Yesterday Is Ancient History

It is going to be a wild and
woolly expiration day!

Less-than-meets-the-eye earnings reports from
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IBM |
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and
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MSFT |
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pulled the rug out from under an otherwise impressive day
yesterday. There were strong upside reversals in the Comp
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$COMPQ |
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and
(
QQQ |
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s,
and an upside parallel day in the DJI
(
$INDU |
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coming off of technical
support levels amidst short-term oversold conditions. However, yesterday is
ancient history…

Short-term traders with cojones of steel might be
looking to buy this lower gap, especially if it trades back into yesterday’s
range.

The Open Interest Game…

I have often commented (too often, some might
say) about the “magnetic strike” effect on expiration day. Briefly,
large blocks of open interest tend to “pull” the stock toward it on
expiration day as positions are liquidated. What is interesting is that at the
end of the day yesterday, most stocks were sitting right on top of the strikes
with large open interest, and this morning they will open substantially below
those strikes. Does this mean that a rally is in store? Not always, but it is
something to be aware of. Some examples:


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QQQ |
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— 40 strike, 240,000 OI


(
$SPX.X |
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— 1150 strike, 70,000 OI


(
IBM |
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— 120 strike, 85,000 OI


(
MSFT |
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— 70 strike, 235,000 OI


(
INTC |
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— 35 strike, 250,000 OI

January Positions Update

Not much left here except worthless options that
we are hoping to “get lucky” on:


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AWE |
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— Long Jan. 15 calls at an effective
cost of $.10. (We bought the Jan. 12.5/15 reverse collar at $.05, and then
covered the Jan. 12.5 puts at $.05, leaving us long the calls at $.10.) Going
out worthless.


(
JDSU |
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— Long the Jan. 10 calls at an
effective cost of $.90 credit (due to “rolling”). Let it ride —
monster open interest at the 10 and 12.5 strikes (relative to the lower strikes)
means that we are in with a chance!

JDSU — Long the Jan. 12.5 buy-write at $9.60 —
hold, same reasoning as above.


(
UAL |
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— Long the Jan. 25 calls at $.75 —
going out worthless.

Straddles

[GENZ|GENZ] —
Effectively whacked out the 60 puts at $8.00, calls have no value.


(
BBBY |
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— Sold the Jan. 35 puts at $3.00,
calls have no value.

Updates

Yesterday we lightly bought the
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IBM |
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Jan./Feb. 120 put calendar at $2.30, and bought the IBM Jan./Feb. 115 put
calendar at $ 1.70 (25% for both or 12.5% each strategy).

Current Recommendations

Cover the IBM Jan./Feb. 115 put calendar this
morning, hold the 120 for a late rally.

Rolls/Adjustments

Watch alerts!

Recap of open trades

Long-term

Airline calendar spreads


(
UAL |
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Jan./Oct. 25 call calendar @ .70 —
Oct.’s went out worthless, holding Jan. 25 calls, looking like rip-ups.

Reverse Collars


(
AWE |
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Chart |
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PowerRating)
— Jan. 12/15 reverse collar (long the
Jan. 15 calls, short the Jan. 12.5 puts) @ .05 average. Note: We have
covered the Jan. 12.5 puts at $.05. This effectively leaves us long the Jan. 15
calls at $.10, eliminating the need for a stop.


(
TLAB |
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— March 17.5/15 reverse collar (long
the March 17.5 calls, short the March 15 puts) at $1.50 credit average (50%).


(
AMD |
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— April 25/15 reverse collar (long the
April 25 calls, short the April 15 puts) at $.05 credit (100%).

Buy-writes

*
(
AMZN |
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Jan. ’03 10 buy-write @ 5.15 (100%)
— hold.

*
(
JDSU |
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Jan. 12.5 buy-write @ 9.60 — hold.

Proxy buy-writes


(
BA |
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Jan. ’03 35/May 45 call calendar @ $4.75
— hold.

BA Jan. ’03 40/May 45 call calendar @ $2.75 —
hold.

Complex Strategies

JDSU — Long 1 unit of the Jan. 10 calls at $.90
credit. (Due to “roll.”)


(
GENZ |
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— Effectively exited at $8.00
yesterday (not counting gamma scalping profits of ~$2.00).


(
BBBY |
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— Effectively exited this morning at
$3.00 (not counting gamma scalping profits of ~$.43).

Short-term

Call Positions

None.

Call Spread Positions


(
DYN |
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— Long the March 30/40 1:2 call ratio
spread @ $1.50 (100%) — hold.


(
TLAB |
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— 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


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

Put Spread Positions


(
AZO |
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— Long the March 55/65 put spread @
2.125 (100%) — hold.

STOPS

TLAB: Stop @ 11.95 close only.

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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