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To: Allen Furlan who wrote (8760)	7/31/2001 2:37:36 PM
From: Jacob Snyder	Respond to of 10934

re: arbitrage play in storage: 1. selling the calls, while buying the stock, is appealing, because the volatility has been so high, that the options premiums are huge. 2. selling far-out-of-the-money calls is probably better than closer-to-the-money calls. When these stocks go back in favor, they will soar, and you don't want to give up all the upside. 3. A big problem I have with your strategy, is that it depends on the stocks tracking together. I think this is unlikely. There will be winners and losers. The market often treats big caps and smaller caps very differently. Here are possible scenarios: A) hardware becomes a commodity, and only the software companies make money. Now, you have to answer the question: is EMC a sofware company? (70% of their 1B$ R&D budget is for software.) Is NTAP really a software company, disguised as a hardware company? B) EMC uses their size, balance-sheet strength, and brand name to crush NTAP, as SAN and NAS converge. NTAP goes the way of Apple. C) NTAP has a discontinuous innovation, and does to EMC what Wintel did to IBM. D) EMC's customer base starts buying again soon, while NTAP's customer base steadily goes bankrupt, through 2002. 4. Given that tech niches tend to be winner-take-all, the stocks will probably not track together over the next 3 years. The reason I'm buying both EMC and NTAP is because I realise I'm not smart enough to figure out who the winner will be. 5. I'd suggest a safer arbitrage play would be to buy the stock/sell calls in the same stock. Alternately, use stocks that are more likely to track closely together over time, like the semi-equips. AMAT and NVLS, for example. 6. IMO, it is not useful to compare PE, P/S, P/CF levels for the software vs. the hardware stocks. This comparison doesn't tell you which stocks are "reasonably priced", because it's an apples-and-oranges comparison. Software companies have lower fixed costs, and tend to be less cyclical, so they have (and deserve) permanently higher valuations. Disclosure: I have little experience with arbitrage plays. I am currently long TXN (at 30), and short QCOM (at 65). This is a hedge play, buying TXN at support, and selling QCOM at resistance.