Option Investor
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Daily Newsletter, Tuesday, 08/10/1999

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The Option Investor Newsletter         Tuesday  8-10-99
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)
************************************************************
        8-10-99          High     Low     Volume   Advances Decline
DOW    10655.15 - 52.55 10714.67 10549.08  836,280k    764   2,314
Nasdaq  2490.11 - 28.87  2521.65  2442.22  989,475k  1,343   2,684 
S&P-100  665.41 -  6.33   673.36   658.23   Totals   2,107   4,998
S&P-500 1281.43 - 16.37  1298.78  1267.73            29.7%   70.3%
$RUT     422.82 -  3.07   425.89   417.07
$TRAN   3137.54 - 82.91  3219.33  3104.44
VIX       28.30 +  0.31    31.09    28.21
Put/Call Ratio      .78    
*************************************************************

Don't buy it! The avalanche/decline line is picking up speed.

The markets pulled another miraculous recovery from another 
capitulation event this afternoon but I am not convinced yet.
The DOW was down over -150 points at 2:15 when buyers materialized
out of nowhere. Analysts theorize that several buy programs were
triggered when the DOW broke 10500 and the spurt of buying sent
short running for cover. The Internets pulled back from the brink
of another disaster with stocks like YHOO, INKT, EXDS posting 
strong gains after being strongly negative at midday. EXDS was
down over -$7 but closed +5.00. YHOO was down over -6 but closed
up +6.31. INKT gained over +$8 after starting the day negative.

 
 
 




By all standards the huge rebound would be buyable BUT the most
visible indicator is the avalanche/decline line. Advances are
becoming few and far between with decliners beating advancers
by 3:1 on the NYSE and 2:1 on the Nasdaq, and this is after the
strong bounce firmed the numbers. Until the advancers pull ahead
of the decliners you should not buy this bounce. The new highs
also fell victim to new lows by 41 to 332 on the NYSE and
45 to 278 on the Nasdaq. This is not a buyable market.

Another factor that could have sparked the bounce was the 
breaking of the 200 day moving average by the S&P-500. This
was the first time the S&P has traded under the 220DMA since
Oct-1998. Secondly the S&P broke the -10% barrier to officially
signal a correction in the broader market. Either of these events
can trigger buying by technical traders. This does not mean they
are right. They are just playing the historical averages which
favor a market bounce at these technical points.

 


Even though the S&P broke the -10% barrier today the DOW is only
down about -6%. The most widely watched and reported index is only
comprised of 30 stocks and is weighted strongly to energy and 
cyclicals. There are 3100 stocks on the NYSE and the DOW cannot
represent the true movement of the market. The cyclicals are
defensive stocks and attract money when the other DOW stocks
are selling off. The oil stocks are basking in the glow of high
oil prices and are helping to hold up the index. Even with the
bounce today the market is continuing to follow the pattern of
lower lows and lower highs. On 8/2 the DOW low was 10615, 10614
on 8/3, 10565 on 8/5, and 10549 today. The highs were 10829 on
8/4, 10818 on 8/6, 10762 on 8/9 and 10714 today. This may seem
boring to read but if the pattern holds we are looking at a
retest of the DOW's real support at 10500 or even 10400 very soon. 
Our recent trading range is continuing to trade lower and it will 
continue until the buyers start winning the battle. 

The buyers are still waiting on the sidelines and there is still
nothing to cause them to want to be in the market. The next
earnings cycle is still two months away and this is typically a
weak month in the market. This is not the time to be in calls.
We got several emails last week about our call plays losing money.
No kidding. Obviously some people are still not reading the 
commentary. We have been telling people for weeks NOT to play 
calls until the market trends change. As I have mentioned many 
times before, we list the call recommendations as possible plays
WHEN THE MARKET RECOVERS, NOT NOW! If you must play calls we
have recommended ONLY buying calls on a strong dip to the bottom
of the trading range, like today, and then selling them on any
bounce to the upper end of the range. As long as the range is
trending lower you must sell quicker every time. This is a very
risky strategy and I do not recommend it. I recommend waiting on
the sidelines or shifting into put plays. Enough preaching but
it really aggravates me to have someone blame us for losing
money on calls when the market is tanking like we predict.

The main reason analysts are blaming for the recent market drop
is still the interest rate problem. Yes they will raise rates
on the 24th and yes they will probably raise rates at the next
meeting also. Live with it. The September FED fund futures are 
showing a 100% chance of a +.25% raise in August and the December
futures are calling for another +.25 by December. Both of these
raises are already priced into the market and we do not feel 
this is the reason for the current weakness. The market is weak
because there are more sellers than buyers and I think the 
reason is the fear of history repeating itself from the last
two years and Y2K fears. I was at a picnic on Sunday and two
people in separate conversations, who did not know me were 
telling others they were selling stocks now to avoid the OCT 
Y2K rush. Multiply this by 100,000 picnics this weekend and 
you see why the advance decline line is accelerating downward.

CSCO announced earnings after the close and beat the street by 
+.01 with a $.21 actual. CSCO traded up after the announcement
and this positive tech event may help hold up the Nasdaq tomorrow.
The Nasdaq needs serious help. The Nasdaq was down almost -80
points at midday before the Internet sector caught fire and
pulled out of its death spiral. All of the Nasdaq majors finished
negative. MSFT, DELL, CSCO, INTC, WCOM were all down. With the
majors trending down the Nasdaq has an uphill battle to rally.
MSFT may not be a contributor anytime soon with the Justice
Dept now saying that they did find that Microsoft was a monopoly
and did employ monopolistic practices in controlling their 
market. 

EBAY lead the charge for the Internet rebound after they reassured
analysts that they had a handle on the outages and business was
good. EBAY finished up +9.63 today but they had been beat up
badly in recent days. Internet IPOs continue to flounder as
Hotjobs (HOTJ) closed under its reduced IPO offering price.
Blockbuster will be out tomorrow after also pricing at less
than expected as a result of weak demand.

Adding another match to the market fire, John Bollinger said
today he had increased his cash position to 10% and planned to
increase it to 30% in the next two weeks. Another bull bites
the dust. Al Goldman from AG Edwards, lowered his bottom target 
for the DOW again today to 10,400 after the Richmond Fed
reported that manufacturing and services were gaining momentum
and wage pressures were adding to inflation. The DOW is not
getting any help from the transports. All the stocks in the
Transportation Index were down today except ROAD. The index
closed down -83 after being down over -100 at midday. It is
now trading under its 200DMA and is negative for the year. 

 


The Russell-2000 is also failing and is within two points of 
trading below it's Jan 4th starting point. It did bounce off 
it's 200DMA today.

Remember the bear trap rally from last Thursday? The steel jaws
slammed shut on us the very next day as the market continued
downward. Also remember that NOTHING goes up or down in a 
straight line. 2-3 days down will bring a technical rebound.
2-3 days up will bring a profit taking session. Watch closely
the internals of this market before committing funds to call
plays or buying stock. The yield of the 30yr bond broke above
6.25% at midday. This is a level that has not been seen since
Nov-97. It will lure cash out of the markets to the safety of
bonds in the face of Y2K unknowns.  

Now after painting this bleak picture of the markets let me
try another analogy. Visualize a face off in a hockey game.
The ref drops the puck and each player tries to anticipate the
drop and bounce on the ice. The winner may setup his team to 
score. Many stocks are like pucks this week. Traders with
itchy mouse fingers are trying to decide when they will hit
bottom so they can be the first to swing and chance a big
score. The problem here is no one knows where the bottom is
going to be. Traders swinging early will be penalized by
having to sell quickly for a loss if the drop continues
thereby increasing the drop rate. The player who waits too
long is penalized by having to pay several dollars more than
the lucky person that accidentally picked the exact bottom.
This process causes many false starts and stops. Watch the 
internals NOT the stock to decide when to swing. We could
see several more bounces before we see the bottom.

Don't forget the PPI is due out Friday!

Please, if you must play, pick your entry points carefully.

Good Luck, Definitely, sell too soon.

Jim Brown
Editor



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

As of Market Close - Tuesday, August 10, 1999 

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

DOW Industrials   10,500  11,320  10,655    Neutral   7.20
SPX S&P 500        1,330   1,420   1,283    BEARISH   7.30
OEX S&P 100          675     735     666    BEARISH   8.06
RUT Russell 2000     430     465     422    BEARISH   8.06
NDX NASD 100       2,200   2,468   2,164    BEARISH   8.10 *
MSH High Tech      1,105   1,250   1,090    BEARISH   8.10 *


XCI Hardware         920   1,090     971    Neutral   7.20
CWX Software         700     844     696    BEARISH   8.10 *
SOX Semiconductor    450     535     499    Neutral   7.20
NWX Networking       550     625     529    BEARISH   8.05
INX Internet         500     580     381    BEARISH   7.20


BIX Banking          690     710     618    BEARISH   7.23
XBD Brokerage        410     440     352    BEARISH   7.23
IUX Insurance        645     660     580    BEARISH   7.23
RLX Retail           915     960     812    BEARISH   7.23
DRG Drug             370     400     333    BEARISH   7.20
HCX Healthcare       750     800     684    BEARISH   7.22
XAL Airline          180     190     151    BEARISH   5.21  
OIX Oil & Gas        285     310     313    BULLISH   8.10 *



Posture Alert    
Watching paint dry? Sector after sector continues a slow but
steady pace south. With Tuesday's action, we have turned
BEARISH on the Nasdaq 100 (NDX), Morgan Stanley High Technology
(MSH), and Software (CWX). On a positive note, we have turned
BULLISH on Oil & Gas, as it now is the only BULLISH sector on
the posture board. 



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

members.OptionInvestor.com/marketposture



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

Still going long?

Over the last month, there haven't been many good opportunities
to go long a stock or option. Many people refuse to short a stock,
or buy puts, thinking that this is un-American. Just like in Las
Vegas, many people will not put money down on the don't pass line,
even if the table is obviously cold. Folks, it is un-American to
lose lots of money or not take advantage of an opportunity when
you see one. The best short-term opportunities lately have been
taking advantage of down moves. For those of you who have been going
short this last month, the equity in your brokerage accounts will
do all the talking for you. For the rest of you, you may want to
take advantage of the Volatility Index (VIX).

Below is a chart of the VIX. If you recall last weeks one day
reversal, you will see that the VIX broke above 30 and touched
just above 32. This happened to occur at the absolute bottom of the
market. If you happened to buy an internet stock (or anything in
general on the Nasdaq), you could have made a huge percentage return
on your money in just a few hours. You can see the big swing by the
corresponding chart of the Nasdaq below.

Today, we saw action similar to last week's one-day rally. Today,
the VIX broke above 30, touched 31 and change, and closed at
28.30. While the VIX was above 31, the Nasdaq was at its bottom for
the day. You could have, once again, done some nice fire sale
shopping, as evidenced by the chart in Yahoo/Nasdaq below.

There is no doubt that there is considerable weakness in this
market. With the threat of a larger-than-expected interest rate
hike (or numerous hikes), and Y2K looming around the corner,
shorting is probably the best place to be right now. However, if
you will only go long, try to use the VIX as a tool to help you
with your trades. At times, it is very powerful and useful. However,
as you can see below, the VIX can go a lot higher (i.e.54 for 1997,
60 for 1998), but for 1999, anything in the 30's has been a good
buying opportunity so far. 
 

Market Volatility Index (VIX)
                    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 *
  
August 10, 1999                         28.30

 
 

 
 

 
 

 
 

 
 

 
 


BULLISH Signs: 

Pinnacle Index:
The Pinnacle Index for the OEX (630-670) is now reaching levels of 
extreme pessimism.  From a contrarian standpoint, support is building 
in this area, and may indicate a short term base.

Investor Intelligence:  
As a contrarian indicator, the percent of Bullish investors decreased 
1.4% and Bearish sentiment increased 3.2%.


Mixed Signs: 

None


BEARISH Signs:

Russell 2000: 
Broke below both the 50 and 200 day moving averages, proving very 
bearish.

Interest Rates:
The yield on the 30-yr Treasury broke out to new highs, which could 
spell potential disaster for this market.
  
Peak Open Interest:  
The contraian put-call ratio clocking in at 1.0 suggesting bullish
sentiment picking up steam.

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

Market Posture 2:
Several indexes continue on their bearish decline, including drugs, 
healthcare, brokerage, banking, airlines, Russell 2000, Insurance,
and Internet.

Advance/Decline Line:
The A/D line has been rolling over, and will continue to 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 690-780)
Date                 Open Interest     Change %    Alert

Friday, July 16           32,285        
Friday, July 23           62,455        +93.4%
Friday, July 30           74,895        +131.9%
Friday, Aug. 06          113,258        +250.8%




Market Sentiment at a Glance     Friday     Tues       
Indicator                        (8/06)    (8/10)     Alert


Pinnacle Index (OEX):          

                    
Overhead Resistance (715-745)      6.5       6.8 
Overhead Resistance (680-710)      1.4       1.9
Underlying Support  (630-670)      6.3       5.7
                    

Put/Call Ratios:

CBOE Total P/C Ratio                .7        .7
CBOE Equity P/C Ratio               .5        .6
OEX P/C Ratio                      1.1       1.0


Peak Open Interest (OEX):

Puts                              620        650
Calls                             700        700
P/C Ratio                          .7         .7

Market Volatility Index (VIX):	

CBOE VIX                         28.30



Investors Intelligence:

Bullish                         52.20%  *
Bearish                         27.80%  *


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.

 

(OEX)
Pinnacle Index                   Friday      Tues
Benchmark                        (8/06)    (8/10)


Overhead Resistance (715-745)    6.30       6.78
Overhead Resistance (680-710)    1.41       1.86

OEX Close                      674.13     665.41
 
Underlying Support  (630-670)    6.50       5.73 
                     

 
Average ratings: 
Resistance levels 2.0 / Support Levels .5

What the Pinnacle Index is telling us:
Overhead sentiment resistance is building at the OEX 720/750
level while the underlying support is holding at the OEX
645/680 level.


Put/Call Ratio                  Friday     Tues
Strike/Contracts                (8/06)    (8/10)



CBOE Total P/C Ratio             .66       .71
CBOE Equity P/C Ratio            .54       .62
OEX P/C Ratio                   1.10      1.01



(OEX)
Peak Open Interest   Friday           Tues
Strike/Contracts     (8/06)           (8/10)



Puts                 620 / 11,005     650 / 11,622
Calls                700 / 14,674     700 / 16,566
Put/Call Ratio          .74              .70           

 
 

 
 

VIX)
Volatility Index     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 *
  
August 10, 1999                         28.30 

 



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
Aug  04, 1999                         52.2        27.8 *




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

Index        Last    Mon    Tue   Week
Dow       10655.15  -6.33 -52.55 -58.88
Nasdaq     2490.11 -28.99 -28.87 -57.86
$OEX        665.41  -2.39  -6.33  -8.72
$SPX       1281.43  -2.49 -16.37 -18.86
$RUT        422.82  -2.15  -3.07  -5.22
$TRAN      3137.54   0.42 -82.91 -82.49
$VIX         28.30   0.63   0.31   0.94

Calls                Mon    Tue   Week

SNE         123.00  -0.19   3.19   3.00  Merrill upgrade
DELL         40.44   1.19  -0.56   0.63  Strong relative day
INTC         71.75   1.88  -1.69   0.19  AMD chip worries
LSI          53.44   0.94  -0.88   0.06  Strong sector
AMGN         75.00   0.38  -1.81  -1.44  Dropped, broke 10-dma
SLB          66.38  -1.00  -1.06  -2.06  New, hot sector
NXLK         80.88   0.88  -3.50  -2.63  Have we hit bottom??
HGSI         57.25  -0.63  -2.63  -3.25  Use caution!!!
TXN         138.50  -1.00  -3.00  -4.00  Where's the split run
IBM         119.31  -1.31  -2.88  -4.19  Dropped, weakening
HWP         106.69  -3.31  -1.00  -4.31  Potential split play

Puts

NITE         30.25  -4.88  -1.50  -6.38  Another rough day
BRCM        104.88  -1.88  -3.50  -5.38  New, not recovering
TAN          41.06  -3.88   0.25  -3.63  Retail sector suffering
AMR          59.31  -0.56  -2.06  -2.63  Higher oil prices
SCH          38.00  -1.31  -0.81  -2.13  Dropped, successful
TBH          72.50  -1.13  -0.38  -1.50  Interest rate play
U            31.06   0.06  -1.44  -1.38  Another 52-week low
CMGI         76.19  -3.75   2.94  -0.81  The wild ride continues
DH           57.81  -0.69   0.13  -0.56  Moving with sector
MER          63.69   0.63  -0.81  -0.19  30-year bond pressure
NKE          49.19  -0.13   0.25   0.13  Dropped, going nowhere
MWD          83.31   0.31   0.88   1.19  Looking for support
AMZN         91.00  -4.06   5.50   1.44  Internet rally today
AXP         124.50   1.94  -0.50   1.44  Waiting for Fed
SEPR         70.25   4.88   0.00   4.88  Flattening out
DCLK         79.00   0.56   4.44   5.00  Dropped, strong day
GNET         60.88  -3.50   8.56   5.06  Dropped, nice gains
EBAY         89.25  -3.63   9.63   6.00  Bear trap rally??



****************
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:
******

IBM $119.31 -2.88 (-4.19) Short but not that sweet.  About 
the best we can say is that IBM found support again at $119.  
Remember, this play was predicated on the DOW remaining above 
10,600, which unfortunately was pierced by an arrow just like 
an apple on William Tell's head.  Yes, the market rebounded 
(which itself was not all that convincing, since the market 
still finished with a loss) but IBM did not participate at 
all.  Also its volume remained average which is called 
relative weakness and isn't conducive to good call playing.  
If you followed the play from Sunday, you know we were 
waiting for volume to confirm direction and were not about 
to chase IBM for an entry.  With that said, there should have 
been no reason to open a position thus we're dropping IBM 
from our call plays. 

AMGN $75.00 -1.81 (-1.44) Amgen has been in and out of its 
Narrow trading range that we spoke of last weekend.  It has 
given us an opportunity to profit from its recent moves.  
Today it fell $1.81 on average volume and we believe it may 
be time to move on.  It has ran up to the $80.00 twice only 
to pullback.  It has spent to long basically going sideways, 
without any real conviction.  The biotech industry has been 
trying to recover and may be trying to find a short-term 
bottom.  Today AMGN fell very convincingly through its 10-dma 
leading us to believe there may be more to come.  We will 
step aside for now.

 
***** 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 
a qualified professional before trading in any security. The 
information provided has been obtained from sources deemed 
reliable but is not guaranteed as to accuracy or completeness.
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         Tuesday  8-10-99  
Copyright 1999, All rights reserved. 
Redistribution in any form strictly prohibited.


DROPS CONTINUED
***************


PUTS:
******

SCH $38.00 -0.81 (-2.13) A mixed performance for Schwab today 
but in the end, it was just another loss.  SCH went lower 
out of the gates this morning before rebounding with the 
market midday.  It was unable to hold its gains though and 
closed right on the afternoon low at $38.  The entire sector 
was lower today amidst interest rate concerns.  This group 
has seen an incredible pullback, in most cases over 50% from 
year highs.  Even Schwab which is considered to be a more 
stable play is at a 50% discount.  But we don't like to see 
the flattening out on the 200-dma that SCH has shown us for 
the last few sessions so we are closing out our play.  The 
stock has dropped sharply since we recommended it and we 
feel that we are better off to take our profits and move on 
to another play.

DCLK $79.00 +4.44 (+5.00) While showing some strength on 
Monday as the rest of the sector sank around it, today the 
Internet rebound really caught a hold of DCLK.  While we did 
ride it down to its old support level of $70, the rebound was 
swift and sharp.  We hope you had the opportunity to use a 
trailing stop on the way down, which would have stopped you 
out at a profit on the way back up.  While the sector is 
still weak, there is also the possibility of a breather (or 
even further technical bounce) before lows are tested again.  
Having held up well into the close, we need to let the market 
give us a direction again before we play DCLK again.  Thus 
we're dropping DCLK tonight, thanks to its relative strength.  
It also didn't hurt that AG Edwards initiated coverage with 
an accumulate rating or a $119 price target.

NKE $49.19 +0.25 (-0.13) The fall in Nike shares may or may 
not be over.  Technically looking at the chart, it is still 
pointing south.  With the broader markets exhibiting weakness 
earlier today NKE, couldn't get out of its own way.  Given 
the conditions in the retail sector the past two days, NKE 
should have joined the party.  Instead it barely moved, leading 
us to believe this could be a short-term bottom or it may 
become range bound.  Either way it is time to walk away from 
Nike.

GNET $60.87 +8.56 (+5.06) Go2Net really did go today! So much
so that we need to drop this for now.  With all the high 
profile news that the stock has had, it was just a matter of
time until analyst attention hit and today it did.  News of
a strong buy initiated by Piper Jaffery.  Record earnings for
Commtouch and D.G. Jewelry were also indirectly attributed
to GNET's good job.  The news rallied the stock above our
resistance levels, so it's time to move on.  The stock saw
a price swing of almost $19 since our recommendation.  
Investors who watched this stock closely should have profited 
nicely during that time. 


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

SNE $123.00 +3.19 (+3.00) Sony rose Tuesday when the Japanese 
Nikkei index rebounded overnight but that isn't the big news 
for the stock.  The big news is that Merrill Lynch raised 
their price target on SNE.  Analyst Hitoshi Kuriyama said a 
higher target price was justified on three counts: Sony's 
first-quarter profit shrank less than analysts expected, cost-
cutting efforts are working, and expansion into the high-
yielding business of digital electronics will pay off.  This 
helped SNE climbed on the New York exchange as the stock 
opened at $122.88.  We had a fairly sideways day after that 
but considering the market weakness, it wasn't that bad.  If 
we can get a broad market bounce tomorrow then Sony may be 
able to start a new uptrend.  It was also nice to see the 
stock come back late in the day to end right on the day-high.  
Remember to confirm the direction if you are looking to open 
new plays.

LSI $53.44 -0.88 (-0.06) The chip sector continued to show 
strength yesterday and LSI peaked at $55 to set its latest 
52-week high.  The news of Advanced Micro Devices (AMD) 
unveiling their newest speed demon, a 650 MHz Athlon 
microprocessor didn't hurt either.   Today, LSI couldn't 
quite reach its newest resistance level as the stock price 
fluctuated throughout the day on strong volume.  The recent 
volatility should continue to create entry points intraday 
for those who are looking to open new plays.  Also, Banc of 
America Securities started new coverage with a "strong buy" 
rating.  That should help to buoy the stock in this market. 

DELL $40.44 -0.56 (+0.63) The first 2 days of the week have 
been negative for the market but not for DELL.  It's managed 
to eke out a gain so far this week.  Technically, DELL showed 
strength today at $39.50, having lost only $1.50 while the 
NASDAQ was down 77 points.  Then both the market and Dell 
rallied from there in today's action.  Remember that we're 
playing DELL for a potential earnings run before it announces 
results on August 17 after the close.  Yesterday DELL was 
upgraded by BancBoston Robertson Stephens from a "market 
perform" to a "long-term attractive" with a $48 short-term 
price target.  This is because year over year revenues seem 
to have stabilized and unit growth looks respectable, at least 
according to BBRS analyst Dan Niles.  We're still waiting for 
volume though.  CSCO's results today may help the whole tech 
sector tomorrow, including DELL.  Unless there's a meltdown, 
consider buying dips if it fits your risk profile. 

TXN $138.50 -3.00 (-4.00) TXN is staying on our call list 
thanks to its upcoming split on August 16.  As we noted on 
Sunday there isn't much time for this play to work, just 
3 more trading days.  While it held up well yesterday, it's 
recovery this afternoon was weak compared to the market's.  
Banc of America Securities' today announced a coverage 
initiation with a strong buy and that may help tomorrow, 
though it didn't do much today.  Even if TXN is so blessed, 
it needs volume to lift it up.  No volume = no gain.  Let us 
take this opportunity to suggest that you sit out if volume 
never materializes.  Not much else has changed since Sunday.  
Remember our comments, "this market is still treacherous and 
unforgiving on call trades that go against us.  After all, 
the trend is still down." 

INTC $71.75 -1.69 (+0.19) We are going to stay with INTC for 
now despite recent weakness.  We would suggest if you are 
still in a play on Intel, that you move your stops up tight 
to pull you out of the play on any further decline.  INTC is 
near the bottom of an ascending channel.  It touched a new 
52-week high at $74.44 again today but fell $2.88 in the last 
30 minutes of the day.  Volume as well picked up in the last 
hour today during the decline.  But INTC did still close 
above its 10-dma and may bounce back tomorrow.  In the news, 
Intel completed its acquisition of Level One today, which is 
valued at $2.73 billion.  Shareholders of LEVL will receive 
0.86 shares of INTC stock for every one share of Level One 
stock they own, based on Monday's closing prices.  We are 
cautious about opening new positions in Intel but if the 
NASDAQ recovers Intel should be headed back to new highs.  
Remember keep your stops very close and let the market do 
the rest.  

NXLK $80.88 -3.50 (-2.63) There is a lot in the news that 
is affecting Nextlink this week.  First, we have the interest 
rate scenario which needs little, if any, further discussion.  
Next, last month Sprint started a price war with their "nickel 
nights" on long distance service.  Yesterday MCI WorldCom 
responded with its own version by extending its popular "5-Cent 
Sundays" plan to the entire weekend and weekday calls at night.  
With the current price war receiving so much attention NXLK 
Fell $3.50 today to close at 80.88.  At the low of the day 
Nextlink was off by $6.00, hitting $78.38 about midday.  The 
selling tapered off and some buyers did step up to the plate 
and brought NXLK back the last half of the day.  We are going 
to stick with NXLK for another few days as technically, NXLK 
could be at or nearing a bottom.  But use caution, we are not 
trying to pick bottoms here!  It just looks like the current 
push down its lightening up somewhat.  Now for the good news.  
Nextlink is due to announce the ex-date for a 2:1 split, 
probably around August 27th.  We are looking for NXLK to begin 
a split run, which is why we are hanging on to Nextlink.  
Again allow Nextlink to prove itself before entering a new 
play with positive movement and volume.

HWP $106.69 -1.00 (-4.31) HP was relatively flat today as the 
stock was down $1.00 to close at $106.69 on moderate volume 
totaling 3.35 mln shares.  HP and Yahoo Inc. announced today 
a partnership that will assist companies in constructing 
Internet hubs.  HWP said the new product will be named 
Corporate My Yahoo.  It will be targeted to professionals 
and corporate executives.  We still anticipate that HP will 
outperform most other tech stocks up until earnings are 
released on Aug 19 if the market calms down.  It is probable 
that the stock will make a positive run over the next few 
days but we must confirm both stock and market direction first.  
Furthermore, the price of the stock is still holding above 
$100 and historically this is where the company likes to split 
their stock.  If that is in the works and rumors begin to 
stir, we may just get the kind of earnings run we are use to.

HGSI $57.25 -2.63 (-3.25) Today HGSI retreated with the market
as investors protected recent gains but we did manage to stay 
nicely above support of $56.  At current levels, any sign 
of market strength could provide us with a good entry point.
Despite the negative market, HGSI showed some resistance at 
$57, almost like a spring being coiled for the bounce.  But 
remember this is a speculation play, so caution is advised.
Cambridge Antibody Technology group agreed to work with HGSI.
This is a great combination that should speed results to
developing useful medications for the future.



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

AMR $59.31 -2.06 (-2.63) Another rough day for the transports 
as oil spent most of the last 2 days north of $21.00 a barrel.  
Plus this was one of the hardest hit sectors in the market 
today and the technical picture is worsening.  That is why we 
are seeing such a selloff in AMR.  It's the double whammy.  
A weak technical outlook due to lack of support and a bad 
fundamental outlook thanks to high flying oil prices.  We are 
now convincingly under the $60 level and have seen no end to 
the trend that started last Tuesday.  It has been straight 
downhill since then.  Keep your eye on the weekly inventory 
report for oil that is due out late Tuesday afternoon.  This 
will give us an indication of which way oil prices and thus 
the airline sector will move tomorrow.  

U $31.06 -1.44 (-1.38) It's the same old story for USAir as 
investors keep their finger on the sell button.  They tried 
to rally the stock on Monday but never made any substantial 
gains and it was right back to new lows on Tuesday.  The 
temporary rally may have stemmed from news that they will be 
offering new routes from Atlanta to New York.  But we keep 
talking about the overall sentiment for USAir and other 
airlines and until the momentum shifts, these rallies are 
nothing more than entry points.  So keep the new 52-week lows 
coming and follow up the play with trailing stops to protect 
your gains.

DH $57.81 +0.13 (-0.56) Investors who are still fearful of 
rising interest rates and tapering consumer spending are 
selling off their retail stocks as the economic picture 
grows more somber.  On strong volume both days this week, 
DH traded below the $59 mark.  This is a good sign because 
for the past three days it appears the 200-dma at $60 has 
been acting as overhead resistance.  Put another way, the 
lower DH stays below this indicator the better.  Be careful 
choosing entry points at this level since some indicators 
are showing oversold indicators.  Look for entry points on 
the bounces and use stop losses. 

MER $63.69 -0.81 (-0.19) As the financial world of brokerage 
houses continue in its turmoil, MER is losing more ground.
For the third day in a row, the stock has closed below its 
long-time bottom support of $65-66.  Today, the stock 
pushed even further down and hit a daily low of $62.  Pay 
close attention to the market sentiment.  MER has been 
falling for weeks now and if this stock gets a strong market 
boost it may cycle upwards.  In the news on Monday, MER was 
hit with a $75 mln lawsuit by Slovnaft, an oil-refining 
company.  The suit alleges Merrill Lynch misrepresented and 
failed to disclose pertinent elements of 4 arranged loans 
between 1994 and 1997.  Also today, Solomon Smith and Barney 
raised the 3Q EPS to $1.30 from $1.25 citing a strong show 
of retail volume (which may or may not hold true in the 
upcoming months).  Either way if you have profits in this 
play in may be prudent to adjust your stops to protect 
those gains.  

MWD $83.31 +0.88 (+1.19) The financial sector is still in 
the dumps and the brokerages are first in line.  MWD is 
consistently trading below its 200-dma of $87.  Plus the 
stock has been pushing to lower-lows almost every day the 
past couple of weeks.  Nevertheless we can never forget that 
nothing moves in a straight line, so always be prepared for 
those unforeseen bounces in the market.  If the bond market 
recovers after hitting lows not seen in 2 years, we might be 
in for just such a relief rally.  In the news, MWD's discount 
brokerage unit kicked off the week with their leading edge 
wireless trading!  

NITE $30.25 -1.50 (-6.38) What bottom?  If there was one, 
this market maker fell right through it!  On exceptionally 
strong trading volume NITE sunk $6.38 in two days, dropping 
it below the questionable $34-$35 level.  Now let's not get 
too excited, too fast.  There may very well be more room for 
profit.  The falling stock market and potential regulatory 
issues are certainly pressuring NITE.  In fact, insiders 
have sold off almost 1 million shares in the past week. 
Overall the sentiment is still very bearish but the stock 
has fallen so much that it is tough to pick new entry points 
so let's remember "caution" on this play. 

EBAY $89.25 +9.63 (+6.00) Is an Internet recovery at hand? 
Well, one day does not make a trend, but it can sometimes 
be a warning.  Specific to EBAY, a couple of things may have 
contributed to today's almost double-digit advance.  First, 
EBAY is naturally recovering from the sell-off on Friday and 
Monday.  But unfortunately for us put players, there was an 
across the board rebound in the Internet sector today adding 
fuel to EBAY's fire.  Also, some analysts believe that the 
appointment of Maynard Webb (a former Gateway executive who's 
known for his great organizational skills) to eBay's engineering 
and technological operations may have played a vital role in 
the stock's reversal (perhaps he can get the outages in 
check!).  Plus the analysts' conference went well and, of 
course, they now are talking up eBay.  Again one day does 
not end a play, but in this case leads one to caution.  As 
you should know by now, EBAY = VOLATILITY + HIGH RISK!   

SEPR $70.25 +0.00 (+4.88) After making a little spike on
Monday and coming in unchanged today, Sepracor's three week 
tumble is undergoing a slight stall.  Despite this slight 
setback, investors continue to worry about inflationary fears 
and Greenspan's likely rate hike.  We anticipate that these 
worries will continue up until the actual announcement on 
August 24.  With the help of rate-hike worries in the market 
and the earnings loss reported by the company last month, we 
are hoping to get through this little stall and continue to 
even lower price levels.  However use caution with this play.   
Conservative investors may want to hold off on opening new 
plays until the stock reconfirms downward direction.  Remember 
SEPR has lost almost $30 in three weeks and may bounce as it 
approaches its support, so make the most of your stop loss 
orders.

CMGI $76.19 +2.94 (-0.81) Nice attempt at recovery but CMGI 
couldn't get back above its weak Friday closing level of $77.  
Thus it stays on our put list despite the strong afternoon 
recovery.  We all know that CMGI is capable of big swings. 
It actually touched as low as $68.25 today before adding 
back almost $8 by the close.  If you had the luxury of 
watching today's action, setting trailing stops on the way 
down would have garnered exceptional profits.  CMGI now rests 
precariously just below its support level of $77 (technically 
weak despite a big finish).  While the possibility exists for 
a technical break to the upside, the overall trend is still 
down.  Nonetheless, remember that Internets carry a high 
degree of risk and you need to plan your entry accordingly.  
Those with fragile tickers (hearts) should stay clear.

AMZN $91.00 +5.50 (+1.44) In yet another sign of technical 
weakness, AMZN failed to close above its trading high of 
Monday, a day of wide market losses.  Today's snapshot of 
strength in the final 2 hours can't negate that.  While 
support is at $90, any further weakness in the sector (the 
bond rate is telegraphing that there will be weakness) could 
send AMZN scrambling back to the low $80's.  After that the 
new floor would be $60.  We're not trying to poke holes in 
AMZN.  After all, it has a fine brand name that offers a good 
shopping experience and conjures up all kinds of positive 
images.  Unfortunately they don't look like $$$ signs.  In 
fact, in a briefing.com article today it was pointed out 
that brick and mortar retailer, Wal-Mart has a higher profit
margin than AMZN.  Wasn't that supposed to be the beauty of 
online retailing?  Anyway, look for continued sector weakness, 
but be mindful that even on their way to the cellar, they 
still take the stairs, not the slide.  It's a volatile play 
so exercise caution.  Also note that they have settled their 
dispute with the New York Times over use of the words "Best 
Seller List".

TAN $41.06 +0.25 (-3.63) Has it hit the floor yet?  On Monday, 
Shares of Tandy fell another $3.88.  Volume on the decline 
was more than twice the norm, with 2.48 mln shares exchanging 
hands. The retail industry has really been getting kicked 
around recently.  Many company's are still reporting increases 
in same store sales with earnings beating analysts estimates. 
This was the same story last quarter except investors rewarded 
the retailers.  This quarter interest rates are a bit higher 
and investors are drop-kicking many of the retail companies 
like a football.  The retail sector did find some strength 
today after Walmart reported earnings and led the industry 
to a gain.  Is this the bottom?  We will let the markets tell 
us for sure.  However one day does not a trend make.  At its 
low of the day TAN hit $37.38, down $3.43 for the day.  The 
last hour it did regain its composure, coming back to close 
at $41.06.  If you are in Tandy and didn't take your money 
off the table today, move your stops down tight.  We would 
be cautious about entering a new play on TAN at this time,
given the strength it exhibited near the close today.

TBH $72.50 -0.38 (-1.50) Telebras was down $0.38 on Tuesday 
to close at $72.50.  Volume today was a little on the heavy 
side with 1.97 mln shares changing hands. It appears market 
sentiment is favoring an interest rate hike by the Fed on 
Aug 24.  With the South American economies being heavily 
influenced by U.S markets, higher interest rates will likely 
drive TBH lower over the next couple of weeks.  If you were 
to look at two six month charts, one of the DOW and one of 
TBH, it is astonishing how TBH mimics the DOW as economic or
monetary concerns effect the market.  Historically, we can  
expect Latin American ADR's to be volatile as interest rate 
uncertainty continues.  Moreover, unless the Fed decides 
that one rate increase is not enough, we will see more losses 
in TBH.

AXP $124.50 -0.50 (+1.44) Not much movement today on AXP.  
This fact makes caution necessary since a lot of the market's 
move today were based on interest rate concerns and the yield 
on treasury bonds.  Financial stocks were affected for the 
most part but, AXP held up quite well with an afternoon rally 
off it's low of $123.06.  We are still holding below resistance 
of $127 though and any sign of market strength may move AXP 
up so set your stops.  Yesterday analysts were confirming that 
the financial sector is oversold so watch for investors jumping
in on bargain hunting.  But if we get more market weakness, 
we could see $115 as our support.  Be cautious before starting 
any new AXP plays.



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

SLB - Schlumberger Limited $66.38 -1.06 (+3.06 this week)

Schlumberger is one of the world's largest and most diversified 
oil services firms, operating in more than 100 countries.  
Its Oilfield Services unit provides practically everything 
needed for finding oil, including interpreting seismic data,
drilling rigs and services, wireline logging, constructing 
wells and project management. Its Measurement & Systems unit, 
which makes smart cards and other measurement and transaction 
systems, is a world leader in gas, water, and electric meter 
manufacturing.

With investors anticipating an interest rate hike by the Fed 
on  August 24, many are running from those sectors of the 
market that are most affected by higher interest rates into 
others that are safe havens.  These worries that have existed 
for the past few months have made oil stocks the place to be.  
In the short-term, we expect continued selling of interest 
rate sensitive securities and more buying of stocks like SLB.  
We picked SLB as a play because of the fact it's an industry 
leader and is positioned well to make a nice move ahead.  
The stock recently broke through its resistance level at $65 
and should be on track to go even higher considering the 
current market conditions.  Oil has recently closed above 
$21 for the second day in a row, which is a great sign for a 
stock that lives or dies by these prices.  Each Tuesday there 
is a report from the American Petroleum Institute showing oil 
inventories.  Today's release indicated that draws on oil 
were higher than expected for the week and that should help 
the sector.  Like always place stop orders to protect yourself 
if oil prices change directions on us.

In the news, Schlumberger said Monday it restructured its 
joint venture with UK.-based Cable and Wireless Plc. to make 
their Omnes communications company a Schlumberger unit.  
This joint venture would help Schlumberger provided wireless 
communications to companies in remote regions.
        
BUY CALL AUG-60 SLB-HL OI=9305  at $6.75 SL=5.00
BUY CALL AUG-65 SLB-HM OI=9399  at $2.69 SL=1.25
BUY CALL SEP-65 SLB-IM OI= 648  at $4.38 SL=2.75
BUY CALL SEP-75 SLB-IN OI= 705  at $1.94 SL=1.00

Picked on August 10 at $66.38    PE = 78
Change since picked      0.00    52 week low =$40.06
Analysts Ratings    7-9-8-1-0    52 week high=$67.63
Last earnings  07/99 est 0.25    actual 0.63 
Next earnings  10-22 est 0.26    versus 0.13
Average daily volume = 3.2 mln
Chart = http://quote.yahoo.com/q?s=slb&d=3m



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

BRCM - Broadcom Corp. $104.87 -3.50 (-4.13)

Faster, Faster, Kids say while spinning!  We big kids want
faster as well, just faster online connections.  BRCM is 
the company helping us as they focus on products that give 
us high speed transmission over our existing phone lines 
and cable systems.  This technology allows users to more 
efficiently use voice, data, and video streams.  BRCM's 
detailed focus on system design allows this speed and 
efficiency to be offered in MPEG devices for the cable TV 
box, Cable modem's, Ethernet networks, home based networks, 
digital broadcast, and XDS markets.  Broadcom has thus 
captured a large share of the cable modem market and 
acquired customers like 3Com, Cisco, General Instrument, 
and Motorola.  Revenues have almost tripled to $96 million 
due to expanding markets, and the companies effective 
management.  

August 5th took BRCM to a new 6 week low of $101.50.  The
stock has been unable to recover and looks poised to head
lower on continued market weakness.  Currently our 10-dma 
is serving as resistance at $115, with support at $98.  Any 
market correction should prove profitable to support.  The 
company may be currently overvalued with a relatively high 
P/E, and this should also help put downward pressure on the 
stock as the market corrects.  Because we have seen several 
sessions of profit taking, do not enter until you are sure 
of the market's direction and the stock is also continuing 
down.

There is not a lot of news on Broadcom however there is one 
report Monday that confirmed BRCM's weakness.  It cited that 
while many other chip makers were experiencing strength in 
shares, BRCM was declining due to interest rate fears. The 
stock also seems to be trending with the Internets, another 
reason to play this one short.

BUY PUT AUG-105 RDZ-TA OI= 430 at $4.75 SL=3.33
BUY PUT AUG-110 RDZ-TB OI=1293 at $7.75 SL=5.87 
                           
Average Daily Volume =  2.19 mln
Chart = http://quote.yahoo.com/q?s=brcm&d=3m



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*************************************************************
This newsletter is a publication dedicated to the education 
of options traders. The newsletter is an information service 
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newsletter picks are not to be considered a recommendation 
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The Option Investor Newsletter         Tuesday  8-10-99  
Copyright 1999, All rights reserved. 
Redistribution in any form strictly prohibited.


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

U - USAir Group Inc. $31.06 -1.44 (-1.38 this week)

As one of the top 10 airlines in the U.S., US Airways Group 
is the holding company for US Airways, Inc., Shuttle, Inc., 
Allegheny Airlines, Inc., Piedmont Airlines, Inc., and PSA 
Airlines, Inc.  As a certified air carrier, they are engaged 
primarily in the business of transporting passengers, mail, 
and property.  USAir is still trying to emerge from a rough 
decade which has included low-fare competition, labor disputes, 
and early retirement by more than 300 pilots.  Currently one 
of their more popular routes comes from Shuttle, Inc. which 
operates the US Airways Shuttle between New York and 
Washington.

Sunday Write Up 

It's hard to believe that we started this week with such a 
spike in optimism in USAir's stock.  When Tiger management, 
USAir's largest shareholder, announced that they had filed 
with the SEC to explore merger/alliance deals for USAir the
stock spiked up $4 in a matter of hours.  What an entry point 
for those of us that weren't fooled by the hype!  In hind 
sight that news was probably nothing more than a chance for  
Tiger to unload some of their shares which total 22% of the 
company.  The rest of the week was nothing but down for U's 
stock.  On Friday they filed their quarterly report for Q2 
with the SEC.  It read like a shareholder horror story.  It 
was filled with labor problems, Y2K concerns, shrinking cash 
positions, court battles, revenue and economy worries, higher 
fuel prices and increased competition.  We got depressed 
reading it and we don't even own the stock.  It is no wonder 
the stock hit another 52-week low today, closing only .06 
cents off the day-low.  But like we have been saying for 
weeks now, entry point is the name of the game.  The stock 
only moves a few dollars a week but premiums are extremely 
low.  So plan your moves before opening new plays.  

US Airways said Friday it has had to cancel a rising number 
of flights because of pilot training problems, bad weather 
and the work of integrating new aircraft into its fleet.  
This portion of the 10-Q mentioned above was summarized after 
the close on Friday by Reuters.  The company said they don't 
have an ETA on when the problems will be resolved.  Just 
another log being thrown on the fire for USAir.  

Tuesday's Update

It's the same old story for USAir as investors keep their 
finger on the sell button.  They tried to rally the stock on 
Monday but never made any substantial gains and it was right 
back to new lows on Tuesday.  The temporary rally may have 
stemmed from news that they will be offering new routes from 
Atlanta to New York.  But we keep talking about the overall 
sentiment for USAir and other airlines and until the momentum 
shifts, these rallies are nothing more than entry points.  So 
keep the new 52-week lows coming and follow up the play with 
trailing stops to protect your gains.

BUY PUT AUG-40 U-TH OI=697 at $9.50 SL=7.00
BUY PUT AUG-35 U-TG OI=254 at $4.38 SL=2.75

Average Daily Volume = 859 K



STRADDLES
*********

Well traders, breakouts to the downside are in full force.  
The Index Averages have helped just about any consolidated stock to
breakout to the downside.  The good news is that looking at the
different markets by sector tells me that there is more room for
not only breakouts to continue, but there are still several markets
that have not broken out yet.  Sectors that I am looking at right 
now that are consolidating include the oil and gas sector and some
stocks in the financial data services sector.  Stay tuned!

Did anyone take a look at the straddles published just a few 
days ago? The two that interested me the most were Whirlpool 
and Maytag. Same industry, different market directions.  You 
can look at the fundamentals all you want, but what the consumer 
sees is one company (Whirlpool) selling quality appliance products 
at competitive prices, while another company (Maytag) sells 
quality products, but at a higher price.  Maytag is of appliances 
as Michellin is to tires.  Problem here is this company is 
relying too much on top of the line products.  Maytag has washers 
and dryers that retail for $1000 or more each.  This is similar 
to the braun shaver offered by Gillette.  Shaving your face has 
the same affect with a 99 cent razor as it does with a $200 
electric shaver.  Now I know I will get some argument here, but 
the result is basically the same.  The same goes with washers 
and dryers.  Why spend $1000 on a washer when you can basically 
get the same affect for $300?  This seems to show with Maytag, 
as inventories are building.  Get ready Maytag, Christmas is 
only 130 days away.   

Most of the stocks that were published as breakout stocks did 
indeed breakout.  HoneyWell (HON) has broken down out of its 
classic wedge and shows a clear selling pattern.  Its down about 
4 points from Friday, and the latest news is that it is proposing 
a merger with Allied Signal.  Avery Dennison (AVY) broke down and 
is now 2 points ITM from Fridays price.  No news here, but the 
stock is down 3.5% which is great for the put side of a straddle.  
Zion Bancorp (ZION) is nowhere from last week as the wedge 
continues to tighten.  They are involved in merger talks which 
can be a risk to straddle traders if they happen to be bought at 
today's stock price.  Centocor (CNTO) is one of those stocks that 
looks like watching paint dries.  CNTO was downgraded yesterday, 
but the stock hasnt moved on any news since the takeover rumors 
of last week. If these rumors don't surface into reality soon, 
CNTO should get tagged to the downside soon.  Maytag and Whirlpool 
were both mentioned above, and are moving apart, with MYG leading 
the way, with nearly 5 points of intrinsic value in the puts since 
Friday.  


Straddle Mailbag 

I have gotten several questions asking what a straddle is, the 
elements to creating a straddle, and placing the straddle order.  
I also got a question wanting to know how you make money with a 
straddle. Keep in mind that in the OIN / OPTIONETICS seminar series,
I cover this strategy in more detail.  I will answer the above 
questions in order.

What is a straddle and what are the elements to creating a straddle?  

A straddle is basically a call option and a put option, at the same
strike price, using the same expiration date for each option type.  
These strikes can be anywhere you like, as long as the call and put 
are the same strike price.  Keep in mind that I like to enter all 
my straddles using strikes as close to the underlying asset as 
possible (at-the-money).  If the stock is trading at 98, and the 
strikes that are closes are the 95's and 100's, I will go with the 
100 strikes as they are closer, or I may decide to wait a day or 
two for the stock to reach a strike, making that strike price 
"at-the-money."  

How do you place a straddle order to your broker?  

Well, this is not as tricky as you think.  First of all, a straddle 
order is a spread order, meaning that this order can be placed and 
filled on one ticket.  When I first started trading straddles early 
in my career, I first had to look for a broker that would take my 
straddle order on one ticket, and fill it as a spread.  An example 
of outright fills versus spreads would be as follows:

OPTION STRIKES				SPREAD (COMBINED PREMIUMS)
XYZ DEC 100 CALLS FOR 8			XYZ DEC 100 STRADDLE FOR 15
XYZ DEC 100 PUTS FOR 7

Getting this order quoted and filled at a spread price does 2 things.
First, I don't have to get quotes for each and add them up in my head.
Second, and most important, I know that if I am filled, I am filled on
the entire straddle, not just one side of the trade.  I always enter 
my orders as a straddle spread and get filled as a spread to insure I 
am in on both sides.  

Here is a few more tips and tricks that I use when entering a 
straddle.  Like Jim Brown lives by, I avoid placing straddles 
during the opening hour.  Even though spreads are more tolerant to 
directional risk, the spreads are often wider during "amateur hour."
The other thing that helps me is that I always use a "limit order" 
when entering the straddle.  This just helps me to keep from 
overpaying for the straddle.  Like I always say when it comes to 
the bid and offer, I am glad to give the floor trader a little 
spread, but I don't want to put his kids through college.

Tom Gentile  



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

Delta Neutral Trading Techniques

There are many ways to take advantage of theoretically mispriced
options in the retail market. Most traders will buy or sell a
concurrent (and possibly opposing position) in the underlying
issue or open a spread with options on the same instrument in a
similar series. Those who wish to participate in delta neutral
strategies may choose to trade options which are theoretically
equivalent. Spreads with this type of "hedged" outlook generally
fall into the category of "volatility" plays. Two of the more
advanced volatility spreads are the "Back-spread" and the "Ratio
Vertical Spread".

The first thing one notices about these two techniques is they
have many common characteristics:

1. Both spreads are initially "delta neutral".
2. Both spreads are affected by changes in the underlying issue.
3. Both spreads are affected by the passage of time.
4. Both spreads are affected by changes in implied volatility.

First, the Back-spread:

A back-spread exists when more long positions are purchased than
those which are sold (2x1,3x1 etc..) and all the contracts expire
at the same time. In order for a call back-spread to be delta
neutral, the purchased calls must have a higher exercise price
than those which are sold. A put back-spread requires just the
opposite; the purchase of puts with a lower exercise price than
those which are sold. The primary characteristic of a profitable
call or put back-spread is an increase in volatility; a move away
from the long (purchased) option's exercise price will increase
the value of the spread.

Depending on the type of back-spread, movement in one direction
will be preferable to movement in the other direction. In a call
back-spread, upside potential is unlimited and a put back-spread
has unlimited downside potential. Traders should choose the type
of back-spread that reflects their opinion about future market
direction and avoid this strategy during stable cycles. In most
cases, regardless of direction the strategy requires movement.
If the underlying issue remains in a small range, a back-spread
will rarely profit.

One way to ensure profit from a volatile market (regardless of
direction) is to open the position for a credit. That means the
amount of money received from the sold options is greater than
the cost of those which are purchased. If the market collapses
in the case of a call back-spread, or explodes in the case of a
put back-spread, all options will expire worthless and the play
will profit from the credit of the initial transaction.

Ratio Vertical Spread 

Some traders refer to the opposite of a back-spread as a ratio
vertical spread or front-spread. This position consists of more
short (sold) contracts than long (purchased) contracts, with all
contracts expiring in the same month. A ratio vertical spread
will realize the maximum profit at expiration if the underlying
issue finishes at the short (sold) option's exercise price. The
value of the position will decrease if the underlying contract
moves away from this exercise price. While the ratio vertical
spread will generally profit in a stable market, the type of
position (bullish/bearish) should still be based on the future
outlook for the underlying issue.

Since the ratio vertical spreader assumes the opposite risks of
the back-spreader, the amount of loss is unlimited on the upside
in a call ratio vertical spread, and just the opposite in a put
ratio vertical spread. With the current market outlook in mind,
we will focus on the bearish form of this strategy; the ratio
call spread.

The ratio call spread is a neutral strategy in which one buys a
number of calls at a lower strike price and sells more calls at
a higher strike. This type of play offers a large probability of
making a limited profit with low downside risk and a relatively
small investment. It is one of the more attractive delta neutral
spreading techniques since the trader is buying mostly intrinsic
value and selling a relatively large amount of time value.

The ratio call spread has a defined range within which a profit
can be made at expiration. If the spread is initially established
for a credit, there is no downside risk. The profit or loss at
expiration is constant below the lower strike price because both
options are worthless in that area. Maximum profit occurs when
the issue finishes exactly at the strike price of the sold option.
The greatest risk in a ratio call spread lies to the upside, where
the loss is theoretically (although not realistically) unlimited.

Many delta-neutral traders prefer ratio call spreads because the
downside risk or gain is predetermined in the opening ratio and
therefore the position requires little monitoring in a bearish
market. The margin investment required for a ratio call spread
is fairly nominal since (on the long side) one is buying a call
rather than buying the stock. The actual position is really the
combination of a bull-call spread and a naked call, thus the net
investment is equal to the collateral required for the naked call
plus (or minus) the net debit (or credit) of the spread.

As in many spreads, there is more than one way to implement the
strategy. The most common philosophy is that ratio call spreads
should be established for credits so that there is no chance of
losing money on the downside. Traders that use this method want
the underlying stock to be below the sold strike price when the
spread is established. The further the stock is below the strike,
the more attractive the spread will be. Once again, this type of
position has no downside risk; even if the stock collapses, the
profit will be equal to the initial credit received.

The trader that plays both debit and credit (ratio call) spreads
will generally have a better selection of candidates to choose
from and will also be able to assume a more neutral posture on
the underlying issue. Those who trade only credit spreads will
generally return smaller profits (when the price of the security
remains relatively unchanged) but will not have to worry about
risk with a declining market.

If the stock price falls significantly after the play is opened,
a downside follow-up is not required when the initial spread was
for a credit. If the initial spread was a debit, the trader may
want to roll-down the written calls. The follow-up action for an
upside move usually consists of buying additional long calls to
reduce the ratio in the spread. Eventually, the goal would be to
adjust the spread ratio to 1:1 (a bull-call spread). In addition
to these defensive actions, ratio call spreads can also be closed
early to take profits or limit losses. The most common situation
occurs when the stock price is close to the higher strike price
and the time value on the sold position has eroded significantly.
Another alternative is to re-adjust the ratio to reflect any new
opinion on the underlying security or to re-establish a neutral
profit range.

Our new associate, Tom Gentile, is an expert in the art of 
delta-neutral trading. With a little bit of reader interest, 
we may be able to convince him to provide some ratio spread 
candidates in a future newsletter.

Good Luck! 

ray@OptionInvestor.com



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