Option Investor

Daily Newsletter, Thursday, 10/26/2000

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The Option Investor Newsletter                 Thursday 10-26-2000
Copyright 2000, All rights reserved.                        1 of 2
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MARKET WRAP  (view in courier font for table alignment)
        10-26-2000        High      Low     Volume Advance/Decline
DJIA    10380.10 + 53.60 10454.80 10265.10 1.29 bln   1451/1397
NASDAQ   3272.18 + 42.61  3286.29  3081.36 2.29 bln   1919/1983
S&P 100   720.62 +  1.48   725.32   705.51   totals   3370/3380
S&P 500  1364.44 -  0.46  1372.72  1337.77           49.9%/50.1%
RUS 2000  479.76 +  4.55   479.79   466.56
DJ TRANS 2491.90 + 53.09  2492.67  2436.42
VIX        31.05 +  1.16    34.00    29.13
Put/Call Ratio      0.65

Another buying opportunity brought to you by Nortel

Just like the IBM and Intel prompted market events of the last
several weeks the Nortel earnings brought us a surprise Halloween
buying opportunity. The Canadian fiber optic vendor said sales
had cooled somewhat to only +90% over the prior year. Still the
rocketing fiber optic sector which thought fiber would eventually
replace steel as the building material of choice took it hard.
The market penalized the sector for only an outlook of +100%
growth going forward with a -$128 billion drop in sector market
cap. This drop today was simply a PE compression event as growth
expectations came back to earth. JDSU gave back -$21 billion in
market cap before their earnings release tonight. JDSU beat the
street by +$.02 cents and had a glowing conference call. Investors
who ran for cover and trashed JDSU over the last two days are
probably going to have a serious bout of sellers remorse on
Friday. After trading as low as $62 today and closing around $74
after the market rebound, JDSU is trading up about +$10 in after
hour to $84. Look for momentum to come back into JDSU on Friday
and also to SDLI. With JDSU paying almost 4 shares for every 1
of SDLI the change in SDLI will be dramatic. Almost 100 million
shares of JDSU traded today.

The market reaction to all the negative news the last two days
provided yet another retest of the October lows. The bottom
today was 3081 on the Nasdaq and the resounding rebound was huge.
From -142 to +42 in about an hour, if you blinked you missed it.
Imagine working at nights and sleeping during the day. Going to
bed as the market was opening up +60 points in the morning and
waking up after the close at +42. Just another boring day in the
market for day sleepers. For us who are keenly and painfully
aware of the market movements during the day we are clinging to
the fact that there are only three days left in October. With
most tax selling by funds completed the remaining impact may be
light but there is still those three days left for selling into
rallies and capturing that last dollar from the losers.

Amgen will undoubtedly be on the list on Friday. After beating
estimates today after the close they warned that sales were
slowing on several of their drugs and earnings for next year
would be lower. After rebounding almost +5 to close at $69 AMGN
fell to $59 in after hours trading.

WCOM also got a disconnect from investors today as they posted
far less revenue than analysts expected. The telecom sector has
now come full circle again. The breakup of AT&T into the baby
bells and then the consolidation last year has led into, you
guessed it, a breakup again. Both AT&T and WCOM have announced
breakup plans to create multiple companies from the newly
consolidated group. Seems the lack of profits has put profits
into a lockbox (election humor) and the only way to get them
out is break up the box. Good luck! With T trading at a 52 week
low of $22 and WCOM close to that low as well there may be even
lower numbers for the parents in the future. Take value out of
a $22 stock and what do you get? I know, I know, you get two or
four stocks for the price of one but the parent will be trading
in single digits if something does not change soon.

Just when you thought it was safe to go back into Internet stocks
after AMZN and EBAY posted better than expected numbers, Lehman
Brothers came out with an "avoid" rating on AMZN. After analyzing
cash flow for Amazon they feel the amount of cash on hand is not
enough to service debt and run the company for the next year. OOPS!
Here comes another Amazon.bomb story in Barrons. I can just see
that writer frothing at the mouth with anticipation. Last week
Barrons slammed CSCO and started the weakness in the Nasdaq.
AMZN traded down -$2 from the close in after hours after being up
+5 during regular trading.

If you thought investing in tech stocks was volatile and went
into consumables instead then the profit warning by Kellogg today
was probably disturbing. Of course with K trading at a nine year
low of $22 there was not much downside. However the acquisition
of Keebler today put a positive spin on the news that maybe the
company is finally doing something to turn the business around.
Keebler is the number two cookie company and the merger of those
two will add distribution outlets to both and the stock actually
closed up.

Inktomi however was not so lucky. They announced earnings after
the close and warned that next quarter may come in at half of
the current estimates. They dropped -$10 in after hours and will
probably continue the dive tomorrow. They tripled their revenue
but will suffer going forward with acquisition problems.

The economic news today was good. The Employment Cost Index
fell again to only a +0.9% increase for the 3Q. 2Q was +1.0%
and 1Q +1.4%. With employment cost increases rapidly decreasing
the Fed will have a tough time making the case that the tight
job market is adding to inflation. This will help keep the Fed
on hold. The reverse of this story was the headline SUNW made
today saying the only thing wrong with their outlook was the
inability to hire almost 7000 workers they currently need do
to the tight job market. Only one report can be right and
analysts point to things like benefits and stock options not
being counted in the ECI numbers. Add in those figures and the
employment costs may be skyrocketing. The next major report is
the GDP tomorrow. With estimates clocking in at +3.5% growth the
markets will be looking for some signal that the soft landing is
not turning into a crash. Any number under 3% will be seen as a
possible crash and could have negative results. A number over 3.5%
will be seen as the light at the end of the tunnel of pessimism
but a much larger number could re-ignite the Fed fears. It is a
tightrope that must be treaded carefully.

Iraq played its "hole" card today. Iraq threatened to withhold
its 2 million plus barrels of oil beginning November 1st if they
had to receive payment in American dollars. Dollars is the world
standard for oil payments. He wants payment in Euros. This is
in retaliation for the U.S. support of Israel and a purely
political move. Still 2+ million barrels of the 75 million
daily world output is a significant amount. OPEC has said
they would make up any shortfall but the news event caused yet
another hike in oil prices. Another 500,000 barrels per day are
coming to market next week under the OPEC price control policy.
In any 20 day period that oil trades over $28 they will bump
production to stabilize the price. Production is not the real
problem today. Problems at refineries and world shipping capacity
running over 95% are both adding to the consumer shortage.

The market event today was purely fiber related. During the dip
back to 3081 several mainline Nasdaq big caps were stubbornly
positive. Microsoft opened positive and never looked back to close
at $64.50 +3.19. Intel opened up, gave back some ground at midday
but never went negative and closed up +3.44. Dell gapped up from
a sub $26 close yesterday and finished +1.88 at $27.75. CSCO
went negative only briefly to touch $50 again but roared back to
close near $54. About the only Nasdaq big cap to suffer was SUNW
which closed +7 off its low but still -6.63 for the day. SUNW
was seen as being susceptible to earnings problems due to business
slowdowns. With servers their major product any crash landing
would impact server sales. I don't believe it but that is the
reason given in the media for the drop. More likely would be
a couple mutual funds scrambling to take profits to offset major
losers in other areas. If you had any of the Internet or fiber
stocks in your fund portfolio and were forced to sell during the
recent drops then you might be forced to sell winners to improve
your fund performance. It is a dog eat dog world in the fund
sector and overall performance is everything. We may never know
what is causing the volatility in specific stocks that have not
warned but just keep saying to yourself, three more days and
October will be over. Then funds will be forced to put that money
back to work as well as the massive influx of cash that occurs
over the next four months. Good times are ahead, somewhere!

Several traders were blaming the rebound today on yet another
short squeeze. Could be but I think a better answer is simply
money on the sidelines waiting for October to be over could not
believe their luck and jumped at the chance to buy near the
bottom again. The three day losing streak on the Nasdaq was
snapped in climatic fashion and the low from the 18th was not
touched. GE bottomed at $49 and started back up. CSCO bottomed
at $50 again. INTC bounced off $42 for the fourth time in the
last six days and looks headed for $50 tomorrow. IBM ended a
six day slide and appears to have bottomed. Dell ended a four
day slide. With the fiber optic sector poised to explode again
on Friday and most of the big caps showing signs of successful
bottoms I just don't see any major risk from this point. Sure
there could still be three days of tax selling but it is a
buying opportunity not a crisis. The GDP report will probably
come in close to estimates and not be a major factor but that
is always a wild card. Advance/declines today finished dead
even and volume was good. Considering the decliners were beating
advancers 2:1 Thursday morning this was a significant turnaround.
Remember the rebound from last Wednesday's drop to near 3000?
More importantly remember the Thursday/Friday rally? I think
tomorrow will be a repeat as long as we don't get slammed by
something out of the blue. Futures are up strong at +8.00 for
the S&P and +40 for the Nasdaq. Looks like a good day to sell
some naked puts or buy leaps while they are on sale. I plan
on bargain hunting in the morning but the likely gap open may
take some bargains off the shelf before we even get in the store!

A point of interest, Dick Arms, a market timer, inventor of
the TRIN indicator AND a speaker at the Denver Options Workshop
this weekend, was quoted numerous times on CNBC today as calling
this a successful retest of last weeks bottom. He reported that
he was calling his clients all afternoon and telling them to
buy based on his research. As a market historian and market
technician he is widely respected for his market calls. He has
been doing it for 35 years and that is longer than most investors
today have been alive. Dick of course called us to get our opinion
before making his prediction. (just kidding!) Great planning on
our part to get him as a speaker the day after a major market
call. I will be looking forward to see if Steve Nison, the
Candlestick charting guru, agrees with him. Now don't you wish
you had signed up for the seminar?

Good luck and sell too soon.

Jim Brown

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The next Technical Analysis, Stock and Option Seminar
is in Phoenix on Nov 02-04th.  Here is your chance to learn
from the pros. It is three days of in-depth education that
will make you a better investor. If you live in the Phoenix
area 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
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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
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I attended the Atlanta seminar and wanted to forward my positive
comments. The seminar "really lit my fire". I have been a trader
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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
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I am writing this note to compliment you and your staff on the
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I am doing my best to persuade other members of the two investment
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Sincerely, ML

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Back To The Bear Cave?
By Austin Passamonte

Just when we saw a firm bottom try to shore up behind us the next
test of recent lows has emerged. How dumb are these lows? Can't
they pass the test our first time around and leave it at that? New
market highs must be much smarter because we haven't felt the need
to repeatedly test them in quite some time.

Market Sentiment certainly isn't calling for new highs any time
soon and perhaps not within the measurable future. However, we
like the chances of higher-highs being posted soon. Extreme
volatility, heavy volume and repeated bounces point to the fact
that we could be close.

The VIX has spiked above 33 again today and 35+ would pierce its
daily chart upper Bollinger band, a strong buy signal for bullish
plays. Overhead and underlying put/call ratios across the broad
indexes have reached the highly-bullish skew again.

Long-term chart oscillators on weekly charts are within oversold
range and in the process of reversing, although these moves take
time. Numerous technical studies suggest our next major move leans
to the upside.

But first we face tomorrow. Earnings reports, Iraqi oil games, a
sick euro, GDP report, rumors everywhere of Argentina possibly
defaulting on debts and a host of other news will be dissected,
digested and plugged into the equation before our next bell rings.

We believe Friday will be another volatile large-range day. That's
the easy part. Which direction is the tricky one!

It's vital to hold above Thursday session lows and move forward
from here. A break below them will send us right back to last
Wednesday in a hurry. A move up to break recent highs will pass
this latest test and resume the next leg up each chart.

These markets aren't out of the cave and into green pastures just
yet but we're getting there. Small positions, day trades and quick
profits are a good idea. Puts on a break below today's lows or
calls above today's session highs with tight stops in place may be
the next high-odds entry points from here.


Thur 10/26 close; 31.39

30-yr Bonds
Thur 10/26 close; 5.73%

Support/Resistance Indicator
The Index Support/Resistance(S/R)Ratio is a formula used to
gauge possible support or resistance based on open-interest
disparity. Ratio listed is percentage of calls to puts or
puts to calls respectively.

Support is factored from dividing puts by calls at strike
levels beneath index closing price. Resistance is factored
from dividing calls by puts at strike levels above current
closing price.

  (Open Interest)       Calls       Puts         Ratio
S&P 100 Index (OEX)
760 - 745               6,543       4,606         1.42
740 - 725              10,235       7,891         1.30

OEX close: 720

715 - 700               1,306       7,784         5.96
695 - 680                 129       4,362        33.81**

Maximum calls: 740/5,501
Maximum puts : 602/8,601

Moving Averages
 10 DMA  725
 20 DMA  736
 50 DMA  776
200 DMA  779

NASDAQ 100 Index (NDX/QQQ)
 85 - 83              24,458       42,557          .57
 82 - 80              30,165       27,034         1.12

QQQ(NDX)close: 79.88

 79 - 77               3,820       30,242         7.92
 76 - 74               7,695       20,673         2.69

Maximum calls: 84/14,499
Maximum  puts: 73/25,308

Moving Averages
 10 DMA 81
 20 DMA 82
 50 DMA 89
200 DMA 94

S&P 500 (SPX)
1450                   9,781         8,676         1.13
1425                   9,214        10,914          .84
1400                  14,162        20,871          .68
1375                  11,915        18,131          .66

SPX close: 1364

1350                   8,054        22,496         2.79
1325                   1,987        10,734         5.40**
1300                   1,206        16,941        14.05**

Maximum calls: 1400/14,162
Maximum puts : 1350/22,496

Moving Averages
 10 DMA 1374
 20 DMA 1139
 50 DMA 1445
200 DMA 1442


CBOT Commitment Of Traders Report: Friday 10/20
Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts on the
Chicago Board Of Trade. Small specs are the general trading
public with commercials being financial institutions.
Commercials are historically on the correct side of future
trend changes while small specs are not. Extreme divergence
between each signals a possible market turn in favor of the
commercial trader's direction.

                  Small Specs           Commercials
DJIA futures
Open Interest
Net Value              -91                   -5
Total Open
Interest %        (7.19% net-short)      (2.86% net-short)

Open Interest
Net Value              +300                  -85
Total Open
Interest %        (1.73 net-long)        (.21% net-short)

S&P 500
Open Interest
Net Value              +55,273               -66,352
Total Open
Interest %        (17.89% net-long)      (10.75% net-short)

What COT Data Tells Us: Commercial positions in S&P
500 added to five-year extreme short levels while small specs
decreased their net-long positions as compiled Tuesday 10/17
by the CFTC.

Friday's data should give a clearer picture to Commercials
either covering some profitable shorts or holding fast into
next week.

Fed's finished
Benign government reports
Oversold market levels
Disparity in overhead call/put ratios
VIX well above 30

Oil Prices
COT reports
Recent pre-warnings, downgrades and shortfalls
Broad market's break of critical M/A support
Market leaders breakdown
Daily technical chart indicators


As of Market Close - Thursday, 10/26/2000

                                  Key Benchmarks
Broad Market           Last     Support/Resistance   Alert

DOW   Industrials      10,380       9,650  10,600
SPX   S&P 500           1,364       1,305   1,420
COMPX NASD Composite    3,272       3,000   3,650
OEX   S&P 100             720         700     750
RUT   Russell 2000        479         455     500
NDX   NASD 100          3,167       2,950   3,550
MSH   High Tech           891         825     990

BTK   Biotech             737         640     780
XCI   Hardware          1,222       1,100   1,310
GSO.X Software            407         360     440
SOX   Semiconductor       705         600     805
NWX   Networking          991         925   1,180     **
INX   Internet            346         275     400

BIX   Banking             552         520     575
XBD   Brokerage           584         550     630
IUX   Insurance           767         720     805     **

RLX   Retail              736         715     775
DRG   Drug                427         395     440
HCX   Healthcare          885         840     900
XAL   Airline             134         124     140
OIX   Oil & Gas           302         296     328     **

Three alerts were triggered in the past two sessions, with the
IUX triggering an alert at resistance.  Lowering support (NWX,
OIX).  Lowering resistance (NDX, BTK, GSO.X, NWX, BIX, XBD, RLX).
Raising support (OEX, BTK, GSO.X, BIX, RLX, HCX).  Raising
resistance (IUX).  There's work to be done, but the bulls look
like they're making progress.


The Key To Trading Is In The Mind
By Molly Evans

Exceptional traders, according to Jack Schwager, author of The
Market Wizards books, have both a real desire to actively
participate in the market and confidence in their abilities to
achieve success through trading.  Schwager, who interviewed
dozens of Wall Street's most successful traders, asserts that
winning in the markets is a matter of skill and discipline,
not luck.  In fact, at the end of The New Market Wizards,
Schwager catalogues forty-two generalized observations that he
gleaned from his in-depth immersion in the markets and meticulous
interviews with the great traders.  It's interesting to note
that the overwhelming theme of this appendix addresses the
psychology and discipline of the trader.  This was the essence
of the interviews with these highly successful people.  The
reader learns little to nothing of any particular trader's
styles or methods.  Instead, Schwager made good strides in
showing us not only the history and socialization of his
wizards but was able to capture their thought processes as
well.  What caused them to act and react as they did?  How and
when did they learn discipline?  Why did they gravitate to a
certain market or trading vehicle or abandon another?

The reason I bring up Schwager's endeavors, apart from the
sincere affection I feel for his books, is that I very recently
had the privilege of seeing and meeting one of those profiled
market wizards.  Linda Bradford Raschke is, I believe, the only
female trader to attain the distinction of Schwager wizardom.
Having read her story no less than three times in the past year,
I was especially thrilled to learn that she would be speaking at
a trading seminar held in Dallas a couple of weeks ago.  It was a
bit disappointing when I read her topic would be "Slump Busting
Techniques."  Figuring that this would be an hour of "rah rah"
and "you can do it" themes instead of solid trading tactics or
methodologies, I only casually strolled in to find my seat.
Apparently, many others were excited to see the market maven
live too.  The room was packed.

I wonder just what she could have discussed that would have
made a better topic.  Raschke is not only a great trader,
she's a dynamic speaker and motivational powerhouse.  I hadn't
really considered myself to be in a slump as far as my personal
trading goes but the fact stands on its own that when I left
that conference room, I couldn't wait to get back to my
trading station at home.  It's nothing short of amazing to
experience what a booster shot of self confidence and
excitement can add to your profitability in trading.  From this
one hour of lecture, I learned that without a doubt, the
market is the land of opportunity and what you get out of
it is entirely up to you, not the market, not your broker,
and not your trading buddy.  It's up to you.

Raschke's didactic was in truth, rather simple.  She spared us
the "cut your losses quick and let your winners run" tirade.  Yet,
she talked about how as traders we must recognize when we
are in a slump and know that the battleground is in our own heads,
not the market.  The most successful traders are the ones who
have lost the most money.  Does that mean we have to lose our
portfolio to eventually become that great trader?  No, of course
not.  We all lose in trading but it's the reaction to those losses
that put us on the path to our destiny.

It is assumed that as a trader, you already have a trading method
and established money management rules.  Yet, for various reasons,
even seasoned traders go through long flat periods or even a
string of losses.  How do we make our own V bottom or stop
spinning our wheels to breakout of our bands?  That answer, as
you would probably suspect, lies within.  A self assessment is in
order.  What is the problem?  Are you distracted?  Are you
stressed in your life outside of your trading?  Are you self-
defeating?  Are you unprepared?  Have you abandoned your own
rules or tried to counter the market?  You must first identify
problems with your style or your read of the market.  Recent
market dynamics for Nasdaq followers have seemed to be most
advantageous for scalp traders.  No one disputes that this
present market is tough.  It's whipsawing both ways but you can
see that happening.  You can recognize setups and alignment of
indicators for trading in both up and down directions.  Over on
the NYSE, long position trades in pharmaceuticals and
medical/insurance stocks or their respective sectors would have
returned handsomely in recent weeks.  Is your mind open to
trading the short and the long side?  Do you look at the charts
of stocks across the markets and in the various sectors?

An open mind is so important to trading.  One must fight to be
objective in their analysis of the market, in looking at the
patterns of the chart and to various trading vehicles.  Linda
Raschke would argue that just as importantly, you must have the
confidence that you are going to win.  You must have a self
assurance that you can rely upon your own decision making process.
And so, we're back to ourselves.  It is imperative to develop a
very positive self image as a trader.  Visualize yourself
succeeding but fight the urge to beat yourself up if you make a
mistake.  Mistakes happen in this business.  You can't take it
back but you can get right back on the horse with a positive
mental attitude.  As Raschke said, "There is nothing you can do
to undo the damage that has been done.  It is like cheating on
a diet.  Once you have eaten the chocolate cake, all you do is
get back to exercising to work it off.  So it is with trading
and making back losses.  Get back to making trades.  The sooner
you can clear your mind and start trading again, the faster you
will make up yourlosses."

And speaking of exercise, Raschke is in great physical shape.
She works out regularly and takes being mentally and physically
fit very seriously.  Burnout comes from sitting in front of the
computer all day and night.  It's not healthy.  How can we expect
to be the master of our own universe if we are tired, beaten and
full of self doubt or misery?  The list goes on and on about how
we must have a positive self image and confidence in our own
abilities to succeed.  This obviously isn't limited to success
as a trader.  Visit the self-help section of the bookstore.
Look for titles by Tony Robbins, Napolean Hill or another
motivational author.  Personally, I like to get books on tape
and listen whenever I'm out buzzing around in life or before I
drift off to sleep at night.  One of Linda Raschke's favorite
books is "Winning Ugly" by Gilbert.  He was Andre Agassi's
personal coach and penned the trials of mental attitude in
overcoming obstacles in the very competitive world of tennis.
No matter where you are in your trading career, a burning desire
to succeed must be accompanied by a positive self image and

This article could go on and on.  While there are many facets
to addressing issues of self motivation, awareness and success,
it always boils down to a few themes of mentality in all "how to
succeed" discussions and books.  It can never hurt us to review
these pearls of wisdom.

Those who are successful in their endeavors all share common

Burning Desire:  We must have a passion and driving motivation to
become successful at the task.

Faith:  We must believe that our goals are attainable and that
obstacles are but bumps in our path.

Strategy:  We must have a solid game or business plan that
addresses the achievement of our goals.  Think of any business
plan; isn’t it true that lack of preparation and organization are
the main reasons for failure?

Values:  Personal integrity is vital to self esteem.  Know who you
are what you do and don’t stand for.

Commitment:  This provides you the strength and fortitude to stay
on your game and keep moving in a positive direction each day.

I wish that I could convey to you the enthusiasm for the markets
and for trading that Raschke emanates.  We should all have our
role models and as a female trader, I had previously sought
positive living proof that a woman too could be a shark in the
waters of the market.  I just didn't know that I'd be so
positively influenced upon seeing and meeting my own role model.

Attention Online Traders:

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Index      Last    Mon    Tue     Wed    Thu    Week
Dow    10380.12  45.13 121.35  -66.59  53.64  153.53
Nasdaq  3272.18 -14.45 -48.90 -190.22  42.61 -210.96
$OEX     720.62  -3.81   4.07  -19.28   1.48  -17.54
$SPX    1364.44  -1.15   2.35  -33.26  -0.46  -32.52
$RUT     479.76   2.51  -2.11  -12.64   4.55   -7.69
$TRAN   2491.90 -32.21  34.23  -32.28  53.09   22.83
$VIX      31.05  -0.44  -0.76    3.67   1.16    3.63


HAND      95.47  -3.56   2.38    0.31   7.03    6.16  Winner!!!
IDPH     190.19   6.63   3.88  -13.75   3.19   -0.06  Profit taking
MSFT      64.44  -3.06  -0.63   -0.25   3.19   -0.75  New
RSAS      55.06  -1.81  -1.56   -0.88   1.56   -2.69  Dropped
AGIL      68.00   2.19   2.88   -4.81  -4.81   -4.56  Dropped
EMC       86.00  -0.06  -4.25   -5.69  -4.00  -14.00  Standing
RIMM     102.50   5.84  -4.47  -12.63  -3.63  -14.88  TSE effect
BRCM     214.13   9.56 -12.75  -21.13  -3.75  -28.06  Come back!
NTAP     116.81  -8.25  -6.69  -11.44  -5.44  -31.81  Grab your hat
BRCD     216.00  14.19  -6.63  -19.00 -25.00  -36.44  Rebound!!!
JNPR     190.13  -7.13  -6.75  -22.50  -5.50  -41.88  Found support
CIEN     103.00  -7.38  -6.75  -27.00  -5.38  -46.50  Buying oppt


VTSS      58.63  -2.63  -6.75  -11.50   2.63  -18.25  Downgraded
TIBX      57.00  -3.06  -0.13   -5.13  -4.75  -13.06  New
FCEL      65.69  -2.09  -1.78   -8.69   2.88   -9.69  Breakdown
PVN       93.69  -2.31  -2.50    0.50  -5.06   -9.38  Rolled over
PHCC      51.25   6.94  -3.38   -1.00   0.31    2.88  Steady

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.


AGIL $68.00 -4.81 (-4.56) Despite holding support near $71
yesterday afternoon, anybody cheering the victory woke up to
an unpleasant surprise this morning.  Due to continuing weakness
in the technology sector (largely from the Optical group) AGIL
moved sharply lower this morning, falling all the way to $60
before finding support.  Although the recovery looked decent,
the technical violation places the stock below every moving
averaged except for the 200-dma, and this will present
formidable resistance going forward.  We may consider AGIL again
in the future, but until sentiment improves, we will err on the
side of caution and drop it tonight.

RSAS $55.06 +1.56 (-2.69) The bulls have taken a beating this
week, with many stocks giving up as much as 35% due to rampant
investor fears.  RSAS has actually held up fairly well, putting
in a mild bounce this afternoon at the $52 level.  The problem
is that the recovery ran out of steam near $55, which was
previous support.  The stock's inability to hold support and
move higher, changes our outlook for the near future.  Despite
positive news and competitor VRSN announcing strong earnings,
the bulls just can't seem to get our play moving.  Rather than
wait for a significant technical violation, we'll take our money
off the table first, and look for better plays.


No dropped puts today

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The Option Investor Newsletter                 Thursday 10-26-2000
Copyright 2000, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.

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BRCM $214.13 -3.75 (-28.06) What a come back!  Today's play by
play action in the market would have best been suited for a
sports caster, due to the dramatic and dynamic swings that
occurred.  BRCM  appeared to be on the way out, hampered by
the weakness in the markets due to a lack of buyers.  The
stock was trading well below the 200-dma with a momentous
negative trend.  Then the buyers came as the NASDAQ bounced
off the 3100 mark.  BRCM rallied $34.50 on the spree, and has
given us a very bullish bounce sign with a kite tail on the
chart.  Another bullish factor to the play, is the fact that
the strength is on the heels of a 3-day pull back.  The other
very bullish aspect to this play is the addition of BRCM to
the NASDAQ 100 on Monday.  The event should also attract many
buyers to the play.  Due to the volatility of the markets,
traders should wait for BRCM to trade above $225 on continued
volume and market support.  At this mark, BRCM should develop
enough momentum to retest the $260 resistance channel.

BRCD $216.00 -25.00 (-36.44) While Nortel is in the Networking
sector and BRCD is in the Storage sector, our play fell victim to
the "shoot first, ask questions later" mentality as traders
headed for the exits after NT's revenue miss.  Because both the
Storage and Networking sectors are high growth areas with high
expectations, a high premium and valuation was assigned to
leading stocks in both sectors.  The bear argument was these
stocks were priced to perfection, which brought in the sellers.
With that, BRCD fell $19 or 7.31% yesterday on 130% of ADV.
Today, selling reached a fever pitch as BRCD went below $200 but
finding support at the $190 level, came back with a vengeance.
Despite closing down over 10%, the high volume (almost three and
half times ADV) and dramatic recovery intra-day would suggest
that today may have been the climax.  Support for BRCD can be
found in increments of $5 all the way down to $190.  Aggressive
traders can target shoot their entries depending on their risk
tolerance at these levels but it is best to confirm a bounce with
volume before entering.  Conservative traders will want to wait
for BRCD to make it back above its 50-dma ($226.71) confirmed
with a rising NASDAQ before considering a play.

EMC $86.00 -4.00 (-14.00) As one of the last remaining big cap
stocks left standing, EMC presented a tempting target for
profit-takers and bears alike.  All they needed was an excuse.
Yesterday, with the NASDAQ down 190 points, EMC was unable to
hold on.  Gapping below the 10 and 50-dmas (now at $94.50 and
$95.05, respectively), the stock fell as the sellers were out in
force, especially targeting the recently strong sectors such as
Storage.  This was not helped by subsidiary MCDT, as it too headed
lower.  Today, EMC continued to move down, but twice it was able to
bounce off support at $80.  From there, a late day rally allowed
the stock to significantly narrow its loss to close down 4.44% on
over twice the ADV.  At this point it appears that the worst may
be over.  With strong support at $80, a bounce off that level as
well as support at $85 would be a possible target to shoot for as
an aggressive play.  For the more risk adverse, a break above the
100-dma $87.53 on strong volume would provide a safer entry

IDPH $190.19 +3.19 (-0.06) Unable to hold $200, and with a strong
downdraft in the NASDAQ, as well as the Biotech sector, traders
took their profits yesterday, bringing the stock down $13.75 or
6.85% on almost twice the ADV.  As a result, IDPH closed below
its 5-dma (now at $193.14) for the first time in almost two
weeks.  Today, with even more selling in both the Tech index and
the Biotechs, IDPH headed lower.  But each time the sellers came
in, so too did the buyers.  Despite getting as low as $178
intra-day, a late day rally allowed IDPH to close 1.70% higher on
over 135% of ADV.  Fans of candlestick technical analysis will
note that today's action formed a hammer pattern, with a long
tail.  It means, that despite the sellers' attempt to bring the
stock down, the buyers were stronger; it is a bullish sign
indeed.  However, such a formation requires confirmation.  If
IDPH can break through resistance at the 5-dma tomorrow on
volume, this would likely be enough confirmation for conservative
traders can take a position.  For the more aggressive, a bounce
off the 10-dma, now near $185 would provide a better, but
higher-risk entry point.

RIMM $102.50 -3.63 (-14.88) As one of the larger cap stocks on
the Toronto Stock Exchange (TSE), what happens to other TSE
giants such as NT and JDSU has a significant affect on RIMM.
With this in mind, the stock was clearly effected by the fallout
of Nortel's revenue shortfall.  With the TSE closing down over
900 points yesterday, RIMM followed in sympathy, losing $12.63 or
over 10% on over twice the ADV.  This put the stock below both
its 5 and 10-dmas, currently converged near the $114 level.
Today, as NT and JDSU continued lower, so did RIMM as it fell
another 3.42% on over 250% of ADV.  However, it did manage to
close above the psychologically important $100 mark.  Support can
be found in increments of $5 with the 50-dma just below the $90
level.  Aggressive traders looking to buy on a possible pullback
can target shoot these levels but confirm with volume.  At this
point, conservative traders will want to make sure that RIMM can
break above its 5 and 10-dmas before entering the play, with
overhead support also in increments of $5.  With JDSU reporting
earnings tonight, tomorrow will surely be a volatile day for RIMM
so when considering a play, confirm with sentiment in the TSE and
only enter if the buyers return in force.

JNPR $190.13 -5.50 (-41.88) After the carnage that we saw in
the Optical Networking sector in the aftermath of NT's earnings
disappointment, it seemed a foregone conclusion that JNPR would
be a drop tonight.  But then, after giving up nearly 27% of its
market cap between Tuesday's close and this morning's low of
$159.38, our play staged a near-miraculous recovery, managing
to eke out a close above $190.  Today's low should act as good
strong support, but beware of changing sentiment.  Volume today
came in north of 22 million shares, dwarfing yesterday's 14
million, and most of it was on the sell side.  The NASDAQ
dropped mid-day to test it's intraday lows, and fortunately
managed to post an impressive recovery.  Most of the selling
over the last 2 days was directed at Optical stocks, and this
same sector led the recovery into the close this afternoon.
Use extreme caution in trading JNPR as the sentiment is shifting
with amazing rapidity.  Anticipation of JDSU's earnings after
the close contributed mightily to the recovery, and fortunately
the report was strong.  But there is a lot of darkness between
now and tomorrow's open.  If traders sell the good news, we
could see a rapid return of the negative sentiment that has
plagued Optical stocks over the past 2 days.  Only those that
like to live dangerously should consider buying intraday dips
to support.  We have seen solid support levels (200, 190, 180,
170) cut asunder in the past 2 days, so unless the buying volume
is strong on the bounce, wait to buy strength on a breakout.
$200 looks like a logical place for JNPR to convince us that it
is on the road to recovery.  Stop losses are a must if you are
going to play in this volatile sector.

CIEN $103.00 -5.38 (-46.50) The last of the Internet high-flyers
finally got their wings clipped.  The instigator?  Nortel's (NT)
relatively decent earnings report.  At the onset, the fiber-
optics started to tumble in sympathy, but the selling within the
sector turned into a frenzy.  Investors got cold feet and didn't
want to try to catch the falling knife.  CIEN was knocked down
25%, or $27 before the closing bell put a stop to the slide.
Today, CIEN fell lower and hit a bottom at $84.  The stock
proceeded to trade sideways with over 39 mln shares exchanging.
It wasn't until the NASDAQ turned around later in the day that
CIEN managed a slight recovery and closed above the century
mark.  Needless to say, the fiber-optic saga is currently
disastrous, but that's not to mean the play is over.  The silver
lining might be a capital buying opportunity tomorrow.  Look for
a strong rebound on the NASDAQ to propel CIEN off the current
level.  A convincing move through the 50-dma ($112.58) would
provide some confirmation that CIEN can resume an uptrend.

NTAP $116.78 -5.47 (-31.81) Did you have time to grab your hat
on the way out the door?  Many of the networking stocks took big
hits as a result of Nortel's (NT) earnings report.  The punishment
for not being perfect put many stocks to the test.  On Wednesday,
the 50-dma buoyed NTAP around the $120 level, but that safety net
failed during today's extended downdraft.  Concerns about the
valuation of storage stocks added the salt to the bleeding wound.
A heavy-duty parachute would have helped soften NTAP's crash
landing; however, stop losses worked better to minimize losses.
Whether it was the oversold conditions or a combination of other
market variables, the current changed on the NASDAQ and a late
day rally ensued.  NTAP was on the buy list and it recouped the
majority of today's losses.  The advance places it back in the
vicinity of the supportive 50-dma line ($119.59).  As a result
of today's action and in consideration of the upside potential,
we're keeping NTAP on our call list tonight.  Now if selling
resumes tomorrow as a result of JDS Uniphases' (JDSU) earnings
report (despite its good marks), wait for the market to
stabilize then look for a strong volume recovery through $120
before taking a position into the upward momentum.  Network
Appliance also has its own earnings release scheduled in just a
couple of weeks.  The announcement is scheduled for November
14th, after the market.

HAND $95.47 +7.03 (+6.16) Oh yes, it's true.  There were a few
stocks that bucked the selling trend and moved into the
positive.  HAND was on that short list and gave a stellar
performance during the past two sessions.  On Wednesday, HAND
was steadfast and traded at higher levels for most of the day.
The stock continually tested the all-time resistance of $99.31,
but the NASDAQ pressure eventually took HAND back down to $88 by
the close.  Today when the selling finally subsided and
investors started picking and choosing, we were presented with a
prime buying opportunity.  Strong momentum bounces off the 10-
dma line and the $85 level followed by high-volume moves through
$90 provided a variety of opportunities to take entry.  Look for
the trend to continue tomorrow.  Definitive moves through $95
accompanied by rallying market conditions could portend a
momentum entry tomorrow, but be wary of traders selling into the
strength.  Keep stops tight.


FCEL $65.69 +2.88 (-9.69) When we started this play last Sunday,
one of the main technical signals we were looking for was a break
below the neckline of FCEL's head and shoulders formation.
Yesterday, thanks to an overall shaky market after the Nortel
news, FCEL gapped down at the open.  In doing so, it opened below
the critical $70 neckline support level and from there, spent the
rest of the day heading lower.  By the end of the day, FCEL had
lost $8.69 or 12.15% on over 125% of ADV.  Today, with oil moving
higher due to comments from Iraq, threatening to hold back
production, FCEL was able to move slightly higher but serious
technical damage has already been done, making this an attractive
put play.  Failed rallies above $70 resistance and the 5 and
50-dmas at $69.63 and $75, respectively can provide aggressive
entry points while a break below $60 with conviction should give
conservative traders a target to shoot for.  As this play is
driven by oil-related news, make sure sentiment confirms
direction before jumping in.

PVN $93.69 -5.06 (-9.38) Our play on PVN is performing nicely,
aided by downside pressure in the Financial sector.  Yesterday's
attempted rally failed right at the 5-dma (then at $102), and
the afternoon rollover turned into a rapid downhill descent on
the back of the overall bearish sentiment this morning.  After
falling to test major support at $86, PVN managed to attract
some buying interest and recover to close fractionally above
the 200-dma (currently $93.50).  This level will be pivotal for
our play going forward.  If it can hold as support, our play
will have run out of gas, but the declining 5-dma will continue
to pressure the stock, and rollovers near this level will
continue to make for good entries.  Strong volume has
accompanied the recent selling, with today's session seeing
nearly 4 times the ADV change hands.  Below current levels,
look for support to materialize at $83, and then $79.  The
more conservative entry strategy will be to wait for continued
selling pressure to violate the 200-dma before initiating new
positions.  For those of you with open positions, keep your
stops tight in case the bulls manage to stage a recovery from
current support levels

VTSS $58.63 +2.63 (-18.25) No use crying over spilt milk, as we
missed a great entry on VTSS earlier this week.  We missed the
majority of the move yesterday due to the large gap down, but
sentiment is still favoring the bears.  It was bad enough that
the solid earnings report last week was not received, but
bearish sentiment aimed at just about any stock in the
Communications arena has not been kind.  Heaping more misery on
VTSS yesterday afternoon was Lehman Brothers, downgrading
the stock from Buy to Outperform.  Caught between the pain being
felt by the Optical and Semiconductor sectors, VTSS will have a
hard time moving higher and should make for a fairly easy
mauling target for the bears.  Buyers tried to step in this
morning, but were quickly turned back at the bottom of
yesterday's gap (near $60) and this level should act as
resistance, especially as the month of October continues to
spook investors.  The late-day recovery began to give the bulls
hope, as volume picked up.  Above $60, VTSS will see solid
resistance at the top of the gap ($67.50), reinforced by the
sharply declining 5-dma ($66.69).  Consider new entries as our
play rolls over from resistance, or for a more conservative
play, wait for continued selling volume to penetrate intraday
support near $53.

PHCC $51.25 +0.31 (+2.88) PHCC is currently epitomizing the
phrase, "steady as she goes".  Now granted this is certainly not
something option traders want to hear, but that's how PHCC has
traded in recent sessions.  On one hand there wasn't any major
event to precipitate further losses, yet on the flip side, it
doesn't appear PHCC is poised to bounce higher either.  The
stock is simply trading sideways and consolidation at this lower
level.  Both yesterday and today, $52.25 served as a tough line
of upper resistance in contrast to the much higher ceiling of
$56.50, established earlier in the week.  This developing
pattern of lower highs is encouraging.  Better evidence of a
trending breakdown would be convincing moves back under the $50
level on strong volume.  Wait for the confirmation before
beginning new plays and keep stops tight while the market
struggles for direction.

Attention Online Traders:

NobleTrading.com has become the first online trading firm to
offer both Direct Access Trading, and web based trading to its
customers. Trade Direct using any ECN, SOES, and SelectNet, or
trade right through your browser using our web based trading
application. FREE DSL service for active traders.

Visit our website and sign up for a Free real-time demonstration!


MSFT - Microsoft $64.44 +3.19 (-0.75 this week)

Microsoft is the largest software stock traded on the U.S. stock
exchanges measured in market capitalization.  They develop,
license, manufacture and support many different software products
for various client applications.  Their best known products
include Windows 2000 and Windows NT.  In addition, their MSN
internet service is widely successful.  Their business has
three main divisions:  sales, marketing and support, and business
operations.  The vast majority of computers in the US and the
world use Microsoft software.

Microsoft has had a difficult time for the last twelve months.
However, due to several factors, including a superb first
quarter earnings report, the stock seems to be making a dramatic
recovery.  At its peak in January of 2000, the company had a
market capitalization of over $550 billion and a P/E of over 100.
The market crash in April coincided with the verdict in the
widely publicized monopoly trial, and pushed the stock below its
200 DMA for the first time since 1996.  The trial is no longer
making headlines, and since Joel Klein resigned from the case,
many analysts have stated that the outcome of the trial may have
little significance in valuing the stock over the long term.
Investors seem to have forgotten about it.  MSFT hit a two year
low on October 16th of $49.56.  However, a blowout earnings
report released on October 18th seems to have had the power to
reverse the downtrend.  Microsoft reported that their profit in
the first fiscal quarter rose 18% to $2.5 billion, or 46 cents
per share, primarily due to the success of their Windows 2000,
and shrinking expenses.  This new earnings report gives them
a P/E of 37.6 and a market cap of $339 billion.  This is quite
impressive for a company with revenues of over $23 billion
annually.  In this market environment, investors are running
away from companies with no profit and P/E ratios in the hundreds.
They want growth, safety and reliability, and need look no further
than MSFT.  Today, MSFT surged over 3 points on strong volume to
poke through the 50 DMA at $62.36.  Aggressive traders could
look to enter new positions at current levels early tomorrow if
the NASDAQ shows signs of rallying.  If MSFT pulls back, look for
bounces off $64 and lower near the $62.50 level.  A more
conservative entry might be found if MSFT trades above the $66

In the news today, MSFT announced the long awaited release of
new database software for hand held electronic Internet devices.
In addition, the Wall Street Journal reported that CSFB joined
forces with MSFT to broaden its distribution channels.

BUY CALL NOV-60 MSQ-KL OI=25487 at $6.13 SL=$4.13
BUY CALL NOV-65*MSQ-KM OI=33918 at $3.13 SL=$1.63
BUY CALL NOV-70 MSQ-KN OI=37920 at $1.31 SL=$0.50
BUY CALL DEC-60 MSQ-LL OI=  422 at $7.38 SL=$5.38
BUY CALL DEC-65 MSQ-LM OI= 2701 at $4.38 SL=$2.88

SELL PUT NOV-65 MSQ-WM OI=11698 at $3.38 SL=$1.56
(see risk of selling puts in play legend)

Picked on Oct 26th at    $64.44    P/E = 38		
Change since picked       +0.00    52-week high=$119.9
Analyst Ratings      6-10-2-5-0    52-week low=$ 48.43
Last earnings 10/18   est= 0.40    actual= 0.46
Next earnings 01-18   est= 0.49    actual= 0.47
Average daily volume = 28.6 mln


TIBX - Tibco Software $57.00 -4.75 (-13.06 this week)

Tibco Software helps companies get a ride on The Information
Bus (TIB).  Tibco's software products enable businesses to
link internal operations, business partners and customer
channels in real-time. The Company's software products allow
multiple distinct applications, Web sites, databases and other
content sources to be integrated and managed within a common
framework.  By licensing their software, TIBX enables
enterprises to extend their information technology
infrastructures and business processes across the Internet to
conduct all forms of electronic business.

Where have all the buyers gone?  Caught in a down-trending
channel for more than 3 months now, TIBX just can't seem to
get the bulls to come back in strong enough numbers to keep
up the bears in check.  Even the 200-dma (then at $81.94)
couldn't stem the selling, and TIBX has now confirmed several
times that this level will be a tough obstacle to overcome.
Our new play could be the poster child for the lower high/lower
low pattern that is becoming more and more common in the
Internet sector.  Many technical factors have coalesced to
confirm the degree of weakness we can expect from TIBX.  The
most recent rollover took place in the middle of the
downtrending channel, rather than the top, and oscillators like
MACD and Stochastics have been posting continually weaker peaks
for the past 3 months.  The most recent breakdown has pushed
the stock solidly below all of its shorter moving averages, with
the 5-dma clear up at $64.35.  This coincides nicely with
violated historical support (now resistance) between $64.65.
Support near the $51 level was tested and held this morning,
but further NASDAQ weakness could be the straw that breaks that
camel's back.  Pick the entry strategy that fits your trading
style such as a rollover at resistance or a violation of support,
but in either case, let volume be your guide.  If today's
late-day recovery is any indication, we will likely test
resistance first.

BUY PUT NOV-60*PAV-WL OI=124 at $8.88 SL=6.25
BUY PUT NOV-55 PAV-WK OI=177 at $5.75 SL=3.75

Average Daily Volume = 1.71 mln


CIEN - Ciena Corp $103.00 -5.38 (-46.50 this week)

CIENA Corporation's market-leading optical networking systems
form the core for the new era of networks and services
worldwide. CIENA's LightWork architecture enables next-
generation optical services to transmit signals simultaneously
over the same circuit.  This multiplexing system changes the
fundamental economics of service-provider networks by
simplifying the network and reducing the cost to operate it.
About 45% of sales come from outside the US markets.

Most Recent Write-Up

The last of the Internet high-flyers finally got their wings
clipped.  The instigator?  Nortel's (NT) relatively decent
earnings report.  At the onset, the fiber-optics started to
tumble in sympathy, but the selling within the sector turned
into a frenzy.  Investors got cold feet and didn't want to try
to catch the falling knife.  CIEN was knocked down 25%, or $27
before the closing bell put a stop to the slide.  Today, CIEN
fell lower and hit a bottom at $84.  The stock proceeded to
trade sideways with over 39 mln shares exchanging.  It wasn't
until the NASDAQ turned around later in the day that CIEN
managed a slight recovery and closed above the century mark.
Needless to say, the fiber-optic saga is currently disastrous,
but that's not to mean the play is over.  The silver lining
might be a capital buying opportunity tomorrow.  Look for a
strong rebound on the NASDAQ to propel CIEN off the current
level.  A convincing move through the 50-dma ($112.58) would
provide some confirmation that CIEN can resume an uptrend.


JDSU's bullish earnings report could set the optical sector a
light.  CIEN's $7 burst in after hours trading could portend a
bigger rally early tomorrow with cooperation from the economic
data scheduled to be released.  Aggressive entries could found
if CIEN charges out of the gates above $105 tomorrow morning.
A more conservative approach might be to wait for CIEN to
build momentum, thereafter target shooting for entries upon a
rally above the $110 level.  If shares pull back, a bounce off
$100 might provide a solid entry.

BUY CALL NOV-100 UEE-KT OI=2803 at $14.50 SL=10.75
BUY CALL NOV-105*UEE-KA OI= 545 at $12.25 SL= 9.25
BUY CALL NOV-110 UEE-KB OI=3476 at $10.38 SL= 7.25
BUY CALL DEC-110 UEE-LB OI= 177 at $15.13 SL=11.00
BUY CALL DEC-115 UEE-LC OI= 215 at $13.38 SL=10.00

Picked on Sep 24th at   $120.75    P/E = 736
Change since picked      -17.75    52-week high=$151.00
Analysts Ratings      9-9-0-0-1    52-week low =$ 15.13
Last earnings 06/00   est= 0.17    actual= 0.19
Next earnings 11-16   est= 0.24    versus= 0.03
Average Daily Volume = 8.57 mln

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Market Volatility Continues...

Wednesday, October 25

The stock market plummeted today after a disappointing forecast
from Nortel Networks (NT) sent technology stocks into a downward
spiral.  Industrial issues also slumped on worries of a slowdown
in future earnings.  The Nasdaq closed down 190 points at 3,229
and the Dow was down 66 points at 10,326.  The S&P 500 index was
down 33 points to 1,364.  Activity on the Nasdaq was heavy at 2
billion shares exchanged, with declines trouncing advances 2,734
to 986.  Trading volume on the NYSE reached 1.29 billion shares,
with declines beating advances 1,901 to 970.  In currency trade,
the Euro fell to a new low of 82.46 cents amid ebbing confidence
in the European Central bank.  In the bond market, the 30-year
Treasury fell 16/32, pushing its yield up to 5.74%.

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

Microsoft   MSFT   LJAN50C/DEC65C   $20.50   debit   LEAPS/CCs
Home Depot  HD     JAN36P/JAN43P    $3.25    credit  bull-put

Our new pair of spread candidates experienced favorable activity
during today's session.  Both plays were available at the target
entry prices and the underlying issues held up well considering
the bearish market movement.  (Congratulations to our new staff
member for some excellent selection over the past two weeks!)

Portfolio Plays:

Technology issues crashed lower Wednesday as worries about the
future performance of the networking sector weighed heavily on
investors.  The sell-off in Nortel (NT), whose shares fell 29%,
sent shock waves through the Nasdaq as analysts scrambled to
unravel the effect of NT's shortfall in optical network system
sales on other industry issues.  Nortel's performance was well
below analysts' consensus forecasts of 120% growth and concerns
that other networking companies will show similar sales declines
affected a number of the leading communication companies.  Most
semiconductor and Internet stocks also retreated as news of NT's
deficiency began to take its toll on other technology sectors and
a significant drop in shares of AT&T (T) pulled the telecom group
into the foray.  The #1 U.S. long-distance phone company cut its
growth outlook and announced plans to separate its wireless units,
broadband, business services, and consumer long-distance, marking
the biggest reorganization of the corporation since the breakup
that created the Baby Bells.  The Dow industrial average was also
pressured by losses in Hewlett-Packard (HWP) and International
Business Machines (IBM).  At the same time, stocks supporting the
blue-chip index included "Old Economy" companies in the consumer
products, pharmaceutical, and banking sectors, all of which were
well received by investors fleeing the troubled technology group.
Johnson & Johnson (JNJ), Merck (MRK) and Coca-Cola (KO) led the
gainers on the Dow.  In the broader market, biotechnology issues
moved higher thanks to bullish earnings reports and health-care
stocks also edged upward as investors looked for companies whose
earnings are expected to rise even if the economy slows.

Portfolio Plays:

In Tuesday's session, we enjoyed a number of winning positions.
The industrial group was our most productive category and plays
in the financial sector dominated the portfolio winners.  Bear
Stearns (BSC) jumped to a mid-day high near $66 and eventually
closed up $5 at $63 on momentum from the recent takeover rumors.
Our bullish diagonal spread returned an enormous two-week profit
for traders that rolled the long-term play to November options.
Allstate (ALL) finished up $2.31 at a recent high near $36 and
those of you in the bullish synthetic position are starting to
achieve excellent returns.  Knight Trading Group (NITE) also
rebounded with the online brokerage sector and now the issue is
above $30, our original cost basis in the synthetic position.
Last week's downward adjustment to the NOV-$25 Put appears to
have been too conservative but at least the position will end
without major losses.  Long-distance carrier Bellsouth (BLS)
continued higher, closing near $43 amid subtle strength in the
telecom group and the bullish synthetic play is now offering a
$1.50 profit with three months remaining until the long option
expires.  Carter Wallace (CAR) was the surprise of the session,
climbing almost $2 to a high near $30 as traders speculated on a
potential buyout of the issue.  Our new diagonal spread produced
a short-term profit of $1.06 on $2.94 invested and the position
does not expire until January.

Wednesday's trading was fraught with apprehension and investors
showed their true outlook for the technology group, dumping all
but the most attractive issues.  Share values dropped across the
board and the capitalization of many market leaders was reduced
by substantial amounts.  Applied Micro Circuits (AMCC), one of
last month's candidates, dropped $50 during the volatile session.
Juniper Networks (JNPR) and Broadcom (BRCM) were the big losers
in our portfolio and the bullish positions in those issues will
need to be monitored closely (for exit or adjustment) over the
next few days.  Maxtor (MXTR) was the lone standout, rising $1.12
to $9.62, and the unexpected move boosted our bullish calendar
spread to profitability.  The long option expires in January.
Another small-cap issue, Fairfield Communities (FFD) also moved
in opposition of the trend and our recent synthetic position is
beginning to exhibit excellent potential.

Thursday, October 26

No plays today...(on the road!)

Questions & comments on spreads/combos to Contact Support
                         - STRATEGIES -

A recent commentary by staff writer Chris Verheigh in Options 101
prompted a request from one of our readers for information on the
popular strategy of "Butterfly Spreads."

Butterfly Spreads: Overview

The butterfly spread is generally a neutral position that is a
combination of both a bullish spread and a bearish spread.  The
spread is designed primarily for the instrument that will not
experience much of a net rise or decline before option expiration.
The most common approach involves spreads with a relatively small
investment and has limited risk as well as profits.  The strategy
can be costly in terms of commission fees so you should consider
playing these combination strategies with a low cost (discount)
broker.  That is, of course, unless you trade with a professional
who has direct access to the exchange floor and can easily return
he cost of personal service in the form of better executions.

There are three strike prices involved in a standard butterfly
spread.  With calls, (the spread can also be initiated with puts)
the butterfly spread consists of buying one call at the lowest
strike price, selling two calls at the middle strike price and
buying one call at the highest strike price.

Here are the basic characteristics of the strategy:

1. The maximum amount of profit is realized when the stock price
   ends the expiration period at the strike price of the written

2. The risk is limited both to the upside and to the downside,
   and is equal to the amount of the net debit required to
   establish the spread.

3. There is a profit range within which the butterfly spread
   makes money.  Outside this profit range, losses will occur
   at expiration, but these losses are limited to the amount of
   the original debit.

4. The collateral investment required for the butterfly spread
   is equal to the sum of the requirements for the bullish
   position and the bearish position.

The following formulae can be used to quickly compute the
important details of this spread:

Collateral required = distance between strikes + net debit
Maximum profit = distance between strikes - net debit
Downside break-even = lowest strike + net debit
Upside break-even = highest strike - net debit

Here is a profit graph of the Butterfly Spread:


Ideally, one would want to establish a butterfly spread at the
smallest debit possible in order to limit his risk.  At the
same time, most traders try to initiate the position with the
stock or index value near the middle strike price (in the area
of maximum profit) to benefit from those cases in which the
instrument remains relatively unchanged.

Some traders will try to obtain a small debit by taking an
opinion on the underlying issue.  These are the smallest debit
positions as the stock price is usually some distance from the
middle (short) strike price.  For example, if the stock price is
close to the higher strike price, the debit would be small, but
the investor would also have to be somewhat bearish on the issue.
The instrument would have to decline in price (towards the sold
options) for the maximum profit to be realized.  When the issue
begins closer to the lower strike price, the investor also open
the spread for a small debit but he would now have to be bullish
on the underlying stock in order to try to realize the maximum
profit.  Thus, if the butterfly spread is to be established at a
very low debit, the trader will have to make a decision as to
whether he intends to be bullish or bearish on the underlying
issue.  Most professionals prefer to stay as neutral as possible
on the instrument in this strategy.  This approach will lead to
slightly higher (initial) debits but it will theoretically have
a greater probability of returning a profit if the stock price
remains relatively unchanged.

In my experience, the best butterfly spreads are generally found
on the more expensive (and volatile) stocks with strike prices
at least 10-20 points apart.  The potential return in these
positions is large enough to overcome the commission costs and
the probability of profit is somewhat higher, relative to lower
priced stocks with options strike spreads of $5 or less.

Butterfly Spreads: Follow-up Strategies

The butterfly spread has limited risk by its construction and
there is usually little that the spreader must do in the way of
follow-up action.  The only portion of the spread that is subject
to assignment is the (short) option at the middle strike.  If the
price of the issue is near the middle strike after a reasonable
period of time, and one feels that the stock is about to make a
big move, it may be advantageous to close the spread to protect
the available profits.  If the original debit was large and the
stock price is beginning to move above the higher strike or break
down below the lower strike, the trader may want to close the
spread to limit losses.

There is a common method of legging out of a butterfly spread
that is often used by more experienced traders.  If the price of
the underlying issue moves significantly, early in the life of
the spread, the bullish portion (or the bearish portion, depending
on which way it moves) of the play might be closed-out near its
maximum profit potential.  The trader may want to take advantage
of this situation in order to increase position profits if the
issue reverses direction and returns to the original target range.
By increasing his risk slightly, he may be able to improve his
position significantly, converting the butterfly spread to a
vertical (or price) spread.  Although the chances of such a trend
reversal cannot be considered great, it does not cost the trader
much to restructure himself into a position with a much broader
(maximum) profit range.

Butterfly Spreads: Strategy Summary

The butterfly spread is an attractive low-cost strategy with
limited profit potential and limited risk.  One can keep his
initial debits to a minimum by taking a directional posture on
the underlying stock.  To remain neutral, he will normally have
to pay a larger debit to open the spread, but may have a better
chance of making money.  If the stock experiences a large move
prior to expiration, the trader may want to close the profitable
side of his butterfly spread near its maximum potential and thus
be able to capitalize on a stock price reversal, should one occur.

Good Luck!

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