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Daily Newsletter, Sunday, 07/29/2001

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The Option Investor Newsletter                   Sunday 07-29-2001
Copyright 2001, All rights reserved.                        1 of 5
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******************************************************************
MARKET WRAP  (view in courier font for table alignment)
******************************************************************
        WE 7-27          WE 7-20          WE 7-13          WE 7-06
DOW    10416.67 -159.98 10576.65 + 37.59 10539.06 +286.38  -249.72
Nasdaq  2029.73 +   .36  2029.37 - 55.42  2084.79 + 80.63  -156.38
S&P-100  620.26 -  5.33   625.59 -  1.26   626.85 + 13.90  - 19.07
S&P-500 1205.93 -  4.92  1210.85 -  4.83  1215.68 + 25.09  - 33.79
W5000  11166.00 - 46.37 11212.37 - 59.55 11271.92 +212.36  -347.59
RUT      485.02 -  2.91   487.93 -  2.78   490.71 +  7.45  - 29.38
TRAN    2909.88 - 55.78  2965.66 + 25.31  2940.35 +191.43  - 81.04
VIX       24.73 -   .24    24.97 +  1.10    23.87 -  1.10  +  3.34
Put/Call    .47              .82              .65              .90
******************************************************************
 
Still Holding Our Breath!
by Jim Brown

A typical summer Friday put lulled everyone to sleep and prompted
many traders to leave early, confident that all the fireworks for
July were over. Volume was mediocre with only 1 billion on the NYSE
and 1.56 billion on the Nasdaq. Advancers beat decliners and new
highs beat new lows. What is wrong with this picture?


 


 


 


 

What was missing was the big closing move in either direction! 
From 1:PM all the major indexes traded perfectly flat and market
commentators were scratching their heads trying to make news
where there was none. Welcome to a normal summer Friday! This
was still bullish in my humble opinion. I mentioned that I 
expected some profit taking from the Tuesday dip rebound as 
well as some traders going flat before the weekend. We got 
both but the impact on the markets was minimal. 

We had bad economic news but many traders were relived it was
not worse. The GDP limped in at an annual rate of only +0.7%
and business spending dropped -13.6%, the biggest drop in 19 years.
There are rumors that the GDP may even be revised downward as more 
data becomes available. There was no sign of a turnaround in the 
current quarter with the slump in IT equipment sales accelerating. 
Inventory decreased but at a slower rate than the prior quarter. 
Exports dropped as the global weakness increased. Many other 
countries are developing recessions of their own which will hurt 
the possibility for a quick recovery by our own economy. This was 
the slowest growth rate in over eight years and with no signs of 
improvement the Fed has a green light to accelerate rate cuts if 
needed. The next FOMC meeting is August 21st but futures indicate 
only a 25 point cut. No hope for traders here but the markets did 
not sell off! The Consumer Confidence number dropped to 92.4 as
layoffs weighed on the workforce. Consumers start getting their
$38 billion in tax rebates next week and history shows us that
they will spend it or most of it almost immediately. On a side
note the $38 billion tax rebate is $12 billion less than the
$50.6 billion JDSU lost this year. This is thought to be the
largest corporate loss ever. Now you know why the stock is
only $8.

Continuing the good news Friday thought process, HWP gained
slightly as investors fished for bargains even though their
warning was fairly drastic. JDSU only lost -.92 after missing
earnings by several miles and was actually climbing at the close.
Compaq was the proverbial stepchild that continued in the dog
house with a small loss but was also improving at the close.
The winners of the day were QCOM and VRSN. QCOM gained +3.52
after saying that things "might" be looking up for the fourth 
quarter. Verisign soared with a 6.93 gain after beating estimates
of fourteen cents with actual earnings of a quarter. They also
raised their estimates for next quarter and the full year.
AFCI beat the street by a penny and they said "orders from
traditional customers...showed year over year growth during
the quarter". A fibre company with order growth? That should be
a major sign for somebody! AFCI gained almost $4 or +17% on
the news.

One of the bright points of the day was not from an earnings
report but from an acquisition. Cisco announced that they were
going to buy Allegro Systems, a security company, for $181 million.
While the deal itself is not remarkable it is the second CSCO
buy in the last two weeks. They announced on July-11th that they
were buying AuroraNetics, a data transmission company, for $150M.
This is important because Cisco CEO John Chambers has repeatedly
said they would not make any acquisitions until business improved
and have been notably silent from their deal a month program for
some time. Several analysts speculated that Cisco must be feeling
better about the future if they suddenly have moved into a "deal
a week" acquisition mode. 

Earnings were relatively quiet on Friday with 79% of the S&P-500
already reported. Of the 395 S&P companies reporting over 56% 
have beaten (mostly lowered) estimates while only 14% have
missed estimates. 81% of the S&P tech stocks have reported.
So far this season we have had 213 warnings about Q3 compared
to only 26 for the same time last year. As earnings draw to a
close the focus will move to the late cycle stocks like CSCO
(Aug-7th) and DELL (Aug-16th) to see if their guidance has changed. 
While the furious announcement pace will decline more credence 
will be given to those who have yet to tell all. No more slipping 
in undetected while the spotlights are on a big cap being crucified 
in the press. 

Don't look now but historically the biggest leading indicator
for the Nasdaq, the SOX, is back over 600 again. In several of
the economic reports recently, semiconductor orders have shown
a slight increase. Texas Instruments also said they were seeing
an increase in orders for Q3. LSI Logic said they were seeing
higher revenue already for Q4 and Taiwan Semiconductor said orders
had stabilized. Numerous chip stocks were upgraded to "buy" 
status by several analysts this week. After being on a chip free
diet it appears investors are starting to nibble at this sector.
The SOX above 600, while encouraging is also sitting right at
resistance dating back to July-6th. If we can break out of the
605 range then the 50-DMA is 613 and the 200-DMA is 627. Once
over those the next major resistance is 700. Typically investors
buy chips 6-9 months before they expect profits to surge. Based
on the current forecast of Q2-2002 being the crest of the next
tech wave, we are seeing the most aggressive traders take positions.
Mainline investors will wait until the resistance points mentioned
above are penetrated before putting their toe in the waters.

Next week the markets will have to wade through several hundred
earnings announcements from many companies most traders have
never heard of before. The possibility of positive, market moving
announcements is slim but negative news could be a challenge.
The market will also have to digest the Personal Income/Spending
and Chicago PMI reports on Tuesday and Construction Spending on
Wednesday. Has it been a month already? The Non-farm Payroll
Report is Friday. Lest we forget we are entering the three week
window for the next Fed meeting on Aug-21st.  

As traders we will watch anxiously as the major indexes enter
the week right on support. The Dow pulled back to lose -160
points for the week but rebounded to close just over 10400.
The Nasdaq closed the week exactly even with where it entered
at 2029 but comfortably over 2000 again. The S&P-500 is back 
over 1200 and trading in the high end of it's recent range. Not
a bad place for the indexes to start the new week as long as 
they continue ignoring the bad news like they did with JDSU,
CPQ and HWP. This is a key point. The few investors still trading
seem to be immune to the bad news. The problem is luring those
retail traders back off the bleachers and into the game. After
being on injured reserve for months these traders are gun shy
and are not sure if they want to rush back into the game now or
save their strength for the fourth quarter.

Ah but greed is a wonderful thing. As soon as we get any upward
movement from these levels those same shy traders will be throwing
money at tech stocks to avoid being left out of the victory dance.
Just when this rush to buy will begin is the $64K question. You
know my thought process. A Nasdaq close over 2100 is my entry
point signal. The Dow needs to get back over 10600 as well to
make everyone feel bullish again. You can see from these numbers
that we still have to retake 75 points of ground from the bears
on the Nasdaq and almost 200 points of blue chip territory. These
points may be hard fought. Every fifteen minutes on stock TV, 
regardless of what channel you watch, there are competing analysts
predicting 9000 or 11000 as the next major level we will hit. The
economy is still in the tank and any buying now is pure speculation
that it will recover in the next six months. Of course we do have
the Fed on our side and a 100% chance of another 25 point rate
cut next month. Still the Fed cannot control the global economy
no matter how hard they try. The U.S. is still consumer heaven
but without the help of the global village there is no way our
economy will explode again. Historically, after a period of rate
cuts such as we have experienced the economy eventually roars
back to life. Also, historically economic downturns and bear
markets are time dependent and their average time has expired. 

This is what investors are betting on when they buy stocks next 
week. They are investing on faith. "Faith is the substance of 
things hoped for, the evidence of things not seen" Hebrews 11:1. 
They will be betting on a recovery that has not yet been seen. 
Now the problem becomes, how much faith do investors have? We are
all optimistic, some more than others. Just how optimistic we
are will be tested next week. If we pass the test then maybe the
bottom is behind us. If not then there is more pain ahead. How
much faith in a rebound do you have?

One last thought. Ralph Acampora said last week that if we could
hold above the March lows of 9100 on the Dow and 1600 on the
Nasdaq then we might make some gains in the fourth quarter. 
Ralph, where is your faith? Take that bear coat off and enjoy
the summer sunshine! He makes a great contrarian indicator!

Definitely, enter passively, exit aggressively!

Jim Brown
Editor

************
Fall Seminar
************

The fall seminar has been moved to November instead of September
in order for us to have a broader range of speakers and allow
us more time during market hours for live trading. The new
dates are Nov 12th-16th and we will be announcing the complete
lineup of speakers next Sunday. This will be our biggest trading
event ever! Five days of real time trading and market analysis!
Don't miss it. 


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**************
Editor's Plays
**************

A Rebound in Our Future?

While there may be a rally in our future it may not be until
long after August options expire. I have picked two plays
today that use October options to allow for...are your ready...
an earnings run. Yes, as more companies start saying positive
things it is entirely possible that we couls see a rise into
October earnings. Is that optimistic or what!

There two different plays here, a breakout and a break down.
Choose your options carefully with weak August volume ahead of
us. Buy more time than you would normally buy and try to ride
out any weakness over the next couple of weeks.

********

Comverse Technology 

The company was punished severly recently and it was very likely
overdone. As evidenced by the charts there is buying pressure 
coming back into the stock and it does not take a genius to see
that there is not much downside risk.


 


 

There are multiple ways to play this. Once the stock recovered
over resistance at $28 it appears to be accelerating. You can
use the October $30 call for a straight long play or sell the
October $50 put for a better return.

I listed two calls and my preference would be the $25 call.
It only "costs" $2.50 more but it is almost $4 in the money.
Compared to the cost of the $30 call it is only $2.97 vs $4.40.
The $2.97 is the time premium of the $25 call. Actually it is 
cheaper if you compare apples to apples since $1.07 of that
premium is under $30.

Lets compare results of both calls based on expected stock price.


 

The $25 call "cost" me $2.50 more but it was worth $5 more at
any point after the stock reached $35. There are traders that
will argue that the rate of change of the higher strike price
call is greater than the rate of change of the more expensive
ITM call. I agree...BUT.

The rate of decay should CMVT stumble or go flat is much faster
for the $30 call than the $25 call. I PERSONALLY buy ITM calls
instead of OTM. I know others that only buy OTM. TO play OTM
you have to be right about direction and speed in that direction.
Miss either one and you lose. Nothing loses value faster than
an OTM call when the stock changes direction slightly. 

TO be fair, an ITM call loses value at the same rate as the stock,
$1 for $1 once stock direction changes more than slightly. The
Delta on an deep ITM option is almost 1. 

Now check out the profitability of each option with CMVT
at $40.


 

The profit on the naked put is the highest and the margin to
execute the trade was less than $6. The profit on the $25
call was next highest with relative safety. The lowest profit
was the OTM $30 call. Every person should be aware of the
differences in each option and choose the one that is right 
for them.

***********

Visteon Call Play

 

They don't get much easier than this. This is a simple breakout to
a new high and options are cheap. You can play the Dec-$20 for only
$2.30 or spend eighty cents more and get THREE MORE MONTHS!

I personally would go for the March since that gives you three more
earnings periods for increasing the stock value.

****************

Remember this one from last week?

Amazon $15 Put/Call

 

My recommendation was to buy the put for $1.00 and wait until 
after earnings to see if they were going to fall then buy the
call if you wanted to bet on their future prospects.


 

The $1.00 put spiked to over $3.50 after the announcement. 
Had you played this you would be $2.50 richer and the Oct $15
call is now $1.25 instead of $4.30. Do you still want to take
that bet even with the cheaper call? I doubt it. Remember I
said the possibility was stronger that AMZN would fall even
on good news and bad news just made it worse. Go back and
read last weeks write up on this play.


*********

Be very careful this week. Earnings are drawing to a close and
there will not be much to power the markets upward. Bullish
sentiment is growing but the bears are still prowling for that
last major dip before giving up.

Good Luck

Jim Brown
 

****************
MARKET SENTIMENT
****************

Perhaps Columbus Was Wrong
By Jeffrey Canavan

The Earth may be round, but the markets are flat.  The Nasdaq 
started the week at 2029.37, and ended the week at 2029.73, a 
monstrous 0.36-point gain.  The Dow and S&P 500 didn't fair any 
better.

The markets continue to waver as good economic news and positive 
earnings offer hope that an economic recovery is coming, but 
those hopes are then dashed by a conflicting batch of news.  
Today we had good news from several companies, but a weaker GDP 
number.  Earlier in the week we had a surprising drop in 
unemployment data, but that was mostly attributed to seasonal 
adjustments.  Looking at the Conference Board's online help 
wanted index shows that demand for white collar workers continues 
to decline.  The index dropped another 40 points to 101, and the 
steady decline doesn't offer any evidence of a bottom.  The 
Misery Index, which is the combination of inflation and 
unemployment, rose to a four-year high, and hints that the trend 
will continue until the end of the year.

Certain economic indicators may look miserable, but the stock 
market continues to look at the glass as half full, or at least 
no broken beyond repair.  On Tuesday the major indices came close 
to losing support, but bulls were able to step in and recoup 
those losses. Bulls have three days of momentum going for them, 
and July 30th and 31st have typically been bullish days.   If 
that holds true, Wednesday could be the day when the rubber hits 
the road, as downtrends, moving averages, and other forms of 
resistance converge to challenge any advances.  The medium-term 
trend is still down, and weak stocks are still susceptible, but 
relatively stronger issues may be able to hold up under the 
strain.

Nasdaq and NYSE Advance/Decline Charts (5-Day Moving Average)

 

A 5-day moving average of advancing minus declining issues also 
paints a picture of indecision.  Since April, up trends and 
downtrends have been squeezing the A/D line, which has basically 
caused the line to hover around zero.  As we approach the apex of 
the symmetrical triangles, one of the trends is going to have to 
give.

===

Market Volatility  
VIX   24.73
VXN   51.77

===

          Put/Call Ratio  Call Volume   Put Volume
Total           .47        542,157       252,742
Equity Only     .40        507,120       203,053
OEX            1.00          6,689         6,698
QQQ             .47         45,407        21,432

===

Bullish Percent Data

The Nasdaq-100 has reversed into bull alert status.

           Current   Change   Status
NYSE          34       -      Bear Confirmed
NASDAQ-100    38       -      Bull Alert
DOW           36       -      Bull Alert
S&P 500       48       -      Bear Alert  

Readings above 70 are considered overbought, and readings below 
30 are considered oversold.

Bull Confirmed  - Aggressively long
Bull Alert      - Cautiously long
Bull Correction - pause or pullback in upward trend
Bear Alert      - Take defensive action if long
Bear Confirmed  - High risk if long, good conditions for shorting
Bear Correction - Pause or rebound in downtrend

===

10-Day Arms Index  1.11  

Extreme readings above 1.5 are bullish, and readings below .85 
are bearish.  These signals don't occur often and tend be early, 
but when the do, they can signal significant market turning 
points.

===

        Advancers     Decliners
NYSE      1713           1349
NASDAQ    1952           1705

        New Highs      New Lows
NYSE      103             27
NASDAQ    115             83

===

Advisory Sentiment 

Bullish  Bearish  Correction   Net   Change 
  52.5%     23.2%    24.3%    29.3%   +3.3%

A bearish reading of 25% to 30%, combined with a bullish reading 
greater than 55% is typically considered bearish by contrairians.  
A net percentage greater than 30% is also viewed as bearish. 

===

Commitments Of Traders Report: 07/24/01
Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the 
Chicago Mercantile Exchange and Chicago Board of Trade. COT data 
can be found at www.cftc.gov.

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 tend 
to be wrong.  

S&P 500
The three-week reduction in the net bearish position of 
commercials came to an end. This wasn't the result of new short 
positions being added, but rather more long positions being 
dropped than short positions.

Commercials   Long      Short      Net     % Of OI 
7/10/01      309,374   385,178   (75,804)   (10.91%)
7/17/01      336,836   403,561   (66,725)   ( 9.01%)
7/27/01      317,241   392,146   (74,905)   (10.56%)

Most bearish reading of the year: (111,956) - 3/6/01
Most bullish reading of the year: ( 41,144) - 5/1/01

Small Traders Long      Short      Net     % of OI
7/10/01      135,587     59,889   75,698     38.72%
7/17/01      122,525     50,211   72,314     41.86%
7/24/01      141,372     61,665   79,717     39.26%

Most bearish reading of the year:  36,513 - 5/01/01
Most bullish reading of the year:  91,122 - 3/06/01
 
NASDAQ-100
The net bearish position of institutions has increased for the 
third week in a row.  (11,802) is the third highest bearish 
reading of the year. 

Commercials   Long      Short      Net     % of OI 
7/10/01       26,688     34,640   ( 7,952)  (12.97%)
7/17/01       26,721     37,225   (10,504)  (16.43%)
7/24/01       27,396     39,198   (11,802)  (17.72%)

Most bearish reading of the year: (15,521) - 3/13/01
Most bullish reading of the year:  (1,825) - 1/02/01

Small Traders  Long     Short      Net     % of OI
7/10/01        9,073     7,486    1,587       9.58%
7/17/01       11,680     8,183    3,497      17.61% 
7/24/01       12,170     7,744    4,426      22.23%

Most bearish reading of the year:  (1,028) - 1/02/01
Most bullish reading of the year:   8,460  - 3/13/01


DOW JONES INDUSTRIAL
Institutions added a few more long positions, increasing their 
net bullish stance on the Dow.

Commercials   Long      Short      Net     % of OI
7/10/01       13,743    12,999      744      2.8%
7/17/01       14,145    12,963    1,182      4.4%
7/24/01       16,080    12,812    3,268     11.3%

Most bearish reading of the year: (8,322) - 1/16/01
Most bullish reading of the year:  8,925  - 5/22/01

Small Traders  Long      Short     Net     % of OI
7/10/01        5,048     7,835    (2,787)   (21.63%)
7/17/01        5,255     9,144    (3,889)   (27.01%)
7/24/01        5,599     9,526    (3,927)   (25.96%)

Most bearish reading of the year:  (7,572) - 5/08/01
Most bullish reading of the year:   1,909  - 1/16/01


***************
ASK THE ANALYST
***************

Market - Sector - Stock
By Eric Utley

The mantra of monitoring the market, sizing up sectors, and
ultimately selecting stocks is often echoed by members
of the top-down clique.  It makes sense; after all, isn't
trading about quantifying risk versus reward?  I think yes,
along with the quandary known as supply versus demand.

Breaking down the market (Dow, S&P 500, Nasdaq-100) into sectors
helps the trader to view risk on more of a micro level, and to
discern where capital is flowing and likely to continue flowing.

Here at Option Investor, we stress monitoring a stock's sector
in our play write-ups.  And that much is often the source of
questions, so I've provided three links to the proprietors of
the majority of the narrow-based indexes we refer to.  The
three major proprietors of narrow-based (sector) indexes are:

The Chicago Board Options Exchange (CBOE)
The Philadelphia Stock Exchange    (PHLX)
The American Stock Exchange        (AMEX)

Granted, there are a few indexes that are not listed on the
following sites, but readers should find the majority of the
sectors we follow at Option Investor.  In addition, the
exchanges provide the components of each sector, which should
be of value.  Here they are:

http://www.cboe.com/OptProd/index_comp.asp

http://www.phlx.com/products/sectors.html

http://www.amex.com/asp/option_info.asp


Please send your questions and suggestions to:

Contact Support 

----------------------------

JDS Uniphase - JDSU

I enjoy your comments very much.  I think I am not the only one
who would like to hear anything about what is going on with JDSU.
Any bottom in sight? - Thanks, Jerry

Thanks for the question and compliment, Jerry.

JDS Uniphase (NASDAQ:JDSU) reported a loss of $50.6
billion last Thursday evening, far worse than what Wall Street
had been expecting.  But what the media didn't take into account
is that the loss stemmed, in part, from massive write downs of
inventory and goodwill.  While the acquisitions of SDL Inc. and
E-Tek, among others, positioned JDS Uniphase as the dominant
player in its market, they also contributed to the company's
loss last year to the tune of about $39 billion.  So the
glorification of JDS Uniphase's record-setting $50 billion loss
was blown out of proportion.  It was a one-time event, which
also included the write-off of a bunch of inventory.

Still, the company has problems and so does its stock.  For what
it's worth, the company previously had guided to around $450
million in revenue for its fiscal first quarter, but officials
withdrew those projections during the conference call Thursday.
That tells me the company doesn't have much in the way of orders
and is still contending with lackluster demand from telecom
customers.  If that's true, there's more downside left in the
stock, especially after taking into account all of its shares
outstanding from its acquisitions and stock splits.  (Just
because a stock price is low doesn't mean that it's cheap.)

Referring to the point & figure chart, the bearish price objective
for shares of JDS Uniphase is $7 - it hit $7.90 Friday morning.
Taking into account that the stock is very near its bearish
price objective and the bad news is out, a short-term bounce may
be in the cards.  But I wouldn't buy it.

For those readers who have a cost basis above $20, I think that
selling covered calls is a prudent strategy in the foreseeable
future if you can't take the loss.  It's reasonable to expect
that shares of JDS Uniphase could trade in a range between its
current lows and maybe $15 for the next two years, plus or minus
$3.  The only saving grace for the stock would be a V-bottom like
recovery in demand, but I don't think that's going to happen and
neither does the market.


 

----------------------------

Apple Computer - AAPL

Can you give your views on AAPL.  I am holding it at a cost of 23
and would like your advise on how to trade it. - Thanks, Ruth

Thanks for the question, Ruth.

It's been well documented and widely reported that the box makers
are engaged in a heated price war.  So I don't think that it's
the most prudent strategy to invest in a business that has margin
pressures.  Lower margins mean lower profits mean lower stock
prices.  The price wars will continue until demand returns to the
PC market.

And according to Apple (NASDAQ:AAPL) officials, demand has yet to
return in any way, shape or form.  During its conference call in
conjunction with earnings release, one Apple official said, "We
haven't seen any signs of an upturn in the consumer PC market."
Compaq (NYSE:CPQ) and Gateway (NYSE:GTW) have recently echoed
similar sentiment.

Perhaps the bullish argument for investing in box makers at
current levels is that the sector - along with the chip business -
was the first to fall last year.  Therefore, it should be the
first to rise from the mire.  In fact, the longer term charts of
Apple and Dell (NASDAQ:DELL) do lend to a bottom in the two.  Of
the two, Dell seems the strongest.

For investment purposes, I think there are easier places to make
money in the market away from the box makers.  The price wars
could last much longer than one might think, which, if they do,
will continue to pressure margins in the group.

For trading purposes, buying near meaningful support and selling
near meaningful resistance could work, but be careful not to cut
your hand.


 

----------------------------

Research In Motion - RIMM

This stock looks like it's ready to breakout in either direction.
I've also noticed that RIMM tends to follow the Nasdaq fairly
closely, and sometimes even closes on the positive when the QQQ's
has a negative day.  A recent positive earnings report also
supports a possible breakout with the Nasdaq if it clears 32 or
so, do you think this will be a good play? - Brian

Thanks for the elaborate question, Brian!

Research In Motion (NASDAQ:RIMM) is not a component of the
Nasdaq-100 (QQQs), so it's certainly feasible that it doesn't
trade in concert with it.  And I, too, have occasionally noticed
that it oftentimes finishes higher on days when the Nasdaq
finishes lower, and vice versa.  Maybe it has something to do
with the fact the company is from Canada, and also trades on
the Toronto Stock Exchange (TSE).

The wireless sector has been hopping recently, and I think it's
still good for a TRADE to the upside.  OI has been playing a
few wireless-related stocks through RF Micro Devices (NASDAQ:RFMD)
and Alpha (NASDAQ:AHAA).  But RIMM hasn't traded as well as the
others in the wireless sector.  And that may be a product of the
niche market that RIMM serves with its Blackberry Pager.  The
handset makers seem to be leading, reinforced by what Qualcomm
(NASDAQ:QCOM) reported last Thursday evening, and the ensuing
price action in its shares.  The chart below reinforces the
underperformance of RIMM relative to the Wireless Telecom Sector
(YLS.X).  (Simple directional analysis.)


 

However, if the broader wireless sector continues to perform,
RIMM is likely to be dragged higher by the group.  But other
pure play wireless stocks such as AT&T Wireless (NYSE:AWE) and
Aether Systems (NASDAQ:AETH) have out performed, and will most
likely continue to do so if the group works higher.

In terms of technicals, RIMM faces some pretty staunch resistance
just above its current levels.  The $25 level - also the 61.8
percent retracement level - served as fairly solid support during
mid-June.  Therefore, that level should now morph into resistance.
Should enough demand build to carry RIMM above $25, it could see
the upside of $28 in the shorter term.  And I agree that an advance
above $32 would signal a solid breakout, but my sense is that it
will be awhile before RIMM trades above $32 again.


 

----------------------------

Point & Figure

I have been interested in the Point and Figure Charts that you
have used in your column.  Is there a resource available that I
could use to get them? - Please advise, Denny

Good question, Danny.

I, along with most of my colleagues, use www.stockcharts.com for
my point & figure work.  In addition to their point & figure
charts, the site provides a plethora of other chart types that
far surpass the quality of any other free site I've visited.
They also provide a stock scan that is far more advanced than
most other free sites provide.

By the way, I'm in NO WAY associated with the site.  So my
opinions are unbiased.

----------------------------

DISCLAIMER:
This column is an information service only.  The information
provided herein is not to be construed as an offer to buy or
sell securities of any kind.  The Ask the Analyst picks are not
to be considered a recommendation of any stock or option but an
information resource to aid the investor in making an informed
decision regarding trading in options.  It is possible at this
or some subsequent date, the editor and staff of The Option
Investor Newsletter may own, buy or sell securities presented.
All investors should consult a qualified professional before
trading in any security.  The information provided has been
obtained from sources deemed reliable, but is not guaranteed
as to its accuracy.

 
**************
TRADERS CORNER
**************

Portfolio Evaluation For Sector Rotation
By Renee White

Have you ever thought about how you approach your trading 
decisions? I like to have a basic, big picture opinion of what I 
think the economy is trying to do, and then decide quarterly 
after an earnings period, how I will play things the next quarter. 
By paying attention to quarterly reports, CEO projections, and 
economic cycles, I can plan entry points on future plays and 
keep my portfolio flexible to sectors as they change. 

One thing that is very helpful, is tracking earnings reports and
significant comments during earnings season. This is valuable 
both for short-term trades during earnings season, and planning 
longer-term trades and trends throughout the year. 

If I keep up with economic cycles and where business sectors are 
along the normal business cycle wave, then timing swing and longer 
term trades becomes a bit easier. The micro-focus necessary for 
intra-day and short-term trades during volatile periods is 
stressful. Timing of course is everything, but if you practice 
tracking the subtle changes of the bigger economic picture, 
positioning isn’t as difficult.
 
You can do this easily by noting the highlights from your nightly
newsletter, and keeping a journal of the major points. On review 
of key points, a bigger picture emerges. Keeping track of key 
points: lay-offs, big earnings misses & winners, economics, sector 
shifts, etc, keeps one from the confusion of the day to day chaos. 
Besides, sometimes the best entry points occur during the post-
earnings slump period, when even the strongest companies take a
breather, drop off a little and then rest. If you plan your 
trades, you will be waiting with bait for your stock to pull back 
to a perfect Fibonacci retracement level, instead of being fearful 
that it is breaking down.

Now that the damage from 2nd Quarter earnings seems to be behind 
us, it is a good time to evaluate the bigger picture. In the old 
tech gold-rush days, when things got sick, we'd rotate from one 
tech sector to another. If networking was selling off, we'd run 
to software, or storage. Now though, with tech still on life 
support, rotation flexibility must involve a broader diversity 
of sectors to evaluate. These evaluations must be combined 
with economic reports. One day our tech sector will be strong 
again, but we aren’t there yet.

We all know the economy is weak. And to many, it is continuing 
to weaken. Announcements of lay-offs have escalated in the last 
3 weeks, along with poor visibility comments and the first set 
of warnings for the 3rd Quarter. Consumer debt has continued to
increase, another sign of grave trouble to many. This week, we 
heard that business spending dwindled to its biggest drop in 19 
years, and our first reading of the 2nd Quarter GDP came in at 
a dismal .7%. Mr. Greenspan also hinted that the worst is not 
over.

Nevertheless, there is a light flickering at the end of the 
tunnel.  Housing is still growing and holding steady. People are 
still buying cars, which means they are taking advantage of the 
interest rate cuts and promotions being offered. The NAPM is at 
its highest level since November, slowly trying to crawl back up 
to the key 50 level. The LEI, or index of Leading Economic 
Indicators, apparently bottomed around 108.6 in March, and has 
continued to climb to 109.6 in June. 

The interesting point of the two paragraphs above is that both 
Housing and Earnings are lagging economic indicators. That may 
confuse some, but realistically, it seems appropriate as the 
market works its way out of the mud. Since the markets lead the 
economy, these mixed signals tell me that our economy will 
continue to weaken in several areas, while beginning to 
strengthen in others, helped by the continued strength of the 
consumer. 

My guess is that 3rd Quarter earnings will again be weak, but 
by then I expect CEOs to report visibility improvement, 
which will give the markets reason to perk up with sustained
confidence. Since the market tends to move in anticipation of 
the economy by as much as 6 months, it is clear to me that a 
softer economy is predicted near term, yet firming on the 
downside. All we need is continued firming. The upside will take 
care of itself. If we have fewer warnings in September and key 
comments on visibility in October, the markets will reward us.

Although it feels shaky right now, I think we are out of the 
woods. Obviously, the consumer is holding this economy together. 
The timing of our refund checks may be just right to keep money 
rotating for back to school items. Those sales will affect 3rd 
Quarter earnings. Housing is also typically hot during the summer
season, and the June Housing numbers came in strong this week. We
should have one more rate cut coming at the August FOMC meeting 
for sure. We have already heard that advertisement spending has
apparently bottomed and is showing slight signs of improvement. 
Yes, movement is occurring. Even if the consumer stops spending 
after school starts, and housing drops off, business visibility 
will have improved. If housing starts to tumble, and CEOs start 
to report better visibility, guess where that money will go? This 
is an excellent time for dollar cost averaging into things for a
recovery.

According to Ned Davis Research, economic recovery tends to favor 
these sectors: Automotive, Leisure & Entertainment, Broadcast 
Media, and Transportation. Six to eight months after rate cuts 
end, the worst performing sectors tend to be: Housing, Food, 
Utilities, Healthcare, and Aerospace Defense. Of course, every 
cycle is a little different. For instance, leisure has been a 
strong sector recently, while utilities took a premature hit due 
to the helter-skelter energy debacle. 

One could argue that this cycle is different in many ways 
including that debt levels are at record highs and investor 
sentiment is too bullish. Still, fewer traders are chasing 
technology, which is why some things look very attractive on a 
long-term basis.

So here we are. The dead zone of post-earnings is soon to be upon 
us. It is time to develop your plan for the next 3-6 months.
Personally, my opinion is that we are slowly working our way up 
out of a near miss of a long-term economic recession. Repair will 
take time. If I am right, it will take another year for the repair 
to be felt worldwide with the global markets following us. Still, 
we will lead. 

Our stock market will lead recovery and earnings will lag. Watch 
the start of the food chain for movement. Greenspan mentioned that 
he looks at scrap metal prices, particularly copper, to give him 
a sign of demand. Copper is at the front of the food chain. 
Something needs to be built, before you can sell it. Demand for 
the products will come first, then earnings. Therefore, watch
commodities for early signs of recovery in manufacturing.

Also, watch large mutual funds. Have their charts stabilized? I 
find it valuable to follow mutual fund charts and larger 
portfolio managers. Notice what sectors the big guys are 
rotating.  

I'll be evaluating my trading plan soon. From the notes I kept 
during earnings season, I will choose a few select retail plays 
and possibly trucking, to take advantage of the tax cut. With a 
slowing economy, I am not comfortable taking a large position in
retail. On the other hand, transportation companies (trucking) 
came in strong with earnings, so someone is moving goods 
somewhere. 

I'll be adding to my financials, and mortgage lending. Even if 
housing softens after school starts, with interest rates low,
refinancing may continue. Also, since July is typically the weak 
period for energy related stocks, I will enter select plays for 
the winter season. I avoided energy during the whole 
schizophrenic hysteria the last 8 months, but now some stocks 
have been overly punished in this sector. Lastly, a few juicy 
techs blew away estimates and raised expectations, which I will 
try to catch on a weak summer pullback. I expect September and 
early October to be a very dangerous trading period, so careful 
entry is important.    

If you are loaded with value stocks, in cyclical areas, be sure 
you evaluate your weekly charts along with the index for the 
sector. I've noticed that many of the sectors that grew 
significantly during the tech crash, have not been able to 
take out their May highs. This may be the signal to take your 
profits. Don’t let your profits vaporize from a slow quiet drift
downward during the summer, while technology continues to firm up. 

We are just now starting to feel the effects of the first rate 
cuts from January. With each month, companies will feel the 
effects more and more. Tech will not be the only beneficiary, but 
through the years, technology has outperformed other sectors. 
Getting in near a bottom doesn't happen very often. New leaders 
emerge there; some are still unknown at this time. Just be prepared 
for complete recovery to take longer than you expect. As traders 
though, we only need a few good trades. You should be planning 
for those now.


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*************
COMING EVENTS
*************

There are still a number of earnings announcements due to come
out this week.  Any disastrous numbers from the remaining big 
players in the market are likely to cast more of a shadow than 
some of these economic reports.  Despite that, both market 
analysts and institutional investors will be looking at the 
economic data to confirm or delay the hope that a recovery may 
be on the way.


Date                          Forecast     Previous

Monday, 07/30/01
 None scheduled

Tuesday, 07/31/01
PCE (Jun)                         0.3%         0.3%
Personal Income (Jun)             0.2%         0.2%
Chicago PMI (Jul)                42.5%        44.4%
Consumer Confidence (Jul)       118.5        117.9

Wednesday, 08/01/01
Auto Sales (Jul)                 6.4M         6.4M
Truck Sales (Jul)                7.4M         7.6M
Construction Spending (Jun)      0.1%         0.3%
NAPM Index (Jul)                44.5%        44.7%

Thursday, 08/02/01
Initial Claims (July 28)         N/A          366K
Factory Orders (Jun)             -1.0%        2.3%

Friday, 08/03/01
Average Workweek (Jul)           34.3         34.3
Hourly Earnings (Jul)            0.3%         0.3%
Nonfarm Payrolls (Jul)           -50K         -114K
Unemployment Rate (Jul)          4.6%         4.5%
NAPM Services (Jul)             51.0%        52.1%
 

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The Option Investor Newsletter                   Sunday 07-29-2001
Sunday                                                      2 of 5

To view this email newsletter in HTML format with embedded
charts and graphs, click here:
http://www.OptionInvestor.com/htmlemail/5534_2.asp


**************
BROKERS CORNER
**************

Trade Smart
By Robert Ogilvie

The contrarian trader beats their drum to Sell When They’re
Yellin’; Buy When They’re Cryin’.  The “smart money” does the
opposite of the majority at the extremes.  This means that when
the fear gauges indicate that investors are comfortable with the
market, watch out below!  And when those same gauges indicate
that investors are scared that the apocalypse is near, the market
usually bounces.  The key is realizing that there is no
indication of duration of a bounce or drop.  It could last a few
hours or months, possibly longer.

“What fear gauges are you referring to?” you ask.  To be consistent
with my recent articles on keeping it simple, there are three
indicators I watch.  The first is the VIX and VXN (Volatility Index
and NASDAQ 100 Volatility Index).   The second is the put/call
ratios of Equity and Index Options.  The third is the AAII
(American Association of Individual Investors) poll.


 

The VIX and VXN can be very temperamental.  If you take the time
to look at a chart, you will find that it is not an exact science.
Remember the saying “When the VIX (VXN) is low it’s time to go
(sell). When the VIX (VXN) is high it’s time to buy.”  The
standard range for the VIX is usually between 20 and 30.  However,
these levels are not set in stone.  For instance, the VIX’s most
recent top on 7/24/2001 was at 28.83.  I have observed that a
break above the 30 level resets the range to between 30 and 40.
The two-scale chart below displays the OEX on top and the VIX
below.  Although it is hard to read, the OEX bounced off of
600.44 when the VIX peaked to 28.83.  The OEX August 610 calls
were offered at 11.40 at the low.  On Friday, the calls were
trading at about 20.  The picture below tells the story.  Look at
the extremes and trading range in March and April.

The VXN is a little trickier because the index hasn’t been around
for very long.  A historical study showed that the lows were in
the low 40’s.  The recent extremes occurred this year at levels
exceeding 80.  The VXN has an approximate 13-point range.  The
highest range was from 65 - 78 in February to April of this year.
Once the 65 level was broken, the new range was defined by
subtracting the range by the previous bottom of 65. That reset it
to 52 - 65.  Once the 52 level broke, the range fell again to 44
to 57.  Look at a chart of the VIX or VXN and the OEX or NDX,
respectively, to see the mirror image pattern.

The Put/Call ratios of the Equity and Index Options are also
contrarian indicators.  When there are a lot of investors buying
Calls, this suggests the majority is bullish.  When there is an
increase in Put volume, this suggests that investors are fearful.
Doing the opposite of the crowd is what the smart money tends to
do.  There have been debates on the ranges to use and whether or
not to include all of the option exchanges or just the CBOE.  I
look at each ratio separately looking for an anomaly that might
skew the total results.  However, I generally look at the total
volume of all the exchanges.  The following is a
contrarian-adjusted key that I use:

Equity Put/Call Ratio
Bearish     Below 0.40
Neutral     Between 0.40 - 0.70
Bullish     Above 0.70

Index Put/Call Ratio
Bearish     Below 0.75
Neutral     Between 0.75 - 1.50
Bullish     Above 1.50

Generally, peaks and troughs occur during the day.  If you have
the ability to monitor these intraday, you might have a more
precise measure of timing your entry points.  If you don’t have
the ability, find someone who does.  Not having access to this
information is no excuse for not using it.

The third contrarian indicator that I use is the American
Association of Individual Investors Poll.  I have used the
Investor Intelligence Poll in the past.  However, it is a poll
of advisors and not the investing public.  Therefore, I pay
more attention to the AAII poll.  I look for extremes in
Bullish and Bearish sentiment from week to week.  For
instance, the results released on Thursday revealed that
Bullish Sentiment among individual investors dropped to 29.52%
from 50% during the past week.  Those bearish rose to 38.1%
from 34.78%.  The number neutral more than doubled to 32.38%.
Barron’s releases this data in their Investor Sentiment
Readings section of their weekly publication.

I use a couple of other sentiment indicators in addition to the
above mentioned.  However, that is another article.  A few minor
indicators to mention is when a well known market bull becomes
bearish.  The market turned on a dime on Wednesday when he said
the market was heading lower.  Another historical bottom was
formed when this same person called for DOW 6800 in October of
1998.  Another minor contrarian indicator is when mutual funds
record net outflows for the month.  This marks that investors
are really scared.  Although not a recommendation, I use them
all as a 123 checklist to indicate the market sentiment’s
consistency.  I have to disclose that these are my parameters
and don’t promise anything.  It is my experience that when used
with discretion and patience, the data increases one’s
perception of the market’s psychology.  Some use the information
when planning their portfolios near and long term strategies.
While some investors use the data to trade the extremes.  No
matter what your strategy is, I believe it is smart to always
know what investors feel.  Knowing where the markets might be
heading before entering a position may increase one’s success
or at least prepare for the worst.  When a hurricane is brewing
it is a smart person that follows the projected track.  And
when the track points to disaster in your area, board up the
house and move to safer ground. If you want to know what the
smart money is doing, tracking these indicators is a good place
to start.  No one wants to be dumb.

I am an Options Broker and ROP that trades for and educates
investors on many strategies.  Please contact me toll free at
the e-mail address below.

Robert John Ogilvie
robert.ogilvie@verizon.net

Neither Cutter & Company, Inc. nor Robert J. Ogilvie makes any
representation as to the accuracy, reliability or completeness
of any charts, formulas, and /or research opinions presented
herein. This article is intended solely for educational purposes.
Nothing herein should be construed as an offer or solicitation
to buy or sell any securities. Cutter and Company is a Member of
the NASD, MSRB, and SIPC. Please read the OptionInvestor.com
Disclaimer:  http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html.


********************
THE PLAYS OF THE DAY
********************

Call Play of the Day:
*********************

JBL - Jabil Circuits $32.72 (+4.28 last week)

See details in sector list




Put Play of the Day:
********************

FD - Federated Department Stores $35.83 (-2.37 last week)

See details in sector list




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**************************
PICKS WE DROPPED THIS WEEK
**************************

Remember that historically, when we drop a pick it will go up
10 to 15% the very next week. It is part of Murphy's Law.
Just because we drop a stock as a pick does not mean we are
advocating a "sell" on any position you have. We are simply
dropping our recommendation as a new play. Existing plays
can and do continue on and are usually profitable.


CALLS

IBM $104.70 (-1.00) IBM just couldn't get out of its own way last
week.  The stock finished lower Friday by a measurable amount,
despite strength in SUNW and EMC.  This may have been an early
warning sign; however, the stock did bounce from its aggressive
support line that we've been writing about.  And its 10-dma
continues to serve as resistance.  So a breakout should be coming
in the near future, but because of its poor action Friday, we're
dropping coverage this weekend.  Traders with open positions might
watch for an advance above roughly $106 early next week to
discern if IBM is going to break to the upside. 


PUTS

No dropped puts this weekend


***********
DEFINITIONS
***********

SL  = Suggested stop loss. Sell if bid breaks this price.
OI  = Open Interest - the number of open contracts outstanding.
ITM = In the money
ATM = At the money
OTM = Out of the money
ADV = Average Daily Volume

The options with a "*" by the strike price are our choices from the
group. If the stock moves as expected we feel they have the best
chance to substantially increase or double in price with the best
risk/reward ratio compared to the other options for the same stock.
You must determine if they fit your risk profile for time and price.

Analysts ratings: 1-2-3-4-5
Analysts who follow each stock rate it and these rating are
accumulated and displayed as follows;

Position 1 = number of analysts recommending "strong buy"
Position 2 = number of analysts recommending "moderate buy"
Position 3 = number of analysts recommending "hold" or "neutral"
Position 4 = number of analysts recommending "moderate sell"
Position 5 = number of analysts recommending "strong sell"

Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys",
1 "hold" recommendation.

RISKS of SELLING PUTS:
The risk of selling naked puts is always the possibility
of a catastrophic event that drops the stock below the
strike price and could result in the stock being PUT to you.
Always protect yourself with a "buy to cover" limit order
to take you out before this can happen.


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

CTXS - CITRIX Systems $35.04 (+3.39 last week)

Citrix Systems, Inc. is a supplier of application server software 
and services that enable the effective and efficient enterprise-
wide deployment and management of applications, including those 
designed for Microsoft Windows operating systems. For the 3 months 
ended 3/31/01, revenues rose 4% to $132.8M. Net income fell 25% to 
$28.9M. Results reflect new customer wins and the release of new 
products, offset by increased marketing expenses.

CTXS is sitting just under its 52 week high, closing today at 
resistance of $35.00.  So many of its peers have succumbed to the 
volatility of the NASDAQ and, though CTXS has certainly seen days 
with wild price swings, the stock has been impressively resilient, 
climbing to new recent highs.  Earnings were announced after the 
close of the market on July 19th and were quite impressive.  
Despite the economic slow down, the company was able to post its 
fourth consecutive quarter of growth in revenue and earnings as 
well as sign on numerous customers.  We would look to the 52 week 
high of $37.19 as the next level of resistance as well as a short-
term traders likely exit point.  CTXS's leadership role in its 
sector and its impressive financial results lend credence to a 
longer term holding period, if one was so inclined.  If shares can 
usurp the 52 week high and the NASDAQ cooperates by acquiescing 
with higher relative highs, we think that CTXS could see $40.00 by 
mid August.  Volatility suggests that a stop price of $33.00, the 
mid-point of trading three days ago should allow for fluctuations 
in the share price without stopping us out.

BUY CALL AUG-35*XSQ-HG OI=4112 at $2.25 SL=1.25
BUY CALL AUG-40 XSQ-HH OI=1308 at $0.55 SL=0.25
BUY CALL SEP-35 XSQ-IG OI=4668 at $3.90 SL=2.75
BUY CALL SEP-40 XSQ-IH OI=3964 at $1.95 SL=1.25

Average Daily Volume = 4.3 mln



JBL - Jabil Circuits $32.72 (+4.28 last week)

Jabil Circuit designs and manufactures electronic circuit board 
assemblies and systems for original equipment manufacturers in the 
communications, computer peripherals, personal computers, and 
consumer product industries. For the 6 months ended 2/01, revenues 
rose 53% to $2.34B. Net income rose 46% to $88.5M. Results reflect 
increased production of communication and personal computer 
products, partially offset by lower levels of capacity 
utilization.

Contract manufacturers are beginning to rebound as investors 
speculate that the market's recent lows might be the bottom.  As a 
leader in its sector, JBL is well positioned to capitalize on a 
rebound in capital spending.  And from the stock's perspective, 
recent action has taken the share price beyond short-term 
resistance to a level that could indicate that a break out has 
arrived.  Today's close secured the 200 DMA of $31.97 as a 
significant support level and several days of better than average 
volume have added buying conviction.  The next level of short-term 
resistance sits at the $34.00 area and this would likely be one of 
the better exit thresholds for the short-term trader.  If your 
holding period is longer-term, recent highs suggest that a price 
just under $38.00 would likely be a perfect exit price.  Though we 
are fond of the 200 DMA and the associated support that it should 
provide, JBL possesses inherent volatility that could present 
itself come Monday.  Bearing this in mind, it seems prudent to 
establish a stop under recent lows at $30.00.

BUY CALL AUG-30*JBL-HF OI= 2496 at $4.00 SL=2.75
BUY CALL AUG-35 JBL-HG OI= 2543 at $1.45 SL=0.75
BUY CALL SEP-30 JBL-IF OI= 3714 at $5.60 SL=3.75
BUY CALL SEP-35 JBL-IG OI= 5514 at $2.95 SL=1.75

Average Daily Volume = 2.3 mln



LH - Laboratory Corp. of America $90.80 (+4.30 this week)

Laboratory Corporation of America Holdings (LabCorp) is the #2
clinical laboratory service in the world, behind Quest
Diagnostics.  LH performs 2000 types of tests for more than
100,000 clients, including health care providers, pharmaceutical
firms, physicians, government agencies and employers.  With 25
major laboratories and some 1200 service sites nationwide, the
company emphasizes specialty and niche testing such as allergy
tests, HIV tests, blood analyses, and substance abuse
screenings.

Welcome to the land of breakouts!  We played LH leading up to
its earnings report on July 23rd, and pocketed a small gain for
our efforts.  Beating estimates by 4 cents was just what the
doctor ordered, and it has kept the bulls interested in the
stock over the past week.  So much so, that they pushed LH
through the formidable $90 resistance level on Friday to post a
new all-time closing high.  In the wake of earnings, the buying
volume has been strong, running near double the ADV for the past
four days.  Except for some intraday dips shortly after the
earnings report, the stock is using the 5-dma ($87.56) for
support and despite having its daily Stochastics oscillator
buried in overbought, the stock continues to look attractive.
This is a plain old-fashioned momentum run (remember those?) and
we are more than happy to jump aboard as long as it lasts.  The
stock's overbought condition makes buying the pullbacks a
prudent approach, and we will target a dip to intraday support
first at $88 and then $86 for initiating new plays.  Of course,
a continuation of last week's strength can allow for new entries
as the stock powers through the $91 level on strong volume.
Look out for volume to begin weakening, as that would be an
early sign that the momentum players are losing their
conviction.  Place stops initially at $85.

BUY CALL AUG-90*LH-HR OI=380 at $4.20 SL=2.50
BUY CALL AUG-95 LH-HS OI=123 at $1.80 SL=1.00
BUY CALL SEP-90 LH-IR OI= 10 at $6.90 SL=5.00

SELL PUT AUG-87.5 LH-TY OI=  1 at $2.05 SL=3.75
(See risks of selling puts in play legend)

Average Daily Volume = 538 K



PHCC - Priority Healthcare Corp. $24.78 (+4.98 this week)

Priority Healthcare is a national distributor of specialty
pharmaceuticals and related medical supplies to the alternate
site healthcare market.  The company provides patient-specific,
self-injectable biopharmaceuticals and disease treatment
programs to individuals with chronic diseases.  With its
acquisition of Freedom Drug, the company is also a major
infertility specialty pharmacy.  PHCC caters to the specific
needs of outpatient renal care centers and office-based
physicians in oncology by shipping refrigerated pharmaceuticals
overnight in special packaging to maintain appropriate
temperatures.

Despite weakness in the Healthcare index (HCX.X), select health
care related stocks are seeing some concentrated interest from
the bulls.  PHCC is one of those favored stocks, especially in
the wake of its earnings report on July 19th.  Although the
actual numbers were a bit disappointing according to CEO Robert
Myers, investors seemed to focus on the positive factors
reported, such as increasing sales.  The bulls took charge in
the wake of the report, pushing the stock from a low of $17.45
the day before earnings to a high of $26.19 this past Thursday.
A big part of the rally on Thursday is likely due to the BofA
upgrade from Market Perform to Buy.  Price action was much
calmer on Friday, with volume running on the low side as well.
What was encouraging was the fact that the stock held above the
$24 level and looks ready to use the 30-dma ($23.96) as a
spring-board for the next leg up.  That is if the bulls can
continue to fend off the profit takers.  Renewed buying volume
will be critical next week as the daily Stochastics are in
overbought territory and threatening to roll over.  Not only
that, but there is some significant resistance between $26-28,
owing to the gap that was left at the end of June.  Buying a
low volume dip may be the best entry strategy; look for a bounce
either from $24 or $23 (the bottom of Thursday's gap) to allow
entry into the play.  Momentum players will want to wait for
PHCC to clear $26 before taking a position.  We are initially
placing our stop at $22.

BUY CALL AUG-25*UHP-HE OI=170 at $1.55 SL=0.75
BUY CALL SEP-25 UHP-IE OI= 10 at $2.60 SL=1.25
BUY CALL OCT-25 UHP-JE OI= 30 at $3.20 SL=1.50
BUY CALL OCT-30 UHP-JF OI= 35 at $1.45 SL=0.75

Average Daily Volume = 975 K

 

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The Option Investor Newsletter                   Sunday 07-29-2001
Sunday                                                      3 of 5

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******************
CURRENT CALL PLAYS
******************

RFMD - RF Micro Devices $29.33 (+5.18 last week)

RF Micro Devices designs, develops, manufactures and markets
proprietary radio frequency integrated circuits (RFICs)
primarily for wireless communications products and applications.
The Company's products are included primarily in cellular and
personal communications service phones, base stations, wireless
local area networks, and cable television modems.

RFMD followed through Friday in spectacular fashion.  Although
the stock gapped higher, it did pullback on several occasions
throughout the day, so it was possible to gain entry on any
dip.  As for new entries into the play, bullish traders will
want to make sure to monitor the direction of the broader tech
sector by watching the Nasdaq Composite (NDX.X).  As for the
sector, traders should keep close tabs on AHAA, QCOM, and several
of the carriers including VZ, PCS and NXTL.  RFMD is above most
of its near-term resistance levels, but may encounter some
congestion around the $30 level early next week.  It's a whole,
round number that bullish traders may use to take profits.
But, a continuation of RFMD's momentum into early next week is
certainly possible.  Bullish traders can confirm any rally
attempt from current levels by monitoring the RFMD's high in
June around the $30.94 level.  A breakout from there should
allow for RFMD to make its way towards $35 level over the short
term, market and sector conditions permitting.  In terms of risk
management, we're raising our stop up to the $27 level, which is
right around RFMD's 38.2% retracement level.  Although, traders
with different risk tolerances should take that much into
account and adjust their stop losses accordingly.

BUY CALL AUG-25 RFZ-HE OI=6348 at $5.40 SL=3.50  
BUY CALL AUG-30*RFZ-HF OI=6740 at $2.15 SL=1.25
BUY CALL SEP-25 RFZ-IE OI= 252 at $6.90 SL=5.00
BUY CALL SEP-30 RFZ-IF OI= 566 at $4.00 SL=2.50

Average Daily Volume = 7.88 mln



CSCO - Cisco Systems $19.06 (+1.07 last week)

Cisco Systems and its subsidiaries are engaged in networking for
the Internet.  Cisco hardware, software and service offerings are
used to created Internet solutions so that individuals, companies
and countries have seamless access to information, regardless of
differences in time and space.

Shares of Cisco traded up to around $19.50 early Friday, but
slipped lower throughout the session.  Its relative weakness was
discouraging Friday in light of the Qualcomm guidance and the
fact that the COMPX finished modestly higher.  However, we
noticed weakness across the majority of mega cap tech stocks
Friday, including Intel, Dell, Microsoft and Oracle.  It may have
been a one day event, perhaps a rotation out of large cap into
small cap tech issues.  Whatever the reason, we're still looking
for Cisco to trade closer to the $20 level before exiting
positions.  Traders might look for an exit point starting at the
$19.75 level early next week if the COMPX continues to work
higher.  Of course, a breakout above the $20 level could carry
Cisco much higher.  That's because an extremely large number of
calls have accrued at the front month $20 strike.  Over 100,000
calls are currently open at that level.  As such, a breakout
above that level could cause a combination of longs adding to
positions and shorts covering, resulting in an explosive move
to the upside in CSCO.  The catalyst to get CSCO above $20 is
the unknown that we must contend with.  But, we must also
keep in mind that our original premise in this play was to
capture about $1 in the underlying through the use of a higher
delta option.  So keep that in mind next week if CSCO makes its
way towards $20.  We're keeping our stop at the $18 level in order
to maintain coverage on Cisco in an attempt to game an earnings
run, so it's rather liberal relative to current levels.  Traders
should adjust stops according to their entry points and risk
preferences.

BUY CALL AUG-17.5*CYQ-HW OI= 56284 at $2.25 SL=1.00  
BUY CALL AUG-20.0 CYQ-HD OI=101410 at $0.80 SL=0.25
BUY CALL OCT-17.5 CYQ-JW OI= 22972 at $3.40 SL=1.75
BUY CALL OCT-20.0 CYQ-JD OI= 35213 at $2.10 SL=1.00

Average Daily Volume = 67.0 mln



MOT - Motorola $19.00 (+0.50 last week)

Motorola provides integrated communications solutions and
embedded electronic solutions.  The company's solutions include
software enhanced wireless telephone, two-way radio and
messaging products and systems, as well as networking and 
Internet access products, for consumers, network operators 
and commercial, government and industrial customers.

Late last week, MOT proved that dip buying can be a profitable
strategy.  Recall that the stock dipped down to $17.05 last
Wednesday, a mere nickel from our stop.  Enter National Semi
Thursday and Qualcomm's impact Friday, and MOT finished the week
right on the $19 level.  Its rebound could've allowed for entries
late last week, but if traders didn't have a chance to enter new
positions another action point is not too far off from current
levels.  The action point we're talking about is the $19.50
level.  The momentum type traders will be looking for MOT to
trade above $19.50 level early next week before jumping in.  From
there, a test of $20 is likely.  But because $20 is a
psychological level, MOT may encounter resistance at that area.
What bullish traders will want to see is an advancing COMPX and
SOX to build enough demand to carry MOT well past $19.50 and
eventually $20 next week.  On the other hand, if sellers return
early next week, the efficacy of the dip buying strategy may
return.  We're moving our stop up to the $18 level, which is the
site of MOT's EXPONENTIAL 10-dma.  This level should serve as
support during any market/sector related weakness and may offer
an entry point for those who like buying on pullbacks.

BUY CALL AUG-17.5*MOT-HT OI=26110 at $1.90 SL=1.00  
BUY CALL AUG-20.0 MOT-HD OI= 9106 at $0.60 SL=0.25
BUY CALL OCT-17.5 MOT-JT OI=12433 at $3.10 SL=1.50
BUY CALL OCT-20.0 MOT-JD OI=21635 at $1.75 SL=0.75

Average Daily Volume = 10.5 mln
 


AHAA - Alpha Industries $38.00 (+3.20 last week)

Alpha Industries designs, manufactures and markets proprietary
radio frequency, microwave frequency and millimeter wave
frequency integrated circuits and discrete semiconductors for
wireless voice and data and broadband communications. The
primary applications for the company's products include
wireless handsets, wireless infrastructure and broadband
communications equipment. AHAA also produces integrated
circuits, discrete components, electrical ceramics and ferrites
used in wireless base station equipment, cable television, cable
modems and other broadband applications, wireless local loop,
wireless personal digital assistants and wireless local area
networks.

Remaining true to its pattern in recent weeks, AHAA pulled back
on Friday, giving back a small portion of its gains from the
day before.  Emerging strength in the Wireless sector is the
underlying catalyst for our play, but the technical strength of
the stock is hard to ignore, especially in the unsettled
rangebound market we are currently mired in.  After clearing the
$30 resistance level on July 12th, the bulls have taken out
multiple resistance levels and are now focusing their attention
on the $40 and then $43.  After jumping up at the open on large
volume on Friday, the stock pulled back steadily into the close,
and it looks like the stock could be setting us up for a fresh
entry as the bulls return to dominance next week.  Look for a
bounce near current levels, or even a dip near $36 to provide
entry into the play, preferably with the NASDAQ holding above
the 2000 level.  Waiting for a renewed breakout over $40 before
taking a position makes sense too, but only if buying volume
remains strong.  Keep stops set at $35.

BUY CALL AUG-35 GAQ-HG OI=389 at $4.60 SL=2.75
BUY CALL AUG-40*GAQ-HH OI=407 at $1.95 SL=1.00
BUY CALL SEP-40 GAQ-IH OI=107 at $3.80 SL=2.25
BUY CALL NOV-40 GAQ-KH OI=915 at $5.90 SL=4.00

Average Daily Volume = 1.11 mln



DO - Diamond Offshore $30.76 (+0.26 last week)

Diamond Offshore Drilling engages in the worldwide contract
drilling of offshore oil and gas wells, and deep water drilling.
For the 3 months ended 3/31/00, revenues rose 22% to $205.2M. Net
income increased 25% to $36.8M. Revenues benefited from new
drilling programs and increased day rates for high specification
floaters and jack-ups. Earnings also reflect improved operating
margins, increased interest income and a lower effective income
tax rate.

Confirmation from OPEC that they would be reducing crude oil
production by 1 million barrels per day lent support to shares
of the Oil Service stocks in the middle of the week, and DO
managed to gradually advance throughout the balance of the week.
Coming to rest just below the $31 level gives the impression that
a fresh breakout is just around the corner.  With the lows getting
higher, we have a short-term bullish wedge forming, and
confirmation will come with a breakout over $31 on strong volume
next week.  Of some concern however, is the fact that volume
continued to decline as the price was rising, with Friday's session
only seeing about 60% of the average daily number of shares trade
hands.  Without a return of strong volume, we are faced with DO
weakening relative to the Oil Services index (OSX.X) which is
posting higher highs along with the higher lows.  While the OSX
plowed through its 20-dma on Friday, DO was turned back at its own
20-dma ($30.89).  A renewed bounce from the $30 level (also the site
of our stop) is an acceptable entry point, we only want to take it
if it is accompanied by a strong volume bounce.  The more
conservative approach will be to wait for bulls to prove their
strength by pushing the stock through the $31 resistance level.
And don't forget that there is strong resistance at $32 that will
also need to be cleared if DO is going to really break out of the
long-term downtrend.

BUY CALL AUG-30*DO-HF OI=1289 at $2.10 SL=1.00
BUY CALL AUG-35 DO-HG OI= 161 at $0.50 SL=0.00
BUY CALL SEP-30 DO-IF OI= 282 at $3.00 SL=1.50
BUY CALL SEP-35 DO-IG OI= 600 at $1.00 SL=0.25

Average Daily Volume = 1.11 mln



JDAS - JDA Software Group $21.05 (+2.35 last week)

JDA Software is a global provider of sophisticated software
solutions for the retail industry.  The JDA portfolio of
products consists of comprehensive, integrated software
solutions that are designed to address the demand and supply
chain management, business process, decision support, e-commerce
and collaborative planning requirements of the retail industry
and their suppliers.

And we're off!  Up 2.68% on Friday shares of JDAS closed off
their intraday high of 21.75.  What the bulls should really be
excited about was the volume.  Average volume is 145K and Friday's
volume was 529K.  In our initial write up, Thursday, we discussed
potential entry points at a close over $21 (we're there) or a 
dip and bounce off what should be support at $20 (or even $19).
Now everyone should really look at a chart on this stock.  A lot 
of the indicators look great.  Volume, MACD, it broke out over 
resistance.  Our one concern is that the stock is overbought
and we don't know when momentum will need to pause as traders
do a little profit taking.  We currently have our stop set at
$19.

BUY CALL AUG-17.5 QAH-HW OI= 11 at $4.00 SL=2.25
BUY CALL AUG-20.0*QAH-HD OI=  5 at $2.00 SL=1.00
BUY CALL OCT-20.0 QAH-JD OI=374 at $3.00 SL=1.50

Average Daily Volume = 145 K



MERQ - Mercury Interactive $40.22 (+3.59 last week)

As a provider of integrated performance management solutions
that enable businesses to test and monitor their Internet
applications, MERQ is looking for growing e-commerce demand to
continue to fuel its business.  The company's products perform
such tasks as analyzing and eliminating Web site performance
bottlenecks and automating quality assurance testing.  MERQ's
client base spans a wide range of industries including
Internet companies such as Amazon.com and America Online,
infrastructure companies Ariba and Oracle, as well as Apple
Computer, Cisco Systems and Ford Motor Company.

Ask and you shall receive.  Thursday we mentioned that our
preferred mode of entry into this bullish play would be on an
intraday pullback near $38.  This is exactly what we got on
Friday with an intraday low at 37.81.  The last few hours saw
a top at 40.50 and traders may want to see shares trade above
this level before taking any new positions.  The software sector
really didn't do much on Friday so we're not too alarmed by
MERQ's performance.  Our stop remains at $35.

BUY CALL AUG-35 RQB-HG OI=1074 at $6.90 SL=5.00
BUY CALL AUG-40 RQB-HH OI=2103 at $3.40 SL=2.00
BUY CALL AUG-45 RQB-HI OI=6479 at $1.55 SL=0.88
BUY CALL OCT-40 RQB-JH OI=3242 at $7.50 SL=5.25
BUY CALL OCT-45 RQB-JI OI=4279 at $5.30 SL=3.30

SELL PUT AUG-35 RQB-TG OI=2344 at $1.40 SL=2.50
(See risks of selling puts in play legend)

Average Daily Volume = 4.41 mln



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The Option Investor Newsletter                   Sunday 07-29-2001
Sunday                                                      4 of 5

To view this email newsletter in HTML format with embedded
charts and graphs, click here:
http://www.OptionInvestor.com/htmlemail/5534_4.asp


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

AIG - American International Grp. $81.72 (-2.29 this week)

Engaged in a broad range of insurance and insurance-related
activities through its subsidiaries, AIG's primary focus is on
its general and life insurance businesses.  Additionally, the
company is growing its presence in financial services and asset
management.  Other operations include auto insurance, mortgage
guaranty, annuities, and aircraft leasing.  With operations in
130 countries, AIG generates more than half of its revenues
outside the United States.

Insurance stocks have been having a hard time lately, and one
only has to take a quick look at the Insurance index (IUX.X) to
be convinced of that fact.  Despite a valiant attempt, the
bulls couldn't push the index through the 795 level and since
the bears took control in early July, it has been a painful
slide.  AIG has almost perfectly mirrored the IUX right up to
the past few days, as the IUX has stabilized near the 738 level,
while AIG has continued its descent, falling through the $82
support level on Friday.  Sure the stock is in oversold
territory, but the selling volume just won't let up.  Even
posting in-line earnings on Thursday gave the bulls no respite,
although there was a minor recovery from the opening dip.  AIG
has had a fairly narrow range of late, so we want to gauge our
entry point carefully.  Option one is to wait for a bounce near
the $83 level, also the site of the 50-dma (actually $83.32).
When the rally fails, look to initiate new plays for a short run
down to the $80.50 support level.  We are initially placing our
stop at $84, just above significant resistance and the 50-dma.
Alternatively, a drop below $80 will get the bears hungry again
and open the door for a test of the $77-78 support level.

BUY PUT AUG-85*AIG-TQ OI=8963 at $3.70 SL=2.25
BUY PUT AUG-80 AIG-TP OI=6689 at $1.15 SL=0.50

Average Daily Volume = 4.48 mln

 

*****************
CURRENT PUT PLAYS
*****************

DIGL - Digital Lightwave $20.38 (-1.92 last week)

Digital Lightwave designs, develops and markets a portfolio
of portable and embedded products and technologies for
monitoring, maintaining and installing fiber optic circuits
and managing fiber optic networks.  Network operators and
other communications service providers use fiber optics to
provide increased network bandwidth.

DIGL bounced higher last Friday, which appeared no more than
market related.  As we mentioned in Thursday's update, DIGL
could be set to reverse its recent trend, noting the crossover
of its stochastics reading, which are buried in oversold.  We're
keeping the play on the put list this weekend because we have
a fairly tight stop in place at $21, relative to the stock's
current level.  As a result, the stock doesn't have much upside
from current levels if we use our stop as a guide to manage
risk.  That's not to say those traders with open positions should
keep stops at $21.  Traders with open positions can use an even
tighter stop to prevent any negative impact on a potential
reversal in this stock.  Nevertheless, we're maintaining coverage
over the weekend and in the belief that DIGL could continue
working lower IF the market weakens early next week.  And we're
defining market as the COMPX and NWX.X.  Therefore, bearish
traders should keep close tabs on both indexes early next week
to gauge the most probable direction of DIGL.  As for entry
points, it seems that the $20 area is growing more efficient the
more time that DIGL spends around it.  As such, it may be more
prudent to wait for DIGL to find its new distribution by looking
for a breakdown below relative lows, which in DIGL's case sit
around the $18.50 area.

BUY PUT AUG-22.5*DGW-TX OI= 42 at $3.90 SL=2.50
BUY PUT AUG-20.0 DGW-TD OI=107 at $2.40 SL=1.50

Average Daily Volume = 1.85 mln



PDII - Professional Detailing $64.70 (-3.69 last week)

As a provider of sales and marketing services to the
pharmaceutical industry, PDII is divided into three operating
segments; Contract Sales, Product Sales and Distribution and
Marketing Services.  The company provides dedicated contract
sales services, sales, marketing and distribution services for
companies facing portfolio optimization challenges, and
commercial launch services for emerging and biotechnology
companies to independently launch new brands.  PDII also
provides marketing research and consulting services, as well as
medical education and communication services, through which
clients can access continuing medical education and
peer-to-peer promotions.

The trading in PDII this week certainly didn't compare to last
Friday's excitement, but it looks like the bears are still in
control.  Volume has been similarly sedate, only a faint shadow
of last week's 15 times the ADV.  But fading the intraday
rallies continues to deliver attractive entry points for
vigilant and nimble traders.  Resistance is solidifying near
the $67 level, also the site of our stop.  With the highs
getting lower and the lows getting higher, we have the makings
of a neutral wedge.  The upper bound is sitting at $66.75, while
the lower border sits at $66.75.  Aggressive traders can
continue to target rollovers near the upper edge of the wedge as
they anticipate the eventual breakdown below the $64 level.
Those that would prefer to wait for confirmation before
taking a position, look for PDII to drop through the $64 level
on increasing volume.

BUY PUT AUG-65*PKU-TM OI=43 at $6.10 SL=4.00
BUY PUT AUG-60 PKU-TL OI=62 at $3.40 SL=1.75

Average Daily Volume = 232 K



MEDI - MedImmune Inc. $40.59 (-2.72 last week)

MedImmune is a biotech company focused on developing and
marketing products that address medical needs in areas such as
infectious disease, autoimmune disorders, cancer, and
transplantation medicine.  The company has six products on the
market and a diverse product development portfolio.  The
products currently on the market include Synagis, CytoGam,
RespiGam, Ethyol, Neutrexin, and Hexalen.

MEDI caught a bid from the bullishness in the biotech sector
last Friday.  Biotech heavyweight Amgen delivered some decent
guidance with its earnings report late last week, which caused
the selling to subside in MEDI Friday.  However, the bulls
couldn't keep the stock up as it ran smack dap into its 10-dma
right around $41.45.  Bearish traders might keep a watch of
the 10-dma early next week as additional rollovers near that
level may provide profitable put entry points.  Another
strategy to consider when searching for entry points is a
breakdown below the $40, which now serves as psychological
support as well as technical support.  Bearish traders who opt
for this strategy might confirm any weakness early next week
with a decline below the $39 level.  Also, make sure to confirm
weakness in the AMEX Biotechnology Index (BTK.X) when pursuing
a momentum based strategy; that is, entering put plays on
weakness.  We feel that we're in the correct stock for bearish
purposes in the biotech sector because MEDI is trading rather
heavily relative to the BTK.  But, a rising tide tends to
lift all ships.  Stops are still in place at $42.

BUY PUT AUG-40*MEQ-TH OI=878 at $2.20 SL=1.25
BUY PUT AUG-35 MEQ-TG OI=715 at $0.70 SL=0.00

Average Daily Volume = 2.66 mln



FD - Federated Department Stores $35.83 (-2.37 last week)

Better late than never, FD is trying to leave the comfort of
its luxurious brick and mortar walls.  The company is the
largest upscale retailer in the U.S., with over 400 stores in
33 states.  In addition to its flagship chains, Macy's and
Bloomingdale's, the company runs six regional chains, Lazuras,
The Bon Marche, Burdines, Stern's, Rich's, and Goldsmith's.
Attempting to capitalize on consumer demand for online shopping,
FD is increasing its focus on catalog (Macy's by Mail and
Bloomingdale's by Mail) and internet (Macys.com) sales.

Shares of Federated fell lower Friday on the heels of the weak
economic data in the form of the GDP.  The stock steadily sold
off Friday morning, and pretty much flat-lined throughout the
remainder of the day.  We'll want to be cognizant of this
pattern if it persists.  Often, NYSE listed stocks will make
the majority of their daily moves in the first and last hour
of trading, which makes it incredibly difficult to gain a
solid entry point.  Nevertheless, FD is well below its near
term support, which is currently around $36.50.  However, the
stock did find support during Friday's session around its
intraday low Thursday, which lies around $35.80.  Bearish
traders will want to see FD breakdown below the $35.80 level
early next week when initiating new positions, in conjunction
with directional confirmation of weakness in the Retail Sector
Index (RLX.X).  FD continues to trade rather poor relative to
the RLX, so if/when the RLX weakness, we should see the selling
exacerbated in FD.  If the RLX continues higher, however, one
strategy that may produce profits in FD is entering new put
plays near resistance.  In terms of resistance, FD should
encounter selling around its 10-dma, around the $37.25 area;
also, former support around $36.50 should now serve as
significant resistance.

BUY PUT AUG-35.0*FD-TG OI=684 at $1.15 SL=0.65
BUY PUT AUG-32.5 FD-TZ OI=320 at $0.45 SL=0.00

Average Daily Volume = 1.38 mln

 

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*****
LEAPS
*****

Can We Call This A Positive Week?
By Mark Phillips
Contact Support

Considering the less-than-inspiring moves of the broader markets
this week, we actually saw some decent movement in our
Portfolio.  For the record, the DJIA fell 160 points, the S&P500
shed just over 5 points, and the NASDAQ Composite gave up 17.52.
But those closing numbers are a far sight better than the lows
we saw earlier in the week.  Could it be that the markets have
reached that elusive bottom?

I'm not smart enough to answer that question, but I did see some
interesting developments in the VIX. It topped out just below 29
on Tuesday and then spent the remainder of the week falling back
to the middle of its historical range, ending the week at 24.73.
Evidence is mounting that the VIX is moving back into its
historical 20-30 range, and that should make it easier to use
this indicator as a gauge for initiating new long-term positions
again.

Leading the list of surprising developments in our Portfolio
this week was the trading in Washington Mutual (NYSE:WM) and
Versign (NASDAQ:VRSN).  Expecting some significant near-term
weakness for the stock last week, I raised the stop on WM to
$40, practically daring the market to trigger our stop and lock
in our gains.  But the bulls refused to give up, stubbornly
defending the $40 support level.  Who knows...maybe there is
some more life left in the play.  Only time will tell.

Earning the reward for "Comeback of the Week" was VRSN.  After
falling sharply a little over a week ago, the stock found
support 3 days in a row and managed to recover above the $42
level, narrowly avoiding the drop list.  Fortunately, that is
one stop level where we were right on the money, as evidenced
by the fact it held as support ahead of the company's earnings
report on Thursday.  Beating estimates (even after taking a
nearly $10 billion charge related to goodwill losses from
acquisitions made over the past 2 years) and saying the right
things in the conference call got the buyers lined up on Friday.
The stock finished the day with a nearly 15% gain on very heavy
volume (2.5 times the ADV), bringing the laggard Portfolio play
back from the brink, to the nearly unchanged level.  Whew!!

Our other recent entries are actually performing pretty well,
considering the aimless motion in the broad markets this week.
While International Business Machines (NYSE:IBM) and Merck
(NYSE:MRK) have weakened just a bit this week, our
bottom-fishing in the Tech sector is off to a good start.  Cisco
Systems (NASDAQ:CSCO) is up solidly since we added it to the
Portfolio and our new play on Sun Microsystems (NASDAQ:SUNW) is
off to a good start as well, with a 20% gain (average of the '03
and '04 positions) in just 3 days.

The red ink continues to flow in the Energy sector, and our
Calpine (NYSE:CPN) Watch List play fell right through our entry
target before finding support just below $33.  Despite the
weakness, we still like the stock, so we're ratcheting that
entry target a little bit lower.  In an attempt to profit from
recoveries in beaten-down but well-run Energy-related issues, we
have added a new Watch List play on Enron (NYSE:ENE).  And for
those of you that are looking for an attractive consumer stock,
we decided to profile Philip Morris (NYSE:MO) due to its
favorable risk/reward.

There are a couple of house-keeping items to cover as well.
Looking at the Watch List, you'll notice that I've now listed
recommended strikes for those of you that intend to write
Covered Calls against any of the LEAPS plays once you purchase
your LEAP.  We won't move this strikes into the Portfolio when
we take a position due to space constraints, but this should
help in your trade planning.

As we promised several weeks ago, we will be dropping coverage
of all the 2002 strikes as of next week.  These options are too
close to expiration for us to continue covering them in the
LEAPS column.  Time is now a powerful enemy in these positions,
and I would strongly recommend closing out those positions -
either taking profits (or losses) or rolling out to the 2003 or
2004 strikes to give yourself sufficient time for the stock to
move as expected.

That's it for this week.  As you can tell, I am cautiously
optimistic about the market's performance this week, but I can't
ignore the fact that we are in the midst of a pretty dismal
earnings season in the middle of summer.  Things are looking
better on the surface, with the broad markets bouncing at
support this week, but I also remember what happened at this
time last year.  The markets rose in agony right up to Labor Day
before the bottom fell out.  Hopefully we won't see anything
approaching a repeat of that process, and seeing some real
evidence of a bottoming in the economy, I'll be cautious with
my cash.

Take the entry points that come to you, but don't chase stocks
higher.  It is just too dangerous in the current market
environment.  And keep those stops in place.  The loss can hurt
when you get taken out of the play prematurely, but it will keep
those losses from growing out of proportion with the risk you
rationally decided you could accept when you first initiated
the position.


Have a Great Week!


Mark Phillips
Contact Support



LEAPS Portfolio

Current Open Plays

SYMBOL OPENED     LEAPS    SYMBOL  ENTRY   CURRENT  CHANGE  STOP

CLX    03/13/01  '02 $ 35  CLX-AG  $ 3.50  $ 3.80    8.57%  $ 34
                 '03 $ 35  VUT-AG  $ 6.10  $ 6.50    6.56%  $ 34
WM     03/22/01  '02 $33.8 BWT-AY  $ 4.00  $ 8.40  110.00%  $ 40
                 '03 $33.8 OBN-AY  $ 6.13  $10.80   76.18%  $ 40
FON    04/09/01  '02 $ 25  FON-AE  $ 2.80  $ 1.40  -50.00%  $ 19
                 '03 $ 25  VN -AE  $ 4.40  $ 3.70  -15.91%  $ 19
DELL   04/27/01  '02 $ 25  DLQ-AE  $ 6.20  $ 5.40  -12.90%  $ 24
                 '03 $ 25  VDL-AE  $ 9.00  $ 8.50  - 5.56%  $ 24
ADBE   05/16/01  '02 $ 40  AEQ-AH  $11.00  $ 9.20  -16.36%  $ 37
                 '03 $ 40  VAE-AH  $14.60  $14.80    1.37%  $ 37
BRCM   06/05/01  '02 $ 40  RCQ-AH  $ 9.70  $12.60   29.90%  $ 34
                 '03 $ 40  OGJ-AH  $14.00  $19.50   39.29%  $ 34
VRSN   06/12/01  '02 $ 50  QVR-AJ  $17.10  $15.50  - 9.36%  $ 42
                 '03 $ 60  OVX-AL  $20.40  $19.50  - 4.41%  $ 42
CSCO   07/11/01  '03 $ 20  VYC-AD  $ 3.90  $ 5.70   46.15%  $ 13
                 '04 $ 20  LCY-AD  $ 5.70  $ 7.00   22.81%  $ 13
IBM    07/11/01  '03 $110  VIB-AB  $17.70  $16.20  - 8.47%  $ 99
                 '04 $110  LIB-AB  $23.70  $23.40  - 1.27%  $ 99
MRK    07/09/01  '03 $ 70  VMK-AN  $ 7.40  $ 7.70    4.05%  $ 59
SUNW   07/24/01  '03 $ 15  VZX-AC  $ 4.80  $ 5.70   18.75%  $12.50
                 '04 $ 15  LSU-AC  $ 5.70  $ 7.00   22.81%  $12.50



LEAPS Watchlist

Current Possibles

SYMBOL  SINCE    TARGET PRICE  TARGETED LEAP  SYMBOL

ORCL   06/24/01  $15-16        JAN-2003 $17.5 VOC-AW
                            CC JAN-2003 $ 15  VOC-AC
CPN    07/08/01  $38-39        JAN-2003 $ 40  OLB-AI
                            CC JAN-2003 $ 35  OLB-AG
                               JAN-2004 $ 40  LZC-AJ
                            CC JAN-2004 $ 30  LZC-AF
ABX    07/22/01  $14           JAN-2003 $ 15  VBX-AC
                            CC JAN-2003 $ 10  VBX-AB
                               JAN-2004 $ 15  LBX-AC
                            CC JAN-2004 $ 10  LBX-AB
GLM    07/22/01  $15-16        JAN-2003 $ 20  OML-AD
                            CC JAN-2003 $ 15  OML-AC
                               JAN-2004 $ 20  KLW-AD
                            CC JAN-2004 $ 15  KLW-AC
MO     07/29/01  $43           JAN-2003 $ 45  VPM-AH
                            CC JAN-2003 $ 40  VPM-AI
ENE    07/29/01  $43           JAN-2003 $ 45  VEN-AI
                            CC JAN-2003 $ 40  VEN-AH
                               JAN-2004 $ 45  LYN-AJ
                            CC JAN-2004 $ 40  LYN-AH



New Portfolio Plays

SUNW - Sun Microsystems $14.90

It was frustrating to watch the erratic movement of SUNW a
little over a week ago as it gapped below and then above our
entry target, preventing us from getting an acceptable entry
point.  This past week was a different story altogether, as
the stock dipped to $14.10 on Tuesday and began a steady
advance throughout the balance of the week.  Not only was it
a steady price move, but volume increased throughout the week,
confirming that we picked a solid entry point.  It was
particularly encouraging to see the big caps like SUNW (as well
as our CSCO play) start moving up ahead of the recovery in the
broader NASDAQ this week, and we are breathing a bit easier this
weekend seeing that the NASDAQ managed to hold above the 2000
level.  The company's earnings report was certainly less than
stellar earlier this month, but the fact that price remained
relatively stable is an encouraging sign.  The question of
whether we are looking at a recovery from "the bottom" will be
bandied about for months to come, but this looks like a solid
entry that should hold up through any near-term volatility.

BUY LEAP JAN-2003 $15.00 VZX-AC $4.80
BUY LEAP JAN-2004 $15.00 LSU-AC $5.70



New Watchlist Plays

MO - Philip Morris Companies $43.16

Remember last year when tobacco litigation concerns hammered
shares of MO to new multiyear lows?  Since hitting a low of $19
in early 2000, the stock has been one of the big winners of the
economic downturn, running almost to the $55 level before the
litigation bogeyman appeared again.  What investors forgot a
year and a half ago (and likely are forgetting now) is that MO
is much more than an evil tobacco company, with a major portion
of their business in food and beverages through the Kraft Foods
and Miller Brewing units.  Even after the recent Kraft IPO, MO
retains 97% ownership of the Kraft unit, which has an incredibly
large and diverse portfolio of foods, ranging from Jell-O to
Oreos to Minute Rice.  With a PE ratio of only 12 and a steady
stream of income from every area of its business, MO looks like
a good long-term play.  The litigation concerns (along with the
company's occasional poorly-considered public comments) have had
just about all the negative impact they are owed.  Now it is
time for the stock to stabilize and resume its upward trend -
that is if the weekly Stochastics oscillator is to be believed.
Risk should be fairly easy to manage in the play, as the recent
weakness has served to bring the stock down to much more
attractive levels.  We will target new entries near the recent
$43 low (tested again on Friday) and set our stop at $40, a
level of solid support that should remain intact.  The
relatively slow movement of MO should make it another attractive
Covered Call candidate.


BUY LEAP JAN-2003 $45.00 VPM-AH
BUY LEAP JAN-2003 $40.00 VPM-AI  For Covered Call


ENE - Enron Corp. $46.10

Perusing the list of beaten down sectors this past week, I was
reminded that the Natural Gas index (XNG.X) has fallen sharply
over recent months owing to the precipitous drop in the price of
Natural Gas from its January highs.  The weekly chart of the XNG
index shows its Stochastics oscillator bottoming and beginning
to turn up.  That looks attractive for a long-term play, and it
certainly won't hurt that the price of natural gas is beginning
to firm.  So I went searching for LEAP-able stocks in the
sector.  Quickly rising to the top of my list was ENE, which
has recently posted a double-bottom at $43.  In addition to
providing natural gas, ENE also delivers electricity and
communications to both wholesale and retail customers.  The
weekly chart of ENE isn't quite as compelling, as the
Stochastics oscillator is struggling to really get moving to the
upside.  But $43 is the site of solid support dating back to
1999 and gives us an attractive risk/reward for the play, as it
allows us to place a nice tight stop.  We'll target an entry at
$43, and control our risk with a tight stop at $42, just below
the recent lows.

BUY LEAP JAN-2003 $45.00 VEN-AI
BUY LEAP JAN-2003 $40.00 VEN-AH  For Covered Call
BUY LEAP JAN-2004 $50.00 LYN-AJ
BUY LEAP JAN-2004 $40.00 LYN-AH  For Covered Call



Drops

None


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The Option Investor Newsletter                   Sunday 07-29-2001
Sunday                                                      5 of 5

To view this email newsletter in HTML format with embedded
charts and graphs, click here:
http://www.OptionInvestor.com/htmlemail/5534_5.asp


Due to technical difficulties the Covered Call and Naked Put 
Sections are absent.  We will forward them to you as soon as 
they are available.  

*************
COVERED CALLS
*************

Coming...

*****************
NAKED PUT SECTION
*****************

Coming...

************************
SPREADS/STRADDLES/COMBOS
************************

******************************************************************
                         - MARKET RECAP -
******************************************************************
Friday, July 27

Technology stocks showed "signs of life" today, with the NASDAQ
closing the session higher even after news of a profit shortfall
from telecom bellwether JDS Uniphase (NASDAQ:JDSU).  The hi-tech
index ended up 6 points at 2,029.  Industrial stocks were less
fortunate as the Dow retreated 38 points to 10,416 amid new data
which showed continued sluggishness in the U.S. economy.  The S&P
500, a broader market index, finished slightly higher at 1,205 on
strength in the biotechnology segment.  Trading volume on the Big
Board was 1 million shares with advances pacing declines 17 to 13.
Activity on the NASDAQ was light with volume of only 1.5 billion
shares exchanged.  Technology advances led declines 19 to 16.  In
the U.S. bond market, the 30-year Treasury rose 16/32, pushing its
yield down to 5.54%.


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

Stericycle   (NASDAQ:SRCL) AUG50C/AUG50P  $4.95  debit   straddle
AOL-Time Warner (NYSE:AOL) AUG45C/AUG45P  $4.25  debit   straddle
Medtronic       (NYSE:MDT) AUG40P/AUG45P  $0.50  credit  bull-put
Clarus       (NASDAQ:CLRS) NOV10C/AUG10C  $0.50  debit   calendar
Isis Pharma  (NASDAQ:ISIP) OCT15C/OCT12P  $0.10  credit synthetic

The new position in Stericycle was a surprise winner on Tuesday,
just a day after being initiated as it produced an "early exit"
profit of almost 20%.  The stock actually traded in an $8 range
over the two day period, offering a number of favorable profit
opportunities.  AOL-Time Warner was also active but the straddle
has not yet achieved the target return in the "Reader's Request"
position.  Medtronic and Isis Pharmaceuticals offered favorable
entry opportunities and surprisingly, ISIP was the more volatile
stock of the two candidates.  The speculation play in Clarus was
easily entered at the target debit, but the company received no
buying support after reporting quarterly results that beat the
consensus estimates.  Traders must now decide whether they believe
the issue will recover prior to the November options' expiration.


Portfolio Activity:

There was relatively little activity in the Spreads portfolio
this week but the Straddles section produced another big winner.
Symantec (NASDAQ:SYMC) shares traded near $51 Friday, providing
a closing credit near $10.50 in the bullish portion of the play.
That's a $3.30 profit on $7.20 invested in less than one month.
The speculative strangle in Cable and Wireless (NYSE:CWP) also
reached a profitable outcome in the bearish portion of the play,
with the AUG-15 Put paying for the entire position when the stock
price dropped to $14 on Thursday.  The debit straddle in Verity
(NASDAQ:VRTY) has yet to produce a profit but the issue has moved
in a more volatile manner during the past two sessions.  In the
calendar spreads group, John Hancock Financial (NYSE:JHF) crossed
the sold strike at $40 again, offering another favorable closing
opportunity with an excellent position credit.  Among the other
plays in that section, Cadiz (NASDAQ:CLCI), Sinclair (NASDAQ:SBGI)
and National City (NYSE:NCC) have all achieved profitability and
we will begin to look for new candidates in that strategy.  The
Reader's Request position in Altera (NASDAQ:ALTR) is starting to
show some promise and in the Credit Spreads category, all of the
current positions are expected to expire profitably.

Questions & comments on spreads/combos to Contact Support
******************************************************************
                           - NEW PLAYS -
******************************************************************
KSS - Kohl's  $56.00  *** Reader's Request! ***

Kohl's (NYSE:KSS) operates family oriented, specialty department
stores that feature quality, national brand merchandise priced to
provide value to customers.  The company's stores sell moderately
priced apparel, shoes, accessories and home products targeted to
middle-income customers shopping for their families and homes.
Kohl's stores have fewer departments than traditional, full-line
department stores, but offer customers dominant assortments of
merchandise displayed in complete selections of styles, colors
and sizes.  Central to the company's pricing strategy and overall
profitability is a culture focused on a low-cost structure.  The
critical elements of this low-cost structure are the company's
store format, lean staffing levels, sophisticated management
information systems and operating efficiencies resulting from
centralized buying, advertising and distribution.

One of our readers submitted a number of retail stocks for review
as "bearish" candidates, based on the recent decline in consumer
spending and the slowing economy.  Indeed, increasing layoffs and
other affects of reduced personal wealth diminished sales at many
retailers in June and Kohl's department-stores posted a tepid 1.7%
same-store sales gain during the month.  Kohl's officials said a
shift in the fiscal calendar decreased June results but analysts
are not overly confident about the near-term future of the company.
Kohl's was downgraded by Jefferies and Co. earlier in the month and
on Wednesday, Prudential Securities said analyst Wayne Hood issued
a "hold" rating on the stock with a $63 per share price target.

Based on the current technical indications, KSS has significant
resistance near the sold strike price at $60 and traders who are
interested in a bearish position in the retail segment should
consider this conservative spread.

PLAY (conservative - bearish/credit spread):

BUY  CALL  AUG-65  KSS-HM  OI=1061  A=$0.30
SELL CALL  AUG-60  KSS-HL  OI=2647  B=$0.90
INITIAL NET CREDIT TARGET=$0.65-$0.75  PROFIT(max)=15%

http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=KSS
******************************************************************
CPWR - Compuware  $13.68  *** Cheap Speculation! ***

Compuware (NASDAQ:CPWR) provides unique software products and
professional services designed to increase the productivity of
the information technology departments of businesses worldwide.
The company operates in two business segments in the software
industry: products and services.  Their Mainfraim Testing and
Implementation Tools include File-AID, Abend-AID, XPENDITER and
QAHiperstation products.  The company's Mainframe Application
Management Tools include the Compuware Application Performance
Management software, the STROBE MVS Application Performance
Measurement System and APMPOWER Application Performance Analysis
System products.  Compuware's Distributed Systems and Web Markets
tools include UNIFACE and OptimaView products.

This issue surfaced in our search for bullish, small-cap stocks
and although the share price movement is relatively slow, the
recent technical pattern suggests a test of the yearly highs is
forthcoming.  Last week, Compuware reported fiscal first quarter
earnings that were higher than the previous year, despite the
current U.S. economic slowdown.  The maker of computer software
that manages and monitors large corporate computer systems said
it earned $45.2 million, or $0.12 per share, compared with $34.3
million, or $0.09 last year.  Analysts had expected the company
to earn only $0.11 a share, and that may be why the issue has
moved higher over the past few sessions.  The CEO noted "Growth
in earnings indicates we continue to have exceptional leverage
to increase future profitability as market conditions improve"
and that comment should help investors' confidence levels in the
issue despite the current economic environment.

Traders who enjoy low-risk speculation with collateral portfolio
funds should consider this (bullish) synthetic position.

PLAY (conservative - bullish/synthetic position):

BUY  CALL  SEP-15.00  CWQ-IC  OI=458  A=$0.90
SELL PUT   SEP-12.50  CWQ-UV  OI=1    B=$0.75
INITIAL NET CREDIT TARGET=$0.00-$0.10 TARGET PROFIT=$0.50-$0.75

Note:  Using options, the position is similar to being long the
stock.  The collateral requirement for the sold (short) put is
approximately $500 per contract.

http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=CPWR
******************************************************************
                   - STRADDLES AND STRANGLES -

Despite the recent market volatility, there are a number of good
candidates for neutral "option buying" strategies.  Here are some
of my favorite issues, based on analysis of historical option
pricing and technical background.  Recent company news and market
sentiment will have an effect on these stocks so review each play
individually and make your own decision about the future outcome
of the position.

******************************************************************
BK - Bank of New York  $45.20  *** Probability Play! ***

The Bank of New York (NYSE:BK) is the bank holding company of The
Bank of New York (BNY), a New York chartered banking corporation.
The BNY was founded in 1784 by Alexander Hamilton and is now the
United States' oldest bank.  With over $70 billion in assets, the
company provides a complete range of banking and other financial
services to corporations and individuals worldwide through its
basic businesses.  The company's basic businesses are Securities
Servicing and Global Payment Services, Corporate Banking, Asset
Management and Private Client Services, Retail Banking, and
Global Market Services.

Banks and other interest-rate sensitive issues have been active
in recent sessions on speculation that the Federal Reserve will
adjust the cost of borrowing in the near future, to help bolster
the flagging U.S. economy.  Money-center stocks such as BK can
be significantly affected by changes in the Fed Funds rate and
Friday's share price activity suggests there will be future
volatility in this issue.

PLAY (conservative - neutral/debit straddle):

BUY  CALL  AUG-45  BK-HI  OI=3375  A=$1.50
BUY  PUT   AUG-45  BK-TI  OI=4703  A=$1.30
INITIAL NET DEBIT TARGET=$2.65-$2.75 TARGET PROFIT=20%

http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=BK
******************************************************************
EMC - EMC Corporation  $20.01  *** Technology Volatility! ***

EMC Corporation (NYSE:EMC) its subsidiaries design, manufacture,
market and support a wide range of hardware and software products,
and provide services for the storage, management, protection and
sharing of electronic information.  These integrated solutions
enable organizations to create a unique enterprise information
infrastructure, which EMC calls an E-Infostructure.  EMC is a
supplier of these solutions, which comprise information storage
systems, software and services.  Its many products are sold to
customers that use a variety of computing platforms for key
applications, including electronic commerce, data warehousing
and transaction processing.  EMC operates in information storage
products, information services and other business segments.  
The information storage products segment consists of information
storage systems and information storage software.

Technology stocks saw renewed buying interest late last week and
some analysts believe the group will begin to recover after the
earnings season comes to a close.  The recent activity in EMC's
share value suggests that traders are "bottom-fishing" and with
the discounted option prices, we also have a great opportunity
to speculate on future movement of the issue.

PLAY (conservative - neutral/debit straddle):

BUY  CALL  AUG-20  EMC-HD  OI=15131  A=$1.15
BUY  PUT   AUG-20  EMC-TD  OI=9887   A=$1.00
INITIAL NET DEBIT TARGET=$2.00-$2.05 TARGET PROFIT=25%

http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=EMC
******************************************************************
LOW - Lowe's Companies  $38.90  *** Earnings Volatility? ***

Lowe's Companies (NYSE:LOW) is a retailer of home improvement
products, with a specific emphasis on retail do-it-yourself and
commercial business customers.  Lowe's specializes in offering
products and services for home improvement, home decor, home
maintenance, home repair and remodeling and maintenance of
commercial buildings.  Lowe's operates over 600 stores in 40
states.  The company's earnings are due August 20.

The retail sector has been quite active in recent weeks and a
a few companies have yet to report quarterly earnings.  Lowe's
is on that list and any significant surprises in monthly sales
or profit forecasts, or changes in the outlook for the economy
will generate volatility in this issue.

PLAY (conservative - neutral/debit straddle):

BUY  CALL  AUG-40  LOW-HH  OI=4348  A=$1.00
BUY  PUT   AUG-40  LOW-TH  OI=2671  A=$2.05
INITIAL NET DEBIT TARGET=$2.90-$2.95 TARGET PROFIT=20%

Note: A true "delta-neutral" position (straddle) would involve
buying two Calls for every Put that is purchased.

http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=LOWE
******************************************************************


*************************ADVERTISEMENT*********************
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index instead?

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market updates, plays, education and daily commentaries by
those who know.

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IndexSkybox.com:
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**********

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