Option Investor
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Daily Newsletter, Thursday, 07/29/1999

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The Option Investor Newsletter         Thursday  7-29-99
Copyright 1999, All rights reserved. 
Redistribution in any form strictly prohibited.

Posted online for subscribers at http://www.OptionInvestor.com

Published three times weekly, Sunday, Tuesday, Thursday evenings.
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
        7-29-99          High     Low     Volume   Advances Decline
DOW    10791.29 -180.78 10971.36 10714.03  766,699k    805   2,227
Nasdaq  2640.01 - 65.83  2672.51  2627.80  913,879k  1,349   2,591
S&P-100  690.40 - 12.64   703.04   685.76   Totals   2,154   4,818
S&P-500 1341.03 - 24.37  1365.40  1332.82            30.9%   69.1%
$RUT     441.58 -  5.03   446.61   439.80
$TRAN   3348.95 - 69.44  3417.32  3342.21
VIX       25.08 +  1.88    26.98    24.62
Put/Call Ratio      .74
*************************************************************


When in doubt, sit out!

Just when you think the doom and gloom at OIN is simply bull the
market does another swan dive on economic news. The Employment
Cost Index rose +1.1% for the biggest jump in eight years. The
signs of inflation were flashing red today as the bond market
tanked on the strong inflation news. Bond yields closed off the
highs but still a hefty 6.08%. The Dow went into panic mode at
the open and promptly dropped -130 points within several minutes. 
The worst was not over and after resting at 10800 for awhile it
fell to the afternoon low of 10714. Bargain hunters in denial of
the market pull back jumped in to buy the dip again. The Dow
closed +76 points off its lows but the ticks were still not 
showing any signs of life. The advance/decline line was severely
negative with decliners beating advancers 7:3. The Nasdaq was
looking worse, down -65, but dropping again at the close.

 
 



These charts do not paint a pretty picture. Just Monday of
last week we were setting new highs but how quickly the economic
picture can change. Just a week after Greenspan warned the Fed
would act "promptly and forcefully" and a day after he repeated
his warning, the signs of strong inflation appeared as if to say
"oh yeah? I dare you!" The challenge has been made and the bond
market analysts say it is now better than an 80% chance that 
the Fed will raise rates again in August. While the actual
raising of rates another +.25% is hardly a big deal, the worry
that the hike could be higher or more than one, put the old
fear of uncertainty back into the markets. 

The GDP numbers released today were non-inflammatory at +2.3%
but the ECI blowout completely overshadowed the news. With the
ECI showing the biggest increase in eight years there was no
doubt at all that the results of the tight labor market had 
finally made itself felt. Wage prices make up 66% of the cost
of most goods. If wages continue to climb, inflation cannot be
ignored. The few reasons for continuing to buy stocks just
got smaller. Bulls who had been using the weakness from the
last week as buying opportunities may be rethinking their 
positions. Bonds are starting to look very attractive at 6.1%,
the high of the day, especially with Y2K uncertainty growing.
Did you hear Y2K mentioned today? I did several times by 
analysts claiming part of the sell off to be Y2K related as
well. Whatever your feeling about Y2K it is only 108 trading
days away. 

Funds are bleeding cash as cautious investors are moving money
out of stock funds and while there is not a lot of selling by
funds there is a lack of buying. If you remember my "Why Buy"
article last week there is just no compelling reason to buy
stocks right now. Earnings expectations are over. 83% of the
S&P-500 have reported and the remaining 17% are spread out over
the next several weeks. Of the companies reported, 66% beat
estimates, 22% were on target and only 12% reported less than
estimates. A very good season, but it is over. No reason there.
Interest rates are more than likely to go up which impacts
future earnings. No reason here. Third quarter earnings are
not normally great so expectations are not high. August is not
normally a banner month so no reason to jump in now. There is
just no reason to expect the market to move up from here.

I know this is heresy but as traders we need to face facts even
if we don't like the facts. The best scenario I can picture for
the next two weeks would be a range bound market. Definitely
not a positive for traders. The most likely scenario is a 
continued downtrending market. Bulls are pointing to the last
ECI report of .4% as abnormally low and today's ECI of 1.1%
as abnormally high. Averaged together at .75% you get a normal
reading. I can see their point but remember Greenspan is looking
for any reason to justify the next rate increase. They try to
anticipate future inflation and be pre-emptive NOT chase after
inflation with a leaky hose.

Another bullish sign today was the lack of volume. At 766 mln
on the NYSE there was no panic driven rush to the exits. Either
the bulls are still in denial or most investors think the 
reaction was overblown. Another bullish sign was the spike in
the put/call ratio to .74. Normal is .50 and market bottoms
are formed when large numbers of traders buy puts to protect
positions. This is sometimes a last ditch effort which slows 
market declines and is viewed positively. These bullish signs
may contribute to the next bounce but in the end I think the
direction is down. The technical bounce after the last –400
points on Tuesday, came true only to become another rally for
investors to sell into. I expect the next bounce to be the
same.

The next major economic report is the July jobs report next 
Friday. If we can make it to then without a surprise rate
increase then our fate will hinge on the unemployment rate.
With employment in some states as low as 2.4% and employers
offering large cash signing bonuses it is not likely that
the U.S. rate went up. This will be another wall of worry
that the market and Fed will have to climb. 

In stock news today the 800lb software gorilla. MSFT, may end up 
being several smaller ones. A Justice Dept spokeswoman said the 
agency had "made preliminary inquires to experts that might assist 
us in evaluating an array of remedy options" if the U.S. wins the
antitrust case. Bankers at two investment banks, which declined
to take on the project, said the government wanted to know how
a breakup would be done and how the market would react. While
I don't think this will happen I can believe this was a trial
balloon to create anxiety on the part of MSFT and make them
more reasonable at the negotiating table. Time will tell.

If you are not in the market today, and I hope you are not
stuck trying to "hope" up some positions tonight, I would suggest
that cash is king and sleeping is much easier on pillow of cash
in your account. Waking up to markets gapping down is not good
for your health. Our motto is "when in doubt sit out" and this
would be our directive for tomorrow. 

Good Luck, Sell too soon.

Jim Brown
Editor



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***************
Market Posture
***************

As of Market Close - Thursday, July 29, 1999 

                   Key Benchmarks
Broad Market       Bearish/Bullish  Last    Posture/Since  Alert
****************************************************************

DOW Industrials   10,500  11,320  10,791    Neutral   7.20
SPX S&P 500        1,330   1,420   1,339    Neutral   7.20
OEX S&P 100          675     735     689    Neutral   7.20
RUT Russell 2000     430     465     442    Neutral   7.20
NDX NASD 100       2,200   2,468   2,263    Neutral   7.20
MSH High Tech      1,080   1,250   1,136    Neutral   7.20


XCI Hardware         920   1,090   1,003    Neutral   7.20
CWX Software         700     844     736    Neutral   7.20
SOX Semiconductor    450     535     493    Neutral   7.20
NWX Networking       550     625     565    Neutral   7.20
INX Internet         500     580     445    BEARISH   7.20


BIX Banking          690     710     667    BEARISH   7.23
XBD Brokerage        410     440     398    BEARISH   7.23
IUX Insurance        645     660     629    BEARISH   7.23


RLX Retail           915     960     883    BEARISH   7.23
DRG Drug             370     400     350    BEARISH   7.20
HCX Healthcare       750     800     723    BEARISH   7.22
XAL Airline          180     190     163    BEARISH   5.21
OIX Oil & Gas        285     310     296    Neutral   5.13



Posture Alert
GDP and the Employment Cost Index were the main contributors to
today's selloff, with the  Internet sector leading the way down
(-4.35%). There was no where to hide as all sectors got beat up
including Semiconductors (-3.35%), Drug (-2.84%), Healthcare
(-2.30%), and Software (-3.1%). 


A detailed description of our Market Posture and its
applications can be found at:

members.OptionInvestor.com/marketposture
 


****************
Market Sentiment 
****************

Not Many Positive Signs.

In doing our latest update, we at Pinnacle Capital noticed that
there is currently not a lot of positive things going for this
market, with the exception of another solid earnings season in the
books. Advance/Decline looks poor, stocks/indexes are breaking below
key supports, money flows in the market is slowing down, the bond
market is hinting at (inflation) higher rates, rumors of more
currency devaluation around the globe, and Y2K looms just around
the corner. When all stacked up, not a pretty picture.
 
However, there isn't a state of panic either. It's very mediocre, as 
was this selloff today. Volume on the NYSE was lame; the 30-yr bond 
sold off this morning on very light volume, and rebounded well off
of its lows by day's end; and overall, investors and traders we spoke
to seemed very complacent. This complacency can be witnessed by the
weekly Investors Intelligence Survey. Bullishness decreased by .5%,
yet bearishness decreased by 3.3%. For this market to break new
highs, we need bearishness to increase, not decrease.  

When evaluating all of the above, we would most likely expect more 
downside potential in all segments of this market, so be prepared.  
However, the key will be interest rates. As long as the yield on the 
long bond doesn't break new highs, this market could be trading
range bound, with wild fluctuations like this last week. 

Even though this market has taken it on the chin (especially
technology) several sectors have held up nicely during these last
seven days. This would include: the Morgan Stanley High Tech
(MSH +14), Semiconductor (SOX +17), Hardware (XCI +9), and
Networking (NWX -1). Below are charts of the 4 above-mentioned
sectors, and as you can see, they have been very volatile yet
locked in a narrow range. If interest rates (for whatever reason),
start to rally and sparks this market, these sectors would be where
I would put my money. If the bond continues on its higher course,
look for red across all sectors. 


 


 

 
 
 

 
 

 
 

 
 

 
 




BULLISH Signs:

None



Mixed Signs:   

None



BEARISH Signs:


Investor Intelligence:  
As a contrarian indicator, the percent of Bullish investors
decreased 0.5% but Bearish sentiment decreased 3.3%.

Russell 2000: 
Trending below both moving averages, and also below key 450
benchmark.

Interest Rates:
The 30-yr Treasury is beginning to bump back over the key 6% level, 
which could prove disastrous for high tech and small caps.
  
Peak Open Interest:  
The contraian put-call ratio clocking in at .97 suggesting bullish
sentiment picking up steam.

Market Posture:
Several indexes have just rolled over, including 
the Dow, OEX, networking, software, and semiconductors.

Advance/Decline Line:
The A/D line has been rolling over, and could prove Bearish if 
decliners continue to out-pace advancers in the weeks ahead.




OTM Call Analysis

As we move through the August expiration cycle, Pinnacle is
tracking the level of call buying (OTM) between 710-780 among
option speculators. As we have been documenting, excessive
out-of-the-money (OTM) call may serve as overhead resistance.


July Expiration Cycle
OEX OTM Call Analysis (Open Interest July 680-750)
Date                 Open Interest     Change %    Alert

Friday, June 19           35,225        -
Friday, June 25           63,342        +79.8%
Friday, July 02           87,833       +149.3%
Friday, July 09           99,855       +183.5%



August Expiration Cycle
OEX OTM Call Analysis (Open Interest August 710-780)
Date                 Open Interest     Change %    Alert

Friday, July 16           32,285        
Friday, July 23           62,455        +93.4%





Market Sentiment at a Glance     Friday     Tues      Thurs  
Indicator                        (7/23)    (7/27)    (7/29)


Pinnacle Index (OEX):          

                    
Overhead Resistance (720-750)      3.2      3.9       4.1
Underlying Support  (685-710)      1.2      1.2       1.2
                    

Put/Call Ratios:

CBOE Total P/C Ratio                .7       .7        .7
CBOE Equity P/C Ratio               .5       .5        .5
OEX P/C Ratio                      1.0      1.0       1.3


Peak Open Interest (OEX):

Puts                              700       700
Calls                             740       740
P/C Ratio                         1.02      1.55

Market Volatility Index (VIX):	

CBOE VIX                         25.44



Investors Intelligence:

Bullish                         53.60%  *
Bearish                         24.60%  *


The Power of Sentiment Analysis

It has often been said that the crowd is right during the
market trends but wrong at both ends.  Measuring and
evaluating the sentiment of the crowd, therefore, can give
savvy option traders a decided edge.

 
Pinnacle Index
OEX                             Friday      Tues      Thurs
Benchmark                        (7/23)    (7/27)    (7/29)

Overhead Resistance (720-750)    3.2         3.86      4.14

OEX Close                      698.88      701.51    690.40

Underlying Support  (685-710)    1.2         1.18      1.21
                     

 
Average ratings: 
Resistance levels 2.0 / Support Levels .5

What the Pinnacle Index is telling us:
Overhead sentiment resistance is building at the OEX 725/750 level
while the underlying support is holding at the OEX 685/710 level.


Put/Call Ratio 
                                Friday     Tues       Thurs
Strike/Contracts                (7/23)    (7/27)     (7/29)

CBOE Total P/C Ratio             .68       .70       .68
CBOE Equity P/C Ratio            .49       .50       .52
OEX P/C Ratio                   1.04      1.55      1.32




(OEX)
Peak Open Interest   Friday           Tues            Thurs
Strike/Contracts     (7/23)           (7/27)         (7/29)



Puts                 700 / 8,032      700 / 8,427    700 / 8,629
Calls                740 / 7,933      740 / 8,230    740 / 8,971
Put/Call Ratio         1.01            1.02          .97



 
 

 
 


(VIX)
Market Volatility   Major
Date                Turning Point       VIX
****************************************************

October 97          Bottom              54.60
July 20, 1998       Top                 16.88
October 8, 1998     Bottom              60.63
January 11, 1998    Top                 26.38
March 4, 1999       Bottom              28.15
May 14, 1999        Top                 25.01

July 16, 1999       Top?                18.13 *
  
July 29, 1999                           25.44


 


 
 



Investors Intelligence Survey
                    Major             Percent     Percent
Date                Turning Point     Bullish     Bearish

October 97          Bottom            22.0        48.3
July 20, 1998       Top               52.0        24.0
October 8, 1998     Bottom            38.5        42.7
January 11, 1999    Top               58.3        30.0
March 4, 1999       Bottom            49.1        32.5

January   6, 1999                     58.3        30.0
January  13, 1999                     60.0        30.0
January  20, 1999                     61.7        25.9
January  27, 1999                     60.7        28.2

February  3, 1999                     60.0        26.7
February 10, 1999                     61.7        25.9
February 17, 1999                     55.7        28.7
February 24, 1999                     54.1        31.5

March 3, 1999                         50.9        32.1
March 10, 1999                        49.1        32.5
March 17, 1999                        52.6        17.6
March 24, 1999                        55.9        29.7
March 31, 1999                        55.6        31.6

April 07, 1999                        56.4        31.6
April 14, 1999                        55.9        30.5
April 21, 1999                        56.4        30.8
April 28, 1999                        56.1        30.7

May 05, 1999                          58.1        27.6
May 12, 1999                          56.9        31.0
May 19, 1999                          60.9        28.7
May 26, 1999                          61.6        27.7
June 2, 1999                          61.6        27.7
June 10, 1999                         58.3        28.7
June 16, 1999                         58.8        26.3
June 24, 1999                         57.5        26.5
June 30, 1999                         55.8        25.7
July 07, 1999                         52.6        27.2
July 14, 1999                         55.2        26.7
July 21, 1999                         54.1        27.9
July 28, 1999                         53.6        24.6  *




Please view this in COURIER 10 font for alignment
*****************************************************
CHANGES THIS WEEK


Index       Last    Mon    Tue    Wed     Thu    Week
Dow      10791.29 -47.80 115.88  -6.97 -180.78 -119.67
Nasdaq    2640.01 -73.21  60.14  26.51  -65.83  -52.39
$OEX       690.40  -5.97   8.60   1.53  -12.64   -8.48
$SPX      1341.03  -9.18  15.08   2.56  -24.37  -15.91
$RUT       441.58  -5.51   3.61   0.13   -5.03   -6.80
$TRAN     3348.95   1.83  33.94   1.13  -69.44  -32.54
$VIX        25.08   2.15  -1.98  -0.73    1.88    1.32

Calls               Mon    Tue    Wed     Thu    Week

JDSU        87.00   1.06   3.56   5.38   -1.00    9.00  Excellent
QCOM       156.38  -2.06   1.75   5.38   -3.38    1.69  Looks good
DELL        41.25  -1.00   2.13   0.63   -1.50    0.25  Held up
GDT         60.50   1.19   0.44   0.88   -2.25    0.25  Entry??
VOD        207.00  -1.56   4.19  -2.25   -1.31   -0.94  Bounce
CSCO        61.75  -1.88   1.88   0.38   -1.56   -1.19  Waiting
VISX       100.56  -3.19   1.69   3.50   -3.19   -1.19  Low volume
CMB         80.25   1.31   0.88  -0.81   -2.69   -1.31  Dropped
EDS         62.13  -2.13   0.50  -0.31   -0.44   -2.38  Dropped
GE         112.00  -1.19   2.25  -2.25   -1.81   -3.00  Dow mover
BGEN        66.88  -2.19   1.75   0.31   -3.13   -3.25  Dropped
WHR         71.69  -0.56  -0.44  -0.63   -2.19   -3.81  Dropped
LGTO        73.44  -3.56  -0.19   0.88   -4.44   -7.31  Dropped
VRIO        72.00  -1.25  -0.25  -2.38   -5.75   -9.63  Ouch!

Puts

MSPG        34.38  -3.94   0.06  -4.75   -1.13   -9.75  New
AOL         98.75  -7.81  -1.94   4.56   -4.00   -9.19  Looks good
GNET        63.88  -8.06   2.38   1.75   -2.88   -6.81  Rough week
ELNK        49.50  -4.44   3.31  -2.38   -3.00   -6.50  New
EBAY       102.25  -3.44  -4.81   5.38   -2.69   -5.56  Down again
NITE        44.00  -4.53   0.19   2.88   -3.25   -4.72  Weak group
LVLT        53.75  -4.06   1.44   2.38   -4.06   -4.31  Falling
CMGI        93.50  -8.44   1.50   7.88   -4.63   -3.69  Net play
TERN        38.38  -2.00   1.56  -1.63   -1.31   -3.38  On target
U           36.06  -1.00   0.81  -0.31   -1.63   -2.13  Keep going
DCLK        81.88  -5.13   2.19   5.25   -4.13   -1.81  Dropping
SCH         45.86  -1.13  -0.06   2.50   -2.20   -0.88  $45 is key
MER         70.88   0.25   1.63   0.13   -2.81   -0.81  Weakening
MWD         93.00  -0.88   3.75  -0.31   -3.06   -0.50  Rate fears
CA          47.25  -0.94   2.13  -0.19   -1.31   -0.31  Rangebound
XRX         49.56   0.56  -1.38   0.69    0.44    0.31  Caution


****************
PICKS WE DROPPED
****************
When we drop a pick it doesn't mean we are recommending a sell
on that play. Many dropped picks go on to be very profitable.
We drop a pick because something happened to change its
profile. News, price, direction, etc. We drop it because we
don't want anyone else starting a new play at that time. 
We have hundreds of new readers with each issue who are
unfamiliar with the previous history for that pick and we
want them to look at any current pick as a valid play.


CALLS:
******

LGTO $73.44 -4.44 (-7.31) LGTO is dying with the market as 
the employment cost index triggered a selloff on Thursday.  
The stock is now under the important 10-dma that we mentioned 
on Tuesday.  This should have been the signal to stop out 
your plays.  There is no specific news to have caused the 
recent profit-taking but, believe it or not, Legato's employees 
are jumping for joy with this decline in their stock price.  
This is because their stock option program for next year is 
locked in to purchase shares at whatever price the stock is 
on August 1.  So the lower it goes, the better the price they 
can exercise at.  We do still have a split coming on August 
16 but now that we have broken the uptrend the risk outweighs 
the reward so we are dropping it as a play.

EDS $62.13 -0.44 (-2.37) EDS earnings came in better than 
expected on Thursday.  EDS beat the street by about 10% with 
earnings at $0.48.  The street was expecting $0.43.  However 
you should have exited any positions in EDS by the close of 
business today.  EDS traded down to $60.37 for the low before   
coming back strong the last hour of trading to regain just 
under $2.00, closing at $62.13.  Whether investors will pat
the company on the back or slap them in the face remains to 
be seen.  We will step aside and wait for another opportunity 
with EDS.

CMB $80.25 -2.69 (-1.31) Banks and other financial stocks 
went south today, following a reported increase in the cost 
of labor and fears that a tight labor market will send wages 
even higher. That means inflation may still be a problem 
and interest rates are more likely to go higher.  CMB couldn't 
buck the trend and dropped with the rest of the financial 
sector, as well as the overall market.  CMB has a little 
support at this level but it has dropped below its 10-dma 
and if market forces send it lower, the next support level 
isn't until the $70 level.  Therefore we are dropping CMB.

BGEN $66.88 -3.13 (-3.25) BGEN was up fractionally yesterday
on a newly issued "buy" rating from Gruntal and Co.  They 
believe the market does not fully appreciate the potential 
of 2 drugs currently in development by the company, saying 
that Amevive and Antova could eventually become blockbusters 
that generate $1 billion.  They gave the stock an $83, 
12-month price target.  In spite of these positive comments, 
BGEN sank with its sector and the rest of the market today.  
The technicals look fairly negative and we don't want to 
keep BGEN in case it decides to test that lower levels of 
support so we are dropping from our call plays.

WHR $71.69 -2.19 (-3.81) So where is all the support?  We 
hope for sake of those in the play it's at $71-$71.50.  But 
on a day when the market is taking out its aggressions (and 
profits) in tech stocks, WHR should have given us a better 
performance given its typically defensive nature. Instead 
the stock fell with no buyers coming in to support it.  
Investors are telegraphing that this is no safe haven.  Even 
on an up day yesterday, WHR lost ground.  That's our cue to 
exit the trade.  Bye bye, Whirpool.  You are all washed up 
for now.


PUTS:
******

none today



 
***** Play updates continued in section two *****




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*************************************************************
                      DISCLAIMER
*************************************************************
This newsletter is a publication dedicated to the education 
of options traders. The newsletter is an information service 
only. The information provided herein is not to be construed 
as an offer to buy or sell securities of any kind. The 
newsletter picks are not to be considered a recommendation 
of any stock or option but an information resource to aid the
investor in making an informed decision regarding trading in 
options. It is possible at this or some subsequent date, the 
editor and staff of The Option Investor Newsletter may own, 
buy or sell securities presented. All investors should consult 
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information provided has been obtained from sources deemed 
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The newsletter staff makes every effort to provide timely 
information to its subscribers but cannot guarantee specific 
delivery times due to factors beyond our control.




The Option Investor Newsletter         Thursday  7-29-99  
Copyright 1999, All rights reserved. 
Redistribution in any form strictly prohibited.

*****************
PICK NEWS - CALLS
*****************

VRIO $72.00 -5.75 (-9.63) Verio had been consolidating at its
firm support level of $79-80 (also its 10-dma) for the past 
few days.  But yesterday it started showing signs of weakness 
as it dipped to $76.88 and proceeded to close near its day 
low.  Today VRIO followed the bearish market and spiraled 
down almost 9 points during intraday trading, only managing 
to recover to $72 by the finish.  If you decide to open a 
new play, you need to wait until the broader markets turn 
positive - VRIO will likely follow, but always confirm stock
direction.  Remember, earnings are tentatively scheduled for
next week and the 2:1 stock split is expected on or about 
August 20th.

GDT $60.50 -2.25 (+0.25) Following the trend of the market,
Guidant was also on the downside today.  The decline was 
because of a higher-than-forecasted report on the employment-
cost index that stirred fears that inflationary pressures will 
spur higher interest rates.  Despite the unfortunate news 
brought on by today's economic numbers, this may be the entry 
point we are looking for.  With last week's upgrades and a 
support level around $60, GDT has more upside potential.  As 
always, we recommend using stop loss orders to end the play 
if needed.  We would confirm upward direction on the stock 
first before jumping in.

VISX $100.56 -3.19 (-1.19) When looking at the volume the 
last two days on VISX, it has been coming in a bit light.  
This has been common for most major stocks as the summer 
doldrums set in.  Wednesday VISX picked up $3.50 on volume 
of just under 965K.  Today it gave back $3.19 on similar 
volume.  Remember normal volume is about 1.64 mln shares per 
day.  It is encouraging to see VISX not get hit with major 
selling pressure but at the same time we would like to see 
stronger volume on the rallies.  Today, with the major 
indices set to open lower, VISX opened $1.69 lower and 
traded down to $100.38 in the 15 minutes of trading.  But 
buyers quickly jumped in and drove VISX higher to $103.63, 
which given the weakness we saw today is pretty amazing.
Still, the weakness in the Nasdaq was too much and VISX traded
lower by the end of the day.  As we suggested Tuesday, VISX has 
gained over 28% since the first of July.  The bears may become 
serious at any time in this kind of market.  We are not trying 
to scare you out of VISX, but want to make you aware how crucial 
it is that you protect your hard earned profits with stops.

JDSU $87.00 -1.00 (+9.00) With all the hoopla over earnings 
anda stock split, JDSU has had a great week so far.  There 
hascertainly been no post-split or earnings depression this week.
To the contrary JDSU gained $5.38 Wednesday on huge 
volume of 8.68 mln shares.  Today with the broader markets 
getting hammered, JDSU fell $3.75 to a low of $84.25 and 
started its comeback just before 2:00 ET to close at $87.00 
down only $1 for the day.  JDSU hit a new 52-week high on 
Wednesday at $88.88 (split-adjusted), surpassing the old 
high set on July 6th at $88.72.  Given the weakness in the 
major indices today and the strength JDSU managed to show, 
we believe there is more room to move up.  We would suggest 
you assess you risk profile and move your stops up accordingly.

CSCO $61.75 -1.56 (-1.19) More yo-yo and consolidation, and 
still waiting for earnings to be announced after the bell on 
August 10.  This is a classic "hurry up and wait" scenario.  
Volume is the key and it continues to hover around the average 
of 15.5 mln shares.  Until we see heavier volume in CSCO, 
guided by clear market direction, we simply have to wait for 
the play to come to us.  Working against us is a market pre- 
disposed to the downside and CSCO continues its consolidation
in the $61-$63 range.  One thing is for sure, CSCO will break 
out; its just that the direction depends on the market.  If 
the market stays flat or goes up, CSCO should rise into 
earnings.  If the market goes south like today, all bets are 
off.  We can't stress it enough - wait for the entry based 
on volume and confirm market direction before getting in.

DELL $41.25 -1.50 (+0.25) Nobody seemed too rattled by CPQ's 
earnings release that showed earnings in line with expectations, 
and revenue on the light side thanks to a PC turf war that 
CPQ is losing.  We expected some fallout in the rest of the 
sector, but after gapping down this morning, DELL traded in 
an $0.81 range on typically low volume of 15.8 mln shares. 
Recall earlier this week, DELL announced a sub-$1000 PC with 
free Internet service and free user homepage with links to 
other DELL sites.  As the de facto inventor of it, they 
really know how to exploit the direct sales model.  Dell 
seems to be holding up well, but the week isn't over yet.  
Mild support is in the $40 range, with stronger support at 
$37-$38.  Resistance based on technical indicators and open 
interests seems to be at $45.  Still, pick your entry according 
to your risk profile.  You have plenty of time before earnings 
are announced on August 17.  As always, confirm market direction 
before playing.

QCOM $156.38 -3.38 (+1.69) Even in strong market headwinds, 
QCOM continues to progress upward.  Don't let today's drop 
of $3.38 scare you.  Were it not for a $2 spike up at the 
close last night, QCOM would have only lost $1.38 today - 
pretty mild trading on 10% less volume than normal.  That's 
a number we can live with on a day like this.  A look at the 
chart is pretty impressive too, compared to the rest of the 
market.  It remains technically positive, perhaps thanks to 
support over $156 from index funds (see Sunday's write-up 
for details).  The bogeyman in the closet is the NASDAQ 
closing at its 50-dma.  If it doesn't find support soon, 
QCOM will fall in sympathy since it is a part of that index.  
It gets tougher to pull the trigger on entering this play 
too since QCOM can be more volatile than other plays.  It 
is definitely not for the weak stomached.  Heck, even risk 
takers may want to sit out until the market picks a direction.  
There has been no news to move QCOM in the last 2 days.  
Remember, there is also the possibility of a split, just 
don't hang your hat on that as the basis for the play.

GE $112.00 -2.00 (-3.19) GE simply can't fight the downdraft 
in the market.  It lost $2.25 yesterday and gave up another 
$2.00 today.  There is nothing in the news to suggest any 
problem with the stock.  Rather, it is moving in step with 
the rest of the Dow. In the last 2 days, GE has dropped  
through its 10-dma, and technical indicators are dimming.  
Today it bottomed around 1:30 PM at $110.06 and did move higher 
over the next 2 1/2 hours.  Look for a continued move up 
before entering new positions and preferably, watch for a 
positive move in the Dow as well.  It is imperative that you 
use caution in this market.

VOD $207.00 -1.31 (-0.94) Still no word on VOD's ex-date for 
its, in essence, 5:1 stock split.  The stock has gone down 
the last few days and is now at the lower end of its recent 
range.  The stock is also sitting right on its 30-dma.  But it's
the 50 dma you should be looking at.  Notice the last three 
bounces off of this support.  VOD actually came right down to 
this support (at $205) and bounced up today.  This seems to be 
a good entry point as the stock has lost ground for the last couple 
of days and tends to go through this type of movement.  AirTouch 
announced a new all-digital mobile Internet service today called 
Net Access.  This will allow users of certain AirTouch wireless 
services to use their wireless phone to access the Internet.  The
service will initially be launched in Salt Lake, Seattle and 
Michigan.  VOD is not immune from a sell-off in the markets.  
If the Dow or Nasdaq decide to plummet, then VOD will eventually 
follow suit.


****************
PICK NEWS - PUTS
****************

LVLT $53.75 -4.06 (-4.31) LVLT made a technical bounce on 
Tuesday but was unable to push above the 200-dma so back 
down it goes.  The bounce was a purely technical move and 
that is why it made our Play-of-the-Day last night.  Most 
stocks will get a relief after suffering losses for many 
days.  Typically the stock will bounce back to the old level 
of support.  On Wednesday afternoon you may have noticed 
LVLT rally to $60 and turn down again.  This shows that some 
investors aren't done selling and therefore driving the stock 
back down.  Late in the day Thursday, LVLT broke below key 
support at $54.  This is extremely negative but you should 
still use caution and wait for confirmation of the selloff 
tomorrow before opening new plays.  If we don't rebound 
above $54, look out below.

U $36.06 -1.63 (-2.13) USAir is unable to catch a break 
lately but that is just fine with us.  We are dropping into 
territory that this stock hasn't visited in a year.  The 
stock was looking poised to drop on Thursday.  This is because 
oil prices rose on Wednesday but USAir held even so when 
oil rose again on Thursday, U's stock had some catching up 
to do on the downside.  There is still potential for more 
losses despite the current dips but it will depend on your 
entry points.  With the recent trend you would be successful 
entering plays on the day the stock rallies and selling on the 
dips.     

AOL $98.75 -4.00 (-9.19) As always AOL has been in the news 
frequently this week but the real catalyst is still a very 
bearish sentiment towards Internet companies.  On Wednesday, 
the San Francisco battle over open-access came to a short-
term conclusion as AT&T will not have to open their lines 
for competitors such as AOL.  But the war is far from over 
as the door was left open to revisit the issue again in the 
future.  This is one of many problems currently plaguing 
AOL.  Another is the Instant Messaging debate with Microsoft.  
The debate stems from AOL not wanting Microsoft to share in 
its new technology.  No agreement has been reached but odds 
are it will eventually be opened up to everyone.  The $98 
range has offered some support but we are watching technology 
stocks and the NASDAQ carefully for signs of breaking support. 
Then we may get AOL to dip down to the 200-dma at $92.
 
SCH $45.86 -2.20 (-0.89) SCH is dropping again but we still 
haven't broken through $45.  SCH has recently found support at
this level.  For example, mid-afternoon today SCH bounced at $45 
and started moving back up.  Granted, the stock hasn't rallied 
strongly after hitting support but we want to see Schwab move 
down past this mark to re-ignite our play.  The online brokers 
sector did get a nice bounce on Wednesday.  There was a press 
release announcing a new CFO, which is another reason for the 
buying interest, but the sentiment is still too negative for any 
meaningful rally and the stock quickly gave back Wednesday's 
gains.  Keep watch on the sector for any change of sentiment.

XRX $49.56 +0.44 (+0.31) Xerox has been trading between the 
range of $48.50 and $50.00 for the past few sessions since 
its $4.50 point decline last Thursday.  That loss was 
attributed to the recent downgrades by Deutsche Banc Alex., 
strong dollar, and weakness from its overseas operations in 
Japan and Brazil.  XRX continues to trade well below its 
50-dma and 200-dma, and doesn't see any real support until 
around $45.  Once we get through this slight stall, we look 
for the stock to continue its downward trend to its next 
support level.  But keep your stops set tight at this point 
as XRX is struggling to put in a short-term bottom.    

CA $47.25 -1.31 (-0.31) Computer Associates traded sideways 
for most of the day Wednesday although volume and buying 
did pick up in the last hour.  But it didn't last as CA fell
today with the broad markets.  CA opened $1 lower today and 
made an intraday low of $46.50.  If you entered CA on today's 
drop we want you to use caution as CA is trying to halt the 
slide and we are seeing signs of buying around $46.50.  
Technically we would look at yesterdays high of $49.38 as 
an area of resistance for CA.  Today's report of the employment 
cost index was what spooked the market and took the major 
indices down at the opening bell.  If CA is going to remain 
a viable put play we will need to see further movement to 
the downside on strong volume regardless of the action in 
the broader markets.  The 200-dma is just under $44.00 and 
could provide support.  Keep your stops tight on CA.

MWD $93.00 -3.06 (-0.50) MWD rallied for a few hours 
yesterday after all the weary listeners were assured that 
Greenspan wasn't adding in anything new or unusual.  The 
rally offered some solid entry points.  And by late Wednesday, 
MWD had returned to where it began and closed down a fraction.  
Today, the negative market sentiment help slam MWD and it 
shook off 3%.  MWD, and the market, were reacting to the U.S. 
Wage Cost numbers that came in much higher than anticipated.  
Thus volume levels today were also slightly stronger at 1.77 
mln.  In the news, the EEOC is launching and investigation at 
the firm for alleged gender discrimination in reference to 
an earlier case regarding MWD's pay and promotion policies. 
This may cause jitters among investors in the future.   

MER $70.88 -2.81 (-0.81) On Wednesday, MER traded higher 
for the majority day, reveling in the lack of negative news 
from Greenspan's comments.  However, by the end of the day 
some profits were snatched and the stock only kept a 
fractional gain.  The Greenspan limelight was short-lived 
as the Employment Cost Index numbers were surprisingly 
higher than expected.  The DOW plunged and so did MER.  
MER once again slipped below its 200-dma (about $74) to 
close only a fraction from its daily low of $70.06.  Couple 
these bearish indicators with a negative broad market and 
you have the makings of a successful play.  Pick your entry 
carefully and always sell too soon. 

NITE $44.00 -3.25 (-3.38) Yesterday, after all was said and 
done, the market sentiment turned away from the fearful 
anticipation of 'oh my gosh what will Greenspan say now' to 
a more relaxed attitude.   Some buyers came off the sidelines 
and began loading up at the seemingly bargain prices.  NITE 
was pushed up $2.87 on moderate volume.  If we had a crystal 
ball of what today was to bring, that run up would have been a 
great entry point.  Once again, today brought interest rate 
uncertainty (good news for Internet put players) as the U.S. 
Wage and Labor numbers jumped up significantly since last 
quarter giving the Fed a reason to raise rates some more.  
Trading volume was fair during NITE's decline of -$3.25.  In the 
news, NITE became the leading shareholder of Easdaq, the 
Brussels-based pan-European stock exchange, when they bought a 
18.92% stake for $8.2 mln. This foreign exchange was created 
primarily for trading in high-technology companies.

EBAY $102.25 -2.69 (-5.56) The Internets surged upwards on 
Wednesday after Greenspan gave no signals of a prompt rate 
increase nor pulled any surprises out of his hat.  The fears 
faded and buyers were on the front lines.  EBAY traded as 
high as $106.75, but settled in with a $5.38 advance to 
close at $104.94.  Well today was a different market 
to play.  The internets got hammered.  The interest rate 
fears that were just beginning to fade yesterday were 
refueled by the release of the Employment Cost Index numbers.  
The numbers jumped up at the quickest pace since 1991. In 
other words, this piece of data gives Greenspan a green light 
for a rate hike and makes the lofty internets very susceptible 
to profit-taking as they don't react well to anything that 
involves the possibility of higher borrowing costs.  Remember, 
this is an Internet stock and that equals a HIGH RISK 
PLAY.  Just look back over the past two days and it's easy to 
see the wide intraday swings so be careful. 

DCLK $81.88 -4.13 (-1.81) DCLK is trading just below its 
50-dma.  The NASDAQ index is trading right at its 50-dma.  
If the NASDAQ can spring back, DCLK goes with it in the 
Internet sector.  If NASDAQ breaks down, DCLK goes south 
with it too.  The point is, wait for the market to give us 
direction.  If it breaks down, DCLK has no support until it 
reaches $70.  A word of warning if you are reading about 
this play for the first time, exercise extreme caution.  
DCLK shoots up like a rocket or sinks like a stone, depending 
on the market.  Wait for direction, evaluate the risk, and 
trade your plan.  Tums or Rolaids may also prove useful.  

CMGI $93.50 -4.63 (-3.69) Know the breed, know the dog.  Here's 
another Internet stock just waiting for NASDAQ to give it a 
direction.  Like DCLK, CMGI is also trading under its 50-dma.  
Should the NASDAQ falter, the Internet sector and CMGI will 
go with it.  There is short-term support at $88, but if the 
action gets really bad, the next support level is at $77.  
On the other hand, a strong NASDAQ bounce off its 50-dma will 
put a big flea on this put play.  Confirm market direction 
before starting a new position.  (Use flea powder responsibly) 

TERN $38.38 -1.31 (-3.38) So far this play is working according 
to plan.  TERN has fallen through support, with its next level 
of support around $33.  Earnings were announced 2 weeks ago 
and TERN has been headed south since.  Though we think the 
long-term future is good for this company, the current chart 
tells a different story.  The descent is steady and should 
continue whether or not the NASDAQ breaks down from its 50-dma. 
As we noted when we picked TERN on Tuesday, this company's 
news is sparse but when they release news it's usually good. 
So watch the newswire for anything that may trigger a rally 
and keep your stops set in case the outlook changes.

GNET $63.88 -2.87 (-6.81) Home on the range.  That's how we 
felt with GNET today as we were stuck between $63-65.  After 
a nice gap down this morning due to the news of higher labor 
costs and interest rate fears, we didn't get the follow through 
we would have expected in this market.  This is a sign to use 
caution!  We did get a nice test of our resistance at $67.00 
yesterday though and it held up very well.  The more we test 
it, the stronger it becomes.  As the market weakness continues 
to build, we feel this will give us a good trend down. Look 
for an entry point during a market rally and confirm the stock 
is bouncing off resistance before opening new plays.  In the 
news,  GNET announced today that they have hired Eric Zocher 
to head up their Broadband division.  Eric Zocher has 15 years 
of experience and should be a good asset to the company.  
GNET also signed an exclusive deal with Deerbrook to market  
Artup.com on their search engines.  


**************
NEW CALL PLAYS 
**************

none today


*************
NEW PUT PLAYS 
*************

ELNK - Earthlink Network Inc. $49.50 -3.00 (-6.50) 

Internet service provider EarthLink Network, Inc. provides 
Internet access and related services to some one million 
subscribers nationwide. EarthLink provides Internet access 
through a network of leased high- speed dedicated data lines 
and over 1,700 dial-up access sites.  EarthLink also provides 
Internet connections by cable, ADSL, ISDN, frame relay, and 
other high-speed access technologies.

Earthlink along with most of the Internet stocks has had a 
dramatic decline the last few weeks.  ELNK topped earlier in 
the month when it got as high as 70.50 on the July 8th.  Since 
this recent high however, the stock has broken through both 
its 50-dma and 200-dma and continues to fall, closing just 
above today's intraday low.  With the recent interest rate 
worries that are coming into play, not only will it affect 
the general markets but it will have even a greater strain 
on those sectors that analysts feel are overvalued.  ELNK 
is in one of those sectors and we feel they will continue 
along this downward trend.  Watch for any change in momentum 
that may spark a rally.  There are always lots of buyers 
waiting in the shadows to rush into this sector.

BUY PUT AUG-45 QKL-TI OI=963 at $2.25 SL=1.00
BUY PUT AUG-50 QKL-TJ OI=975 at $4.63 SL=2.75

Average daily Volume = 2.05 mln
 
Chart = http://quote.yahoo.com/q?s=ELNK&d=3m 
 
*****

MSPG - MindSpring Enterprises $34.38 (-1.13)(-9.74)

A dream that we, the Internet community have, is to find an 
Internet service provider that has no down time, immediate 
customer service, and the ease to enjoy our Internet experience 
without thinking about procedures.  MindSpring seeks to offer 
this type of service to us.  As a national ISP company, they 
focus on individuals and small businesses.  Providing Internet 
connection, easy to use software, Web hosting services, and 
reliability to 45 states.  They have increased their customer 
base 275% since 1995 as a result of the superior reliability 
and service. 

MSPG has seen better days.  On Tuesday the company announced 
a loss of 0.11.  Ouch!  Analysts were only expecting a profit 
of .09 according to First Call.  Shareholders are accustomed 
to enjoying positive earnings last year, so the stock is taking 
it on the chin.  The company attributes the negative numbers 
to the recent acquisitions of NETCOM and Spry customer bases. 
Since earnings are out of the way, there's not much news to 
push the stock.  The sector is also extremely weak, so any 
company with a high P/E is very susceptible to drops in price. 
If the market continues down and breaks it's 50-dma, look out 
below!  The current down trend with MSPG started on 7/10 
and has taken the stock below all short-term moving averages.  
If the market conditions continuing as they are, MSPG should 
continue to be a good put play. 

Along with earnings, the news announcements from MSPG have not 
been accepted well by the market.  The company has presented 
a new $45 million marketing plan that is very aggressive.  It 
seems they want to give AOL a run for the money.  Some sources 
indicate that this plan will affect earnings for a full three 
quarters in the future.  Keep in mind that nothing goes down 
every day so pick your entry and confirm the market direction. 

BUY PUT AUG-35 MQD-TG OI= 720 at $3.12 SL=1.50  
BUY PUT AUG-40 MQD-TH OI=1501 at $6.75 SL=4.75

Average daily volume = 2.08 mln     

Chart = http://quote.yahoo.com/q?s=MSPG&d=3m


***************
PLAY OF THE DAY
***************

MWD - Morgan Stanley Dean Witter $93.00 -3.06 (-0.50 this week)

Sunday Write up

MWD is the #2 retail broker in the US only after Merrill Lynch. 
The 1997 merger of Morgan Stanley and Dean Witter created an 
investment banking and retail brokerage powerhouse. The company 
is now global financial service firm with three primary business 
segments: securities, asset management, and credit services. 
Its Discover unit has been one of the leading credit card issuers. 
MWD has more than 430 branches in the US and some 30 more abroad. 
Its clients include both individuals and institutions.

MWD had been maintaining a firm support of $100 and $104 since 
the end of June. Then at the beginning of the week, the stock 
started pushing through its bottom resistance of $99 (also its 
10 dma). On Tuesday it broke this barrier and closed at $97.31. 
For the next two days, MWD closed at $96.81 [right between its 
30 dma ($97) and its 50 dma ($96)]. We saw a bearish signal on 
Friday as MWD slipped another -$3.31 giving us further evidence 
of its direction. If MWD slips under its 200 dma at $86 this 
would be even better. Except for Thursday's trading, volume 
has been rather low at only 60-70% of it normal levels. The 
broad market decline and the negative sentiment of the brokerage 
sector has certainly aided in this stock's decline. With 2Q 
earnings in the past (June 24th), and once again rate fears 
lurking in the shadows on WallStreet, there's not much to hold 
up MWD. Now let's realize that this is by no means a guarantee! 
So please don't just go out and buy up all those put options. 
Be patient, look for an entry point, and by all means consider 
stops to protect your capital and profits.

Tuesday's Update

MWD $96.38 +3.75 (+2.88) MWD traded higher today as the DOW 
rallied +115 points; however, the stock's trading volume was very 
low at only 55-60% of its average levels. MWD is now back on its 
50 dma. Recall that Greenspan speaks tomorrow and generally, 
investors get real jittery usually resulting in a market downturn. 
If you had the guts, you may have used the highs today as an entry 
point. However, a conservative player will always wait for 
directional confirmation before beginning a new play.

Thursday's Update

MWD $93.00 -3.06 (-0.50) MWD rallied for a few hours 
yesterday after all the weary listeners were assured that 
Greenspan wasn't adding in anything new or unusual.  The 
rally offered some solid entry points.  And by late Wednesday, 
MWD had returned to where it began and closed down a fraction.  
Today, the negative market sentiment help slam MWD and it 
shook off 3%.  MWD, and the market, were reacting to the U.S. 
Wage Cost numbers that came in much higher than anticipated.  
Thus volume levels today were also slightly stronger at 1.77 
mln.  In the news, the EEOC is launching and investigation at 
the firm for alleged gender discrimination in reference to 
an earlier case regarding MWD's pay and promotion policies.  
This may cause jitters among investors in the near-term.   

BUY PUT AUG-85 MWD-TQ OI=1387 at $1.25 SL=0.50
BUY PUT AUG-90 MWD-TR OI= 649 at $2.81 SL=1.25
BUY PUT AUG-95*MWD-TS OI=2064 at $4.75 SL=2.50

Average daily volume = 2.22 mln.
Chart = http://quote.yahoo.com/q?s=MWD&d=3m



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This newsletter is a publication dedicated to the education 
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The Option Investor Newsletter         Thursday  7-29-99  
Copyright 1999, All rights reserved. 
Redistribution in any form strictly prohibited.


*****************
COMBINATION PLAYS   
*****************

Markets Fall As Labor Costs Raise Rate Hike Fears..

U.S stocks plummeted Thursday as rising wage costs created new
fears that the Fed may be ready to increase interest rates again.

Most stocks made modest gains on Wednesday after Federal Reserve
chief Alan Greenspan ended his remarks to the Senate Banking
Committee without uttering any discouraging remarks. The Commerce
Department also helped, reporting favorable (lower-than-expected)
demand for June durable goods. The Dow ended relatively unchanged
at 10,972 but the Nasdaq index was up 26 points at 2,706. The 30
year long bond's yield stood at 6.03%, off 6/32, and above the
psychologically important 6% level.

Tuesday's new plays (positions/prices):

IGL   IMC Global    JAN20C/AUG20C  $1.87  debit
RNBO  Rainbow Tech. OCT15C/AUG15C  $1.06  debit
UCL   Unocal        JAN40C/AUG40C  $2.50  debit

IGL and RNBO were unavailable at the target entry prices. UCL
traded near the recommended entry point throughout the day.

Portfolio plays:

Intel (INTC) continued it's bullish run after announcing it will
introduce two new PC processors and release a mobile version of
the Pentium III later this year. The stock moved to the recent
resistance level near $70 and this is where we will plan our
roll-up if the rally continues. Chemical giant DuPont (DD) was
up over $1 after it reported a 6% rise in quarterly earnings.
The neutral calendar spread is trading near the maximum profit
point.

Western Wireless (WWCA) continued its meteoric climb, moving
another $5 higher to the low 40's. The bullish debit spread is
now $15 ITM and also at maximum profit. Qualcomm (QCOM) has also
surpassed all expectations and the bullish position can be closed
for a $2.50 profit. Halliburton (HAL) moved back to the $45 range
today and both of the long-term plays are performing very well.
Paxson (PAX) Communications traded as high as $12.25, up almost
$1 and the long (SEP-15C) position should be monitored for an
early exit. The debit straddle on Vulcan Materials (VMC) is also
an early exit candidate; now trading at a $1.00 credit, three
weeks into the play.

One the downside, Macromedia (MACR) moved up $4 on pre-earnings
speculation with rumors flying about 'blowout' numbers and a new
equity partner - merger/buyout from Adobe or Microsoft. If the
stock fails to sell-off significantly after the announcement,
we will roll-up to a neutral calendar position; SEP35P/AUG35P.
Apria Healthcare (AHG) fell over $1 even though they announced
a $25 million increase in net profit for the quarter. EPS was
$0.33, compared to a loss of $0.17 last year. Lets hope that
investors regain their senses before the (bullish) long
position expires in September.

Thursday, July 29

U.S stocks plummeted Thursday as rising wage costs created new
fears that the Fed may be ready to increase interest rates again.
The Dow ended down 180 points at 10,791, its second biggest loss
this month. The Internet sector was hammered, driving the Nasdaq
composite down another 65 points to 2,640. In the broader market,
declining issues outnumbered advances 2,227 to 805 on subdued
volume of 762 million shares on the New York Stock Exchange. In
the bond market, the yield on the U.S. 30 year treasury climbed
to 6.08% percent, highest in a month, and the price fell 27/32.

Portfolio plays:

Not much favorable activity today as investors continued to flee
as if from a burning building. Almost all of the market leaders
were down and many of those appear poised for even lower numbers.
One of the positive movers was Proctor & Gamble (PG); up almost
$2 after the chairman of the company said PG could expect 13%-15%
EPS growth in the year 2000. Other bullish issues were found in
the Oil sector. Both Ensco (ESV) and Halliburton (HAL) moved up
after crude prices rose on favorable weekly U.S. oil statistics.
 
Macromedia (MACR) had a positive earnings report and the stock
managed to avoid serious post-announcement selling until late
in the day. The buy-to-close price for the AUG-30P was $0.87
and the AUG-35P was sold at $2.62 for a new debit of $2.37 on
our neutral position; SEP35P/AUG35P. The Roberts Pharmaceutical
(RPC) play is also an interesting study. With a future buyout
offer (originally calculated at $30), the stock price remains
near $26 and the options are relatively unchanged from the day
the play was offered. Hmmm..

Questions & comments on spreads/combos to ray@OptionInvestor.com

****************************************************************
- NEW PLAYS -
****************************************************************
ENMD - Entremed  $22.75     *** Silver Bullet For Cancer? ***

EntreMed is a leader in the field of antiangiogenesis research,
which involves the inhibition of abnormal blood vessel growth
recently associated with a broad range of diseases such as cancer
and atherosclerosis. Their strategy is to accelerate development
of core technologies through collaborations & sponsored research
programs with university medical departments, research companies
and government laboratories.

EntreMed recently announced the U.S. Food and Drug Administration
has given it clearance to begin clinical trials of Endostatin, a
protein the company is trying to use as a weapon against cancer.
Endostatin is one of two proteins EntreMed is pursuing known as
angiogenesis inhibitors. The proteins have shown the power to
inhibit lung tumor growth in mice by starving the tumors' blood
supplies.
 
ENMD has been waiting a long time for this opportunity. They have
already manufactured sufficient Endostatin protein for the tests
and are now completing the final requirements which include
receipt of protocol approvals from the Institutional Review Boards
(IRBs) at each of the clinical trial sites, and quality assurance
of the vialed GMP material. The first Phase I clinical trial is
human safety testing and evaluation.

An established trading range near $20 (with a few slightly bullish
divergences) and a fair disparity at the August ITM call options
offers us a favorable, low risk position.

PLAY (conservative - bullish/debit spread):

BUY  CALL AUG-17.50 QMA-HW OI=50  A=$5.37
SELL CALL AUG-22.50 QMA-HX OI=250 B=$1.81
INITIAL NET DEBIT TARGET=$3.37 ROI(max)=48% B/E=$20.87

Chart = http://quote.yahoo.com/q?s=ENMD&d=3m
*******************************************************
NE - Noble Drilling  $22.00     *** Break-out On The Horizon? ***

Noble Drilling Corporation is a leading provider of diversified
services for the oil and gas industry. Contract drilling services
are performed with a fleet of 47 offshore drilling units located
in key markets worldwide. Their fleet of floating deepwater units
consists of semi-submersibles and drill-ships, some of which are
designed to operate in water depths greater than 5,000 feet. The
fleet of independent leg, cantilever jackup rigs includes premium
units that operate in water depths of 300 feet and greater. Some
are capable of operating in harsh environments. They also provide
engineering & production management services and turnkey drilling
services.

Noble Drilling Corporation earned $27.3 million in net income this
quarter, about half of last year's numbers. However, they managed
to satisfy the analysts and some of the revenues were used to pay
off a long term debt instrument. Earnings of diversified oilfield
service firms were expected to hit a low this quarter but improve
near the end of the year. Drilling contractors are also expected
to report lower quarterly earnings, because the rising oil prices
will take longer to affect their bottom line. Improved commodity
prices (oil) are expected to support an increase in exploration
and production budgets, which will eventually flow to the service
companies and drillers.

Geoff Kieburtz of Salomon Smith Barney said that after clearing
the hurdle of a weak second quarter, the oil services industry is
poised for recovery. That must be part of the reason this chart
has become so bullish. The small disparity in the September ITM
call options will allow us to participate in this low-risk play
at a discount.

PLAY (very conservative - bullish/debit spread):

BUY  CALL SEP-17.50 NE-IW OI=903  A=$5.00
SELL CALL SEP-20.00 NE-ID OI=1176 B=$3.00
INITIAL NET TARGET=$1.81 ROI(max)=37% B/E=$19.31

Chart = http://quote.yahoo.com/q?s=NE&d=3m
*******************************************************
CATP - Cambridge Tech. Partners  $17.00  *** On The Rebound! ***

Cambridge Technology provides management consulting and systems
integration services to transform its clients into e-businesses.
Working in collaboration with Global 2000 and high-velocity mid-
market companies, Cambridge combines a deep understanding of new
economy issues with integrated, end-to-end services and a proven
track record of shared risk and rapid, guaranteed delivery.

The consulting firm has struggled over the past year but appears
to be on the move again after reporting first-quarter earnings
that met Wall Street's revised estimates. The company also had
a one-time charge of $7 to $9 million to cover a "repositioning
and retention" program intended to help the firm keep, retrain,
and move employees. The program stems from decreased demand for
enterprise resource planning services and growing demand for
interactive and Web-based offerings. They also appointed a new
CEO, a previous board member, Jack Messman.

Implied volatilities and volume are up on front month options
because industry observers have said that Cambridge has widely
been looked at as a takeover target. Rumors of a buy-out have
persisted in recent months, but the previous CEO, along with his
replacement continue to affirm that Cambridge is not up for sale.

The new CEO says that major reorganization is well under way and
nearing completion. This may be a good opportunity to get in on
the ground floor of a long-term recovery and the over-valued
option prices offer us a favorable entry point.

PLAY (conservative - bullish/calendar spread):

BUY  CALL MAR-20 TQP-CD OI=1    A=$3.50
SELL CALL AUG-20 TQP-HD OI=1584 B=$0.37
INITIAL NET DEBIT TARGET=$3.00 TARGET ROI=50%

It is generally best to establish this type of spread at least
2 - 3 months before the long option expires, capitalizing on the
ability to sell another option against the longer-term position.
That is the basic idea in this spread play; selling time value
in the options when they are overpriced (high implied volatility)
and buying it back (if necessary) when they return to intrinsic
value. Ideally, the spreader would like to have the stock finish
just below the sold strike when the near-term option expires. If
the short options are in-the-money at expiration, he will have
to buy them back to preserve the long-term position.

Chart = http://quote.yahoo.com/q?s=CATP&d=3m


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