Option Investor

Daily Newsletter, Tuesday, 08/08/2000

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The Option Investor Newsletter                  Tuesday 08-08-2000
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MARKET WRAP  (view in courier font for table alignment)
        08-08-2000        High      Low     Volume Advance/Decline
DJIA    10976.90 +109.90 10988.30 10836.60  994 mln   1587/1256
NASDAQ   3848.55 - 14.44  3893.05  3839.58 1.46 bln   1843/2224
S&P 100   805.96 +  2.24   806.97   799.13   totals   3430/3480
S&P 500  1482.81 +  3.49  1484.40  1472.53           49.6%/50.4%
RUS 2000  508.72 -  1.15   511.94   508.72
DJ TRANS 2892.19 -  2.02  2899.07  2870.05
VIX        20.83 -  0.72    21.43    20.67
Put/Call Ratio       .50

Productivity propels Dow but Cisco caution calms Nasdaq.

Corporate productivity increased +5.3% in the second quarter 
and unit labor costs fell -0.1% in the same period. The greater 
than expected numbers beat estimates of +4.3% gains and a +0.3% 
increase in labor costs. The report produced a mixed market with 
the Dow gaining +109 points but the Nasdaq dropped -14. The 
Nasdaq drop was prompted by the impending CSCO earnings
announcement after the close today.



Analysts feel the productivity numbers are the icing on the cake
and prove the Fed will not raise rates at the August meeting.
As long as productivity goes up faster (+5.3%) than worker 
compensation costs (+4.7%) then there is no reason to panic.
Workers compensation rose +4.8% last year so the current +4.7%
is right in line with no sign of inflation. The productivity
numbers rose on a year over year rate of +6.9% which is the
fastest rate since 1971, or almost 30 years. With bond rates 
falling to 5.73% today it appears the door is all but shut for 
an August rate hike.

Cisco did announce earnings after the bell and upheld its half
of the double trouble CSCO/DELL duo. CSCO beat the street by
a penny with $.61 vs estimates of $.15 which was much greater 
than the $.10 they earned last year. Revenue rose to $5.72 billion
up from $3.6 billion last year, a +61% increase. CSCO was optimistic
about their prospects going forward but had expressed concern 
that shortages in their component supply chain could slow sales
in the future. This is a continual warning from CSCO but they 
also have experience in working around the problems. CSCO traded
up about $2.50 in after hours to $67.81. They have had trouble 
at the $70 level lately. On a negative front they did announce
the resignation of the top vice-president. I doubt anyone will

Next to play in the earnings Olympics is Dell which announces
after the bell on Wednesday. Dell has been beaten up recently
with earnings rumors and rumors of softer PC sales. Dell did 
gain +$.50 in after hours trading as a result of positive comments
by CSCO. The market will be expecting Dell to meet the street
but with the CSCO earnings and revenue numbers so strong the
outcome may not hinge entirely on Dell. Nasdaq futures are up
+40 at 7:30 tonight. It never hurts to have one of the biggest
tech companies post record profits when the tech sector is 
hurting from tech rumors.

Shares of America Online Latin America Inc. rose 10 percent in their 
stock market debut on Tuesday following an initial public offering 
that raised $200 million, far below original expectations of $425 
million.  In its IPO, AOL-LA priced 25 million shares at $8 each, 
the bottom of a lowered price range.  The shares were originally 
expected to be priced at $15 to $17 each, but the range was cut to 
$8 to $10 last week.  Before the IPO, investor interest was expected 
to be lukewarm for several reasons, including overall tempered 
response to new issues and skepticism about how AOL will transfer 
the power of its U.S. brand to Latin America.  Investors also were 
unwilling to pay the premium that a pricing of $15 to $17 a share 
would have given the company, which posted about $51.2 million in 
losses on revenue of $5.2 million for the nine months ended March 31.  
Critics of AOL-LA have said the company faces stiff competition from 
entrenched local players in Latin America, most of who staked out 
their territory much earlier than AOL and are backed by local media 
and telecommunications heavyweights.  

Microsoft pulled another rabbit out of the hat today with a +$4.12
gain based on their announced plans to reinstate a share buyback
plan and launch an electronic book initiative. The share buyback
program is for a yet-to-be-determined number of shares.

Even though the productivity numbers were great this morning the
Nasdaq rallied early but quickly lost steam and finished the day
negative. The Dow however finished near the high of the day. The
Nasdaq had posted gains for three days and I am sure was suffering
from earnings worry over CSCO but since CSCO has never missed
estimates it appears the worry was misplaced. The Dow however,
even with the big gain, is more troublesome. Most of the gains
came on the back of not techs but cyclicals. The biggest gainers
other than the MSFT +4 were Alcoa +2.25, CAT +1.69, IP +1.69, 
Dupont +1.94, Eastman Kodak +2.38, GM +2, Home Depot +2, and Walmart 
+2.50. The other tech leader, no not INTC -1.31, was IBM which has 
a nice five day run in progress with a +2.56. I am always concerned 
when cyclicals like Alcoa, CAT, EK, IP and Dupont are the market
leaders. These two day rallies never seem to last and traders often
look at them as shorting opportunities. You choose, CSCO or Dupont?
CSCO or IP? I would buy CSCO. Of course the reason behind the
cyclical rally is the concept of a soft landing actually coming
to pass. If the economy is still growing after six rate hikes then
maybe there will not be a crash landing from an over active Fed as 
previously feared.

A reader sent me this sometime back and with all the CSCO interest 
tonight I thought you would find it interesting. "Just in case 
investors are feeling that the market has corrected itself and 
valuations are once again reasonable, consider the following," 
"For half a trillion dollars, an investor could theoretically buy 
either 1) Cisco Systems or 2) the entire gas and electric utility 
industry in the U.S. In the first case, the investor would be buying 
a company with trailing 12-month revenues of $15 billion. In the 
second case, he'd be getting an industry that is paying about $15 
billion per year of cash dividends. Oh, and with option No. 2, he'd 
have about $100 billion left over to go buy something else." Yes,
value is in the eye of the beholder! 

The Dow has put together a string of seven positive closes and appears
poised to break 11,000 again at the open tomorrow. Today's close was
the highest since mid-April and we could be seeing the results of
a short squeeze since institutions have been net short the S&P for
several weeks. With the almost vertical Dow for almost +500 points,
anybody short is bound to be reconsidering the fallacy of their ways.
However in the same breath seven days is a long winning streak and
we still have Retail Sales and PPI ahead of us this week. Advance
declines were net negative today with the NYSE positive and Nasdaq
negative. Other causes for concern were the Russell-2000 which
lost -1.15 and the Wilshire Total Market Index up only +18 or only
0.13%. If the market is so bubbly why was there no movement in these
broader market indexes? 


I still assume it was fear that CSCO, the biggest tech company of 
all, might miss estimates or have a bad conference call and cautious 
traders took profits ahead of the event. Certainly if the futures 
hold we should see a strong open on Wednesday and that open could
propel us over the key 11000 and 3900 benchmarks. How the market
will close ahead of the Retail Sales and PPI reports on Friday is 
another story. The OEX has been bumping a top at 805 this week and 
finally surged ahead at the close. Next resistance is in the 
810-813 area so we have room there. So where is the problem?
I don't see a specific one other than the VIX which hit an eight
month low today of 20.67. Currently in extreme danger territory
but it appears we could break 20 before anybody will care. Just
keep your eye on it when planning long plays this week. Shucks, 
everything just looks too good to be true.......could it be? 
DELL, we are counting on you. Don't mess this up!

Notice the chart above? When have you ever seen this meeting 
of all the averages in one place. We have either gotten a huge
wet blanket to a future rally or the mother of all launch points
if we breakout on the CSCO news tomorrow.

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Good luck and sell too soon.

Jim Brown


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Is The Autumn Rally Brewing?
By Austin Passamonte

Lord knows I can't wait for the next major rally; how about
you? Seems like we've lived in fear of the Fed and all that
goes with it forever now. Perhaps those days are on the wane.
The past few sessions leave the bulls longing for days gone
by and many more to come.

Recent data suggests this rocket ship is now lowering it's
flight gear for the gentle landing our Fed's been shooting
for. Friday's PPI and then the CPI will stall or fuel this
current bullish sentiment in a hurry. Most hope for the latter
to occur.

Should the Fed pass on further interest rate hikes this time
around I don't care how sternly they warn of future moves;
we could see new market highs within days. The tension to
rally is almost palpable now and promises to build until

We still don't like the VIX hovering below 21 and it cannot
be ignored. Of course we've heard all the arguments about
how this measures the OEX and mostly non-tech issues as
well. Many tout the NASDAQ being practically immune to this
indicator. Oh really? Here's a simple suggestion in that
case; take a peek at the daily VIX chart over the past two
years vs the Dow & soon after the NASDAQ and let me know what
you see. Again, don't trust my lying eyes to the pattern,
judge for yourself.

We realize the VIX has coiled around the 22 level for several
weeks with few short-lived exceptions. A hobby of mine is
searching out timber rattlesnakes for wildlife photo
opportunities here in the east. It takes a long time to find
one and we often become complacent while moving within known
den-site areas until a snake is stumbled upon well-camouflaged
in plain sight right beneath our feet.

It's easy to relax and let one's guard down when danger won't
immediately show but that doesn't mean it ceases to exist.

Lest you think we hang our hat solely on one indicator let
me assure you that's not so. However, if there was only a
single market tool traders could use to spot major reversals
the VIX would surely be one of the best.

Raging bulls have probably tired of hearing VIX mantra but
let me assure you the day will come when it hovers near or
bove the 30 zone as all the world is touting doom & gloom.
We here in Market Sentiment will relish those days likely to
offer yet another incredible entry point at that time.

Plenty of signs point to glory days ahead for the bulls.
Do watch out for snakes hidden within high-rocky peaks,
however. Failing to keep a sharp eye out for them can ruin
your entire day otherwise. Tread carefully and prosper in
either market direction!


The CBOE Market Volatility Index measures certain S&P 100
option pricing to determine investor sentiment. Historically,
readings near 30 signal possible market bottoms while levels
near 20 indicate possible market tops.

Thurs 8/8 close: 20.83

CBOE Equity Put/Call Ratio
The CBOE equity put/call ratio is a contrarian-sentiment
indicator. Numbers above .75 are considered bullish, .75 to
40 neutral and bearish below .40

                             Tues       Thurs         Sat
Strike/Contracts            (8/08)      (8/10)       (8/12)

CBOE Total P/C Ratio        .50
Equity P/C Ratio            .42

Peak Volume (OEX)
CBOE index put/call ratio is a contrarian-sentiment indicator.
Numbers above 1.5 are considered bullish, 1.5 to .75 neutral
and bearish if below .75

                      Tues         Thurs        Sat
Strike/Contracts     (8/08)        (8/10)      (8/12)

All index options     1.69
OEX Put/Call Ratio    1.84

OEX Maximum Open Interest Strikes/Contracts:

Puts               790/7,360
Calls              800/5,824
Put/Call Ratio       1.26

OEX S/R (Support/Resistance) Ratio Index
The OEX S/R ratio is a formula to gauge possible support
or resistance based on open-interest disparity. Numeral
listed for resistance is the ratio of calls to puts. Support
is ratio of puts to calls. Values above "10" considered firm.
Divergence of numbers may indicate future market direction.

OEX                      Tues         Thurs         Sat
Benchmark:               (8/08)       (8/10)       (8/12)

Overhead Resistance:
(850 - 825)              303.75
(820 - 805)                2.52

OEX close: 805

Underlying Support:
(805 - 785)                1.66
(780 - 760)                5.32

What the S/R measure indicates: Net open-interest ratios
are huge above 825. A large index move prior to expiration
has clearance in either direction between 780 and 825.
Market-makers would love to pin the OEX index between it’s
two largest strikes of 790 & 800 for maximum expiration of
worthless contracts. Too soon to predict.

30-yr Bond:               5.73%

Light, Sweet
Crude, Barrel:          $29.15

200 Day Moving Average (as of 8/05)
The 200 DMA is widely considered the major benchmark for
critical support in a market.

DOW:   10,778          10,976
NASDAQ: 3,911           3,848
NDX:    3,648           3,686
SPX:     1430            1482
OEX:      770             805

CBOT Commitment Of Traders Report: Friday 7/28 * Updated 8/12
Biweekly COT report discloses positions held by small specs
and commercial traders of index futures contracts on the
Chicago Board Of Trade. Small specs are the general trading
public with commercials being financial institutions.
Commercials are historically on the correct side of future
trend changes while small specs are not. Extreme divergence
between each signals a possible market turn in favor of the
commercial trader’s direction.

                  Small Specs        Commercials
DOW futures
Net contracts;    +445 (long)        - 345 (short)
Total Open
Interest %        6.2% net-long       2% net-short

Net contracts;    - 16,052 (short)      + 445 (long)
Total Open
Interest %          22% net-short      3.5% net-long

S&P 500
Net contracts;     + 40,665 (long)     -53,521 (short)
Total Open
Interest %           24% net-long       9.5% net-short


Interest rates
5.73% on the 30-year Treasury Bond may be signaling the rate
fears are nil. Fed-Fund futures are pricing a slight chance
of one or more rate hikes, .25 basis at this time.

Benign Government Reports
Latest statistics hint the economy is cooling and no further
rate hikes may be needed.

Renewed Strength In Market Leadership
Several session's broad rally after the brief sell-off proves
firm buying interest remains near key levels of support.

COT Report - NASDAQ 100
Sentiment reversal with small speculators growing net-short
while commercials begin accumulation may suggest expected
strength in the sector over the next weeks or months.



Tuesday’s close below 21 places us back in the danger zone.

End Of Earnings Season
Lack of positive news will direct market focus on August
FOMC fears should future reports prove bearish.

Third-Quarter Earnings Warnings
A number of companies pre-warning slowed earnings later in
the year are being met with extreme selling pressure.

IPO Glut
Record numbers of IPOs this week could greatly dilute market
capital and pressure existing issues.

Energy Prices
Prices are still too high. Ultimately this affects profit
margins and inflation. September Crude closed $29.15 today.
Seasonal energy patterns typically bottom by late summer,
but all petroleum expected to be very high this fall. Prices
in low $20s would be welcome relief but may not arrive.

COT Report - S&P 500
Latest updated figures show small spec traders were heavily
long S&P 500 contracts while commercial traders continued
to build ten-year extreme short position. Widened divergence
strongly implored market turn in favor of commercials. The
bottom is likely still ahead.


As of Market Close - Tuesday, 08/08/00

                                  Key Benchmarks
Broad Market           Last     Support/Resistance   Alert

DOW   Industrials      10,976      10,450  11,000     **
SPX   S&P 500           1,482       1,425   1,505     **
COMPX NASD Composite    3,848       3,500   4,000
OEX   S&P 100             806         770     810
RUT   Russell 2000        508         485     540
NDX   NASD 100          3,686       3,300   3,900
MSH   High Tech         1,017         935   1,025

BTK   Biotech             669         570     700
XCI   Hardware          1,507       1,380   1,530
GSO.X Software            446         385     465     **
SOX   Semiconductor       950         880   1,020
NWX   Networking        1,266       1,150   1,295
INX   Internet            516         460     580

BIX   Banking             592         550     610
XBD   Brokerage           606         570     655
IUX   Insurance           720         680     725

RLX   Retail              901         845     935     **
DRG   Drug                406         385     430
HCX   Healthcare          841         800     855
XAL   Airline             168         160     178
OIX   Oil & Gas           289         272     304

Have you ever watched a bear size up prey that he deems suitable
for dinner?  The first thing he does is stand on his hind legs
to see who is bigger, then checks the wind before moving in.
A hungry bear prefers to pick on weak animals that have struggled
to keep pace with the herd and are near exhaustion.  Those
animals do not put up much of a fight.  The point is; we are
starting to see some sectors trade back at resistance levels
(catching up to the herd) and volume (strength) has been
anemic.  If you want to avoid a potential bear, stay away
from weak stocks in weak groups that have rallied on light
volume, especially if there are hungry bears nearby.  If you
are a hungry bear, make sure you have an escape plan if you
bite off more than you can chew.  Raising support (SPX,COMPX,
RUT,NDX,BTK,XCI,INX,RLX,XAL)  Raising resistance on


Downside Protection
By Lee Lowell

If you’re like me, you’ve probably got some long stocks in your
account that have been taking it on the chin as of late.  I’m
tired of watching them slowly deteriorate and lose value.  It’s
time to do something and get pro-active!

What’s the best plan of action?  From a traditional sense, the
most likely course to take is either to sell some covered calls or
buy some puts.  Nothing wrong with that.  Many investors (old and
new) are in it for the long haul and wish to hold onto their stocks
forever and never sell.  They are there through thick and thin.
They ride it out through the up cycles and down cycles.  That’s
fine.  But you know what?  You can increase your monthly and
yearly returns and never have to worry about giving up your shares
as long as you employ some defensive tactics.

What’s better - selling calls or buying puts?  It depends.  Do you
want to take in premium by selling calls, and subsequently give up
more downside protection?  Or do you want to pay a little for a
put and have the comfort of knowing you’re protected all the way
down to zero?  Selling calls also caps your upside profits, but
you can get around that.  Buying puts can be very expensive at
times if implied volatility is currently high.  So what can we do?

Here’s what my situation looks like.  I have some telephone stocks
that’ve been in my portfolio for some 16 years or so.  They’ve
been steady small gainers over the years with nice dividends.
I’ve been taught to always hold onto stalwarts like these.  I’ve
gotten what I expected out these phone stocks - but now I want
more.  We’ve seen the returns that tech stocks have rewarded
investors over the last 2 years alone.  Should I cash in my Old
Timers and go for the gusto, or should I continue to hold these
slow and steady Eddies?  The same thing goes for the Big Blues -
IBM’s, WMT’s, MCD’s, etc.  These are stocks that you just never
sell.  But I want to squeeze more out of them and get some
protection on these slow downside moves.

I’ve come to two conclusions:  I’m either going to sell these
Old Timers and get slapped with a big capital gains payment next
April and put the money into tech investments, or I’m going to
take a more active role and try to increase my monthly returns.
I’ll probably do a little of both.

So where do we start?  Take a look at all the stocks in your
portfolio and see how many contracts you can sell against them or
how many put contracts you can buy against them.  Each option
contract constitutes 100 shares of stock.  If you have 500 shares
of AT&T, then you can work with 5 option contracts.  The next step
is to check the stock’s volatility and its option premiums.
Chances are, some of your stocks will be slow movers so the
premiums may not be all that great to sell.  But you won’t know
until you do a little research.  Check the stock’s past volatility
levels.  If it’s in the higher end of its volatility range, then
most likely you’ll be able to sell some covered calls.  If it’s
at its low end, then buying puts will probably be a better play.
You don’t have to concentrate on front-month options only.  You
might have to go a little further out to get more premium to sell.
You can sell the next one or two expiration series if you want to.
If you are going to buy puts, then you can either buy an ATM put
every expiration cycle or you can buy a further out 3 or 6-month
put option.  See how the costs compare.  You can tailor it any way
you want.  You can buy slightly OTM or ITM puts.  The same thing
applies when selling the calls.  You can sell ITM, ATM, or OTM
call options.  The ITM calls will give you more premium into your
account and more downside protection, but your upside profit
potential will be very limited and your chances for getting called
out will be higher.

The opposite is true for OTM calls.  You get less downside
protection, less premium into your account, but a bigger upside
potential for your stock and a lower chance of getting called out.
Depends on what you want.  Many people sell covered calls just
for the income producing effects alone.  They don’t own any long-
standing stocks.  They put on the trade simultaneously.  They
find a quality stock in an uptrend with higher than average
volatility, and then pick a call to sell against it.  The higher
volatility allows the options to have some meat in their premiums.
If you buy the puts you’ll never have to worry about being called
out of your stock which could potentially lead to a huge capital
gain payment.  Some investors never feel comfortable buying
options because they know the odds are usually against them.
They would rather sell the calls, take in premium, and play
assignment roulette.

If you do want to sell covered calls and continue to keep your
stock, then there are a few things you can do to protect yourself
against possible assignment.  Just know, that if you are getting
worried about being assigned, then you are winning on the trade.
In order to make money with covered calls, you need the stock to
go up.  The gain on the stock will always outweigh the loss on the
call.  So if the call has gone into-the-money, then you are ahead
at this point.

Here’s what you can do to protect against assignment.  Most
likely, you will not get an assignment notice unless the option
is deep ITM and there are only a few days left before expiration.
At this point, you can buy the option back for a loss and sell the
next month’s covered call.  This is called "rolling out".  You
continue to buy back the close-to-expiring options and sell the
next one.  This produces a stream of income throughout the whole
year.  Even though you are buying back the option for a loss, the
gain on the stock will be greater.  So you can continue to keep
your stock, while adding a few hundred or a few thousand dollars
to your account each month or every few months.  I’m no tax
expert, but buying back options for a loss might entitle you to
capital loss deductions. (Please consult your tax professional!)

Another way around possible assignment is to sell call spreads
against your long stock.  You’ll take in a smaller credit, but
once the price of the stock starts moving up, the spread will
cap itself out and you’re free to participate in the upward move
with no possibility of assignment.  If you prefer to play the
puts, you can also profit on downmoves as well.  Not only will
the puts protect you all the way down, but if you feel the stock
may have hit bottom; sell the puts out for a profit.  If the
stock turns around and heads higher, congratulations.  You can
now either buy another put or let the stock keep trending
higher.  This type of trading may require a little more
participation on your part.  If you don’t have the time, no
problem.  Just ride out the put to expiration if you want.
That’s what you intended to do in the first place.

The whole idea of this article is to get you off the sidelines
and use all available resources and tactics.  Don’t let your
stocks sit idle anymore!  If you’re worried about these downmoves,
sell a covered call or buy a put.  You’ll be glad you did.



What Is The Beta Of A Stock?
By Mary Redmond

The beta of a stock measures a stock's volatility when compared
to the volatility of the market.  For this definition, the market
is the S&P 500 index.  If a stock has a beta of 1, this means
it moves in tandem with the market.  If a stock has a beta of
more than 1 this means it is more volatile than the market, and
if it has a beta of less than 1 it is less volatile than the

An example of a stock with a beta near 1 is GE.  GE tends to move
in a pattern which is highly similar to the S&P 500.  The beta
of GE is 1.23.  You can see the chart of GE compared to the S&P.

An example of a stock with a beta much higher than 1 is Broadcom.
BRCM has a beta of 2.88.  This means it is 2.88 times more
volatile than the S&P 500.  An example of a stock with a beta
of less than the market might be Philadelphia Suburban Corp, a
utility with a beta of -.25.  During the summer of 1998, when the
markets dropped over 20% this stock actually rallied.  This is
why some investors use utilities to hedge market risk in other

Some portfolio managers use beta to hedge against market risk.
For example, if you have a stock portfolio with a value of
$1,479,000 and a beta of 1 this means your portfolio is as
volatile as the S&P 500.  Using a value of the S&P at 1479,
the underlying value is $147,900.  You would thus need to buy
10 put options to exactly offset the market risk.  If the
beta of the portfolio is 1.5 you would need to purchase 15 put
options to offset the market risk.

Beta can be useful when trading because it can give you an idea
of how a stock is likely to move when the market rises or falls.
For example, it is highly unlikely that GE would move in the
opposite direction from the S&P 500 by more than a small

In addition to market sensitivity, traders must consider the
sensitivity of stocks to interest rate changes.  Financial
stocks tend to perform poorly in an environment of rising
interest rates because they must pay higher interest rates on
their loans and do not necessarily receive proportionately
higher interest rates on the loans they give to customers.
The financial sector has been rallying lately in part because
of anticipation that the Fed is finished or close to finishing
the rate increases.

It is important to note that the credit spread between high
yield corporate loans and risk free yields is wider than it
has been in several years.  The 30 year and 10 year bond yields
are both lower than the Fed Funds rate, but the high yield index
is averaging over 13%.  US high yield bond issuance has fallen
by nearly 50% this year, in part because of the Fed's interest
rate increases.  Some analysts have suggested that the Fed may
even lower rates next year due to slowing corporate growth.

The companies which are impacted the most by this are primarily
small companies as they are dependent on financing for their
expansion.  In addition to watching the Fed Funds rate and the
30 and 10 year bond yields, it is useful to track the high risk
corporate yields.  If these rates decrease, it could be a strong
catalyst for certain stocks.

The ipo market was robust today, with 7 new issues raising over
$668 million.  The most successful was ACPW, which traded at a
strong premium in the aftermarket.  Approximately 40 new deals
are scheduled to debut this week, depending on market conditions.
With the way the markets are behaving, it seems that the new
issues are drawing funds away from Nasaq stocks more than away
from Dow stocks.

Contact Support


Some Lessons I’ve Learned as an Options Trader
By Scott Martindale

It’s funny that I’ve begun writing for OIN when I’m trading less
frequently than at any time since I started options trading two
years ago.  Not that I don’t want to trade, but I’m hamstrung by
a lack of confidence in market direction, as well as a lack of
desire to have my nose glued to the screen.  Did Thursday give us
the final capitulation that many have been predicting?  Or are we
still due for a retest of this year’s lows?  Either way, I’m not
quite ready to fire up the mouse in earnest just yet.  So along
the same vein as Austin’s "Uncle Tom" story yesterday, please
indulge me as I wax philosophical and share a little of my history
as an options trader.

Although I learned about capital markets and trading tools long
ago, first through a personal finance home-study course, and later
in an MBA program, I didn’t fully understand trading strategies
and money management until I took an options trading seminar.  I
can tell you with neither pride nor embarrassment that I took one
of those two-day seminars from a company whose founder writes lots
of books and gets lots of flack from market insiders.  The seminar
gives most people just enough knowledge to be dangerous, but for
those who are careful and diligent about continuing to learn, it
provides a good toolbox and that little boost of confidence to get

Anyway, I made nice gains right off the bat buying mostly 2-6
month calls, primarily on split runs.  When I hit the January 99
CMGI split run for something like a 1600% return, I thought I had
found the goose who laid golden eggs.  But of course, I soon
learned that it doesn’t always work out that way, and split runs
are usually dependent on a cooperative overall market.  When EGRP
started its split run a couple of months later, I was so confident
that I kept buying more calls every time the stock dipped until I
had about 1/3 of my six-figure trading portfolio tied up in front-
month EGRP calls.  I escaped with a 20% overall gain on my
positions, although the higher strikes (earliest purchases) went
underwater.  Despite coming out okay, I was a little unnerved by
the experience.  I would never dream of going out on such a limb
today, especially after experiencing this year’s market.

Furthermore, I must confess that if it weren’t for online trading,
I don’t think I’d still be at it.  I started with a full-service
broker - a guy who had been trading options since they started
trading in the early 70’s - and he was a great sounding board for
my novice ideas, although he was a bit arrogant and condescending
with me at first.  However, I soon proved myself to him with my
knowledge of various strategies.  I made small, steady gains with
him, until I lost all my gains on one bad Yahoo bull put spread
going into a split that I thought was a sure thing.  I learned
that unwinding a spread can mean losing a lot more than you ever
expected the maximum downside to be because of the market maker’s
wide bid/ask spread on each leg on expiration day.  I also learned
that I prefer to have control of how and when I execute my trades
rather than having to wait for a callback from my broker (usually
due to his smoking breaks) and then deal with his attitude as he
fills my orders - and pay big commissions for the privilege.

Don’t get me wrong, the experienced full-service broker was
helpful for my learning the ropes on the fly (as a novice trader
with little interest in paper trading), but it is online charting
and trading that keeps me in the game.  And I must say the delays
due to their web servers, execution time, and customer service
response are improving all the time, especially compared with the
growing pains of last year during the record-setting volume

I have experimented with a wide variety of options trades,
although my online broker doesn’t allow writing naked calls.  I
have bought calls, LEAPs, and puts.  I have sold puts and covered
calls.  I’ve entered into call credit (bear call) spreads, call
debit (bull call) spreads, put credit (bull put) spreads, and put
debit (bear put) spreads.  I’ve sold calls against calls and LEAPs
(calendar or diagonal spreads).  Having lost money many times by
watching short-term time premiums erode away on purchased options,
often even as the underlying stock price goes in my direction, I
decided that in general it’s better to sell time to someone else.

I went through a period in which I looked at the stocks in the $5-
$30 range with the highest option premiums and wrote puts on the
best looking charts.  When stocks were put to me, I happily wrote
covered calls.  However, I quickly discovered that even the best
of technicals can turn sour in a hurry, and I was stuck with some
stocks that just continued to fall, in some cases into oblivion.
I was burned by the likes of DBCC, HPH, ESPI, KLOC, and even QCOM.
I learned that you can’t let a stock continue to drop - you must
buy back the naked put or the covered call and get out when your
predetermined loss-cut is hit.  I also learned that I should only
write puts on stocks I really believe in and want to own, not just
those that have high options premiums and nice-looking charts.

Next time, I’ll talk more about the strategies I focus on today,
as well as interesting variations on the basic plays.



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Wobbly Gains for the NASDAQ
By Buzz Lynn

The weak internals from the last two still doesn't lend much credibility
to the rally.  Even so, you have to take your hat off to its resilience.
It (by "it", we're referring to the NASDAQ) has managed to stay above
3750, a level of previous resistance that we thought might hold stocks
down.  Nope!  But don't pump your fists in glory just yet.  In contrast
to our weekend comments, it is now the overall NASDAQ market that can
not get through its 50-dma of 3897, let alone its 200-dma of 3911.
Volume remained weak yesterday and today at roughly 1.3 and 1.45 bln
shares, respectively.  While it isn't the stuff new highs are made of,
it isn't going any lower at this moment either.  Today's tech weakness
could largely have been an exposure reduction in front of CSCO earnings,
who true to history, reported a penny above.  The real news was that
CSCO also exceeded revenue estimates by $500 mln.  That should play well
for the sector tomorrow.  The MSFT stock buyback program to fulfill
employees' stock option exercises helped support a sagging NASDAQ today
too.  Remember that MSFT, CSCO, INTC, DELL, WCOM are the heaviest
weighted in the NASDAQ and even heavier in the QQQ (NASDAQ-100 tracking
stock).  Thus despite general technology issue weakness, MSFT did an
awful lot to support the market with its $4+ gain, keeping the overall
losses to a minimum.  That would also explain how the QQQ did manage to
break back over its 50 and 200-dma.  Divergence reversed!  The generals
lead again.  Of course, not everything is coming up roses.  TTH got
whacked today on overall telecom weakness thanks to Verizon (VZ)
earnings miss.  T and WCOM hit 52-week lows on strong volume in the
process.  Similarly LU's new 52-wk low kept BDH on a perfectly-charted
course to the basement.  With charts showing signs of weakness and
running into resistance/congestion and a VIX now under 21, earnings
season at an end, economic reports, an FOMC meeting in two weeks, and
oil prices creeping up again, logic says this can't last.  But since
when is the market logical?  While the market has every probability of
rolling over, sentiment is pretty high on theory that Alphonso the Great
(Greenspan) will hold firm on more rate hikes.  Stay tuned for the next
economic reports, which could strike fear again into the hearts of
traders everywhere.

Index             Last    Mon    Tue    Wed    Thu    Fri    Week

QQQ NASDAQ-100    92.75   2.38   0.50   0.00   0.00   0.00   2.88
HHH Internet     108.31   3.56  -0.94   0.00   0.00   0.00   2.63
BBH Biotech.     188.25   7.31  -3.88   0.00   0.00   0.00   3.44
PPH Pharm.       100.75  -1.13   0.25   0.00   0.00   0.00  -0.88
TTH Telecom       66.38   0.69  -2.69   0.00   0.00   0.00  -2.00
IAH I-net Arch.   96.69   2.44   0.69   0.00   0.00   0.00   3.13
IIH I-net Infr.   53.44   2.31  -1.00   0.00   0.00   0.00   1.31
BHH B2B           48.25   2.00   1.00   0.00   0.00   0.00   3.00
BDH Broadband     90.69   2.94  -1.06   0.00   0.00   0.00   1.88
SMH Semicon.      81.06   2.31   0.06   0.00   0.00   0.00   2.38
RKH Reg. Banks   105.38  -0.38   0.75   0.00   0.00   0.00   0.38
UTH Utilities    101.63   2.50   1.00   0.00   0.00   0.00   3.50


QQQ - NASDAQ 100 $92.75 +0.50 (+2.88 this week) A tracking stock for the
NASDAQ-100, the QQQ reflects the value of the top 100 market cap stocks
on the NASDAQ.  MSFT, INTC, CSCO, DELL, ORCL and WCOM make up over 35%
of the index.  When these companies do well (WCOM excepted), the QQQ
does well.  CSCO's surprise revenues and MSFT's stock repurchases will
likely have a positive effect on tomorrow's market - at least at the
open.  But that today's robust GDP number didn't do more to boost the
technology market was a bit of a surprise.  Accordingly, the market may
care less about CSCO and MSFT tomorrow and send technology issues south
again, but don't bet on it.  Technically, QQQ broke back above its 200-
dma of $91.05 unlike the broader NASDAQ which can't seem to pull off the
prairie-dog imitation and pop its head out of the 200-dma hole.  Yet,
even its attempt to get through its 50-dma has been met with resistance
for the last two days.  It's looking tired and ready for a rest.  With
all the resistance above at the 50-dma ($93.65) and the 30 dma ($94.23),
it will have a hard time pressing through.  However, QQQ's ability to
punch through and remain above previous resistance at $90.50 shows there
is good support.  Watch for CSCO and MSFT-based strength in the morning
with the possibility of a pullback beginning in the afternoon and on
Wednesday in anticipation of initial jobless claims on Thursday and PPI
on Friday.

***August options expire in 2 weeks***

Long Straddle:

We can't help but think some straw is about to break the camel's back of
low volatility.  Once the volatility spikes, the time premiums of our
put and call should rise accordingly.  In the meantime, it's a hedged
but slow process.  Good thing we have until roughly mid-October to be
right.  If the VIX is any indicator (and it hasn't been lately), the
markets are due for a volatility spike.  That will be our payday.  If
you are good at timing your entry, consider legging in at support ($90-
$91) and resistance ($94) for a lower net debit.  In other words, try to
buy the call when QQQ is down and buy the put when QQQ is high.

***August options expire in 2 weeks***


BUY CALL DEC- 90 QVQ-LL OI=1951 at $12.75
BUY PUT  DEC- 90 QVQ-XL OI=2495 at $ 8.75
Net Debit = $21.50 or less


BUY CALL DEC- 94 QVQ-LP OI=1804 at $10.63
BUY PUT  DEC- 86 YQQ-XH OI=1460 at $ 7.00
Net Debit = $17.63 or less

Calendar Spread:

It's no fun to sell volatility of the volatility rises dramatically,
however, with a calendar spread, the long-term call inflates too keeping
the total position value roughly the same with time decay still working
in your favor.  You just don't want to get called out of this one since
that would mean having to cash in all the time value at the time you
exercise the call.  Better to buy back the short call when the time
value has been mostly wrung out of it.  Remember your underlying call
will increase in value as the stock moves up making the cost to cover
very small.  If you are good at timing and your broker allows you to
sell naked options, you can try legging into your long-term position at
support ($90-$91) and sell the short-term position at resistance ($94)

***August options expire in 2 weeks***

BUY  CALL DEC- 90 YQQ-LL OI= 1951 at $12.75

SELL CALL AUG- 90 QVQ-HR OI=13320 at $ 4.25, ND = 8.50 or less
SELL CALL AUG- 92 QVQ-HR OI= 7956 at $ 3.00, ND = 9.75 or less

Long Puts

No rollover here just yet.  But be ready as QQQ approaches $93.65
resistance, its 50-dma, then its 30-dma at $94.25.  A move back down
from there could make a nice entry for this put.  Near-term support is
back at $90-$91.  So if you buy puts at the $94 level, look to cover at
the $91 level.  Otherwise conservative traders can consider a move under
$90 as a targeted entry under current support.

***August options expire in 2 weeks***

At Resistance:
BUY PUT  AUG-92 QVQ-TN OI= 4706 at $2.88 SL=1.50
BUY PUT  AUG-90 QVQ-TL OI=20028 at $1 94 SL=1.00
BUY PUT  SEP-92 QVQ-UN OI= 6130 at $5.75 SL=3.75
BUY PUT  SEP-90 QVQ-UL OI=14465 at $4.63 SL=2.75

Average Daily Volume = 22.01 mln


IIH - Internet Infrastructure $53.44 -1.00 (+1.31 this week) Relative to
other technology plays, IIH is starting to smell like old fish.  While
it was encouraging to call players (we are looking at the put side for
this play) to see the July 28th gap-down retraced and filled yesterday,
resistance is formidable at this level - about $54.  IIH already shows
signs of rolling over as the stochastic has reversed to the downside as
has the RSI.  MACD is already low and not turning up as it would into a
rally.  That said, we think any market weakness would constitute a good
entry at this level or any rollover from $55.  Otherwise wait for a
decline back under the 10-dma of $52.40 before taking a position.  AKAM,
VRSN, INSP, BVSN, and VIGN will be the leaders to watch for a clue.
These just don't look too strong.

***August options expire in 2 weeks***

BUY PUT AUG-55 IIH-TK OI= 47 at $3.63 SL=1.75
BUY PUT AUG-50 IIH-TJ OI=121 at $1.13 SL=0.00
BUY PUT SEP-55 IIH-UK OI=122 at $5.75 SL=3.75

Average Daily Volume = 199 K

BDH - Broadband $90.69 -1.06 (+1.88 this week) Here's another situation
where the stock moved up the fill the gap-down created on July 28th, but
couldn't hold the gain.  It bounced south of its former resistance at
$92, which also happens to be its 30-dma.  Unless NASDAQ can break over
3900, we remain in the put camp awaiting a move back down on any NASDAQ
weakness.  There is mild support at $90 even, and a bit more at $88.
Careful though.  CSCO strength in the morning may make this look like a
new-found call play.  You may want to wait until the afternoon to see if
the market starts flatten or sell off in the afternoon in front of
Thursday's jobless claims and Friday's PPI.  Resistance is at $92.

***August options expire in 2 weeks***

BUY PUT AUG-95 BDH-TS OI=64 at $6.00 SL=4.00
BUY PUT AUG-90 BDH-TR OI=41 at $3.13 SL=1.50
BUY PUT AUG-85 BDH-TQ OI=73 at $1.25 SL=0.50
BUY PUT SEP-90 BDH-UR OI= 5 at $5.88 SL=3.75

Average Daily Volume = 126 K


SMH - Semiconductor $81.06 +0.06 (+2.38 this week) Despite the gains
over the last two days, especially yesterday, our put play remains
technically intact.  It has failed to get through resistance at $82, and
we would consider this level to be an entry.  The doji star on the
candlestick chart indicates indecision in stark contrast to the rest of
the NASDAQ.  Nonetheless, CSCO results could prop up the semis too, so
keep your eyes open for a move over $82.  Find something else to play if
that happens.  Otherwise, if NASDAQ finds a reason not to go up any
further and makes a retreat, feel free to take a position.  Mild support
is at $80.50, then $78, then $74.

***August options expire in 2 weeks***

BUY PUT AUG-85 SMH-TQ OI= 88 at $5.38 SL=3.25
BUY PUT AUG-80 SMH-TP OI= 68 at $2.56 SL=1.25
BUY PUT AUG-75 SMH-TO OI= 45 at $0.94 SL=0.00
BUY PUT SEP-80 SMH-UP OI=  4 at $5.00 SL=3.00, Low OI
BUY PUT SEP-75 SMH-UO OI=  7 at $2.94 SL=1.50, No OI

Average Daily Volume = 326 K

Dropped Plays

IAH - Internet Architecture $96.69 +0.69 (+3.13 this week) Thanks to
CSCO earnings and all those sympathy plays that go along with it, we say
good bye to IAH tonight.  IBM, HWP, SUNW, SCMR, and JNPR were not only
mostly up today, all were trading much higher than their closing prices
this afternoon.  Even without after hours price gains, and even though
IAH could move south on us quickly in the right environment, it is
pretty tough to play a put that has just broken out over every major
dma, and over previous resistance at $96.  If we were picking it fresh,
we might even consider this to be a long play if the market continues up
since the next point of resistance is at $100.  For tonight, keep it on
your radar.  It could still go either way from here.

No Play



Index      Last   Mon    Tue   Week
Dow    10976.89 99.26 109.88 209.14
Nasdaq  3848.55 75.63 -14.44  61.19
$OEX     805.96  7.87   2.24  10.11
$SPX    1482.81 16.39   3.49  19.88
$RUT     508.72  6.24  -1.15   5.09
$TRAN   2892.19  7.40  -2.02   5.38
$VIX      20.83  0.01  -0.72  -0.71


MERQ     108.63  4.31   4.31   8.63  Strong bounce from century mark
DNA      172.25  1.63   6.50   8.13  Keeps rolling on after dip
PEB      101.09  6.81  -2.72   4.09  New, back in the limelight
HWP      115.81  3.56   0.50   4.06  Bolted above resistance at $112
MER      138.84  1.41   1.69   3.09  Charging ahead with gains
PVN      114.25 -0.09   1.63   1.53  Solid play keeps climbing
MVSN      86.81  4.78  -4.19   0.59  One step forward, one step back
ABSC     100.00  1.13  -0.75   0.38  Poised to break the pivot pt.
AMGN      69.50  3.00  -2.63   0.38  Dropped, not convincing enough
AFL       55.50  0.94  -1.00  -0.06  Did someone step on the duck?
HGSI     142.50  5.88  -5.94  -0.06  A little profit taking today
IDPH     136.13  5.75  -6.63  -0.88  Breather after 6 days of rally
COF       57.75 -0.50  -0.63  -1.13  Benefiting from no-hike bias
IVX       43.81 -5.13   3.19  -1.94  Dropped, investors running
FRX      114.47 -2.19   0.00  -2.19  Continuing to hold its own
LEH      126.88 -2.63  -0.13  -2.75  Dropped, quick profit play
GENZ      70.19  0.25  -3.06  -2.81  Dropped, offered opportunity


VRSN     148.00 -7.75  -6.31 -14.06  New, good news hasn't helped
AETH     146.00 -2.50  -8.00 -10.50  New, playing the rollover
IMCL      67.00 -0.19  -6.00  -6.19  New, closing right at support
AAPL      46.75  0.56  -1.19  -0.63  New, definitive downtrend
AMD       61.50  3.13  -3.50  -0.38  Battle of the analysts
MRVC      61.00  2.75  -1.75   1.00  Dropped, moving on from here
TERN      56.47  2.84  -1.50   1.34  Looks a little top-heavy
MU        76.88  3.00   0.75   3.75  Bears hiding at the 10-dma
EFNT      61.19  3.50   5.81   9.31  Dropped, news event related

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.


LEH $126.88 -0.13 (-2.88)  Getting out while the getting is still
good.  LEH has offered us a quick play in the midst of a financial
revival during the past two weeks.  Entry points were readily
available and profitable for the most part as the stock pulled
back to as far as $112.  An upgrade from Bear Stearns and LEH
catapulted from $120 two days later as investors piled into the
hot Financial sector.  We have decided to take our quick profits
for two reasons.  First, the DJIA has put together a seven day
rally that has elevated the index just shy of 11000.  There could
be a rollover on profit-taking.  Also, LEH has flat-lined the
last two days around $127.  So we're being preemptive and taking
before the rest.

GENZ $70.19 -3.06 (-2.81)  During a time when trading was a little
rough for the NASDAQ, GENZ offered a defensive, yet opportunistic
play.  The day after we added it, the stock dropped to $65,
offering a nice entry point.  The 10-dma helped GENZ during the
past week, climbing to as high as $75.  Yet, since hitting that
level, GENZ has pulled back and appears to be under profit-taking
pressure.  Today's close was just below the 10-dma of $70.44.  It
also dipped below $70 briefly during today's trading.  We are
concerned that a short-term reversal may be ahead, or at the least,
a consolidation.  GENZ provided some good trading opportunity, but
we are letting this one go.

AMGN $69.50 (+0.38) AMGN edged above the $70 level early
Monday with help from the extended rally in the broader
Biotech sector.  But, the whipsaws returned Tuesday after
AMGN rolled over at resistance at $72, and plunged back below
support at $70.  Volume was more than robust Tuesday en route
to the nearly 4% drubbing.  The company announced a strategic
alliance with HealthCite, to collaborate on Biotech software
and technology.  But, the announcement couldn't stop the
selling Tuesday.  AMGN's directionless trading has prompted us
to drop the play in search of a more discernible trend.

IVX $43.81 +3.19 (-1.94)  What was once relative strength now
appears to be relative weakness.  The selling that appeared to be
capitulation last Friday was nothing compared to the even heavier
selling on Monday, when the stock lost $5.13 or 11.2% on almost 4
times the ADV.  Today the stock bounced, gaining back part of
yesterday's losses, on 185% of ADV.  The company came out today,
issuing a statement that it was not aware of any news to account
for the recent decline in the company's common stock price.
Despite the bounce on strong volume today, the downdraft of past
few trading sessions can not be ignored.  Investors vote with
their money and the volume speaks volumes.  Looking back at IVX's
chart, the stock is once again above its 50-dma but the break in
its uptrend is more than evident.  News or no news, we are using
this bounce as a chance to make our escape.


MRVC $61.00 -1.75 (+1.00) This would be a play to crow about if
it were a call.  We were a little late to the party, picking
MRVC as a new put after its precipitous decline in late July.
No sooner had we picked it, than it reversed direction and has
been recovering ever since.  Recall our cautionary statements
on Sunday to not open any new positions unless strong selling
could push the stock back below $55.  Well, yesterday was
another up day, coming on reduced volume, and although MRVC
gave up $1.75 today on even lighter volume (only 60% of the
ADV), it looks like the stock has put in a bottom and is ready
to head higher.  Rather than continue to tilt at this windmill,
we’ll mount our horse and pursue other plays.

EFNT $61.19 +5.81 (+9.31) Good for the long, bad for the short.
An announcement on Monday from NorthPoint Communications(NPNT)
that they have chosen EFNT as a Customer Premises Equipment
provider for NorthPoint, Canada offered strength to EFNT, COVD
and CMTN.  This news to rapidly deploy DSL service throughout
Canada caused an industry-wide breakout.  The upward trend led
EFNT to bounce off support of the 5-dma of $56.18 in early
trading, hitting a low of $56.83.  The stock then broke through
10-dma resistance of $61, rallying to a high of $61.75.  Failing
to fall to or through $50, EFNT is not going our way.  Although
it looked like a good play on Friday, it will be dropped from the
put plays due to this recent news event.

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PVN $114.25 +1.63 (+1.53)  Just a solid play that keeps climbing.
Today's close brought PVN to level not seen since last November.
The last two days of trading shows a nice, steady intraday trend.
Yet, we caution that it was been on lower volume.  Monday morning
had two brief tests of $110 support as the stock continued higher
to today's afternoon encounter with $115 resistance.  Watch this
resistance level carefully considering that strong volume would
be a must to conquer that level.  If you are looking for entry
into this position, wait for a pullback to the $110 area, followed
a burst of buying volume to bounce.  This would be an aggressive
entry.  Considering that PVN has run up 14% in the last five
sessions, profit takers could take it down toward the $105 - $107
area.  Bounces from here would provide nice entries.
Conservatively, wait until strong volume pushes the stock through
$115 resistance.  Today, PVN established its second international
operation in Argentina, targeting the Latin American consumer to
establish and build credit.  Its first was in the United Kingdom.

AFL $55.50 -1.00 (-0.06)  Did somebody step on that duck?  After
a strong close on Monday, some of the air was let out of that
quack today.  The stock closed in NY at $56.06 but after-hour
traders took the stock down a little further.  There is no news
hitting the wires to drive AFL so the trading appears to be
technically driven.  The $55 level has been providing intraday
support.  On Monday, $56 provided intraday support and today it
was resistance.  So how do we play this?  The 10-dma has supplied
AFL with some good bounce during the past two weeks.  If $55 does
not hold, look for a bounce off of the 10-dma at $54.38.  Volume
has been waning in AFL, along with the broader market, so watch
for strong volume to come in and push the stock convincingly
through $56.  This move would provide a more conservative entry

MERQ $108.63 +4.31 (+8.63) MERQ bounced off the century mark
Monday morning with a little help from the resurgent Tech
sector.  The company introduced a complete set of wireless
solutions to the wireless Web application market.  MERQ's
announcement Monday morning prompted positive analyst comments
Tuesday.  DB Alex Brown reiterated its Strong Buy rating,
citing the new wireless initiatives and the company's strong
business trend.  The upbeat comments Tuesday morning propelled
MERQ past resistance at $105, which provided a solid entry
early in the day.  Despite the weakness in the broader Tech
sector, MERQ held its ground throughout the day, and looked
strong going into the close of trading with a surge in volume.
If the late-day buyers return Wednesday morning, watch for
entry if MERQ extends its recent rally and moves above
resistance at $110.  An intraday pullback to support at
$107.50 or $105 might provide entry for an aggressive trader
if MERQ bounces from either level.

HGSI $142.50 -5.94 (-0.06) The Amex Biotech Index ($BTK)
rallied for the fifth consecutive day Monday, carrying HGSI
along for the ride.  But, a little profit taking was bound to
take place, and it did.  HGSI gave back nearly all of its
previous day's gains on Tuesday.  The stock fell back to
support at $142.50 on less than half of its ADV.  The pullback
in the Biotech sector was widely anticipated after the group's
recent run.  However, HGSI's dip Tuesday might be the entry
we've been looking for.  Wall Street is expecting the Biotech
sector to stage an impressive rally into the Fall, citing the
host of medical conferences and improving earnings reports.
We're looking to get in on that run.  Wait for the Biotech
buyers to return and consider entry if HGSI moves above $145.
A more conservative trader might wait for momentum to build
and look for entry if HGSI clears resistance at $150.  A
bounce off support at $140, or the 50-dma near $137, might
provide an intra-day entry if the profit taking subsides.

ABSC $100 -0.75 (+0.38) As more and more data suggests, the
economy is slowing.  Many analysts expect investors to move
into the Biotech sector as a defensive play to counter the
slowing economy.  Combine that positive flow of capital with
ABSC's strong technical and fundamental position, and we have
the makings of an explosive run.  Like we mentioned in
Sunday's write-up, ABSC has traced a cup-with-handle formation
over the last five months, and is now poised to break above
its pivot point.  The stock has spent the beginning of this
week consolidating around the $100 level.  An aggressive
trader might watch for an intra-day bounce off $100 for a
possible entry point, while a more conservative entry might be
found if ABSC can rally above $105.  Make certain to confirm
any breakout with strong volume.  Trading activity will be a
telling sign if ABSC is going to break above its pivot point.
Also, confirm direction in the broader Biotech sector before
entering the play.

HWP $115.81 +0.50 (+4.06) HWP bolted above resistance at $112
Monday morning after several bullish articles were published
over the weekend about the Hardware sector.  The buyers showed
up with strength and volume Monday to carry HWP to a new high
in its ascending channel.  The stock's string of higher highs
continued Tuesday after Goldman Sachs reiterated its Buy
rating and said the company might beat EPS estimates when it
reports next week.  The potential for better-than-expected
profits helped HWP buck the weakness in the Tech sector Tuesday.
Going forward, Wall Street will be watching the DELL report
closely Thursday night, which might have an impact on our play.
The 5-dma is providing support at the bottom of HWP's channel,
which is currently located near $113.50.  An aggressive trader
might look for a bounce off the 5-day if HWP stumbles in the
coming days.  A more conservative entry mght be found if HWP
traces a new high in its channel, nd rallies above resistance at
$116.50.  Make sure to confirm a rally with healthy volume.

DNA $172.25 +6.50 (+8.13)  Monday morning saw a quick dip to the
5-dma before bouncing, providing what turned out to be a
beautiful entry point for aggressive traders.  By close, DNA
inched up just under 1% on about 50% of ADV.  This was enough to
move it just past resistance at $165.  Today, with the rest of the
biotech sector taking a break after last week's amazing rally,
DNA bucked the trend and continued higher.  Gapping up to $170 at
the open, DNA made a brief stop at $168.13 before moving higher
for the rest of the day to finish up 3.92% on about 63% of ADV.
The low volume in the past few trading sessions could be
hesitation on the part of traders as the stock price edges closer
to the lip of the saucer-shaped formation and the resistance
point mentioned by Jim Brown on Sunday at $177.  As Jim
suggested, traders may want to take some profit if the stock
price reaches that level and jump back in if it breaks $177 on
high volume.  Aggressive traders may want to continue to buy
bounces off the 5-dma ($163.71) with additional support at $167
and $165.

IDPH $136.13 -6.63 (-0.88)  After 6 straight days of rallying, the
stock was due for a little breather.  On Monday IDPH rallied to
close up $5.75, or 4.2%, on news of a new Phase 2 clinical trial
for Clenoliximan, a drug they are developing for rheumatoid
arthritis.  Investors seemed lukewarm however, as the move up was
on only about 70% of ADV.  Today, the stock gave up all of
Monday's gains plus a little more to finish down 4.64% on about
half of ADV.  The low volume on today's down move is encouraging
as it appears to be normal profit taking after a tremendous run
last week.  However, one item of concern is today's move down
closed the stock below its 5-dma (now at $137.13).  Those looking
for an entry may want to wait for the stock to clear that level
with volume before entering.  Below that, there is support at $135
and its 10-dma at the $130 area.  Looking above there appears to
be resistance at $143.  A break through that level would find the
next level of resistance at $148.

MVSN $86.81 -4.19 (+0.58)  So far this week it's been one step
forward and one step back for Macrovision.  On Monday, the stock
gained 5.53% and in doing so, broke through $90.  This was done
on almost twice the ADV, closing the stock just $3.75 shy of its
all-time high.  Today the stock gave back most of yesterday's
gains, closing down 4.6%.  Despite this, MVSN was able to close
above its 5-dma at $85.50..  Look for this level to continue to
act as support.  Below that, there is additional support at $85,
$83.75, its 10-dma at $82.10 and $81.60.  A confirmed bounce off
of these levels could be a great entry point for a stock with
such a strong chart and so close to its all-time high.  Ever
since the blowout earnings last Monday, volume in the stock has
risen dramatically, especially to the upside which suggests that
interest in MVSN's shares has increased.  Today's move lower was
on about 187% of ADV and while that is high, after five straight
days of rallying on equally high volume, a little profit taking
is expected.  Overhead, there is resistance at $88 and $90.
Getting past $90 will leave a clear path to its all-time high.

COF $57.75 -0.63 (-1.13) Benefiting from the continued
expectations of a no-hike interest rate decision from the
August FOMC meeting, COF continues to lurk in new high
territory.  After setting the most recent high-water mark
($59.25) last Monday, the stock pulled back to consolidate
its gains and gave us another attractive entry point as it
bounced just above the $54 support level.  Then, continuing
to use the 10-dma (currently at $57) as support, COF launched
higher towards the end of the week and has spent this week
struggling to reach its all-time high again.  Although the
bulls managed to succeed in touching that level again early
in today’s session, their victory was short lived as the
marauding bears came out of hiding and pushed the stock lower
for much of the day.  The buyers weren’t willing to give up
too much ground though and drew their line in the sand (support)
at $57.50.  So what do we do from here?  The Financials are
still leading the DJIA higher, and as long as they maintain
their strength, we can consider new positions as COF bounces
at support and heads higher on increasing volume.  If you are
worried about getting caught in a congestion zone, wait for
increasing volume to push the stock through resistance at $60
before playing.

MER $138.84 +1.69 (+3.09) Charging ahead, MER picked up
yesterday right where it left off on Friday.  Tagging a new
52-week high yesterday was just a warm-up, as the stock surged
again today, resetting the yearly high again, this time at
$139.38.  Benign economic data continues to fuel the belief
that the Fed will leave interest rates unchanged later this
month, and the Financials will be one of the primary
beneficiaries of such a move.  After leading its sector higher
and consequently propelling the DJIA within spitting distance
of 11000, the stock is now up nearly $20 in only 7 days.  With
the chatter on CNBC about the Financials possibly running out
of steam, make sure you tighten up your stops to preserve your
profits.  MER hasn’t even descended to touch its 5-dma (now
at $133.91) since last Thursday and is bumping its head on the
upper Bollinger band, so a pullback would not be out of the
question.  Volume has also been declining the past 2 days, which
is another indication that the current move may need to pause
before continuing higher.  Look for support to appear at $135
(the high from early July), followed by the 5-dma.  Wait for a
pullback to support and then pull the trigger as the buying
volume ratchets up again.

FRX $114.48 +0.00 (-2.21) Continuing to hold its own, FRX
is a keeper for the moment.  Trading in a range from $112 to
$118 this week, FRX is continuing to offer nice entry points
at the lows.  The stock opened today at $114.25, where it stalled
for most of the morning.  The stock only traded as low as $113.25,
after which it broke out on a strong volume move to the day high
of $115.75, overcoming resistance at the 5-dma of $114.50.  The
stock pulled back briefly, but regained momentum in the last hour
of trading, jumping above $115.  FRX received positive press on
Monday, securing the right to develop and market Dexloxiglumide,
a drug used in the treatment of Irritable Bowel Syndrome, from
which over 30 mln people suffer.  Aggressive traders may continue
to look for entry points around $112.50 on upward momentum bounce
and strong volume spikes.  Traders who are feeling more
conservative would do well to look for a convincing move above
$114.50 before opening a position.


AMD $61.00 -4.00 (-1.50) The battle of the analysts
intensified early this week when AMD suffered a downgrade from
US Bancorp Piper Jaffray.  The influential Chip analyst, Ashok
Kumar, slashed his rating on AMD to a Neutral from a Buy
rating, citing the slowing growth in the PC market and the
oversupply of flash memory on the market.  Then, Prudential
Securities came to AMD's rescue by reiterating its Strong Buy
rating and calling the recent sell-off unwarranted.  The
feuding analysts fell into the background Monday after the
SOX bounced higher from its recent sell-off, which boosted
AMD above the $65 level.  But, the Chip bears returned
Tuesday to take AMD back down near support at $60.  The wide
intra-day swings are providing entry points as AMD trades
between $60 and $65.  The stock is again precariously
hovering above critical support at $60.  Look for entry if AMD
falls below support at $60, and confirm a breakdown with
continued heavy volume and weakness in the Semi sector.  An
aggressive trader might continue to target shoot intra-day for
entry between AMD's range of $60 and $65.

MU $76.88 +0.75 (+3.44) Typical of the weakness being seen in
many of the Semiconductor stocks, MU looks like it is ready to
roll over.  After finding support at $73 (just above the
100-dma) on Friday, the stock managed to stage a tenuous
recovery.  After moving up just over $5, today MU ran headfirst
into the 10-dma (currently at $78.25) and by the close it was
clear who won that exchange.  Three times today the bulls made
a run at this level and all three times the bears chased them
away.  After reversing on Friday, the volume has been steadily
declining and today’s weak gain saw only half the average daily
number of shares change hands.  This seems to indicate that the
recovery is running out of steam.  On the other side of the
coin, the lows have been getting progressively higher the past
3 days, and as the stock approaches resistance at $78, this
bullish wedge pattern (although more significant over a longer
period of time), could portend a breakout to the upside.  The
fly in the ointment is the sentiment in the Semiconductor
sector;  if it improves, look for the rising tide to lift the
weaklings along with the leaders.  Consider entering new
positions if MU rolls over at resistance again, but confirm
that volume increases as the price rolls over.  Intraday support
has been forming near $76, and more conservative players may
want to wait for the selling volume to push MU below this
threshold before playing.

TERN $56.50 -1.50 (-1.38) TERN eclipsed the $56 level early
Monday morning, en route to ultimately rallying above its 10-
dma.  The stock benefited from the broad rally in the Tech
sector early this week, with particular strength in broadband
related issues, but now looks a little top-heavy.  TERN spiked
above $60 early Tuesday morning, after its opening gap down to
the $56 level.  Once the amateurs retired, TERN slowly slipped
back down near support at the $56 level.  The first signs of
weakness in the Tech sector Wednesday morning might warrant
consideration for entry into the play at current levels.
However, watch how Wall Street reacts to the upbeat CSCO
report.  If the Networking sector carries TERN higher, watch
for the stock to rollover near congestion around $57.50, or
again at the $60 level, and consider entry if the downward
momentum picks up.  A more conservative entry might be found
if TERN falls back below its 10-day, which is now providing
support around $55.33.


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PEB - PE Biosystems $101.09 -2.72 (+4.09 this week)

PE Biosystems develops, markets and maintains systems that are
used in basic life science research, pharmaceutical research and
development, diagnostics, forensics, and food testing.  PEB and
the Celera Genomics Group are parented by the PE Corporation.
One of PEB's largest customers is sister company, Celera
Genomics, which used the company's technology in its effort to
map the human genome.  The separately traded stocks were
launched in 1999.

The genomics-related issues hurled the biotech sector back into
the limelight last week.  While the broader markets erupted, PEB
tested the waters and managed to hold a higher price level above
$90.  There was a lot of intraday volatility with spreads of 6
to 7 points;  however, it demonstrated strength above the old
resistance.  On Monday, it became evident that the momentum was
building as PEB cleared the century mark.  The technical break
above this psychological hurdle and the corresponding 5-dma
($97.86) should generate more enthusiasm in the short-term.
There is also another factor, which may act as a stimulus for
PEB's advancement.  At $110, the stock is considered a split-
candidate.  This element in itself can sometimes create a wave
of excitement bringing in more momentum traders.  As it stands,
the company currently has 500 mln shares authorized and about
208 mln issued, which offers plenty of room for a stock
dividend.  For now, the stock's strong disposition at its new
near-term support of $100 is a potential entry point assuming
the bulls keep charging ahead.  If profit takers come in for a
piece of the pie, then look at $97-$98 for light support and
again around $92 at the 10-dma.  Some others in the genomics
like sister company Celera (CRA) and Millenium Pharmaceuticals
(MLNM) are good references to how the sector is moving.  Confirm
sentiment and stock direction before entering new plays during
these turbulent times.

On July 27th, before the market, PE Biosystems released its
fiscal 4Q earnings meeting analyst expectations.  The unit's
profits rose 26% on increased sales of tools used in genetic
research, like the Human Genome Project.  The numbers came in at
$56.6 mln, or $0.26 p/s in comparison to $45 mln, or $0.21 same
quarter last year.  The following day PEB was reiterated an
Outperform at Lehman Brothers and given a $97 target price.

***August contracts expire next week***

BUY CALL AUG- 95 BVE-HS OI=826 at $ 8.50 SL= 6.00
BUY CALL AUG-100 BVE-HT OI=  0 at $ 7.75 SL= 5.50
BUY CALL AUG-105 BVE-HA OI=  1 at $ 3.50 SL= 1.75
BUY CALL SEP-100*BVE-IT OI=550 at $10.50 SL= 7.50
BUY CALL SEP-105 BVE-IA OI=308 at $ 8.25 SL= 5.75
BUY CALL SEP-110 BVE-IB OI=150 at $ 6.50 SL= 4.50

Picked on Aug 8th at    $101.09    P/E = 116
Change since picked       +0.00    52-week high=$160.00
Analysts Ratings      6-4-1-0-0    52-week low =$ 29.16
Last earnings 06/00   est= 0.26    actual= 0.26
Next earnings 11-02   est= 0.18    versus= 0.14
Average Daily Volume = 1.78 mln


VRSN - VeriSign, Inc. $148.00 -6.31 (-14.06 this week)

VeriSign is the leading provider of Internet trust services
and digital certificate solutions needed by Web sites,
enterprises and individuals in order to conduct secure
electronic commerce and communications over IP networks.  VRSN
has used its secure online infrastructure to issue over 100,000
of its Website digital certificates and over 3.5 mln of its
digital certificates for individuals.  To date, over 300
enterprises have subscribed to the OnSite service and VRSN has
strategic relationships with industry leaders including Cisco,
Microsoft, RSA, Security Dynamics, and VISA.

Even good news can't move this stock up.  Considering the
post-earnings depression since VeriSign reported on July 26th, one
would think that the company must have disappointed or had a nice
healthy pre-earnings run-up.  Closer examination would reveal
that this is not the case.  For the quarter, VRSN posted revenues
of $70.3 mln, a 275% increase over last year's revenues of
$18.7 mln.  This was good enough to earn 7 cents per share
for the company, easily blowing away Street expectations of a one
penny loss.  Along with that were bullish words from President
and CEO Stratton Sclavos.  According to Sclavos, "Our second
quarter results underscore the momentum we are seeing across all
of our lines of business and the leverage that is inherent in our
business model as we continue to drive more and more services
through our infrastructure."  It appears that this was not enough
as the stock has moved sharply lower since then, despite the waves
of good news.  An upgrade by Sands Brothers, new business from
CIBC, an alliance with INKT, even a dismissal of a $1.7 bln
class action lawsuit against the company cannot seem to break
VRSN out of its downward spiral.  Since the news can't explain
the recent activity, let's examine the technicals.  The stock has
had difficulty with the 10-dma (now at $160) since earnings and
has been riding it down.  Bouncing sharply last Thursday, the
stock found resistance in the $165 area and since then has moved
lower, violating not only its 100-dma but it's 200-dma as well,
both in the $155 area.  Today, VRSN closed below the key support
level of $150, putting it also below its 5-dma.  Failure to rally
above resistance at $150, its 5-dma at $153.80, $155 and $160 may
be an opportunity to enter this play.  The next levels of support
appear to be at $145, $142 and from there it's a short trip to

***August contracts expire next week***

BUY PUT AUG-155 XVR-TK OI=1204 at $13.38 SL=10.00
BUY PUT AUG-150*XVR-TJ OI= 661 at $10.25 SL= 7.00
BUY PUT AUG-145 XVR-TI OI= 549 at $ 7.75 SL= 5.50
BUY PUT SEP-150 XVR-UJ OI= 467 at $18.13 SL=13.00

Average Daily Volume = 4.02 mln

IMCL - Imclone Systems $67.00 -6.00 (-6.19 this week)

Engaged in the research and development of novel cancer
treatments, IMCL focuses on growth factor inhibitors,
therapeutic cancer vaccines and angiogenesis inhibitors.  The
company’s lead product candidate, IMC-C225, is a therapeutic
monoclonal antibody that inhibits stimulation of a receptor for
growth factors upon which certain tumors depend.  Phase I/II
clinical trials have been promising.  The lead candidate for
angiogenesis inhibition, IMC-1C11 is an antibody that binds
selectively and with high affinity to KDR, a principal
Vascular Endothelial Growth Factor (VEGF) receptor, thus
inhibiting angiogenesis.

If you follow the Biotech sector, you've undoubtedly noticed
that it is having problems lately.  After leading the NASDAQ
rally in early June, the Biotechs have handed the leadership
roll off to other sectors, that are also struggling to move
higher.  As a matter of fact, a quick look at a daily chart
of the Biotech Index (BTK.X) looks like it is forming the
right shoulder of a bearish head and shoulders formation.
If the Biotechs continue to roll over as we head into the heart
of the summer doldrums, the weakest stocks in the group will
likely feel the most pain.  So what about IMCL makes it look
weaker than its peers?  Well, a good place to start is the
company’s most recent earnings report.  Missing estimates by
more than 33% and showed declining revenue, and the estimates
for this quarter (announcement set for August 15th) are calling
for a wider-than-expected loss compared to this quarter last
year.  The series of lower highs the stock has been posting
since May is a reflection of investors' intolerance of anything
but glowing reports of increasing revenue and increasing profits
(or decreasing losses).  As the Biotech sector continues to
shake out the winners from the losers, the winners will have
a fat pipeline of products coming to market and will be showing
improving financials - two criteria that IMCL does not meet.
So how do we play this one?  Today was a painful day, as the
stock gave up $6 to close right on the $67 support level, and
below the 200-dma ($70.69) for the first time in over a year.
Volume today was a solid 50% over the ADV, and if this selling
continues, a break below $66 looks like a good entry trigger.
A recovery followed by a rollover at the 10-dma ($72.91) may
provide the opportunity to get into the play at a better entry

***August contracts expire next week***

BUY PUT AUG-70*QCI-TN OI=241 at $ 6.63 SL=4.50
BUY PUT AUG-65 QCI-TM OI=320 at $ 4.00 SL=2.50
BUY PUT SEP-70 QCI-UN OI=174 at $10.13 SL=3.75

Average Daily Volume = 577 K

AETH - Aether Systems Inc $146.00 -8.00 (-10.50 this week)

Aether Systems is the company that offers information in the
palm of your hand.  They provide wireless data services and
systems enabling people to use wireless handheld devices for
real-time data communications and transactions. The company also
designs and develops wireless data systems and software
engineered strictly for business customers.   AETH is based in
Owings Mills, MD and has branch offices in New York and Florida.

Traders kept AETH in the palm of their hands until the telecom
battle began in earnest.  The gyrations between $165 and $145
recently afforded day traders a multitude of opportunities from
which to profit, but now it appears AETH may sink below the
support of the 200-dma ($144.76) in the near-term.  Previously,
AETH bounced off the lows intraday, but for three consecutive days
now the stock has steadily inched lower.  And today's strong 5.2%,
or $8.00 cut was also a significant factor.  With the telecoms
struggling to reclaim some dignity in the markets and the PPI
coming up this Friday, AETH may very well prove to be lucrative.
There's no doubt, however, that this is an aggressive play.  We're
hoping that the NASDAQ will rollover and provide a more bearish
environment.  It's imperative to wait for AETH to make definitive
moves south.  Even the more risk-aversive will want to confirm
that a downtrend line is intact before taking positions.

***August contracts expire next week***

BUY PUT AUG-150*HEX-TJ OI=176 at $11.00 SL=8.25
BUY PUT AUG-145 HEX-TI OI=237 at $ 8.25 SL=5.75
BUY PUT AUG-140 HEX-TH OI=495 at $ 5.75 SL=3.75

Average Daily Volume = 1.31 mln

AAPL - Apple Computer Systems $46.75 -1.19 (-0.63 this week)

Apple ignited the personal computer revolution in the 1970s with
the Apple II and reinvented the personal computer in the 1980s
with the colorful Macintosh.  Other products include the Mac OS
operating system, the portable iBook, and a variety of
multimedia tools.  Apple is committed to bringing the best
personal computing experience to students, educators, creative
professionals and consumers around the world through its
innovative hardware, software and Internet offerings.  The
company is still run by the original founder, Steve Jobs.

Here again we have a story of slowing PC sales.  The box makers
recently warned of slowing sales and painted a poor picture for
the 3Q.  This outlook coupled with the lazy days of summer
trading shed any hopes for price stability.  It looks like AAPL
could head lower before finding a bottom.  The recent trading
action has kept AAPL below the near-term 5 and 10-dmas.  And
each attempted recovery has hit with a wall of resistance at $50.
A rollover near this mark are reasonable entry points assuming the
market is cooperating.  It could be risky, but we've got the PPI
numbers coming out on Friday, and the NASDAQ looks to be topping
out at 3900.  Still, it's always best to keep an escape plan in
mind in the event of a short-term rally.  Keep those stops tight.
Technically, there's light support first at $45, and then lower at
$40.  Watch for opposition at these levels.

***August contracts expire next week***

BUY PUT AUG-55 AAQ-TK OI= 2740 at $8.88 SL=6.25
BUY PUT AUG-50*AAQ-TJ OI= 2302 at $4.50 SL=2.75
BUY PUT AUG-45 AAQ-TI OI=14525 at $1.69 SL=0.75

Average Daily Volume = 4.62 mln


HWP - Hewlett-Packard $115.81 (+4.06 this week)

HP is a top provider of computers, imaging and printing
peripherals, software, and computer-related services.  More than
half of HP's sales come from outside the US.  To further fuel its
growth, HP is restructuring itself as an Internet specialist
providing Web hardware, software, and support to corporate
customers.  To that end the company has spun off its test and
measurement equipment and medical electronics businesses as
Agilent Technologies (A).

Most Recent Write-Up

HWP bolted above resistance at $112 Monday morning after several
bullish articles were published over the weekend about the
Hardware sector.  The buyers showed up with strength and volume
Monday to carry HWP to a new high in its ascending channel.  The
stock's string of higher highs continued Tuesday after Goldman
Sachs reiterated its Buy rating and said the company might beat
EPS estimates when it reports next week.  The potential for
better-than-expected profits helped HWP buck the weakness in the
Tech sector Tuesday.  Going forward, Wall Street will be watching
the DELL report closely Thursday night, which might have an impact
on our play.  The 5-dma is providing support at the bottom of
HWP's channel, which is currently located near $113.50.  An
aggressive trader might look for a bounce off the 5-day if HWP
stumbles in the coming days.  A more conservative entry mght be
found if HWP traces a new high in its channel, and rallies above
resistance at  $116.50.  Make sure to confirm a rally with healthy


Despite the dichotomy in the Tech sector and the broader markets
recently, HWP has established a solid uptrend over the past two
weeks.  Wall Street will be looking for good numbers when the
company reports its quarterly results next week, which is the
catalyst we're looking to carry the play higher.  The rolling
trend of higher highs and lows should continue as the Tech bulls
and bears duke it out over the coming week.  After bouncing off
the 5-dma this afternoon, HWP reversed course to retest resistance
at $116.  A breakout above that level might set HWP to test
congestion at the $120 level.  A breakout to a new channel high
will provide new entry into the play.

***August contracts expire in two weeks***

BUY CALL AUG-110 HWP-HB OI=3754 at $ 8.50 SL=6.50
BUY CALL AUG-115*HWP-HC OI=2317 at $ 5.50 SL=3.75
BUY CALL AUG-120 HWP-HD OI=3481 at $ 3.25 SL=1.75
BUY CALL SEP-115 HWP-IC OI=1530 at $ 8.88 SL=6.75
BUY CALL NOV-120 HWP-KD OI= 606 at $12.25 SL=9.50

Picked on July 30th at  $107.25    P/E = 36
Change since picked       +8.56    52-week high=$156.00
Analysts Ratings     9-10-4-0-0    52-week low =$ 67.00
Last earnings 04/00   est= 0.82    actual= 0.87
Next earnings 08-16   est= 0.85    versus= 0.85
Average Daily Volume = 3.75 mln

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Buying the Right Option...

Last Sunday’s discussion of Option Trading Basics brought some
interesting comments from the readership.  Many of the replies
were in regard to my statement that most novice investors lose
money not only because they "buy" options but also because they
pay little attention to the fair value of the position they are

Buying a call is the most basic option trading strategy an
investor can utilize when he anticipates a bullish movement in
a particular stock.  There are different methods for choosing
the underlying issue but in simple terms, when you buy a call,
you expect to the stock's value to increase before the option
expires.  Buying options provides investors with leverage, as
well as limiting the loss on the position to the cost of the
option.  This common method of directional option trading
maximizes the trader’s potential for profit and provides
tremendous flexibility in managing the position for optimum
performance.  Obviously, it's a great technique when used
properly but many inexperienced traders don't realize how
difficult it is to profit from the strategy on a regular basis.
Statistics reveal and most experts agree, option buyers lose
money the majority of the time.

One of the primary reasons that traders fail to achieve a high
rate of success in this strategy is they rely too much on market
timing and too little on proper position selection.  The concept
most investors overlook is that the change in value of a given
option is not always directly correlated to the price movement
of the underlying security.  As a result, even when a call option
is purchased at the exact low point in the underlying stock’s
current trend, it is still quite possible that the eventual
upside movement will not generate a favorable profit from the
resulting change in the price of the option.  The fact that the
price of the underlying instrument and the value of option
fluctuate independently, based on several unique components, is
one reality that is often ignored by the novice trader.

Understanding theoretical pricing and the elements that determine
the fair value of a specific option can be very difficult for new
investors.  The primary factors that influence an option’s value
include the price and volatility of the underlying instrument, and
the time remaining in the life of the option.  These components
can affect the price of the listed option substantially and it is
important to determine whether they will adversely limit the
potential for profit in a given position.

Implied volatility is a fundamental element in the pricing of an
option and traders should be aware of how a change in this value
can affect the outcome of a position.  In some instances, an issue
that has been historically volatile may reach periods in which it
is somewhat inactive, and conversely, stocks which are normally
subdued in terms of volatility will suddenly rally or decline
precipitously.  These changes in price behavior will alter the
influence of this factor on the option premium.  Often, when you
buy an option, a subsequent decline in volatility can create a
loss in the position, regardless of whether the underlying issue
moves in the forecast direction.  Ideally, an option buyer should
focus on situations where implied volatility is relatively low.
Using that approach, one can profit not only from a bullish
movement in the underlying security but also from a favorable
change in the option’s volatility.

There are other influences that can have an effect on the price
behavior of a specific option.  One important bias is the trend
of the market.  For example, optimism rises during a market rally
and prices often become inflated as new interest in call options
enlarges demand.  Option premiums increase substantially during
periods of bullish sentiment and in many cases, theoretically
expensive options emerge, regardless of the price movement of
the underlying issue.  Even during times when the market lacks a
definite trend, public opinion and the current economic outlook
can have an important effect on option price behavior.  When the
majority of investors lack interest in the market or there is
indecision on the part of analysts about future direction, option
prices generally decline.  The reason is simple; options need
activity, either in the price movement of the underlying issue
or in its potential (speculative) value, to maintain robust
premiums.  An experienced trader will use these market slumps to
increase his potential for profit, opening new positions when the
option premiums are at a discount.

Another significant factor to consider when buying options is
supply and demand.  This element, along with liquidity, can have
a material affect on the pricing of options.  A lack of buying
interest causes premiums to deflate, creating opportunities for
traders who use strategies that profit from discounted prices.
Liquidity relates to trading volume, and the ability to buy or
sell an option for a fair price, at the true market value.  As
noted earlier, market rallies normally produce higher trading
volumes and the bullish trend often carries over to derivatives,
creating greater demand for listed options.  The increased
liquidity attracts institutions, which in turn add to the trading
volume.  Surprisingly, institutions are primarily option writers,
selling both put and call options to enhance the income from their
stock portfolios.  This lesser-known aspect of option trading can
be a great benefit to investors who attempt to earn their profits
through speculative (buying) strategies.

The appropriate price for a particular option is a primary factor
to consider when participating in a directional strategy.  At the
same time, the outlook for the underlying issue, its potential
volatility and the overall character of the market are also
material considerations.  As with any investment, the position
entry is particularly important.  It deserves one’s best analysis
and judgment.  Correctly timing the purchase requires a thorough
knowledge of charting techniques and market trends.  In addition,
it's important to make a few key decisions: What is your risk
tolerance?  What will you do if the trade goes against you?  At
what price and in which way are you going to exit the position?
Are there alternative strategies that can help limit losses and
increase profits?  At times, it seems the most costly (and often
self-taught) lesson is the value of an exit strategy however, the
entire process is something you must completely understand because
a successful exit is by and large the product of a proper entry.

Good Luck!

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Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

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