Schaeffer's Midday Options Update Features Apple Computer, Advanced Micro Devices, PepsiCo, Southwest Airlines, and Merck.

CINCINNATI -- Today's Schaeffer's Midday Options Update features Apple Computer (NASDAQ:AAPL), Advanced Micro Devices (NYSE:AMD), PepsiCo (NYSE:PEP), Southwest Airlines (NYSE:LUV), and Merck (NYSE:MRK). The Midday Options Update contains a brief commentary on the day's most notable activity and a table listing the most-active calls and puts for the day.

The Midday Options Update is published every day at www.SchaeffersResearch.com - the home of Bernie Schaeffer and Schaeffer's Investment Research. For additional information about this report or to have it delivered to you free via email every day click on the following link. http://www.schaeffersresearch.com/redirect.aspx?CODE=PRMOU1M&PAGE=1 .

Options Update: A Merck-y Reading

The market is headed sharply lower yet again today as traders weigh the latest economic news and some lackluster earnings reports. Even the retreat in oil has failed to lift spirits today. The price of crude briefly dropped back below the 50 mark today, tagging an intraday low of $49.70 a barrel before rebounding. At last check, the futures contract was up 1.45 percent at $50.95 a barrel.

Economic News

In economic news, initial jobless claims for the week of April 9 dropped by 10,000 to 330,000, falling roughly in line with the consensus estimate. On the other hand, the previous week's report was revised higher by 6,000 to 340,000. The four-week moving average added 250 to hit 338,000. Continued claims for the week of April 2 plunged by 22,000 to 2.66 million

Elsewhere, U.S. business inventories rose by 0.5 percent in February and sales dropped by 0.4 percent, marking the largest decline since April 2003. The Street had expected inventories to increase by 0.6 percent. Meanwhile, retail inventories jumped by 0.3 percent in February, including no change in auto inventories. Excluding autos, retail inventories increased 0.4 percent. Overall retail sales edged 0.4 percent higher in February.

Earnings Madness

Investors were rather disappointed by Apple Computer (NASDAQ:AAPL) earnings outlook last night. The firm announced second-quarter earnings of $290 million, or 34 cents per share, on sales of $3.24 billion. For the same period a year ago, the firm gained four cents per share. What's more, the company easily swept by the consensus estimate of 24 cents per share on sales of $3.2 billion. AAPL reported that it sold 5.3 million iPods during the quarter, which accounted for 31 percent of the firm's revenue. Looking ahead, AAPL expects third-quarter earnings of 28 cents per share on revenue of $3.25 billion versus the Street estimate for 24 cents per share on revenue of $3.24 billion.

Advanced Micro Devices (NYSE:AMD) posted a first-quarter loss last night of $17 million, or four cents per share, compared to its year-ago profit of 12 cents per share and the Street estimate of two cents per share. Sales for the quarter dropped one percent to $1.23 billion, matching the consensus forecast. The company cited deteriorating price for its flash memory chips for the drop in earnings. The firm saw flash chip sales plunge 29 percent to $449 million, offsetting a 31-percent jump in its computer chip sales. While earnings were rather disappointing, investors were cheered by the news that AMD plans to spin off its flash memory chip unit in an initial public offering.

PepsiCo (NYSE:PEP) hopped into the earnings confessional this morning. The beverage behemoth announced first-quarter earnings of $912 million, or 53 cents per share, besting its year-ago gain of 46 cents per share and the consensus forecast of 50 cents per share. Revenue for the quarter soared seven percent to $6.58 billion due to strong growth in the snack division. Furthermore, PEP lifted its 2005 earnings guidance to $2.60 per share.

Southwest Airlines (NYSE:LUV) is flying higher this morning after reporting first-quarter earnings of $76 million, or nine cents per share, compared to its year-ago gain of three cents per share and the consensus forecast of five cents per share. Sales soared 12.1 percent to $1.66 billion on an 11.5-percent jump in growth in passenger revenue and a 36-percent rise in freight revenue. However, the firm warned that second-quarter load factors are expected to decline from year-ago levels due to the timing of the Easter holiday .

Most-Active Options Update

At 2:05 p.m. eastern time, the Dow Jones Industrial Average (DJIA - 10,312.8) is down 0.88 percent, while the S&P 500 Index (SPX - 1,165.4) is 0.71 percent lower. The Nasdaq Composite (COMP - 1,955.1) has shed 0.98 percent. At 2:06 p.m., 2,563,649 calls and 2,454,645 puts had traded hands, equaling a composite put/call ratio across all six exchanges of 0.95. The CBOE put/call volume ratio for equity options totaled 0.85.

Merck

Pharmaceutical giant Merck (NYSE:MRK) is the center of some heavy call trading this afternoon. The security has seen roughly 12,500 contracts cross the tape at its April 35 strike. However, with open interest already numbering more than 30,500 contracts we shall have to wait until tomorrow to see if this spike in call volume translates into new positions. With April options set to expire after the close tomorrow, much of this volume could prove to be investors liquidating their positions.

Overall sentiment is starting to lean toward the bears' camp. The equity's Schaeffer's put/call open interest ratio (SOIR) has ticked higher over the past several sessions as puts are added at a faster rate than calls in the front three months of options. The SOIR has risen from 0.61 on April 6 to its current perch of 0.65 in the 44th percent.

Meanwhile, short interest soared 39 percent higher in March to 23.65 million shares, marking a new two-year high. On the other hand, this accumulation of bearish bets can still be covered in less than two days of trading at the equity's average daily trading volume, offering very little in the way of potential short-covering support.

Wall Street has nearly abandoned the large-cap company. According to Zacks, 20 of the 23 analysts following MRK rate it a "hold" or worse, leaving ample room for potential upgrades.

Technically speaking, the shares have rallied more than 26 percent since tagging a low of 27.48 on January 28. The security has climbed along the support of its ascending 10-day and 20-day moving averages, but may have hit a serious roadblock. MRK is now battling resistance in the 35 area, which marks the stock's gap lower on September 30. And while MRK has the support of its 10-week moving average, it must still conquer its declining 10-month trendline, which has capped the equity since July 2004.

Looking ahead, MRK is scheduled to report earnings on April 21, with the Street forecasting a gain of 62 cents per share. This estimate is down from its year-ago gain of 73 cents per share.

Click on the following link to see the Daily Chart of MRK since September 2004: http://www.schaeffersresearch.com/wire?ID=12950 .

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About Schaeffer's Investment Research (www.SchaeffersResearch.com)

Schaeffer's Investment Research, founded by Bernie Schaeffer in 1981, is a financial information and trading resources company. It publishes Bernie Schaeffer's Option Advisor, the nation's leading options subscription newsletter. The firm's contrarian approach focuses on stocks with technical and fundamental trends that run counter to investor expectations. The firm's website, http://www.SchaeffersResearch.com , is recognized as one of the leading information sources for stock and options traders and was cited as the top options website by both Forbes and Barron's. Click here for more details about Schaeffer's trading methodology: http://www.SchaeffersResearch.com/method .