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Daily Newsletter, Monday, 10/09/2000

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The Option Investor Newsletter                   Monday 10-09-2000
Copyright 2000, All rights reserved.                        1 of 1
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MARKET WRAP  (view in courier font for table alignment)
        10-09-2000        High      Low     Volume Advance/Decline
DJIA    10568.40 - 28.10 10641.30 10546.20  720 mln   1208/1562
NASDAQ   3355.56 -  5.45  3376.92  3233.19 1.44 bln   1498/2373
S&P 100   744.23 -  6.74   751.40   741.36   totals   2706/3935
S&P 500  1402.03 -  6.96  1409.69  1392.48           40.7%/59.3%
RUS 2000  489.53 -  1.49   491.02   481.64
DJ TRANS 2490.63 - 53.02  2543.65  2483.75
VIX        26.33 +  0.66    27.40    25.77
Put/Call Ratio       .77

Listening, But Only Hearing Noise

Do we call it a bottom or discount the day altogether?  The COMPX
finished marginally lower Monday, extending its five-week losing
streak.  However, the NASDAQ staged a respectable rebound after
losing triple digits earlier in the day.  The comeback on the
COMPX had bulls cheering this afternoon, but their voices weren't
as loud.  Missing from the market today were the bulls, and the
bears for that matter, celebrating Yom Kippur and Columbus Day.
As a result of the two holidays, trading activity on both the
NASDAQ and NYSE was bleak at best.  The light volume on which the
NASDAQ gyrated today created many inefficiencies which were highly
tradeable but, had many market watchers discounting the action
altogether.  The lack of conviction, in the form of volume,
during the NASDAQ's sell-off and subsequent rebound this afternoon
left more questions than answers.

The big question on the mind of market participants is: When will
the NASDAQ hit bottom?  Since the first of September, the NASDAQ
has lost nearly 20%!  The big losses on the COMPX bring up two
more questions: Is the NASDAQ in a bear market? - or - Are we
simply witnessing an extended correction of Tech issues?  The
spread of bearish talk among market pundits and media members
contrarily indicates we are approaching a bottom.  Furthermore,
certain market indicators are approaching levels which have
historically been indicative of market bottoms, one of which is
discussed below.  The only ingredient missing from our market-
bottom recipe is capitulation selling on convincing volume.

The 1.39 billion shares that accompanied the NASDAQ's volatile
session was less-than-convincing.  And, although the NASDAQ
staged an amazing comeback, the majority of stocks lagged into
the close of trading as decliners outpaced advancers 8 to 5.
Continued losses in big Tech names prevented the NASDAQ from
finishing in positive territory.  Among the notable losers on
the NASDAQ today: CSCO (-2.50), MSFT (-1.38), and INTC (-0.88).
Big cap Internet stocks, and select Optical and Networking
issues lead the rebound on the COMPX today.  Today's Tech
leaders included:  JDSU (+2.19), YHOO (+4.50), SCMR (+8.75),
JNPR (+9.81), and ARBA (+8.94).  The inefficiency in the
market, which I alluded to above, was clearly evident in JNPR
today; the stock traded in a 30 point range.

The five-week pattern of three down days followed by one up on
the NASDAQ continues to unfold.  Today's decline, albeit a
fractional one, marks the third consecutive down day for the
COMPX.  With that said, the NASDAQ might be due for an extended
rebound tomorrow.  But, the viability of an extended bounce
tomorrow will depend upon how major market participants act
after their respective holiday breaks today.  Also worth noting
on the chart above is how the COMPX's five-week slide has
become progressively steeper in the past week, which might
portend capitulation in the tech-laden index.  Again, we must
wait for the return of volume before speculating on market

Early morning speculators bid the DOW higher in an attempt to
escape the steep sell-off in the NASDAQ.  However, solace was
not found in the blue chip index today.  In a divergent
fashion, the INDU gave back its gains and more in midday trading
after the NASDAQ staged its comeback.  Rising energy prices and
fears stemming from last Friday's economic data pressured select
components in the DOW.  The non-farm payrolls number and
unemployment rate reported last Friday continued to weigh on the
Financial components of the INDU, which included:  AXP (-1.31), C
(-0.88), and JPM (-1.13).  The rising oil prices, which I'll
detail below, pressured energy-sensitive segments of the DOW,
including: BA (-1.56) and MMM (-0.44).

Although the INDU held its ground for the most part today, the
blue chip index's current technical position is not pretty.  In
the last three trading days, the INDU has fallen further away
from its ascending support line, although the sell-off has come
on very light volume.  The failure of support around the 10,650
level could spell trouble for the DOW into the end of the year.
However, we may be witnessing a big bear trap in the DOW, which
could induce a massive short covering rally into the end of the
year.  A clearer picture of interest rates, a stable euro, and
stable or declining oil prices will most likely help the DOW
get back into its diamond and ultimately breakout.  But, until
we get a move backed with volume, it's difficult to discern
which way the DOW wants to move.

We do know, however, that the Internet sector is sure to be on
the move tomorrow.  As previously mentioned, Internet issues
were acting up today ahead of Yahoo's third-quarter earnings
report tomorrow.  The Internet giant has been hit in recent
weeks over concerns of an extended slowdown in online ad
spending, which has also plagued the likes of CMGI and DCLK.
The bulls want YHOO to beat expectations by its historically
wide margins as well as give upbeat guidance for its business
going into the end of the year.  In an attempt to attack the
stock's valuation, the bears will dissect YHOO's third-quarter
revenues and EPS, which are expected to come in at $280 million
and 12 cents, respectively.  The market's reception of YHOO's
earnings report will most likely set the tone for the rest of
the Internet sector throughout third-quarter earnings season.

The other major earnings report to watch tomorrow will be that
from Motorola.  The stock traced a new 52-week low at $26.50 today,
which epitomizes the current bearish sentiment surrounding the
stock.  MOT guided analysts to lower estimates for unit shipments
several months ago, which has plagued the stock ever since.  The
company has faced troubles in the form of increased competition
and declining margins in the handset business.  MOT's report could
influence major players in the Semi sector and also fellow handset
makers including NOK and ERICY.

With the anticipation and actual reports of third-quarter earnings
coming in, we can expect to see more volatility in the broader
markets.  The volatility crept into the market today, evident in
the spike in the CBOE Volatility Index (VIX).  The VIX spiked as
high as 27.40 this morning, its highest level since late last May.
What's more, the CBOE equity put/call ratio rose to 0.77 today.
Since the VIX rose today we know the demand for options rose, i.e.
more buyers than sellers in the options market.  A rise in the VIX
in conjunction with a rise in the put/call ratio reveals the put
buyers were operating more heavily than any other options market
participants today.  The VIX and put/call ratio are approaching
extreme levels but are not quite there yet.  With that said, both
of the sentiment indicators are worth monitoring in the coming

While volatility was rising in Chicago, oil prices were doing the
same thing in New York trading.  Cool weather in the Northeastern
United States combined with escalating tensions in the Middle East
pushed energy prices higher today.  Crude oil futures rose well
above $31 a barrel, although prices are off nearly 16% since
September's highs.  The recent decline in oil prices in
conjunction with a stable euro had given relief to several sectors
of the market including Transportation, Capital Goods, and Basic
Materials.  However, increased fears of unrest in the Middle East
could push oil prices higher, which would erase recent gains in
the aforementioned sectors.

Several low-profile earnings warnings combined to pressure select
pockets of the market.  Compuware (CPWR), a developer of testing
software, warned of a weak market for mainframe software for the
rest of the year.  Compuware's competitors ORCL, MSFT, and BMCS
all finished the day lower.  Williams Sonoma (WSM) caused
weakness in select Retail issues after the home goods retailer
said its third-quarter earnings would fall well below
expectations due to a shortfall in sales from its fall and early
holiday catalog business.  WSM's warning clipped other retailers
including BBBY, LIN, and PIR.  In the Insurance sector, Safeco
(SAFC) warned of lower third-quarter profits due to losses in its
commercial and homeowner lines.  As a result of SAFC's warning the
bears got their paws around recent leaders in the Insurance sector,
including PIR, CB, and ALL.

In the coming weeks, Wall Street will turn its attention to
actual earnings reports and away from the pessimistic warnings
that have plagued the broader markets for the past month.  The
poor performance in the major indices is indicative of low
expectations for third-quarter earnings reports.  And, the
bearish speculation has been fueled by the warnings from Tech
bellwethers such as INTC and DELL.  However, there are sectors
of the market that have not been littered with earnings
warnings, especially specific areas of Technology.  As such,
upward earnings surprises should not be unexpected, which could
act as the catalyst to carry the market higher.

As we enter third-quarter earnings season remember to block out
the noise and remain objective in your decision making, and always
trade in the path of least resistance.  Good luck!

Eric Utley
Research Analyst

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Trading The QQQs
By Austin Passamonte

Last week we left off with a brief explanation of the NASDAQ-100
trust series of option contracts. For sure there is more detail
to them than given, but at least it's a start.

I'm not here to tell you that these options replace the high-
flyers with eye-popping returns. I am saying this is the training
center for handling more volatile issues while actually making
money in the process.

It is a fact of basic human nature that most traders want to
skip the learning curve and get right to the act of creating riches.
That goal is usually achieved in rapid succession but it is not the
beginning trader who gets rich. Nope, it is the market veterans who
already paid their dues in a similar fashion before. And so the
circle of life continues to turn.

QQQs are the blue-collar contracts of technology. Yes, all our
sophisticated traders insist on playing in markets more worthy of
their "stature". Companies like ITWO, MSTR, PCLN. Difference
within these three (and others)? They were once all equal but
time will tell eagles from the buzzards. They all looked the same
soaring far above us last winter but we sure can smell the
difference now. Or can we?

We can always count on our dependable, steady QQQs to grind out
the profits in methodical fashion. Here are some ideas on how.

It's no big secret that I'm a fan of swing-trading. I treat
option trading as a job or profession instead of a hobby. This
doesn't mean I scour the charts and hunt out trades every single
day, although there is a past of that behavior behind me.

I merely watch the markets most every day (more lately) and take
positions when chart signals tell me to. I wait for high-odds
entries, ask for small profits equal to or slightly greater than
stop-loss risked and win a vast majority of the time. Lots of
times my plays just hit their modest profit targets and some
times they run far beyond what I settled for.

Without gnashing my teeth too much over missed gains, I gradually
roll the trading account ever-larger in methodical fashion. Hey,
would you rather drive too far to punch a time-clock at a place
you don't want to be or sit home and win a bunch of small trades?
Pick your poison; I chose mine.

Wednesday we'll cover this specific approach in a special article
about how to profit wildly with no additional risk trading
October index option contracts this close to expiration Friday
next week.

QQQ contracts are exceptional instruments to Position Trade with
as well. I won't list specific prices or plays here but if we
want to buy distant-month contracts to profit from future tech
market strength, I believe this is the way. Compare implied
volatility between QQQ call contracts for this December, January
and so on to your favorite individual stocks.

Without exception I've been able to buy the QQQs for far less
"Vega" of volatility priced in that JDSU, SDLI, PDLI, JNPR and
etc ad nauseam. Do you feel the NASDAQ will trade back to the
4,000+ level by year's end? It can only do that on the strong
backs of the NASDAQ 100 leadership. You will waste far less
precious capital on volatility premium buying QQQ "LEAPS" instead
of high-flying tech LEAPs.

Not saying the upside will be as dramatic with the QQQs although
it easily could be if you guess on the wrong stock. I am saying
your odds of winning are much greater and the downside decay is
less dramatic if you guess the entire market wrong.

Dependable upside, reduced downside risk - I like those odds to
win! Give me small & medium wins with few losses any day over the
occasional big win and a few more small & medium losses that go
with it. Down the road a bit we'll revisit an account-management
strategy that will show you just why.

Short-term linear plays, long-term linear plays are great for
those who only go long. How about selling premium instead? Fine!
QQQs are American-style options just like equities. Your risk is
to be assigned shares of NASDAQ 100 Trust Series HOLDR shares if
the short positions move against you without repair. The fact
that I almost never sell naked time mandates I leave this topic
to others and head towards more familiar ground.

Credit spreads? More my style for selling time. I'll take less
overall return for the quantified risk associated with that. The
story Jim Brown tells of being short DIM naked puts on MSTR when
they tanked in March is one I'd prefer not to experience. I'm not
sure I could fire up my tubes, discover I'm $250,000 in the hole
and repair my way to net-profit like the masterful job he did by
lunchtime. I'm here to tell you that is not a trial by fire I'd
like to face.

Debit spreads are good too, if I have a directional bias and
think the long strike target will get hit by/before expiration.
Spreads let you in closer to the action than straight calls or
puts and they are especially effective within the last two weeks
of expiration when premium has melted but volatility still

We should always buy 10 strike-point credit spreads but sell 5
strike-point credit spreads. If you play with the math involved
here you will see there is a discount in buying one 10-point
spread over two 5-point spreads. Likewise, you will yield a
better return selling two five-point spreads instead of just one
ten-point spread as well.

If that just generated a bunch of questions, please hold them for
a bit. We will be covering the topic of credit spreads real soon
in some detail for those who are interested in selling time to
others while sleeping soundly at night.

To cover each of these strategies in any detail would/will
require a complete discussion or two apiece. Considering I'm ever
hopeful of a long career here in my dusty little corner at OIN,
they'll all get addressed by & by.

How many times have you been told to buy options with plenty of
time-value left to be correct with? That is certainly sound
advice, but there is another side to that coin. Wednesday we will
cover in detail my favorite trading strategy of all during the
hottest time of the month; front-month options within two weeks
(or days) of expiration.

I believe we can share some ways to make some incredible returns
with less downside risk than trading distant-month contracts if
we pick our entries on moving targets well. Anyone interested in
that? Click in on Wednesday and I promise we'll have some fun!

Best Trading Wishes,
Contact Support

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SEBL - Siebel Systems $100.00 (+7.56 this week)

Siebel Systems is a provider of eBusiness applications.  Their
products are used by organizations that wish to enhance their
ability to sell to, market to and service their customers across
multiple channels such as the Web, call centers, resellers,
retail and dealer networks. SEBL's products and services are
available in industry-specific versions. The founder and CEO,
Mr. Siebel got his start as a salesman for the Oracle Corporation.

Most Recent Write-Up

There's no denying the fact that SEBL suffered the brunt of the
bears' attacks on the NASDAQ last week.  What's more, the earnings
warnings from competitors Computer Associates (CA) and BMC
Software (BMCS), plus the rumors surrounding ORCL, compounded to
wreak utter havoc on our play.  The +19 points we had worked so
hard for two weeks ago were just as swiftly taken away last week
by the bears.  However, SEBL is very capable of rebounding, which
is the reason the stock remains on the call list.  If the NASDAQ
bounces back from last week's bruising, SEBL could very well lead
the bulls' charge higher.  Furthermore, SEBL has a five-month
trendline that began at its May lows during the last bear raid.
SEBL has tested its trendline several times over the last five
months, with Friday's decline marking the fifth such retest.  The
supportive trendline now sits near the $90 level, which was the
site of SEBL's intraday low last Friday.  After SEBL traded down
to its trendline last Friday, the stock quickly rebounded $2
higher into the close.  SEBL's rebound was encouraging to witness
and it might project higher prices ahead.  Given SEBL's bounce off
the $90 level, aggressive traders could consider entry at current
levels or on a rally above resistance at $95.  The more
conservative traders might wait for SEBL to regain lost ground and
look to enter new positions if the stock trades above $100.  But,
be cognizant of SEBL's descending 10-dma at $101, which might
present problems.  Additionally, if the NASDAQ's slide continues
next week and SEBL falls below its trendline at the $90 level, it
might be wise to step aside from the play.


While volume was light in the broader market, buying in SEBL was
more than convincing today.  The stock posted substantial gains on
1.5 times its ADV.  What's more, SEBL made us proud by trading
above its pivotal point near $90, which set the stock to close
right at the ever-important $100 level.  An extension of the recent
rebound in the NASDAQ tomorrow could set SEBL sailing.  If the Tech
sector turns positive, aggressive entries could be taken using
bounces off the $100 level.  A more conservative entry could be
found if SEBL rallies on continued heavy volume above the $105

***October contracts expire in 2 weeks***

BUY CALL OCT- 95 EZG-JS OI=2480 at $ 9.63 SL=6.50
BUY CALL OCT-100*EZG-JT OI=2112 at $ 8.00 SL=5.75
BUY CALL OCT-105 EZG-JA OI=4696 at $ 4.38 SL=2.75
BUY CALL NOV-100 EZG-KT OI=2313 at $12.00 SL=9.00
BUY CALL NOV-105 EZG-KA OI=1423 at $ 9.75 SL=7.00

Picked on Sep 17th at    $99.00    P/E = 429
Change since picked       +1.56    52-week high=$118.44
Analysts Ratings     17-5-0-0-0    52-week low =$ 16.88
Last earnings 06/00   est= 0.09    actual= 0.11
Next earnings 10-17   est= 0.11    versus= 0.07
Average Daily Volume = 5.51 mln

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