a. $.50 offer in for the Dec. 25 calls to roll
into the Jan./Dec. 25 call calendar at a net
cost of .25


(
JDSU |
Quote |
Chart |
News |
PowerRating)
— Filled! Put a $1.00 bid in for the JDSU
Jan. 10 calls that we
previously
sold for $3.00. These calls were a part of the original JDSU
Jan.
7.5 put/Jan. 10 call reverse collar strategy.

Recap of open trades:

Long-term

Airline calendar spreads


(
AMR |
Quote |
Chart |
News |
PowerRating)
Jan./Oct. 25 call calendar @ .75 — Oct.’s went
out worthless,
holding Jan. See
rolls above.


(
UAL |
Quote |
Chart |
News |
PowerRating)
Jan./Oct. 25 call calendar @ .70 — Oct.’s went
out worthless,
holding Jan.

Butterflies


(
DELL |
Quote |
Chart |
News |
PowerRating)
— Long the DELL Dec. 20/25/30 call butterfly
at 1.75.

Reverse Collars


(
AWE |
Quote |
Chart |
News |
PowerRating)
Jan. 12/15 reverse collar (long the Jan. 15
calls, short the
Jan. 12.5 puts)
@ .05 average. Stop below.


(
TLAB |
Quote |
Chart |
News |
PowerRating)
March 17.5/15 reverse collar (long the March
17.5 calls, short
the March 15
puts) @ 1.50 credit average.

Buy-writes

*
(
AMZN |
Quote |
Chart |
News |
PowerRating)
Jan. ’03 10 buy-write @ 5.15 (2 units) —
hold.

*
(
JDSU |
Quote |
Chart |
News |
PowerRating)
Jan. 12.5 buy-write @ 9.60 — hold.

Proxy buy-writes


(
BA |
Quote |
Chart |
News |
PowerRating)
Jan. ’03 35/Jan. ’02 40 call calendar @ 5.00 —
hold.

BA Jan. ’03 40/Nov. ‘ 01 40 call calendar @ 3.00 — hold.

Complex Strategies


(
JDSU |
Quote |
Chart |
News |
PowerRating)
— Long 1 unit of the Jan. 10 calls and short
2 units of the
Jan. 7.5 puts @
$1.00 credit.

Short-term

Call Positions


(
WCOM |
Quote |
Chart |
News |
PowerRating)
Jan. 12.5 calls @ 2.40 — hold. Stop below.


(
CIEN |
Quote |
Chart |
News |
PowerRating)
  — Long the Dec. 22.5 calls @ 1.05,
exited at .05 — total loss.

Put Positions


(
TGT |
Quote |
Chart |
News |
PowerRating)
— Long the Jan. 35 puts @ 1.15 (100%) — hold.


(
WMT |
Quote |
Chart |
News |
PowerRating)
— Long the Jan. 55 puts @ 2.35 (50%) — hold.

Put Spread Positions


(
BAC |
Quote |
Chart |
News |
PowerRating)
— Long the Dec. 55/60 1:2 ratio put spread at
.30 — hold.


(
AZO |
Quote |
Chart |
News |
PowerRating)
— Long the March 55/65 put spread @ 2.75 (50%)
— hold.


(
BBY |
Quote |
Chart |
News |
PowerRating)
— Long the Jan. 60/70 put spread @ 3.30 (25%)
— hold.

STOPS

AWE: Stop @ 12.25 close only.

WCOM: Stop @ 13.95 close only.

TLAB: Stop @ 11.95 close only.

If you would like to receive Tony and his trading
team’s options ideas at least 3 times a day, click
here.

*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