Option Investor

Daily Newsletter, Thursday, 09/21/2000

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The Option Investor Newsletter                 Thursday 09-21-2000
Copyright 2000, All rights reserved.                        1 of 2
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MARKET WRAP  (view in courier font for table alignment)
        09-21-2000        High      Low     Volume Advance/Decline
DJIA    10765.50 + 77.60 10783.40 10660.50 1.09 bln   1065/1722
NASDAQ   3828.87 - 68.57  3892.40  3813.12 1.61 bln   1492/2429
S&P 100   780.39 -  2.16   782.55   772.66   totals   2557/4151
S&P 500  1449.05 -  2.29  1452.77  1436.30           38.1%/61.9%
RUS 2000  514.35 -  7.08   521.43   513.86
DJ TRANS 2587.45 -  4.00  2607.64  2569.73
VIX        23.56 +  0.79    24.61    22.96
Put/Call Ratio       .61

Intel warns after hours! Who is next?

The Dow struggled all day and fought valiantly for every positive
point trying to put as much distance as possible from the 10567
low from Wednesday hoping to make that the low for the month and
position itself for October. A positive warning from MMM this
morning gave the Dow a needed lift and retailers WMT and HD joined
druggies MRK and JNJ to power the Dow for a +77 point gain. The
Nasdaq never traded in positive territory and struggled to stay
above 3800. The profit taking from the +200 point intraday gains
since the 3702 Monday low weighed heavily on the tech sector.

The battle between the bulls and bears for control this week took
a serious turn for the worse after the market closed today. Intel
warned that they would miss estimates for this quarter due to
higher expenses and weaker demand. Remember the Ashok Kumar
downgrade on Sept 5th? The stock and the market died for over a
week and we are trading -425 points below those levels today. The
warning today, based on those key words "weaker demand" may be a
real party pooper for Friday. They could have said higher oil
prices, lower Euro, price competition, anything but weaker demand!
The qualifier on the headline news event was weaker demand in
Europe but investors will disregard the Europe comment and focus
entirely on the "weaker demand" words. They also said expenses
were +7%-9% higher than expected due to higher raw material costs.
Can you spell inflation, most likely oil induced but still a Fed

Stocks from all the related sectors were trading down substantially
after the announcement. DELL -5, CSCO -5, AMD -5, AMAT -12, KLAC -9,
JNPR -18, NTAP -14, TXN -6, EMC -7, CPQ -3, MOT -3, IBM -3, ORCL -5,
HWP -5, MSFT -4, CLRS -10, ALTR -6, MU -11, SUNW -7. When Intel was
released for trading after closing at $61.50 the drop was instant
and on large volume. Huge blocks were moving in the $48-50 range or
-13 from the close. The impact of the warning on the markets at the
open will be drastic. With Intel, Microsoft, IBM, HWP, CPQ all in
the Dow the cumulative impact will be something like -150 points
assuming the after hours drop of -30 points for those stocks holds.

The Nasdaq will fare even worse. With every major Nasdaq stock down
huge the damage could be severe. DELL, ORCL, CSCO, MSFT, INTC, SUNW,
KLAC, NTAP, AMAT are down over -75 points in after hours and these
are just the headliners on the Nasdaq. The "me too" stocks will all
suffer the same fate. We could blow through 3700 on the open with
no effort at all. No sector appears to be safe. Even the bullet
proof fiber optic sector is down in after hours. CIEN -10, GLW -22.

The bright side will be the buying opportunity. With significant
events like this there is always the tendency to over react and
we see a big sell off in after hours. The open can produce a big
follow through and then the bargain hunters jump in. There is a lot
of money on the sidelines and a serious downward move could produce
a buying reaction. The dark side is October still ahead. Only two
weeks from October we could see that same money deciding to wait
to see if any other high profile warnings are in the wings. If
Intel is warning then does that mean DELL, SUNW, GTW or ??? are
about to warn also? Yesterday Sprint warned and today we have Intel
and Goodyear Tire. Morgan Stanley missed their estimates today by
-.08 cents due to lower trading volume.

My headline for tonight was going to be "CURBS IN" after seeing
the trading curbs forced onto the market on Wednesday after what
seems like months of less volatile trading. Friday could be a
lock limit type of day as well. The Nasdaq futures are down almost
-100 and the S&P Futures are down -32. There is a lot of darkness
before daylight and the market open in the morning and anything
can change but the odds of a serious gap down are about 100%.

We have had several cancellations recently because we were too
bearish about our September outlook. Personally, I think a -500
point drop on the Nasdaq and a -900 point drop on the Dow would
qualify as bearish. I would be the first to admit that I am never
right all the time (and no one else I know either) but I have been
warning you about September since two weeks before Labor Day.
This is a rough month for just exactly the reasons you saw today.
Summer is a tough selling season and third quarter profits are
normally hit and miss. The warning season will be over in about
two weeks and the markets will focus on the actual earnings which
start the first week of October. It is then that the real surprises
will appear. Those that miss estimates after not prewarning will
be punished severely.

The number one question tonight is how to play the morning drop.
First we need to determine when the drop is over. Normally we
will get a huge downward spike at the open followed by an upward
spike as the first wave of sellers dries up and the first wave
of bargain hunters rush in. This could take 10-15 min. The size
of the upward spike, if any, will impact the sentiment of the
remaining sellers and buyers waiting on the sidelines. A weak
spike will create a second wave of selling and dumping by the
bargain hunters that jumped in too early. The second dip would
be the one to buy but only after the ticks turn positive and
the market heads up again. The possibilities are endless for
combinations and many scenarios would contain increased selling
as the day wears on. Investors may not want to hold any positions
over the weekend and the possibility of another warning before
the Monday open. I expect Intel to try and sugar coat the news
to prevent a total stock melt down. They will probably be on
CNBC talking about the good growth, strong sectors and hot
products. Whatever they can say to provide optimism. Investors
looking for any hope whatever will cling to these comments and
use them as an excuse to buy. This may take the sharp edges off
the disaster but I doubt they can make it go away.

Before you decide what to play on Friday you should consider
the broader market direction. Yes, the Dow was up strong today
but the broader market S&P-500 dropped -2.29. The S&P has been
falling and is sitting exactly on its 200DMA. Same with the
Wilshire-5000. Both were poised to break under these critical
points and Friday could be the last straw. The S&P-100 is
already under the 200DMA and only 4 points above the June/July
lows. This looks like a recipe for disaster if investor sentiment
turns negative tomorrow. Consider carefully the risks before
you commit your funds.

If you must trade you should only do it on a small scale. One
way to eliminate some risk is the target shooting approach.
Pick a stock you would like to own and enter a limit order for
significantly less than the after hours closing price. JNPR for
instance closed at $211 in regular trading and fell to $200 in
after hours. First support is $192 with strong support at $183.
Setting a limit order at $190 could catch a selling spike which
may only last several minutes. More conservative traders could
set a limit closer to the $183 number but would have a much
smaller chance of being filled. This works the same way with
options. The Oct $190 call closed at $30 but that was based
on JNPR at $211. Take off the $11 drop and you have $19.
Assume an opening spike downward and cut that $19 to $15 and
put your limit order there. If you get filled you are positioned
for the rebound. Pick a stock that does not relate directly to
Intel. Dell for instance would not be a good target. A stock
like a biotech or drug would be good. They will drop with
the market but will rebound as money rotates out of PC stocks
and into other sectors. The problem with this strategy is the
possibility of a continued drop. If the bargain hunters elect
to remain on the sidelines until warning season is over then
the market could continue to sell off. If we do get a big
negative number but above 3700 near the close I would take a
chance on a Monday rebound. Under 3700 I would steer clear.
Fasten your seatbelts. Any way you play it Friday should be
really exciting.

At the October Advanced Options Workshop in Denver we will be
discussing strategies to take advantage of market conditions
like we will see on Friday. Strategies for entering trade and
also repair strategies for trades that get caught by disasters
like this. Just because your options are worth half what you
paid for them does not mean you cannot escape with a profit
by applying the correct repair strategy. Come, have fun and
learn how to be a better option trader.
For more information: http://www.OptionInvestor.com/workshop

Good luck and sell too soon.

Jim Brown


The Boston seminar is September 28/30th. Options
expiration is over and earnings still a week away. Here
is your chance to learn from the pros. The three day
Technical Analysis Stock and Option Fall Seminar
Series. Three days of in-depth education. Don't miss it!

Some comments from recent attendees:

I want to thank Chris, Steve and Scott for the excellent workshop
held in Detroit last week.  Having been to the Expo in Denver in
March (which was fabulous), I was ready for a smaller, hands-on
approach to hone my less-than-perfect skills.  I was not disappointed.
One can never get too much education in options investing, and Chris
and Steve offer terrific, unique approaches. Laurie

Chris & Steve, I would like to thank both of you for a great
experience at the Atlanta Workshop. I learned more in the
three days of the workshop about investing and trading than
all of my undergraduate and graduate courses combined. It
was a lot of information in a short time and I hope to put
it to use very soon.  Mike

I attended the Atlanta seminar and wanted to forward my positive
comments. The seminar "really lit my fire". I have been a trader
for 20 years and often go to seminars and this was the first one
that really taught me the most. Dr Lloyd

Jim, I had the good fortune of attending the meeting in Orlando.
Like your newsletter, it was a CLASS ACT. Chris and the others did
a great job. Chris was by far the best performer but the gentlemen
beside me was an option trader with several seminars under his belt
and almost freaked out when Chris finished his Index Presentation.

I am writing this note to compliment you and your staff on the
great job they did in Atlanta.  But more importantly I would like
to single out Steve Rhoades as one of the finest speaker/teacher
on technical analysis that I have ever had the pleasure of hearing.
I am doing my best to persuade other members of the two investment
clubs that I belong to, to attend the Detroit seminar.
Sincerely, ML

We guarantee you will not be disappointed. The class size
is small so you will get plenty of individual attention
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At less than the cost of a bad trade you can learn how
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Feels Like October Already
By Austin Passamonte

Here in western NY we have a frost warning for tonight. Cover
the tender plants or watch them perish. Transition from the
joys of summer to the reality of winter are never easy to

Have you heard about high oil prices yet? Poor earnings reports?
Sector downgrades? Park your money in bonds? Yuck, perish the
thought! After "bearing" with our negative posture for the past
several weeks can you tolerate a bit of emerging bullishness?
I thought so.

We're not saying it's all uphill from here. We may not go a lot
higher on a permanent basis for some time, but a near-term
bottom is closer every day. We've watched the OEX test the low
770 range twice and bounce. The SPX tested 1430 area twice and
bounced. The Dow and NDX have each been pressured and continue
to be but refuse to break down entirely. What's behind all this?

You know the fundamental reasons why you should sell all your
stocks and finally buy that emu farm you've longed for. We
won't bore you with all that. Market Sentiment is controlled by
technicians and we will bore you with that.

The major index charts aren't beautiful but they ain't that
bad. Let's run through them;

The SPX has twice tested and held an ascending trendline dating
back from late-February lows through mid-April and late-May
lows as well. The absolute bottom support has held yesterday
and today so far. Overhead resistance begins just above 1460 as
it now rests just above the 200 DMA.

The Dow is currently trying to penetrate a similar ascending
trendline just overhead around the 820 area. A close over this
would be welcome news for our bulls.

The NDX has twice tested its own ascending trendline drawn from
late-May intraday lows across the early August intraday low as
well. It has been tested and held the last five sessions out of
six. Same goes for the SMH semi-conductor HOLDRs.

Oscillator signals are all buried in oversold on every major
index and the hourly & 30 minute charts are now lining up the
same. Good news again. We could be just part of or one session
away from the next rally.

Open interest disparity is huge on underlying puts and light on
overhead calls. This means everyone is loading up for the big
drop and eschewing calls, knowing that we are sure to test new
lows. Overhead resistance is scant with underlying support just
about impenetrable in some cases.

The VIX extreme high near 24+ has been penetrated twice in its
daily Bollinger Band, each time when the OEX tested the 770 low
range. Both times the VIX backed off and the OEX sprang back.

Need we go on? Why pile on when you get the point. Surface fear
in the market is palpable but underlying technical studies are
all pulling together in silent but convincing fashion. We've
tested the "bottom" several times so far and felt some sand in
between our toes.

Oh, and one other thing; INTC stepped up to the confessional
after the close. Something or other about missed earnings
this time around. Did I fail to mention that?

Pre-market prices are down 12+ points taking all indexes and
most everything with a symbol along for the ride. Not good.

We can expect a smash-down capitulation day tomorrow that will
likely spill over into next week. Fine. Why wait in agony for
October to get here and languish in a sideways market. Sell it
off and let's find our bottom from there.

The commercial futures traders who are heavily net-short will
happily cover from happless victims selling the farm from here.
Their next move will be to start accumulating long positions
at the levels we're about to hit.

Will Intel drop to $30 a share? Count us in if it does! The
next few quarters aren't that far away for us to load up on
2001 LEAPs. Will it tank everything in it's wake tomorrow?
Most likely. Time to sell our blood and wire the proceeds
to the brokerage for LEAPs coming soon.

All things in perspective here; stand aside and wait for the
bounce. It won't be long now.

We'll repeat ourselves here until the end of time; calls and
puts as circumstances dictate is our great advantage over all
other equity traders.

***(Market Data Unavailable)***

(On a personal note for all who inquired about last night's
"Trader Corner" reported put play, it was the mother of all
typos. We bought QQQ 96 calls @ 3.25 Wednesday that stopped
out on a trail @ 3 this morning. Wonder what they'd be worth
tomorrow? Sorry for the massive confusion!)


As of Market Close - Thursday, 09/21/2000

                                  Key Benchmarks
Broad Market           Last     Support/Resistance   Alert

DOW   Industrials      10,765      10,450  11,150     **
SPX   S&P 500           1,449       1,425   1,495     **
COMPX NASD Composite    3,828       3,650   4,000
OEX   S&P 100             780         770     810     **
RUT   Russell 2000        514         510     550
NDX   NASD 100          3,718       3,500   3,850
MSH   High Tech         1,015         980   1,055

BTK   Biotech             732         690     780
XCI   Hardware          1,464       1,400   1,520
GSO.X Software            454         430     470
SOX   Semiconductor       984         940   1,060
NWX   Networking        1,202       1,180   1,280
INX   Internet            540         530     580

BIX   Banking             592         580     635
XBD   Brokerage           633         625     685
IUX   Insurance           728         705     760

RLX   Retail              855         805     890
DRG   Drug                396         365     410
HCX   Healthcare          824         775     830    **
XAL   Airline             143         144     152    **
OIX   Oil & Gas           308         296     332

Five alarms were triggered in the previous two sessions with the
HCX triggering a resistance alert.  Intel’s earnings warning after
the bell could spell trouble for the COMPX and most likely the SOX.
Watch the DRG, if the HCX continues its advance.  Don’t over-leverage
on margin!  Lowering support (DOW, SPX, OEX, XAL) Lowering resistance
(DOW, SOX, XBD, XAL) Raising support (HCX) Raising resistance (HCX).


Tracking Option Volumes: Part II
By Molly Evans

A couple of weeks ago, you read it here first, that there was a
high volume of call options being bought on QCOM.  The rewards
came almost immediately.  I like this indicator!  Tracking option
volume requires a little bit of investigative work.  When you
see the volume in particular options, you have to determine if
it's being equally bought and sold on the opposite side of the
play too.  Someone might be hedging through spreads or they might
be selling covered calls to offset risk of holding the underlying.

Yesterday, I tracked the top option volume throughout the day.
The usual suspects showed up, CSCO, MSFT, INTC but what was
interesting was that as Sprint PCS stock sold off, so did the
whole telecom sector but the option buyers were catching
all the ground balls.  T and NOK options were well taken up over
average daily volumes even though their charts look pretty
unimpressive.  In fact, AT&T (T) is at lows that it hasn't seen
since October of 1997.  Is this where you want to call a bottom,
throw your hat in the ring and bet that it'll turn on a dime to
be profitable by October's expiration?  Why are they buying
October at-the-money calls?  A good part of the answer probably
lies over in the put section.  While the October ATM call volume
was three times over the average daily volume, so too was the
ATM put volume.  I'd assume the buyer is initiating some sort of
spread or other hedge play.  Then again, lots and lots of people
like to buy low and sell high.  If they're picking T to do that,
they've had lots and lots of chances to do so.  The January 30
call options were on a fire sale and options buyers scooped up
around 7,000 contracts of TAF.

Traders wanted a piece of NOK too.  The October 43.75 contracts
traded more contracts in that one issue than all the other puts
combined.  That speaks to people just wanting the NOK contracts
while it was on a dip with the big sell off that was occurring.
The underlying itself was rather boring as it has been for nearly
a month.  It traded in a 2.25 point range on less than 65 day
average volume.  What's more is that NOK has been trading in this
tight point and a half to two point range for most of the past
month's trading.  What does this do?  You all know the answer.
Mary and Lee discussed it just earlier this week.  It shrinks the
implied volatility and the options become "cheap" in terms of
historical range.

But let's back up and revisit the AT&T option volume.  Where might
a savvy option player place their bet for a profitable play?
Here's something to consider.  All things being equal, the market
not crashing or breaking out to runaway highs, the most logical
place for AT&T to close in price at October Expiration is just
above $30 but certainly below $35.  "Bravo and brilliant!" you say
(as you throw dirty socks at me)?  Ok, ok, so it's not the
greatest example as AT&T hasn't seen $35 since June 22.  However,
let's look at how this determination has been concluded.  As of
half an hour before the close today, there were 56,950 call
contracts in-the-money versus 137,288 contracts that were
out-of-the-money.  On the other side, there were 59,449 put
contracts in-the-money versus 64,139 puts out-of-the-money.  It's
the theory of Maximum Pain.  What will cause the most maximum of
pain to the holders of T options at expiration?  Clearly, if T
closes above $30, then 137,288 call contracts will have burned off
all value and 64,139 put contracts with strikes of $30 and below
will fall on their swords as well.  Only 56,950 calls and 59,449
puts would have any value.

I used this "indicator" to save me from myself just the other day.
Recall that I was at the OIN seminar in Chicago late last week.
On Thursday afternoon, Chris pulled up Q charts to have a look at
the market just before close.  Imagine this!  The day before
triple witching, the Nasdaq is screaming.  You know me, Miss Bear,
sniffed around that screen to see what I "know" is a "can't miss"
play.  I quickly spotted my prey and slipped quietly up to my room
to place a nice big bet (and that's exactly what it is these days)
on some INKT puts.  INKT was up $15 on no news and I felt pretty
smug about buying the September 120 puts.  It was only after that
purchase that I thought to look at the maximum pain values for
INKT for September Expiration.  Sure enough, INKT would be
scheduled to mysteriously close above $120 by the time the bell
rang to end the next day's trading.  So, the morning came and can
you believe it?  The market is lower!  INKT was actually pretty
strong considering how weak the market was the next day so I took
my near 50% gain as quickly as it presented itself and got back to
my meeting.  Sometimes better to be lucky, eh?  Guess where INKT
closed at on Friday?  $120.50.  Amazing how that works, isn't

So what else was on the call volume list?  Would you believe a
gold mining stock hit the big numbers yesterday?  Newmont Mining
(NEM) Oct 17.5 call traded one huge block that made the ratio of
that trade 17:1 vs. average daily volume.  That's one thing but
then 1280 contracts of the Jan 30 calls traded.  The 65-day
average volume for that issue is 31.  I don't have any answers,
I'm just snooping around.  Louis Rukeyser loves to kick the
"Goldbugs" in the teeth every week on his show.  Yet, every dog
has his day.  Who thinks gold is going to rise from its long
dreary descent?  NEM saw its all-time highs back in the Spring
of 1996.  Now, just yesterday it hit another 52 week low.  Someone
bottom fishing again?  A gold fund selling covered calls?  Why
would they sell the 30s?  Is Japan going to hold good on Prime
Minister Hashimoto's threat several years ago to go to gold if it
had to in regards to settlement trades?  The international scene
is always something to keep an eye on.  As the strong dollar and
rising oil costs undermine world economies, those on the other
side of the ocean could throw a couple unexpected punches at any
time.  Would you have ever considered buying oil index contracts
a year and a half ago when it was 48% less than what it is now?
I'll bet you've considered it within the last six weeks though.

Now please don't think we're advocating you go and buy options on
the gold industry.  That is one nasty downtrend and it's not like
gold has a growth rate or a PE ratio.  I was waving the flag on
QCOM but gold?  No.  However, if you hear something that grabs
your attention, it never hurts to remember our little trick of
following the volume trail.  Stranger things have happened.

So how about this market?  Isn't it interesting that this time,
the generals have been shot before the soaring eagles?  ORCL, INTC,
NT, JDSU, MU and SUNW, some of the biggest and brightest of stars
have been struggling.  Yet, as I watched the trades go through on
JNPR the other day, I watched the PE rise just as fast as the
green candles.  Pretty amazing to watch.  Did I hear someone say
"soft landing"?  The news has just now been released on INTC
warning.  I think we can pretty much put that idea to rest.  I
know a lot of people are out there getting creamed.  Please know
you're not alone, professional traders are getting whipsawed each
way too.  We're taught to water the flowers and pull the weeds.
Well, the flowers are quite deceptive and the weeds are plentiful.
This is something I constantly struggle with too.  Take my QCOM
example.  I sold all contracts into strength last Friday thinking
that Monday the market would be down.  It was down alright but
QCOM was up 4 or something.  The next day it was up 7 or 8.  That
made it a three-bagger.  Who gets three-baggers on the long side
in this market?  I would have but I took the profits and ran.
There are so many rules to trading.  QCOM was a flower and I cut
it before its prime.  Aren't there just as many who advocate to
take any profit and run?  No regrets here (well...maybe a little).
I made three trips to the bank with QCOM.  That's terrific but it
just goes to show us that emotions are very difficult to overcome
when trading.  It was fear of watching dissolving profits on the
day I sold and unabashed greed and loathing on Tuesday as I watched
it go higher and higher without me.  "I will not chase.  I will not
chase.  I will not chase."

It looks like it's going to be ugly here for a bit.  Remember
your discipline.  All these stocks are going to be on sale
tomorrow.  Be sure you're picking up a real bargain though.
Volatility will be high and opportunities will be all around; good
luck to you and be careful out there.

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Don't Know Which Direction to Trade?
By Buzz Lynn

It's hard to keep your horns sharp with bears gnawing - no,
crunching - off your points.

Well, as we begin to write this, INTC has just warned that
business has slowed overall and the shares have halted trading.
Can you guess?  Yep - earnings warning.  Gross margins will fall
from 63/64% to 62% while interest and other expenses will increase
to $900 mln from earlier estimates of $800 mln.  That's $100 mln
in additional interest expense.  Weak sales in Europe are also
shouldering much of the blame.  So, another Wall Street axiom was
just shattered.  Interest rates DO matter and can affect even the
mightiest of tech stocks.  Get use to it.

So how bad is it going to be tomorrow?  DELL is trading at $34,
MSFT at $60.50, AMD at $24.50, ORCL at $75, SUNW at $112, CSCO at
$58.13, HWP at $97, and IBM at $120.  Tomorrow is going to be
painful for the NASDAQ, and the worst part is that a gap down at
the open is going to prevent us from escaping with a protective
stop order.  Since INTC and MSFT are a part of the Dow, it too
will take a beating.  The QQQ is already trading down at $88.50
from its $92 close today.  Roughly translated, that's about 3600-
3700 on the NASDAQ.  INTC reopened after hours at $50.  We're
going to have to take our lumps.

All right, let's assume that INTC didn't warn.  We'd be talking
about indecision on part of investors as to which direction the
market will go.  Despite slight follow through on Tuesday's rally,
the technical indicators, though inching up, have yet to give us a
stochastic and MACD buy signal on a daily chart on the broader
market OEX.  So close yet so far.  Our stochastic only managed to
get to 19.59%.  We need to see it clear 20% for a good entry.  As
tempting as it would have been to jump the gun anticipating an
upturn, we'd be burned big-time tomorrow.  Just like a pilot in
instrument conditions, we've got to trust our gauges, not the seat
of our pants.  Fundamentally too, advances are rarely made without
the participation of financials and tech stocks, neither or which
did well today.

Unfortunately, we must admit defeat in taking a QQQ trade
yesterday.  In fact, we did get our stochastic signal entry on a
daily chart and an apparent crossover of the MACD yesterday.
There's also a saying on Wall Street that "the second mouse gets
the cheese".  While today's pullback to support of 3800 (actually
3813), might have given us second mice a better entry, INTC just
threw the match in favor of the unforeseen third mouse.

Now, time to look to the clouds for a silver lining.  Tomorrow
morning may give us our capitulation we've been looking for where
investors throw in the towel on everything technology related.
Ideally, the selloff would be sharp, with marketwide capitulation
setting us up for a way oversold rebound late in the day or next
week.  We can dream can't we?

However, earnings warning season, high oil prices and currency
risk will keep the bias to the downside.  Also, an increasing VIX
(as high as 24.58 today) is showing that the market is gaining
more fear.  It may not be over tomorrow.  Unless you see a
substantial rebound over tomorrow's gap down opening price, or a
V-bottom rebound off the morning low, we suggest sitting on your
hands waiting until the dust settles.  Good market timers and day
trader types, however, may want to take advantage of the
volatility for some quick trades.  If we see some support, that
may actually be an opportunity for a straight buy, or long leg of
a spread.

Use good judgement on your entries and if you are wrong, cease to
be wrong by getting out.  With so much pessimism, tomorrow may be
a great day to take advantage of some blood in the streets.

***note we have the MACD set at 8,18,6 and the stochastic set at
10(3),5 for all our technical references in this section.***


QQQ - NASDAQ 100 $88.31 -6.31 (-2.94 this week) Actually, prior to
INTC's warning, the market finished regular trading at $92.56.
Well, INTC warned, techs and QQQ will suffer tomorrow.  Goodnight,
Irene.  End of story (unless the story line changes again by
tomorrow morning).  The only positive we can see is if the selloff
is met with a sharp V-bottom rebound.  That may not make a great
long-term trend, but it should be tradable.  Some of you may be
wondering why we don't pick up puts at this point.  Good question.
The answer is that we won't see much if any profit thanks to an
anticipated gap down.  More importantly, the market is oversold
technically.  It would be poor trading practice to expect a
technically bottomed chart to continue further down.  That said,
the charts may not get much lower, but the market sure can, which
would give us a few individual short-term put trading
opportunities on a fundamental basis, which we encourage you to
take advantage of if that suites your trading profile.  However,
we are mostly about technicals here and are thus staying clear of
puts until we see "oversold" on the charts again.  Support is at
$88, 85, and $83 thanks to INTC.  The NASDAQ is likely to trade in
the 3600-3700 range tomorrow, maybe lower.  You may want to use
any V-bottom as a trading opportunity, especially if 3700 holds by
the close tomorrow.  Resistance now moves to $90-$91, $93, then

Calendar Spread:

This one is simple.  This is likely not the time to be selling the
short leg.  Now is the time to be looking for an entry on a long
leg or buy back a short you've already sold.  A V-bottom on the
chart might make a nice buying opportunity, but wait for the
bottom, or better yet wait for the dust to settle.  That may mean
sitting on your hands tomorrow and waiting for a technical
reversal.  Of course, those accustomed to target shooting can
shoot at support of $88, 85, and $83 (your risk profile, you
decide) if you want to risk jumping the gun.  Better confirm blood
in the streets though first.  Remember, our job is to buy the long
leg cheap (cover the short leg too) and sell the short leg for as
much as possible letting time decay eventually pay for the long

BUY  CALL JAN- 85 YQQ-AG OI=  654 at $14.88

SELL CALL OCT- 90 QVQ-JL OI= 7648 at $ 6.13, ND = 8.75 or less
SELL CALL OCT- 95 QVQ-JQ OI= 7170 at $ 3.38, ND =11.50 or less

Long Call:

Same principle here.  Wait for a bottom.  It may come at $88, $85,
or $83.  Otherwise, those of us trying to play the technical moves
will have to wait until the short stochastic crossover of the long
stochastic and the 20% line.  MACD should confirm it (and would
have saved us from taking the trade yesterday if we'd been a bit
more patient).  Let the dust settle.  Don't try to catch the
falling knife.  You may be able to daytrade a V-bottom, but don't
walk away from your screen if you do.

BUY CALL OCT- 85 YQQ-JG OI=  232 at $9.75 SL=6.75
BUY CALL OCT- 90 QVQ-JL OI= 7648 at $6.38 SL=4.25
BUY CALL NOV- 90 QVQ-KL OI=   69 at $8.38 SL=5.75

Bullish Put Credit Spread:

Don't even think about it until this market finds a bottom.
Gunslingers are still welcome to partake, but be sure you can get
out if the entry you've chosen fails to give you the desired
outcome.  We list no strikes tonight until we see evidence of a
clear bottom.

Average Daily Volume = 18.8 mln


OEX - S&P 100 $780.81 -2.16 (-8.96 this week) While it may have
been possible to day trade off $18 swings in the OEX 30 and 60-min
charts the last two days, the best part about this index is that
we just missed an stochastic entry signal by .44%!  Thankfully,
that will keep us out of tomorrow's gap down selloff expected as a
result of INTC's warning.  Much like we outlined above in the QQQ,
we would expect the same behavior from the OEX.  That said, with
enough blood in the streets tomorrow (capitulation on hopefully
huge volume), a V-bottom might actually give us a good daytrading
opportunity.  But with high oil prices, earnings warnings and
currency risk presenting fundamental market detractors, the
condition may be only temporary, though the technicals look ready
to bounce.  As we've noted before, a fundamental market change
will overpower a line on a chart any day.  In the end, the
financials and tech stocks must participate in any rally.  INTC's
warning and the high probability of other financial institutions
failing to please the Street may keep any rally from getting too
serious.  We suggest sitting out until a clear bottom forms,
though as traders at heart, that may test our will power.  When
you don't how deep the water is, it's best not to dive.

Long Call:

Morgan Stanley (MWD) failed to please analysts and INTC warned
big-time.  Tomorrow promises to deliver a sizeable selloff.  Time
to buy calls?  Maybe if the market can give us a deep V-bottom, we
could see a daytrading or short-term opportunity on the 30 or 60-
min charts.  For our longer term purposes, a daily chart of the
stochastic and MACD says we should stand aside until the short
stochastic clears the 20% mark and crosses the long stochastic in
the process.  MACD should confirm it, but gunslingers may be
tempted to jump the gun on that indicator.  That may be warranted
if the selloff happens on huge volume (say, 2.0 bln plus shares -
we may see more than that on INTC's woes).  Personally, I might be
willing to overlook a MACD confirmation if there is otherwise
clear evidence of a market bottom.  How low can it go?  It flirted
today with 772 (below the 775-780 support level) and should open
below that figure tomorrow.  The next levels of support are at 760
and 752. . .740 if that doesn't hold.  Resistance?  You probably
won't need to refer to that tomorrow.  Prices listed tonight will
be meaningless tomorrow, so be sure to check them before trading.

BUY CALL OCT-760 OEZ-JL OI=  49 at $34.00 SL=24.00
BUY CALL OCT-770 OEZ-JN OI=  73 at $27.00 SL=19.00
BUY CALL OCT-780 OEZ-JP OI= 997 at $20.25 SL=14.50
BUY CALL NOV-780 OEZ-KP OI=  35 at $29.00 SL=20.00

Bullish Calendar Spread:

This isn't looking like much fun, but what an opportunity we may
get tomorrow to buy a cheap long leg of the spread.  That said,
most of us might be better off sitting out unless we see a deep V-
bottom formation after tomorrow's anticipated opening selloff.
Target shooters may want to forget technical indicators if it fits
the risk profile.  Our suggestion is not to do that, but rather
wait for the technicals on a daily chart to give us the MACD and
Stochastic entry we desire.  Sell the short leg?  Forgeddahboudit.
Tomorrow will give us a grand opportunity to cover a short we
might have already sold though.  Remember to buy cheap (cover your
shorts cheap too) and sell dear.  Chances may be better for an
entry next week.  But for those comfortable with risk, tomorrow
might give you your opportunity too.  Support is at 760, 752 and
740.  We'd rather play it safe.  Again confirm new prices tomorrow
after the open.

BUY  CALL MAR-780 OEZ-JL OI=   1 at $56.50

SELL CALL OCT-780 OEZ-JP OI= 997 at $19.50, ND = 37.00
SELL CALL OCT-800 OEX-JT OI=3523 at $ 9.50, ND = 47.00
Bullish Put Credit Spread:

Average Daily Volume = 1266


Index       Last     Mon    Tue     Wed    Thu    Week
Dow     10765.52 -118.48 -19.23 -101.37  77.60 -161.48
Nasdaq   3828.87 -108.71 139.12   31.80 -68.57   -6.36
$OEX      780.39  -10.84   8.84   -5.22  -2.16   -9.38
$SPX     1449.05  -21.30  15.39   -8.56  -2.29  -16.76
$RUT      514.35  -14.20   6.63   -1.88  -7.08  -16.53
$TRAN    2587.45  -51.30 -14.55  -14.16  -4.00  -84.01
$VIX       23.56    1.08  -0.90    0.66   0.79    1.63


CFLO      135.00   -2.13   7.63    4.13   3.00   12.63  Upside
IDTI       98.56    5.25   7.06   -0.06  -4.69    7.56  Split???
PEB       113.56   -3.28   3.53    1.88   4.94    7.06  Bio Bull
ITWO      178.50   -2.75  12.81    3.63  -7.38    6.31  Trending up
QCOM       71.94    3.56   7.69   -2.47  -3.09    5.69  Entry point
AGIL       79.50    2.00   1.75    2.06  -1.56    4.25  Holding up
SEBL      102.75    1.75   0.13   -0.88   2.75    3.75  Volatile
CAH        91.56    1.34   2.97    0.19  -0.94    3.56  52-wk high
PALM       53.19    1.00  -0.31    3.69  -1.31    3.06  EPS on 9/25
YHOO      108.13   -0.81   3.00    1.63  -1.56    2.25  Bounce?
AFL        61.25   -0.69   0.13    0.88   0.06    0.38  Steady
CHKP      151.06   -1.00   6.00    4.00  -9.19   -0.19  Ascending
CORR       59.94   -2.06   1.81    0.50  -0.75   -0.50  Biding time
ABGX       78.25   -2.56   2.06    3.81  -4.69   -1.38  Dropped
CDWC       79.00   -4.69   0.44    0.13  -0.38   -4.50  Pullback
NT         61.00   -4.19   3.25   -2.50  -7.00  -10.44  Dropped


PCS        29.13   -2.06  -2.56   -7.56  -4.13  -16.31  WHOA!!!
AFCI       38.69   -1.06   2.34   -1.16  -6.50   -6.38  New
DITC       41.25   -1.88   1.81   -1.06  -3.38   -4.50  New
DIGL       69.00   -4.53   2.47    0.25  -2.06   -3.88  Range bound
EPNY       81.19    2.00  -3.75   -2.88   1.81   -2.81  Independent
LVLT       71.75   -4.69   4.13   -2.38   0.13   -2.81  Sick
UK         36.38   -0.03  -0.56    0.06   0.31   -0.22  Stable
PWAV       37.38    2.63   2.38   -2.44  -2.25    0.31  Rollover
MMM        86.44   -1.94   0.69   -2.13   4.69    1.31  Dropped
CMTN       46.75   -2.13   3.81    1.44   0.63    3.75  Bounced
SCMR      113.38   -4.88   5.94   -1.06   7.88    7.88  Rebound?

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.


NT $61.13 -7.00 (-10.44) It appears that resistance at the 5- and
10-dma (now converged near $68.50) was too much for Nortel to
handle.  Yesterday, upon touching the 10-dma in the early
morning, the stock sold off to close down $3 or 4.23% on 124% of
ADV.  This put NT below its 100-dma (now just below $69).  Today
NT gapped lower at the open and spent most of the day drifting
down until the end of day brought in the sellers on high volume.
Closing down 10.77% on 174% of ADV, this put the stock below its
200-dma at $62.05.  With volume to the downside still strong and
violations of major support levels suggesting more downside
ahead, we are closing this play.

ABGX $78.25 -4.69 (-1.38) The Biotech index pulled back Wednesday
morning, as the Nasdaq slipped, so of course ABGX had to follow.
It touched down to a low of $74.63 bouncing around in negative
territory for the majority of the morning, however, when the big
bad Nasdaq reversed course mid-morning, ABGX did not disappoint us.
It popped into positive territory and stayed there into the close,
finishing at $83 up $3.88 for the day on lighter than average
volume. This close left us comfortably up the 5-dma and 10-dma
($80.70 and $76.60).  Mild profit-taking dropped ABGX to a
morning low Thursday, of $79.94 below its 5-dma of $80.70.  As
we neared the end of trading Thursday a few sellers popped up and
pushed ABGX down to a closing price of $78.25, the lows for the
day.  Volume was average at 609K.  ABGX can't seem to muster any
traction and the Biotech sector continues to show weakness,
therefore, it feels like it is time to move on to greener


MMM $86.44 +4.69 (+1.31) Well now, there's a surprise.  MMM came
out this morning announcing that they are on track to meet
growth estimates for the remainder of the year.  Not only that,
but the company's CEO says that strong growth in Asia is
expected to overcome the effects of the weak euro.  After giving
us a very nice ride from the mid-90s, MMM seemed to find a solid
bottom near $81 over the past couple days providing a nice
profit for those that have been playing.  With the positive news
today, the sentiment seems to have shifted, and it looks like
MMM is unlikely to test its recent lows again in the near
future.  Any open positions should have been stopped out on
this morning's sharp rise, and rather than wait for another
entry, we'll happily take our profits and move on to the next

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The Option Investor Newsletter                 Thursday 09-21-2000
Copyright 2000, All rights reserved.                        2 of 2
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IDTI $98.56 -4.69 (+7.56) IDTI has spent the last two days
consolidating its recent gains, which has provide profitable
entry and exit points.  IDTI retested its breakout point at the
$95 level yesterday, which could remain a possible entry level.
However, the Intel warning is sure to shake things up in the
Semi sector, so we'll want to proceed with caution tomorrow.
Aggressive traders might look to enter new positions if IDTI pops
back above $100.  Additionally, an extended pullback to IDTI's
10-dma now at the $95 level might also provide a profitable new
entry into the play.  A conservative entry might be found if the
$SOX strengthens and IDTI rallies back above the $102 level.  And
finally, the risk averse traders might consider buying into
strength and look for entry if IDTI moves past its 52-week high at
$104.  IDTI's shareholder meeting will begin tomorrow at 9:00 a.m.
PDT; we'll be listening for a split announcement.

ITWO $178.50 -7.38 (+6.31) Yesterday, ITWO announced it had
acquired an equity interest in the privately held Primavera
Systems, a provider of project management software.  The news
gave ITWO a nice pop yesterday morning, which also generated a
quite of bit of volatility.  ITWO bolted above $185 early in the
day, retested support at $175, then finished back above the $185
level.  ITWO again retested support at the $175 level during
today's trading as the NASDAQ wavered.  The Intel profit warning
is sure to sway our ITWO play tomorrow morning, so we'll want to
use caution in initiating new positions.  If the NASDAQ gaps down
tomorrow morning, watch for ITWO to stabilize near its support
at $170.  If the buyers jump in early tomorrow, look for an entry
if ITWO bounds from support near $170 or higher around the $175
level.  The more conservative traders might wait for ITWO to form
a solid up-trend, supported by healthy buying volume, before
entering the play.  Near-term resistance levels are located near
$178 and $180.  Conservative traders might consider target
shooting for entry points if ITWO climbs past either of the
aforementioned levels.

QCOM $71.94 -3.09 (+5.69) Entry point, entry point!  Recall this
stock recently broke from a three-month long base near the $60
level early last week.  By Tuesday, QCOM challenged $80!  At the
moment however, QCOM is lingering at a newfound support level
while the techs take a breather amid earnings worries.
Certainly this re-emerging Tech favorite has "profit potential"
written all over it, but be careful of taking entries below the
100-dma line ($70.36).  The more conservative might even want to
hang back until QCOM resurfaces above the $77 mark and rallies
through its near-term high at $78.75.  If you're portfolio can
handle the risk, you might buy into strength as QCOM rebounds
off the current level.  Earnings for Qualcomm aren't expected
until late next month.  This is strictly a recovery play.

CAH $91.56 -0.94 (+3.56) Seven must be this one's lucky number!
For the last seven consecutive sessions, CAH has stepped into
new territory.  The latest 52-week record is at today's peak of
$93!  The dynamism driving the share price originally stemmed
from a succession of bullish comments and upgrades last week.
Now, it appears that pure momentum is carrying CAH to new
heights.  Volume levels reaching 1.5 times the ADV have ushered
in the advances.  Therefore, pay heed to high-volume moves over
the immediate resistance at $92 to signal another breakout.
Keep stops tight for protection; especially if you're taking
positions on the climb.  At these price levels, and considering
the unprecedented advances, expect some profit taking.  On a
pullback, look for $90 at the 5-dma line to hold as near-term
support.  Be wary of a slide back to the 10-dma line however,
which is now higher at $87.55 and just above the former
resistance at $84-85.  CAH may not be able to recover quickly
enough from this deep of a cut.

CDWC $79.00 -0.38 (-4.50) The consolidation following the
powerful run-up continues this week, but not without a spike to
$82.94 during amateur hour this morning!  Currently, the $77
level firmed as a strong bottom.  This pullback effectively
offers more aggressive traders entries into this momentum play.
Above, shorter-term support is developing at $79 and $80, which
is in the vicinity of the 5 & 10 DMAs, respectively.  Taking
positions off this level on a strong bounce coupled with
intraday volume at 50 K, or better, is less risky.  But as
everyone knows, there are never any guarantees!  Expect some
resistance at $83 and $84 before CDWC challenges $86.13, the
latest 52-week record.  Look for CDWC's momentum to recapture
its intensity accompanying a NASDAQ rally.

AGIL $79.50 -1.56 (+4.25) Wednesday was another good day for AGIL
in a string of many over the past week.  The stock started the
day up and continued higher until encountering resistance at the
$83-84 area.  From there, AGIL eased back to close up $2.06 or
2.61% on almost 3 time the ADV.  Today, AGIL attempted to head
higher but resistance at $83 held strong.  Along with a weak
NASDAQ, AGIL closed down 1.93% with volume coming in slightly
higher than yesterday.  The stock has maintained a steep up-trend
which started last Wednesday when it bounced strongly above its
200-dma (now at $66.13).  A continuation of the current up-trend
would see any bounces off the 5-dma (now at $78.46) as an
aggressive entry point.  Support is strong at $75, which is also
its 10-dma. Breaking above $83 would be the target for
conservative traders.  It should be noted that while volume has
been strong lately, it has been tapering off.  Make sure a move
up is backed by strong volume when entering.

CFLO $135.00 +3.00 (+12.63) On Sunday, we mentioned that CFLO's
trading channel allowed the possibility for great upside
potential if the market cooperated.  For now, it appears that the
stock is fulfilling that potential, with or without help from the
rest of the market.  Yesterday, CFLO gained $4.13 or 3.23% on 140%
of ADV.  Today, on a weak day for most Tech stocks, CFLO added
nicely to its gains.  Encountering resistance at $145, profit
takers stepped in but the stock still managed to close up $3,
with volume clocking in at twice the ADV.  Volume to the upside
has been accelerating all week long, which is a good sign.
Bounces off the 5- and 10-dma (at $127.83 and $120.70) continue
to offer aggressive entry points but confirm with volume before
entering.  Resistance overhead can be found at $140 and $145.  In
the news, the company announced today that HydraWEB Technologies
has joined CFLO's Adaptive Content Exchange initiative.

PEB $113.56 +4.94 (+7.06) Select Biotechs have continued to
surge higher this week, and PEB is one of the chosen few.  While
the broader tech sector has struggled to decide which way it
wants to move, Biotechs like PEB, which are involved in the hot
new Proteomics research, have continued to move up.  Perhaps
helping the move in PEB over the past 2 days was Tuesday's
announcement that Oxford Glycosciences will become an early
access customer for PEB's next generation MALDI TOF/TOF mass
spectrometer.  This system is intended to enable higher
throughput with enhanced informational content for researchers
pursuing a better understanding of proteins and their role in
the onset and treatment of disease  After Monday's weakness,
where PEB dropped back to confirm support at $103, the chart
has shown nothing but green.  Today's nearly $5 gain propelled
the stock through the $111 resistance level, and overhead
resistance is thinning out now, with the next obstacles located
at $117 and then $120.  The only concern we have right now is
the volume picture.  Even though the price is moving sharply
higher, volume today still was only two-thirds of the ADV, and
if PEB is going to continue its run, it will need the support
of stronger volume.  The 5-dma (currently $107.75) is continuing
to support the price rise, with further support coming from the
10-dma (currently $103.63), just above the $103 historical
support level.  Consider a pullback to support to be an
attractive entry point, as long as it doesn't come on strong
volume.  As long as support holds on the pullback, look to
initiate new positions on a volume-backed bounce from support.

PALM $53.19 -1.31 (+3.06) Enthusiasm for the new Handspring
products gave PALM a shot in the arm yesterday, and even in a
weak Tech sector today, PALM managed to hang onto much of its
gains.  From Tuesday's writeup, "HandSpring announced they
would be producing two new PDAs, one color, and one with a
cellular phone module.  Production for these little gadgets is
barely keeping up with the strong demand, as more and more
consumers find they can't live without them."  Mild profit
taking today dropped the price down to confirm the $52 support
level before the stock recovered into the close.  With earnings
rapidly approaching (scheduled for September 25th, after the
close), we are running out of time on our play.  In order to
provide time to exit the play ahead of the quarterly results,
we will be dropping PALM this weekend, but that doesn't mean
that you gunslingers can't trade it just a little longer.
Consider a renewed bounce from the $52 level as an attractive
entry point, but only if it is accompanied by strong buying
volume.  A better approach might be to wait for the bulls to
push the price through $55 resistance before initiating new

CORR $59.94 -0.75 (-0.50) While it has been nice to see CORR
holding its recent gains, we need to see the price go up for
our calls to appreciate.  Select Biotechs have performed nicely
in the face of the NASDAQ weakness, and CORR may just be
gathering its strength for the next leg up the chart.
Yesterday's volume was downright anemic at only 370K shares,
but today saw well over double the average number of shares
trading hands.  The daily Stochastics and MACD are still
showing CORR in ascent mode, but that doesn't mean we won't
see any near-term weakness.  Support has been building near
$58, just above the rising 10-dma ($58.19), followed by stronger
support near $55.  While these support levels could provide a
good point to enter new positions before the next run, we don't
want to jump the gun and get caught in a selloff.  If you want
to buy the dip, make sure you wait for strong buying volume to
confirm the bounce first.  A more conservative approach will be
to wait for CORR to jump through the $62 resistance level before
putting your money at risk.

CHKP $151.00 -9.25 (-0.19) The ascent continued Wednesday morning.
Out of the chute, CHKP shot to a new high of $163.38 within the
first 45 minutes of trading, however, the Nasdaq slipped into
negative territory later in the morning and CHKP followed, hitting
an intraday low of $152.25.  All's well that ends well, and the
market did end well.  The Nasdaq reversed course, ending up for
the day and Check Point stabilized into the close to finish up
$4 on the day at $160.25, a new closing high.  Volume was a very
robust 2.58 mln shares (1.63 times ADV).  Of note Wednesday,
Activis, a global provider of managed security services agreed
to integrate Check Point's Provider-1(TM) into its extensive
managed Internet security offering.  Thursday, Enstar announced
that they would be integrating CHKP's FireWall-1 software into
their new eSM service.  Mild profit taking was the theme in
early trading for CHKP, pulling back to just above its 5-dma at
$154.40.  The 5-dma could not hold CHKP so it went down to test
the 10-dma (at $150.20) late in the afternoon.  It did not get
much of a bounce from that support level, as it closed at $151
down $9.25 for the day on volume of 2.25 mln shares (1.4 times
ADV)  Traders could enter a trade on a strong volume supported
move up, from here, off the 10-dma.  Watch for further
profit-taking and pay attention to market sentiment before
jumping into any new trades.

AFL $61.38 +0.19 (+0.38) Aye! Aye! Captain. Steady as she goes!
This stock was rock solid Wednesday even as the indexes were
getting pummeled around it.  The pullback it did have today was
to a low of $59.75, just below its 5-dma and 10-dma.  But, AFL
headed higher into the closing bell settling at $61.19 the high
for the day.  Volume was average and the closing price was above
the converged 5-dma and 10-dma (currently $60.50).  Anemic is the
first word that comes to mind for the volume and price action for
AFL Thursday morning.  Banc of America Securities analysts stated
today that stocks of insurance companies have turned around.  The
steadiness continued, as Aflac finished the day at $61.38 up
$0.19 on volume of 517K.  The converged 5-dma and 10-dma at $60.50
acted as support for the issue today.  Watch for a move up from
this level coupled with strong volume as a nice way to gain entry
to this trade.

YHOO $108.13 -1.56 (+2.25) Given the shocking warning from INTC
that hit after the bell, NASDAQ stocks are going to gap down at
the open tomorrow.  It will take some time for the stocks to
settle down.  Today, YHOO traded up into overhead resistance at
$112 and then declined with the NASDAQ, finding support at $108.
But, with this news coming to light about INTC, YHOO will open
lower tomorrow, and at some point will offer an entry.  It is
going to be extremely important to watch for sentiment on the
Street tomorrow.  YHOO traded down to $103.50 in after-hours so
we will be looking for buyers to step in.  Look to $102.50 and
$100 for support.  A high volume bounce could offer entry along
with a broad market recovery.  Tomorrow will certainly be a test
on the NASDAQ as to whether investors go bargain hunting.  If
buying interest doesn't materialize, or YHOO breaks $100, stay
out until the dust clears and the markets can be discerned.
There is still limited risk if $100 holds, and good upside for
an earnings run, due to report on October 10th, confirmed.

SEBL $102.75 +2.75 (+3.75) If you didn't see the price action on
Wednesday you might think, all right...pretty calm day, however,
SEBL traded as low as $95.75 and as high as $102.75 showing us
its ability to be just as volatile as the general market.  As we
finished up the day, Siebel ended down $0.88 for the day at $100,
just above its 5-dma and 10-dma ($99.10 and $95.10).  Wednesday,
it was announced that Berkeley Enterprise would join the Siebel
Alliance Program as a Premier Partner and Interactive
Intelligence will be joining Siebel Alliance Program as a Siebel
Software Partner.  Joint research was just completed by Int'l
Data Corp. and the Cap Gemini consulting group in reference to
the enterprise relationship management business.  They stated that
Siebel Systems is the market leader in this area with an 18%
market share in 1999 (three times the share of its closest rival).
We pierced through the 5-dma of $99.10 during early trading
Thursday, but as we approached mid-day buyers had regained their
interest in SEBL, pushing it into positive territory at $101.
The buyers decided from here it was time to buck the negative
market trend.  They pushed SEBL higher all day, albeit on light
volume of 4.9 mln shares (60% of ADV), to close up $2.75 at
$102.75, near the yearly high of $103.  Traders could use a
strong push through $103, the last bit of overhead resistance,
as a good entry spot.  It is possible we could see a pullback
to the 5-dma or 10-dma (currently $99.10 and $95.10), from
which you could enter a new trade as long as volume is there to
support the move.


CMTN $46.75 +0.63 (+3.75) Near the close of trading today, it
appeared that the downward slide of the Telecom Equipment sector
had come to an end.  At least that's what Wall Street thought.
Salomon Smith Barney issued a research report, highlighting
several network equipment suppliers.  While SSB didn't
specifically mention CMTN in its report, the analyst comments
were enough to lift the entire sector.  The buyers stepped up
in a big way today as nearly 2.5 times the ADV traded.  While
it appeared the bulls had regained control of CMTN today, the
Intel warning after the bell could change everything tomorrow.
If the bears do come back into the Telecom Equipment sector
early tomorrow, aggressive traders might look to enter new
CMTN short positions if the stock falls just below current
levels past the $46.50 support level.  If the stock gaps down,
aggressive traders might look to enter the play if CMTN falls
past $45.  The more conservative might wait for the selling to
pick up and considering entering the play if CMTN falls below
$42 on heavy volume.

UK $36.38 +0.31 (-0.22) After slipping down to a new yearly
low earlier this week, UK bounced of its low at $36 and has
stabilized near the $36.50 level.  The stabilizing price
action in the euro, and the re-encouraging words from MMM this
morning helped to boost UK.  What's more, the retreat in oil
prices also alleviated selling pressure from UK.  Going
forward, the direction of both the euro and oil prices might
continue to provide profits in our UK put play.  Aggressive
traders might look to enter new positions if UK rallies up
to resistance near the $37 level, then turns lower.  But,
before entering on a rally, confirm higher oil prices with
possibly a lower euro.  The more conservative traders might
wait for the big institutional sellers to return to UK and
look to enter the play if the stock falls below the $36

DIGL $69.00 -2.06 (-3.88) Trading behavior in the last two
sessions demonstrated that DIGL may be range bound.  The upper
resistance at the 10-dma ($72.44) is no doubt keeping a tight
lid on the share price.  This aspect was clearly evident at
yesterday's close and during amateur hour this morning.  DIGL
just couldn't get over the top.  Furthermore, the 5-dma line
($70.42) started to put the pressure on DIGL as today's session
progressed.  So, while the ceiling is being lowered, there's the
hazard of a narrowing trading channel because DIGL hasn't
tested the waters below Monday's intraday low of $66.50.
Today's bearish close on the underside of $70 is promising.
But let's err on the side of caution and keep this one a tight
leash until we see more conclusive evidence.

SCMR $113.38 +7.88 (+7.88) Today's huge spike was the direct
result of Salomon Smith Barney's bullish comments.  The firm
tagged SCMR a Buy and issued a $165 price target.  B. Alex
Henderson cited the recent decline as "unjustified" and believes
the company is a strong player among the optical networks.  To
say the least, these words wrecked havoc on our play.  The share
price rocketed through the converged 10 and 200 DMAs right from
the opening bell - a "Thank Goodness" for stop losses moment!
Today's 11.6% peak advance is certainly not bearish behavior,
however we're keeping SCMR on our put list tonight.  Intel's
(INTC) warning could have quite the negative impact on the
Networking sector tomorrow.  So let's not shut the door on this
put play just yet.  We're looking for another dramatic decline
to the underside of the century mark.

EPNY $81.19 +1.81 (-2.81) The past couple of days have seen EPNY
buck market trend and move in a direction of its own.  Yesterday,
on an up day for the NASDAQ, the stock headed lower until the mid
day.  Finding support above $75, EPNY bounced but closed down
$2.88 or 3.50% on 134% of ADV.  Today on a down day for the
NASDAQ, EPNY made an attempt to rally above its 5-dma (now at
$82.61).  Unable to do so, the stock still managed to gain 2.28%
on 159% of ADV.  The 5-dma continues to act as formidable
resistance, making for an aggressive entry point.  There is also
strong resistance at $85.  Having breached the $80 support level
already, another below above that level could signal further
downside ahead.  Yesterday, the company announced an alliance with
marketing company Martiz Inc. in which Martiz will integrate
EPNY's E.5 system into their VAULT system.  Today, EPNY gained a
new customer in Daimler Chrysler, who will use their software for
data gathering, analysis and management.

PWAV $37.38 -2.25 (+0.31) Unable to rally above its 200-dma
(currently at $42.77), PWAV spent Wednesday selling off to close
down $2.44 or 5.79%.  While volume came in at only half of ADV,
the close below support at $40 proved to be a sign of things to
come.  Today saw PWAV sell down right at the open.  Stabilizing
by mid-day, the stock traded sideways until the end of the day
when the sellers came in to close PWAV down 5.68%.  Once again,
volume was light, coming in a less than half of ADV.  Despite the
lack of conviction in selling, PWAV continues to break through
support levels.  Light support at $38 was broken today and a
break below $36.75 could signal more downside ahead.  Failures to
rally above the 5- and 10-dma (at $39.14 and $42.18 continue to
be great entry points but confirm the rollover before making a

LVLT $71.75 +0.13 (-2.81) The sickness that has infected the
Telecom sector took a turn for the worse yesterday, with Sprint
(FON) confessing that they would fail to meet their earnings
estimates for the current quarter.  This news hit many Telecom
equipment suppliers with big names like NT and CSCO heading
further south.  The selling continued today, but LVLT is
refusing to head lower, holding above the $68 support level.
This could be indicating that the downside pressure is
diminishing.  On the other side of the coin, we have a
powerful convergence of the 5-dma, 10-dma, 30-dma and 50-dma,
all clustered between $72.31 and $74.88.  This will be a tough
obstacle to climb through, especially when you consider the
chart resistance that has built up near $74.  The INTC
earnings confession this afternoon is likely to add downside
pressure to anything technology related, so an entry point could
show up as early as tomorrow morning.  Conservative players will
want to wait for selling pressure to violate the $68 level
before opening new positions, while more aggressive traders can
grab the better entry points as LVLT fails to penetrate the
$72-74 resistance zone.

PCS $29.88 -4.13 (-16.31) Who pulled the fire alarm?!  Remember in
grade school, you were sitting in class just after recess and the
fire alarm would go off and the race was on between you and your
buddies to get back to the playground first, so you could squeeze
in another game of tag.  Well, today it felt like that fire alarm
was pulled and the kids were sprinting for the playground.  We
were down over $3 in the first 45 minutes of trading, but it
seemed calm.  Then the bombshell hit!  Sprint pre-announced a bad
upcoming quarter, coupled with the fact that PCS would not meet
its targets for expanding its customer base.  In fact, PCS is now
slated to add a net of 800,000 new subscribers in the quarter,
below earlier expectations of 900,000 net new subscribers.  The
sellers began hammering PCS to an intraday low of $32.44 and it
managed to close the day just barely above that level at $33.50,
down $7.31.  Here's the biggy though, volume was an astounding
33.6 mln shares on Wednesday (9.2 times ADV) Ouch!  The sellers
continued to slaughter PCS from the get-go Thursday, dropping it
to $30.38 by mid-morning on volume of over 12 mln shares.  Not
much new as we closed out Thursdays trading except we fell further
off the cliff.  PCS closed at $29.88 down $3.13 on huge volume of
26.7 mln shares (7.3 times ADV).  Again, this could continue to
slide from here, but, it may be prudent to use a short covering
rally as a way to gain entry into this play.

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No new calls today


AFCI - Advanced Fibre Comm. Inc. $38.69 -6.50 (-6.38 this week)

Advanced Fibre takes care of what’s known as the "local loop."
That means they design and manufacture end-to-end distributed
multi-service access solutions for the portion of the telecomm
network between the carrier's central office and you at home.
They also design and manufacture environmentally hardened
outside plant cabinets and technology and indoor cabinets.  They
compete with the likes of ADC Telecom, Cisco, Lucent and Northern

Recent developments for AFCI this summer include a new 3 year
$105 mln contract with ALLTEL and an agreement with Tellabs to
continue supplying components.  Furthermore, Frost Securities
reiterated coverage on AFCI with a Strong Buy and a target of
$103 in August.  None of this has had much of a positive effect
on their stock price.  The continuing concern in the marketplace
that capital expenditures in the Telecomm sector are slowing, is
weighing heavily on AFCI and other stocks in the sector.
The overall chart for Advanced Fibre does not look healthy, as a
series of lower highs have formed beginning with the high set back
in the March-April timeframe.  Of late, AFCI pierced its 200-dma
(currently $49.10) on September 13th and from there, it has been
downhill.  This week has been kind of tough for AFCI, possibly in
sympathy with Sprint's recent pre-announcement of a bad quarter
and general Nasdaq deterioration.  AFCI has been trying to hold
onto support at the 5-dma (currently $45.40) for the last few
days, but, today the sellers came out in force and drove it down
by $6.50 to finish the day at $38.69.  There was strong
support at the $43 level which was also pierced today as
volume picked up to 5.79 mln shares (2.48 times ADV).  There is
some support down at the $35-$37 level, but, the tech sector
should be rough tomorrow as Intel' pre-announcement rocked Wall
Street after the bell.  That being said, aggressive traders may
have to catch this one as it continues to fall.  The more
conservative approach would be to watch for a failed rally up to
the intraday support levels at $40 or to the stronger support
level at $43 as a way to gain entry.  Continue to monitor the
sentiment in this sector, as it has been very negative of late.
We don't think profit taking will be a factor in this trade, but,
watch for short covering as this play develops.

BUY PUT OCT-40*AQF-VH OI= 175 at $4.88 SL=3.00
BUY PUT OCT-35 AQF-VG OI=  63 at $2.69 SL=1.25

Average Daily Volume = 2.33 mln

DITC - Ditech Communications $41.25 -3.38 (-4.50 this week)

Making it easier to be heard, DITC's echo-cancellation products
eliminate the problem of echo in emerging and existing voice
networks.  With six standalone products in this arena, the
company provides solutions ranging from the third generation
18T1 and 18E1, all the way up to the system level Broadband
Echo Cancellation System, which employs the company's fourth
generation Quad T1 echo cancellation product.  The company's
optical communications networking products enable telephone
companies to expand network capacity quickly, and in a
cost-effective manner.  Included in the company's optical
offerings are optical amplifiers, wavelength division
multiplexers and demultiplexers, and a dense wavelength
division multiplexing monitor.

In the currently unsettled markets, good news seems to be
ignored, as evidenced by investors' response to DITC's
latest product release.  Yesterday, the company announced a
new 10 gigabit per second (OC-192) optical amplifier.  This
product will enable service providers to significantly
increase the distance between optical-to-electrical signal
regeneration points (up to 300 miles).  In addition, these
new amplifiers allow service providers to replace intermediate
electrical regenerators that are priced in excess of $200,000
with DITC amplifiers at one-tenth the price.  The Optical
sector seems to still be an analyst favorite, underscored by
Salomon Smith Barney's upgrade to a handful of Optical stocks
this morning.  Even while the sector has been moving strongly
of late, DITC hasn't been able to break out of the consistent
downtrend, which has been in place since the highs posted in
early March.  After rolling over at the $60 level in early
September, the stock has continued to head south, pressured
by the 10-dma (currently $46.38).  Support had been holding
near $45, but the consistent selling pressure this week has
now dragged DITC down near $41.  Showing weakness in a strong
sector is not a good sign, and it is likely that the fallout
from INTC's earnings warning tonight will create even more
downside pressure tomorrow.  Use any failed rally as an
opportunity to enter the play at a better price, but wait for
the failure before playing.  Conservative players will want to
wait for selling to penetrate the $41 level on strong volume
before jumping into the play.

BUY PUT OCT-45*DUI-VI OI=120 at $7.50 SL=5.25
BUY PUT OCT-40 DUI-VH OI= 73 at $4.50 SL=2.75

Average Daily Volume = 832 K


CFLO - CacheFlow Inc. $135.00 +3.00 (+12.63 this week)

CacheFlow Inc. designs, manufactures, and markets Internet
caching appliances.  These easy-to-use appliances speed Web page
response times, while saving network bandwidth.  Because of these
key benefits, caching appliances are becoming an integral
component of the network infrastructure - much like routers and
switches.  Explosive growth is forecasted for the caching
appliance market, with revenues projected to exceed $3 billion by
2003.  Company partners include Akamai, Alcatel, CSC, EDS,
Hewlett-Packard, Lucent, Real Networks, Secure Computing Websense
and Westcon.  CacheFlow is a global organization with offices
throughout Asia, Europe, and North America.

Most Recent Write-Up

On Sunday, we mentioned that CFLO's trading channel allowed the
possibility for great upside potential if the market cooperated.
For now, it appears that the stock is fulfilling that potential,
with or without help from the rest of the market.  Yesterday,
CFLO gained $4.13 or 3.23% on 140% of ADV.  Today, on a weak day
for most Tech stocks, CFLO added nicely to its gains.
Encountering resistance at $145, profit takers stepped in but the
stock still managed to close up $3, with volume clocking in at
twice the ADV.  Volume to the upside has been accelerating all
week long, which is a good sign.  Bounces off the 5- and 10-dma
(at $127.83 and $120.70) continue to offer aggressive entry points
but confirm with volume before entering.  Resistance overhead can
be found at $140 and $145.  In the news, the company announced
today that HydraWEB Technologies has joined CFLO's Adaptive
Content Exchange initiative.


In the wake of INTC's warning, NASDAQ stocks are going to gap down
tomorrow.  The last trade in after hours was at $134, only a dollar
off of its NY close.  CFLO has remained incredibly resilient in the
face of NASDAQ weakness.  Look for CFLO to find a bounce at $130 or
$127 for an entry.  Watch the NASDAQ to see if buyers step in to
bargain hunt.  A recovering NASDAQ will only help CFLO continue its

BUY CALL OCT-125 FUJ-JE OI= 12 at $16.38 SL=12.75
BUY CALL OCT-130*FUJ-JF OI=313 at $13.75 SL=11.00
BUY CALL OCT-135 FUJ-JD OI= 20 at $11.00 SL= 8.75
BUY CALL JAN-140 FUJ-AV OI=  2 at $22.25 SL=17.25

SELL PUT OCT-115 FUJ-VC OI= 61 at $ 3.25 SL= 4.50
(See risks of selling puts in play legend)

Picked on Sep 7th at    $113.00     P/E = N/A
Change since picked      +22.00     52-week high=$182.19
Analysts Ratings      4-3-0-0-0     52-week low =$ 27.00
Last earnings 08/16  est= -0.17     actual= -0.14
Next earnings 11-15  est= -0.11     versus= -0.22
Average Daily Volume  =   617 K

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Market ends mixed as industrial stocks recover...

The Dow ended a major losing streak today as bargain hunters
flocked to drug and retail issues.

Wednesday, September 20, 2000

Technology issues recovered from early selling pressure to finish
positive amid strength in biotechnology and Internet stocks.  The
the Nasdaq rose 31 points to close at 3,897.  Industrial issues
were unable to overcome negative sentiment from rising oil prices
and earnings warnings.  The Dow closed down 101 points at 10,687.
The S&P 500 index ended down 8 points at 1,451.  Trading volume
on the NYSE reached 1.1 billion shares, with declines outpacing
advances 1,658 to 1,147.  Activity on the Nasdaq was moderate at
1.79 billion shares traded, with declines beating advances 2,362
to 1,663.  In the bond market, the 30-year Treasury fell 21/32,
pushing its yield up to 5.95%.

Tuesday’s new plays (positions/opening prices/strategy):

Finova Group    FNV    JAN10C/OCT10C   $0.62   debit   calendar
Agile Software  AGIL   OCT55P/OCT60P   $0.56   credit  bull-put
Halliburton     HAL    OCT60C/OCT55C   $0.88   credit  bear-call

All of our new positions offered favorable entry points during
the session.  Finova traded sideways for a few minutes near the
open, allowing a brief period to enter the calendar spread.  The
Halliburton position offered a great entry opportunity as the
stock price spiked in early trading.  A 50-contract transaction
was observed in the Agile spread near 9:50 A.M.

Portfolio Plays:

Industrial stocks slumped again today as worries over the price
of oil and the weakening Euro weighed heavily on investors.
Concerns over negative pre-announcements also plagued the market
and the Street's mood was soured by a report that the U.S. trade
deficit widened to a record $31 billion in July.  Old economy
stocks took the news hard and on the blue-chip average, Hewlett
Packard (HWP), Coca-Cola (KO), and 3M (MMM) were the biggest
losers.  Only five Dow components ended in positive territory.
At the same time, technology stocks rose for a second day in a
row as investors scooped up some of the group’s choice issues.
The Nasdaq trimmed an earlier 70-point loss on strength in chip
and Internet Issues.  The biotech sector was also a net gainer,
and shares of bellwether computer companies contributed to the
positive finish.  In the broader market, oil service issues moved
higher after the news of declining reserves, but utility shares
continued to slump.

Our portfolio enjoyed a few positive moves and some of the new
positions have reached profitability.  On the Nasdaq, fuel cell
stocks were strong with Ballard Power (BLDP) up $5 to $111 and
Plug Power (PLUG) closing $2 higher at $47.  Internet stocks were
also strong and Commerce One (CMRC) led that group, breaking the
$70 mark as investors flocked to the sector.  In the small-cap
group, Steven Madden (SHOO) continued to rebound from a recent
slump, ending $0.75 higher at $12.  Netspeak (NSPK) also edged up
to the $12 range and the issue may yet surprise us with a future
rally.  One of our new positions, St. Jude (STJ) rose for a 10th
consecutive day and our recent calendar spread position offered
a favorable, early-exit profit.  The issue closed at $49 and the
credit for the (JAN50C/OCT50C) position ended at $2.69.  That’s
a $0.75 profit on $1.93 invested for just three days.  Traders
should consider the early exit because the overall spread credit
will shrink initially, as the implied volatility between the near
term and long term options equalizes.  Toronto Dominion (TD), a
recent debit strangle, also made the exit list, closing at $2.43
credit overall for the JAN30C/JAN25P position.  The cost basis
for the play was near $1.69, thus offering a 25% return for less
than a month in the position.  We will take the easy money and
continue to monitor the position for the benefit of the readers.

Covad Communications (COVD) has endured heavy selling pressure
over the past few sessions and the decision to close the long
position in our bullish debit spread may yet pay dividends.  The
issue fell another $0.50 to $14.31 in today’s session and there
was little news to explain the drop.  Some traders suggested the
sale of $500 million of five-year convertible senior notes was
the culprit.  The notes, which were priced at 100 and include a
$75 million over-allotment option, carry a coupon of 6%, above
the 5% to 5.5% range expected.  They are convertible into Covad
common stock at $17.77 a share, a 20% premium over the stock's
current price.  Regardless of the reason, it’s doubtful the issue
will return to the $17 range (and our sold strike) anytime soon.
However, monitor the technical character of the stock for future
reversals and be prepared to cover the short option if the issue
crosses $17.50 in the next month.  Loral Space (LOR) and Lucent
(LU) have also performed poorly in the past few weeks and both
issues confirmed their respective downtrends, closing at recent
lows in today’s session.  Traders with bullish spreads in these
issues should be closing, adjusting or offsetting the positions
to limit further losses.  The Maytag (MYG) play offered a good
example of what can be done with a synthetic position in a stock
that moves out of an established trading range.  In that case, a
combination of offsetting spread positions (sell OTM call - buy
ITM put) was suggested to reduce the potential losses until the
stock recovers.

Thursday, September 21

The Dow ended a major losing streak today as bargain hunters
flocked to drug and retail issues.  The blue-chip average ended
77 points higher at 10,765.  Meanwhile, the Nasdaq declined 77
point to close at 3,828, amid weakness in semiconductor shares.
The S&P 500 index ended relatively unchanged at 1,449.  Trading
volume on the NYSE reached 1.08 billion shares, with declines
beating advances 1,724 to 1,072.  Activity on the Nasdaq was
average at 1.59 billion shares exchanged, with declines beating
advances 2,430 to 1,493.  In the bond market, the U.S. 30-year
Treasury rose 15/32, pushing its yield down to 5.92%.

Portfolio Plays:

Industrial stocks rebounded today amid strength in retail issues
while technology shares slumped on weakness in the chip sector.
A rally in Minnesota Mining and Manufacturing (MMM) led the Dow
higher but continued profit warnings and the recent rise in oil
prices capped the upside activity.  MMM said it expects annual
sales growth of about 11% and per-share earnings growth of 13%
over the next three years, and that boosted the outlook for old
economy issues.  The other blue-chip frontrunners included Home
Depot (HD), Wal-Mart (WMT), Merck (MRK), and Johnson & Johnson
(JNJ).  On the Nasdaq, Internet shares led the group lower in the
wake of EBay's (EBAY) sell-off.  The issue retreated $5 to $71
following Wednesday’s big jump after the announcement of bullish
revenue goals.  In the broader market, oil and oil service shares
slumped after November crude prices dropped below $35.  President
Clinton has been under pressure to release U.S. petroleum reserves
in order to avert a winter fuel-oil crisis and the future cost of
crude may be softening amid the affects of those political demands.
Financial issues slumped after a disappointing earnings report
from Morgan Stanley Dean Witter (MWD) and biotech stocks were also
weak but small gains were seen in the retail and drug sectors.

Most of the positive activity in our portfolio came in mid-cap
issues.  HNC Software (HNCS) was the leader in that category, up
$3 to $68 on continued momentum from the upcoming distribution of
Retek (RETK).  The distribution ratio will be 1.24 shares of Retek
common stock to be paid as a dividend on each share of HNCS common
stock that was outstanding on the September 15, 2000 record date.
Our bullish, put-credit spread at $45 appears to be safe for now.
Abbott Labs (ABT) moved up over $2 on strength in the major drug
group and St. Jude Medical (STJ) continued higher, closing at a
new, all-time high near $50.  Our recent calendar spread offered
a $2.62 closing credit for much of the session and that is a very
favorable, early-exit profit of $0.68 on $1.93 invested, in less
than one week.  Allstate (ALL) rallied $1.38 to close at a recent
high near $33 and our synthetic position is profitable by $0.38.
The one technology standout was Research in Motion (RIMM), which
finished $4 higher at $83 amid renewed momentum in the wireless
personal communication group.  In the credit strangles category,
implied volatility in Cell Pathways’ (CLPA) options has fallen
substantially and the closing debit for our new position is near
$1.06; a $1 profit after just one week in the play.

Questions & comments on spreads/combos to Contact Support
                         - NEW PLAYS -
NITE - Knight Trading Group  $38.75  *** Cheap Speculation! ***

Knight Trading Group is one of the leading market maker in Nasdaq
securities and in the Third Market, which is the over-the-counter
market in exchange-listed equity securities, primarily those on
the New York Stock Exchange and the American Stock Exchange.  The
company has attained its leadership position as a market maker by
providing best execution services to brokers and institutional
customers through its proprietary trading methodology and systems.
The company makes markets in thousands of equity securities on the
Nasdaq and through Trimark, it makes markets in all NYSE and AMEX
securities in the Third Market.

Knight has received expressions of interest from several potential
buyers, including the Salomon Smith Barney unit of Citigroup (C)
and Morgan Stanley Dean Witter (MWD), but a formal offer isn't on
the table yet.  Speculators say the top suitors are willing to pay
$45 to $55 per share for the company, or about $5.7 billion to $7
billion.  Today Morgan Stanley Dean Witter's CFO Robert Scott told
analysts in a conference call that the firm plans to build up its
market-making capacity on its own, not with the addition of a new
firm such as Knight.  Surprisingly, NITE continued to move higher
in the wake of that announcement, closing up $2.12 at the end of
the day.  Now the issue is down again in after-hours trading and
there is no way to determine where it will open tomorrow.  Those
who support a bullish outlook for the stock can use this synthetic
position to speculate conservatively on the outcome of the merger
rumors, at the risk of owning the issue at a favorable cost basis.

Initially, we will target a $0.25-$0.38 credit in the position.
Plan to make adjustments based on the stock’s movement during the
morning session.

PLAY (speculative - bullish/synthetic position):

BUY  CALL  OCT-50  QTN-JJ  OI=2321  A=$0.62
SELL PUT   OCT-30  QTN-VF  OI=9063  B=$0.43

Note:  Using options, the position is equivalent to being long
on the stock.  The collateral requirement for the naked put is
approximately $835 per contract.

TLGD - Tollgrade Comm.  $131.12  *** New Trading Range? ***

Tollgrade is a provider of unique service assurance solutions to
the telecommunications industry.  Tollgrade's focus is helping
local exchange carriers deliver the high quality of service
through enhanced testability.  The company develops, manufactures
and markets Test System and Test Access technology that enables
local carriers to achieve maximum Digital Loop Carrier (DLC)
testability, along with the effective provisioning and deployment
of next generation services that include Digital Subscriber Line
(DSL) service.  Tollgrade's next generation DigiTest centralized
network test platform serves as the company's system solution.
DigiTest includes its Digital Wideband Unit for loop qualification
and in-service DSL testing; the Digital Measurement Unit, which
contains the test head for load coil detection and the complete
range of Plain Old Telephone Service (POTS) measurements, and
Digital Measurement Node, which serves as the mounting shelf for
the system.

There’s not much news to report on this issue and with the recent
slump in telecom equipment stocks, it is strange to see such a
strong performance from an issue in that group.  It may be that
investors are expecting another outstanding earnings report in
October from a company that has a history of beating expectations.
Last quarter, Tollgrade rallied after the company posted earnings
that nearly doubled what analysts were expecting in the second
quarter.  The unique issue is held in high regard at a number of
specialty research firms and based on the recent movement of the
share value, investors also believe in the company’s outlook.

We simply favor the recent bullish technicals and the opportunity
to speculate on the future movement of the issue in a conservative
manner.  The stock is slightly over-extended but a reasonable cost
basis exists below the recent trading range near $110.  Target a
slightly higher (than quoted) premium to open the position.

PLAY (conservative - bullish/credit spread):

BUY  PUT  OCT-100  TQK-VT  OI=40  A=$1.43
SELL PUT  OCT-105  TQK-VA  OI=16  B=$1.88
INITIAL NET CREDIT TARGET=$0.62-0.75  ROI(max)=17%

                   - STRADDLES AND STRANGLES -
BRCD - Brocade Communications  $233.00  *** Technicals Only! ***

Brocade Communications Systems is a provider of Fibre Channel
switching solutions for Storage Area Networks (SANs), which apply
the benefits of a networked approach to the connection of computer
storage systems and servers.  The company's family of SilkWorm
switches enables companies to cost-effectively manage growth in
their storage capacity requirements, improve the performance
between their servers and storage systems and increase the size
and scope of their SAN, while allowing them to operate intensive
applications, such as data backup and restore, and disaster
recovery, on the SAN.  The company sells its SAN switching
solutions through leading storage systems and server original
equipment manufacturers (OEMs) and through system integrators.
These OEMs and system integrators combine their solutions with
other system elements and services for data processing centers.

This play is based solely on the current price or trading range
of the underlying stock and its recent technical history.  We
favor this well-known issue for a bullish position and have
decided to sell premium for credit and use the earned income to
offset any losses on the downside, in the event we are required
to accept assignment of the stock.  If the price of the issue
approaches the (short) call option at $170, we will buy the
underlying stock to cover our obligation.  As with any position,
it should be evaluated for portfolio suitability and reviewed
with regard to your strategic approach and trading style.

PLAY (conservative - neutral/credit strangle):

SELL CALL  OCT-270  ULF-JN  OI=567   B=$3.00
SELL PUT   OCT-190  GUF-VR  OI=1502  B=$1.75
UPSIDE B/E=$275.00 DOWNSIDE B/E=$185.00


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