Option Investor

Daily Newsletter, Sunday, 09/16/2001

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The Option Investor Newsletter                   Sunday 09-16-2001
Copyright 2001, All rights reserved.                        1 of 5
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MARKET WRAP  (view in courier font for table alignment)
        WE 9-14           WE 9-7          WE 8-31          WE 8-24
DOW     9605.51 -   .34  9605.85 -343.90  9949.75 -473.42  +182.39
Nasdaq  1695.37 +  7.67  1687.70 -117.73  1805.43 -111.37  + 49.79
S&P-100  558.58 +  4.69   553.89 - 23.51   577.40 - 29.31  + 12.84
S&P-500 1092.54 +  6.76  1085.78 - 47.80  1133.58 - 51.35  + 22.96
W5000  10104.44 + 37.95 10066.49 -448.60 10515.09 -433.32  +188.32
RUT      440.73 -  4.46   445.19 - 23.37   468.56 - 12.25  +  5.16
TRAN    2676.49 - 36.65  2713.14 -100.27  2813.41 - 40.98  + 29.74
VIX       34.60 +   .24    34.36 +  6.51    27.85 +  5.56  -  4.45
VXN       63.84 -  1.61    65.45 + 12.59    52.86 +  5.16  -  4.32
TRIN        .68             1.25              .71              .70
TICK       +100             -113              -74              351
Put/Call   1.01              .84              .82              .56

Market Meltdown or Explosion?
by Jim Brown

The damage has been done to lives and buildings. The damage to
the stock market has yet to be seen. When the NYSE opens for
trading on Monday it will not be without problems. Still the
almost superhuman effort to reroute communications, occupy
temporary office space, install and configure new computers,
servers, routers, etc, will be tested under fire at 9:30
Monday morning. There is likely to be outages, bad ticks
and massive failures as record volume hits the boards.
Still America will be back in business but it will not be
business as usual.

There is a huge difference of opinion as to what will happen
on Monday morning. There is a group of analysts that think
the markets could easily drop 8-10% at the open, rebound
slightly and then fall off the cliff to extreme levels. The
bullish camp think that Americans have put on their red, white
and blue trading caps and will rush in to buy America on sale
on Monday and create a very strong patriotic rally. Reality
will likely be something in the middle of both those extremes.

The Fed is building a fortress around the U.S. stock market
and the American financial system. They have injected almost
$215 billion of liquidity into the system in the last three
days. $90 billion of that was funding for foreign banks to
prevent a cash drain as funds are shipped around the world
when the markets open for business. The Fed Funds Futures
are showing almost an 85% chance for a 100 point rate cut
in the next 30 days. The educated bettors are expecting a
50 point cut before the market opens on Monday with another
cut at the October 2nd meeting if the markets are still in
the tank.

The Fed action, if it comes, will provide a boost to the
market, temporarily. Because it has been telegraphed all
week much of the impact has already been dulled. Heaven
help us if they do not cut or only cut a quarter.

The biggest problems will come from the change in the world
as we know it. Airlines for example are literally on the verge
of bankruptcy from the already 50% drop in revenue over the
next 90 days. Reservations are being cancelled daily, and
new restrictions on travel are being added as well. The
CEO of Continental said on CNBC that most airlines would
not survive the next 90 days without intervention. The
government is trying to rush through a $2.5 billion grant
to keep them liquid over the next two weeks and then a $12.5
billion loan guarantee to prevent them from bankrupting over
the next 90 days. Air travel as we know it has changed. The
airline sector as we know it will likely change over the next
90 days as well. Expect smaller carriers with lower reserves
to experience problems and become prey for the giants.

The -50% drop in airline bookings will also impact hotels,
restaurants, retail and the service industry. Consumers were
already losing confidence in the economy as evidenced by the
huge drop in the sentiment numbers on Thursday. The University
of Michigan sentiment dropped to 83.6 from 91.5 in August and
was far below the 90.8 analysts expected. This is what the Fed
has feared for some time. Fueling this drop was the spike in
jobless claims to 431,000. With a head start down the recession
hill any pull back by consumers because of the fear of terrorism
could grease the skids not only in the U.S. but globally as well.
The state department has issued a strong caution for overseas
travel and the bombs have not even started falling. Without
the U.S. tourist as well as tourists in general there will be
serious problems with the global picture.

Local economists are painting a gloomy picture. First Union
said on Friday that the drop in retail, restaurants, hotels
and travel would be enough to push the U.S. economy into a
full blown recession. The economist for Bank One was also
negative about the possibility of avoiding a global recession.
In reality market fundamentals have worsened. Before the
attack the fundamentals were terrible and the markets were
tanking as companies warned on a daily basis. Now that the
fundamentals for a major portion of our economy have literally
been cut in half how can the markets react positively?

General Electric was the first major company to warn based
on the attack. They said losses in their reinsurance company
for claims on the WTC would knock four cents off their earnings
for this quarter. AIG also said they would lose -$500 million
for their part in the claims. These are only the first of
many warnings but these warnings may be seen as one time
charges instead of normal operating and therefore ignored.
It still sets a tone for the markets that is negative. Ford
said disturbance in supply lines would cause it to make fewer
vehicles and they would miss earnings estimates. Multiply this
by hundreds of companies and you can see what lies ahead.

Contrary to all the negative issues I mentioned above there
are also many positive benefits to the economy. The amount of
replacement hardware for the ground zero businesses will be
substantial but it will still only be a blip on the screen
long term. What will help is the change in business climate
nationwide. Many corporations will see the devastation and
complete destruction and start thinking about what would
happen if that happened to their building due to terrorism,
fire, flood, hurricane, tornado, earthquake, etc. It makes
you feel very vulnerable. There will be a rise in orders
as thousands of companies beef up their disaster recovery plans.
The security sector will undergo a complete makeover and
literally hundreds of thousands of people could find employment
there over the next year. As the counter attack progresses
it will heighten awareness and increase the security level
for all America.

This wave of capital spending will take some time to be
seen in sales and profits but it will happen. It will not
happen in time to help the markets next week. What will help
us next week is the relaxation of the buyback rules by the
SEC. They normally prevent companies from buying back their
stock in volume on the open market. This prevents companies
from manipulating their stock price. With the relaxed rules
companies have more freedom to buy larger amounts. Cisco has
already announced a $3 billion buyback to begin next week.
AIG, even after announcing a $500 million loss, has approved
a 40 million share buyback. This will put a floor under their
shares. CSCO at $14.47 could put out a blanket order for millions
of shares at $13. This would allow some market movement but
limit the downside. AIG at $74 could put in a limit buy at
$69.75 and basically support the stock in a very bad sector
while giving themselves a little breathing room.

Monday is likely to be historic in more ways than one. Many
analysts think we could easily see the biggest volume day
ever. Some have said we could actually see four billion
shares on the NYSE. While I doubt the four million mark
it will be very heavy. The best guess for direction is a
strong dip at the open followed by a patriotic rebound but
ending negative for the day. The war between the bears and
the bulls could be waged for most of the week. There is likely
to be a struggle to rally which will end with the realization
of the recessionary facts. Sentiment has taken a serious hit
on top of the drop from the prior week. Earnings will continue
to fall through the fourth quarter and any bounce from a new
wave of capital spending will not be seen until next year.

The Dow is going to face a challenge from Boeing, GE, GM, JPM,
AXP, C, WMT and DIS. Boeing is rumored to be at risk to drop
-15% to -20%. JPM, C and AXP could easily drop -10% to -15%.
The Dow, which closed at 9605 last Monday, could easily hit
9300 or even 9000 on panic selling. The European/Asian markets
have fallen close to -10% on the news and could fall more in
advance of our market open on Monday. A 5% drop on the Dow would
put it at 9124. A 10% drop would see 8644. The markets were
already severely oversold from the prior week and even a 5% drop
from here may be too much of a temptation for investors to resist.

That is of course if there are any investors willing to buy the
dip in front of a huge unknown. With comments in the media today
that Bin Laden has over 10,000 trained soldiers at his disposal
across several countries, the battle is shaping up to be long
and arduous. Up to 50,000 reservists have been approved to be
called into active duty. This is bound to weigh on investors
and consumers. The threats of revenge are already being made
by the Taliban and they have the resources to carry it out.

This will not be a couple cruise missiles launched in the night.
This is going to be a sustained conflict with a good possibility
of a ground war. Russia spent years and lost thousands of soldiers
in Afganistan. It is a very rough terrain and not conducive to
a quick conclusion. Benjamin Netanyahu called the attack the
"wake up call from hell." The threat has always been there but
their technical ability to act on it was lacking. He said they
are capable of changing the direction of history if they are not
stopped soon. This type of information is being absorbed by
investors and it will weigh heavy on the markets.

I would love to tell you that the market will do thus and so on
Monday and have you plan your trades accordingly. Unfortunately
there is no human being with the ability to predict what will
happen. We have spent the entire week producing special reports
and analyzing the possibilities. We have received some great
emails from our readers about these efforts. The sector analysis,
trading tips and sentiment pieces were our efforts to equip you
to make the right decisions on Monday.

We have had some very successful put plays recently. Many of them
could have been very successful on Monday as well. Because we
do not want to look like opportunists trying to profit on
the tragedy we are dropping all of them this weekend. BA, PGR,
TSG, JPM, AIG, ACF and MER. How you continue to play these is
of course up to you. We have been asked by many to suggest some
plays that we thought would benefit from the money shuffle that
will occur. We tried to find a couple politically correct companies
that were not directly impacted but would benefit from a longer
term outlook. We chose ATK, Alliant Tech Systems and NBR, Nabors
Industries an oil driller that focuses on the lower 48 states.
We also suggested a couple plays on the QQQ and DJX to benefit
from any major dip and rebound. We will resume a regular play
pick schedule on Tuesday after the smoke clears.

If you are not in the markets currently I would be very careful
attempting to trade them on Monday. Those readers who are long
options and have seen time value evaporate over the last week
would do well to monitor those positions closely. The Options
Clearing Corp will not change the expiration date. Remember,
for every holder of a long option who is wishing for another
week of time to hopefully recover value, there is another
writer of that option that wants it to expire worthless. Do
not expect relief in that direction.

I apologize! Apparently many readers took my comments from Thursday
night incorrectly and not in the spirit given. I apologize for
the misunderstanding. I fully support Bush and realize that plans
for any military operation must be fully developed before being
put into operation. That was never in question. The point I was
trying to make was the tone of the delivery of every speech by
Bush was so soft and lacking in emotion that I feared the leaders
of the rogue nations would read it as weakness. I wanted to see
him speak more forcefully and with passion. I never suggested he
simply start flinging bombs with reckless abandon. The various
speeches on Friday were delivered with much more confidence and
determination. It was encouraging. I seldom use this venue to
make political statements and I apologize for any misunderstanding.

Check out the great strategy sections and special reports in
this weekends edition of the newsletter. New articles as well
as the articles from earlier in the week are being repeated and
summarized for your trading education. Profit from it!

Definitely, enter passively, exit aggressively!

Jim Brown

In the wake of the Attack on America, Option Investor published
several Special Report and Sector Impact pieces last week.  If
you didn't get a chance to read these articles last week, make
sure to read them over the weekend.


Historical Reaction to Terrorist Attacks

In the midst of the confusion and suffering of today's tragic
events, investors already made nervous about the recent bear
market are questioning how the markets may react when they
reopen. There is no precedent for an attack so directly upon
the core of the US financial system; the headquarters of over
150 companies including major brokerages were in the World
Trade Center complex. However from a historical perspective,
in the days and months following large scale terrorist or
military action the U.S. financial markets have proven to be



A Trader's Personal Defense: Definition of various stop orders
by Jeff Bailey

Over the past several months, investors have become very
familiar with the usefulness of trailing stops and different
stop loss orders that they can place on different trades they
currently have open in their accounts. When the markets do
open back up for trading, the type of "stop" order you may
have placed on a trade should be understood. There are two
different types of "stop" orders. Subscribers may want to
reassess their current stop orders and understand their
implications. Here is a description of the two most common
stop orders.



How your brokerage account is insured
by Jeff Bailey

Many investors and traders may be trying to get information on
how their brokerage accounts are insured and what type of
protection they may have. Investors are never insured against
stock price fluctuation, but their accounts are insured
against a firm's inability to continue business.



Brokers Ready To Roll - But Check Your Orders!
by Jon Farnlof

Lower Manhattan will be spending many months, if not years
rebuilding the financial and city infrastructure damaged by
the destruction of the World Trade Center. One of the
benefits of the large investments in technology by the
brokerage industry was that they had disaster recovery
plans and equipment in place for this kind of event. As a
result, even firms directly affected by the attack have
announced that all records are safe and they will be fully
operational when the markets reopen. However, investors
should contact their brokers to verify their readiness and
perhaps more importantly, to understand how will they
handle orders that were pending when the markets closed.



Foreign markets mixed

U.S. markets remain closed today, but many foreign markets were
trading after yesterday's attacks on the World Trade Center and
the Pentagon. In brief, Gold, Oil and the Swiss Franc rose in
price during and after yesterday's World Trade Center attack,
as investors turned toward more defensive assets.



Spotlight on the Oil sector
by Jeff Bailey

Recent events in the U.S. have part of the world spotlight on
the Oil sector. The reason this group of stocks has been
pushed back into the spotlight is that there is speculation at
this point that supply to the United States may be disrupted
at some point should U.S. and Middle East tensions escalate.



Airlines and Aircraft Manufacturers

Already battered by slumping business demand because of a weak
global economy, the financial aftershocks of Tuesday's events
are going through the aviation industry like a typhoon.
Airlines generally operate with a tight 3-percent profit
margin. Those margins are going to be under pressure as
revenue and earnings take hits from the travel halt, disrupted
flight schedules, higher fuel costs and insurance premiums,
declines in overseas travel, increased security expenses and
government regulation. The recent grounding of their planes
alone cost the average major airline $43 million a day in lost



Insurance Companies Exposed to Significant Losses

Damages from this week's attacks on the World Trade Center and
Pentagon are expected to reach billions of dollars. Insurance
claims for property, injuries, workers compensation, loss of
life, and business interruption could reach $30 billion.



Playing Defense
By Eric Utley

Tuesday's tragic events forever changed the landscape and
psyche of America. The ramifications of the terrorist acts
will impact many things American. Preliminary statements from
government leaders suggest that the U.S. defense sector is in
store for further build out


Tired of waiting on trades to execute?
Does your broker offer Stop Losses on Options?

Trade instantly with Stop Losses at PreferredTrade Inc.
Stop Losses based on the option price or the stock price.
Move your trading into the next millennium with PreferredTrade.

Anything else is too slow!


Editor's Plays

The Only Game In Town!

There is only one game in town this week and it is indexes.
The possibility of a major move in both directions IN
EXPIRATION WEEK makes this a tremendous opportunity.

Unfortunately the market may gap strongly down at the open
on Monday and premiums will escalate quickly due to the
volatility. Trading to the downside may not be possible
so our targets should be any anticipated rebound.

The newsletter profiled call plays on the QQQ and DJX
today and IndexSkybox will be all over the SPX/OEX on
Monday. I decided to pick one and suggest a strategy
to capitalize on it.

The one I picked was the DJX since the Dow is likely to
be the biggest mover. The Dow closed at 9605 or 96.05 in
DJX terms.

9100 is probably the best case for a bottom on Monday.
Assuming that there is some patriotic sentiment that
carries through to the markets then it is entirely
possible that we could see a rebound back to close
to 9500.

Knowing that the best laid plans of mice and men always
go astray, we could be left waiting if we simply set
a buy order at 9100. The strategy I want to suggest is
stepping into the position.

Lets assume that the Dow gaps down -200 points to 9400
and then heads lower from there after some initial
resistance. I want to average into a position that will
get me 100% invested if we get to 9100 but does not leave
me out if the Dow does not fall that far.

Here is my plan, modify the quantities to fit your plan.

9400 Buy 10 Sept 94 calls DJV-IP
9300 Buy 20 Sept 94 calls DJV-IP
9200 Buy 30 Sept 94 calls DJV-IP
9100 Buy 40 Sept 94 calls DJV-IP

Total calls purchased if the Dow hits 9100 = 100.

If Sept calls scare you then use October.

The listed price for these calls as of Friday night when
I am writing this is $3.30. Using the DJX at 96.05
that would suggest the price would be $1.50 to $1.75 at 94,
$1.25-$1.50 at 93, $1.00-$1.25 at 92 and $.75-$1.00 at 91.

Using the high price on each range, 10 contracts would
cost you $1250. 100 contracts as shown above $12,500.

Using Preferred Trade you can enter contingent orders
based on the price of the DJX for the entire trade and
just sit back and watch.

Using the same numbers and going backwards you can easily
see where you would be profitable assuming the Dow went back
to 9400 or higher.

This is simply a trading play to capitalize on any bounce
in investor sentiment and from a seriously oversold condition.

The flaw in this play is of course a Dow that does not rebound.
This is something every investor should consider before taking
this risk.

This is purely a speculation trade and should be treated
as such.

Good Luck

Jim Brown

Tired of waiting on trades to execute?
Does your broker offer Stop Losses on Options?

Trade instantly with Stop Losses at PreferredTrade Inc.
Stop Losses based on the option price or the stock price.
Move your trading into the next millennium with PreferredTrade.

Anything else is too slow!



Economic Update
By Jeffrey Canavan

Now more than ever there is going to be a focus on the U.S.
economy.  It pales in comparison to the emotional pain and
suffering we are all experiencing, but eventually we will rebound
fiscally.  An economic recovery, or economic counter-strike as
some are calling it, may be delayed for a quarter or two, but I
fell completely confident in the strength of American consumers
and corporations to hold up during this trying time.

The importance of economic and corporate data that has been
released this week may be miniscule, but it will give us a
yardstick to measure our country's financial performance going

The most encouraging news came from Cisco.  Its board has
approved a $3 billion stock buyback program to be implemented
over the next two years to bolster investor confidence. According
to CFO Larry Carter, "We think this is the right thing to do now
for our shareholders."

Pfizer also stated that it would continue its stock buyback
program, and reaffirmed guidance for 2001 and 2002 earnings.
"Pfizer, like America remains strong, and we continue to be
confident in our future as a company and in the strength of the
nation's economy and institutions," said CEO Hank McKinnell.

The SEC is expected to temporarily ease restrictions on companies
buying back more than a specific amount of their own shares to
help inject money into the market.

Oracle's thoughts were focused on their eight missing coworkers,
not on company earnings, but the company posted a 2% increase in
net income.  Any conference calls and future guidance have been
postponed until trading resumes.

Airlines have eased back into operation, with 20% to 50% of daily
flights operating.  The airline industry has reportedly lost $40
to $60 million dollars per day during the travel stoppage.  A
measure currently in front of the House of Representatives would
provide $15 billion in relief to the struggling airline industry.
$2.5 billion of that would go to cover losses, and the remaining
$12.5 billion would extend credit or guarantee loans.

Not all news from corporate America is positive.  Ford announced
that they would cut production by 110,000 to 120,000 units, and
third-quarter earnings would come up short of expectations.

General Electric reported that they would cut their third quarter
earnings by 4 cents per share due to $600 million in expected
claims for its Employers Reinsurance unit.

Semiconductor testing equipment maker Teradyne has eliminated
1,000 jobs, or 11% of its workforce, and warned that financial
results would come in at the low end of expectations.

One of the most closely watched economic indicators going forward
will be consumer confidence.  Before the affects of Tuesday's
attacks were realized, consumer confidence dropped 7.9 points to
83.6.  While these events could break consumer confidence, a
Gallop Poll revealed that 6 out of 10 respondents do not plan to
make any changes in their personal lives or activities to avoid
being a victim.  Count me in.

Demand for homes and refinancing activity remains strong, but
have come off their highest levels of the year.  The Mortgage
Bankers Association's index of mortgage applications fell 2.6%
for the week ending September 7th, but that is still 18% above
levels from four weeks ago.  There are no significant signs of
the housing market slowing.

Industrial production continues to decline.  After a slight
improvement last month, industrial production fell 0.8% in
August.  Production has now fallen for eleven straight months.
Announcements like Ford's may see this trend continue for a few
months until rebuilding gets underway.

The employment situation also continues to weaken.  Initial
jobless claims jumped 21,000 to 431,000, and continuous claims
rose to 3,345,000.  Disruptions to air travel and the normal flow
of the economy could lead to further worsening in the employment
situation in the short-term.

The Economic Cycle Research Institute's Weekly Leading Index fell
to 118.9 from 119.7 for the week ending September 7th.  The
decline in stock prices, one of the components of WLI, was the
leading contributor to the decline, but labor data also added
weakness.   The indicator had been pointing to short-term
weakness, but a slowly recovering economy.  That recovery will
most likely be postponed.  The components of WLI include money
supply, industrial markets price index, mortgage applications,
bond quality spreads, stock prices, bond yields, and initial
jobless claims.

The above data will do little sway investors on Monday, but once
Wall Street gets back to normal, or at least as normal as humanly
possible, we will once again have to turn attention back to the
economic and corporate outlook.  In the meantime traders and
investors will most likely break one the cardinal rules - trading
on emotion.


Vivacious Volatility
By Eric Utley

Editor's Note: In light of last week's terrible events, Eric
will be publishing a special strategy column in the place of
his normal Ask the Analyst piece this weekend.

The CBOE Market Volatility Index (VIX.X) is often referred to as
the fear gauge, and for good reason.  Also known as the VIX, the
value of the index is determined by the actions of market
participants.  The VIX reflects expected future market
volatility and reveals the level of fear among market
participants.  Since investors are risk averse animals, their
collective level of risk aversion can be measured through the
level of the VIX.

The VIX is calculated using weighted implied volatilities across
several S&P 100 (OEX.X) call and put contracts.  So when we're
discussing the VIX, it's important to keep in mind that it's a
measurement of fear within the S&P 100.  Conversely, the
Nasdaq-100 Implied Volatility Index (VXN.X) is a measurement of
fear among market participants dealing in the Nasdaq-100.  Also
known as the Vixen, the Nasdaq-100 volatility gauge serves the
same purpose of measuring fear among market participants.

The history of the VIX dates back to early 1986, but the CBOE
has been calculating it on a daily only since 1993.  The VXN,
however, has only been around since the beginning of this year.
Through its history, the VIX has displayed extreme levels of
fear during times of political instability, economic uncertainty,
wild interest rate fluctuations, and times of war.

During the October 1987 stock market crash, the VIX actually
reached as high as 170.  When Iraq invaded Kuwait in 1990, the
VIX jumped to the 40 level, and revisited that level when U.N.
forces invaded Iraq in 1991.  More recently, the VIX spiked to
the 50 level in late 1997 as the Asian Flu spread across the
global economy.  In late 1998, at the climax of the Asian Flu
and in the midst of the Long-Term Capital blow-up, the VIX
spiked as high as 60.  During the current bear market, the VIX
traded above 40 during the spring of 2000, and again during the
spring of this year.  Since the VXN is less than one year old,
we don't have much history to draw any conclusions from.
However, what we draw from the VIX can, I think, be applied to
the VXN.

In the greater scheme of things, the VIX's history back to 1986
isn't really that long.  But, there are a few dynamics I'd like
to pinpoint.  For instance, the VIX spiked higher during times
of economic uncertainty than it did during times of military
conflict.  Again, we don't have a lot of observations to draw
that conclusion from, so take it for what it's worth.  More
importantly, however, is that the VIX has always reverted back
to its mean after spiking to extreme levels, which is what I'd
like to elaborate upon.

Exactly what the mean of the VIX is depends upon a great deal
of variables.  For example, its mean during the early 90's is
much different from its average during the late 90's.  For our
purposes, I'm going to use the VIX's 200-monthly moving average
to define its mean.  This is rudimentary, I know, but I think
it serves this purpose.  The level of the VIX's 200-monthly
moving average is currently at 26.  The VIX closed last Monday
right around 34, which is quite a distance from its mean.  It
had already advanced ahead of last Tuesday's events, which I
think was purely a coincidence.  The market had been sliding
and fear was growing, hence the VIX's rise over the past three

Now, recall that during the most recent military conflicts that
the VIX spiked to the 40 area.  I think we'll see that spike
again, perhaps even more fear.  I spoke with a trader friend of
mine on the Chicago Board Options Exchange who said he expected
to see a significant spike in implied volatility Monday.  I tend
to agree with his speculation, and believe that fear levels will
have risen from where there were since the VIX last traded.

If the VIX does spike substantially higher, which I think it will,
there's a couple of things that options traders should be aware
of.  First, a substantial spike in implied volatility should help
to offset the loss of time value during the last four lost days
of trading.  Any spike in volatility won't completely offset the
loss of time, but it should help to mitigate the loss somewhat,
all things being equal, i.e. underlying stock price.  Second,
if a spike in implied volatility helps to offset the loss of time
for those long theta, remember that it will also make the
premium go up across the board.  That means those looking for
new trades in the options market early Monday should be concerned
with high levels of implied volatility and the resulting impact
on the price of options.  In other words, a spike in the VIX will
make options more expensive and create the need for a larger move
in the underlying for any given contract to go in-the-money.

Assuming I'm correct in that the VIX will spike higher, there
arises a question of timing and duration.  The VIX could very
well gap higher Monday morning and begin to recede if fear levels
lower.  Then again, it could gap higher Monday morning and
subsequently climb still higher.  Also, it could gap up to the
40 area Monday morning and stay there for a month.  In short,
the scenarios are innumerable and will most likely be impacted
by U.S. military action.  So a trader needs to take into account
what impact volatility is going to have on open options positions
and how to trade around extreme levels of volatility.

With that in mind, I'm going to give some options-related
strategies that benefit from high levels of volatility as
they relate to three different biases: bearish, neutral, or bullish.



If you're bullish on a particular issue, you obviously want the
price of the underlying to rise.  But, buying a call outright may
not be the best thing to do when volatility is at extremes.  So
here are a few strategies to consider if you're bullish on the
underlying during times of excessive fear.  (Many of these
strategies may not be suitable to certain risk preferences, so
please consider your individual profile before employing any of the
following strategies.)



Buy In-The-Money CALL/SELL At-The-Money CALL
Buy Out-Of-The-Money PUT/SELL At-The-Money PUT



If you're bearish, obviously the bias is for the underlying to
fall in price.  But, again, buying a put outright might not be
wise if premiums are drastically inflated with a spike in
implied volatility.



Buy Out-Of-The-Money CALL/SELL At-The-Money CALL
Buy In-The-Money PUT/SELL At-The-Money PUT



If you're neutral, you're expecting no, or very little, movement
in the underlying.  This is an ideal situation for taking
advantage of excessive levels of volatility.




To reiterate, the aforementioned strategies are intended to
take advantage of extreme levels of volatility.  They may not
be suitable for every reader, but there worth considering when
going into next week's trading.  Remember, the VIX has almost
always reverted to its mean, whatever its mean may be defined
as.  The below chart, which was created using www.stockcharts.com
program, displays the VIX's tendencies to revert back to its
mean since 1995.  Don't focus on its absolute levels; rather,
notice that after a large move in either direction, the VIX
normally reverts back to its average.

Because it's difficult to say how long volatility will remain
high, I think the more prudent course of action would be to
use second or third month contracts with any of the above
mentioned strategies, except maybe the shorting of straddles
and strangles for those who are not as averse to risk.  And
selling calls against underlying stock positions might not be
a bad way for traders to take advantage of an extreme increase
in volatility.

On a personal note, it's been a long week here in Denver during
these times of uncertainty.  Unfortunately, others' weeks have
been much longer.  My deepest sympathies go out to those who've
suffered, in so many ways, from what happened last week.  I
hope all of our readers have a safe, peaceful weekend.

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For the week of September 17, 2001

The government and most statistical organizations are planning to
release economic reports as planned, however, any impact of this
data will recede to the ongoing implications of Tuesday's attack.
The following events could change or be cancelled without notice.

Business Inventories   Jul  Forecast:  -0.4%   Previous:  -0.4%
Trade Balance          Jul  Forecast:-$29.8B   Previous:-$29.4B

CPI                    Aug  Forecast:   0.2%   Previous:  -0.3%
Core CPI               Aug  Forecast:   0.2%   Previous:   0.2%

Fed Beige Book  2:00 PM ET  Forecast:    N/A   Previous:    N/A
NAHB Housing Market    Sep  Forecast:    N/A   Previous:     62
Oil/Gas Inventories   9/14  Forecast:    N/A   Previous:303.3MB
International Trade    Jul  Forecast:-$29.9B   Previous:-$29.4B
MBA Mortgage App      9/14  Forecast:    N/A   Previous:  601.8

Initial Claims        9/15  Forecast:    N/A   Previous:   431K
Housing Starts         Aug  Forecast: 1.635M   Previous: 1.672M
Building Permits       Aug  Forecast:    N/A   Previous: 1.558M
Philadelphia Fed       Sep  Forecast:  -14.1   Previous:  -23.5

Treasury Budget        Aug  Forecast:-$44.7B   Previous:-$10.4B
ECRI Wkly Lding Indx  9/14  Forecast:    N/A   Previous:    N/A

Week of September 24
Sep 24 Leading Indicators
Sep 25 Consumer Confidence
Sep 25 Existing Home Sales
Sep 27 Initial Claims
Sep 27 Durable Orders
Sep 27 Help-Wanted Index
Sep 27 New Home Sales
Sep 28 Chain Deflator-Final
Sep 28 GDP-Final
Sep 28 Mich Sentiment-Rev
Sep 28 Chicago PMI

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The Option Investor Newsletter                   Sunday 09-16-2001
Sunday                                                      2 of 5

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Spotlight on the Gold/Silver sector
By Jeff Bailey

I will ask every subscriber to do this NOW!  Before you read any
further, what do you think gold stocks did after Iraq invaded
Kuwait?  After you finish reading this article, you will
understand why it is so important Monday morning not to rush to
judgment regarding any type of investment decision!

In times of uncertainty, many market participants become
interested in gold stocks.  Over the past couple of months we've
talked about the Philadelphia Gold/Silver Index ($XAU.X) and what
it may have been trying to tell us about the economy, inflations
or possible stagflation.  The index by itself doesn't "tell us
anything" with monitoring the bond market and certain sectors
that are more economically sensitive.

A quick review must be made here.  First, understand that the
XAU.X is a basket of stocks.  One's first impression if they're
looking for some type of defensive play here is this.... If the
markets were halted, is this investment going to provide me the
hedge that I was looking for?  Sounds silly to even think that
doesn't it?

I remember all too well when I was sitting in my World Finance
class in college that Professor Olinyk (I'm sure I'm butchering
the spelling of his last name) asked the class if a gold stock
was truly a hedge against currency crisis.  The discussion began,
but the prevailing answer seemed to be that the true hedge was
gold bullion, not the stock.  The reason for that answer was that
if stocks exchanges were to halt trading under an extreme global
crisis, then perhaps gold bullion would be a truer hedge.  I
think I asked the question.... "how many 7-elevens will let me
shave off a sliver of gold to pay for my candy bar and soft
drink?"  I think I know why I didn't get an "A" in global

With that said, Gold stocks will undoubtedly be pushed into the
spotlight in coming weeks.  As I did last night with Oil stocks,
we should take a look back in history at the Persian Gulf War and
that time frame as it may give us the needed historical pricing
to see how things trade for this sector in coming weeks and

Historians will remember that there were tensions rising before
the United States and its allies pushed back the assault on
Kuwait from Iraq.  It was on August 2, 1990 when Iraq invaded
Kuwait, but it was not until January 16th of 1991 that operation
"Desert-Storm" began.  This may be an interesting time line to
study.  So far, the United States has not declared war on anyone.

As I mentioned in yesterday's commentary.  Current market
conditions are vastly different, but perhaps the global impact is
seen as similar and some of these similarities may present
themselves near-term.  One might argue that the world's
confidence has been shaken under current conditions, compared to
those events dating back to the Persian Gulf War.

Gold/Silver Index (XAU.X) - before and after Persian Gulf War

Now, how did you answer the question in the opening paragraph of
this article?  Surprised?  I sure as heck am.  I would have
answered it as "significantly outperformed the market."  From the
looks of it, a "speculator" that dumped their entire account into
gold stocks when Iraq invaded Kuwait may not have like the
result.  As the time line unfolds, tensions were unfolding and
things were "getting worse" in the Middle East.  There was great

Note the date 01/12/01 on the above chart when Congress voted to
allow US troops to be used in the Middle East.  At the time of
this writing, Congress has yet to approve any use of US troops in
a war effort.  There may never be a "war effort," but it does
give hint of how much time has yet to pass since terrorist
attacks on the WTC and the Pentagon.

As you can see from the above chart, there were certain jumps and
declines in the Gold/Silver Index (XAU.X) as it pertains to
certain events that unfolded during the Persian Gulf War.  While
past performance is no guarantee of future results, the above
chart truly drives home the fact that every trader and investor
must monitor an investment not based on BELIEF, but on how the
instrument performs.

I've mentioned that saying before and I'll do it again....
"forget what you believe, trade what you observe."

The commodity itself

Now it's time to put some statement to the test that I wrote in
the fourth paragraph as it relates to Professor Olinyk's question
of "commodity or stock?"  Jeff Canavan has gathered the following
information during the same time frame on the commodity itself
based on Comex Gold Futures.

Comex Gold Futures

7/01/90  $361.96/oz.
9/28/90  $408.17/oz.
2/01/91  $379.20/oz.

3-month gain  $46.21  12.77%
6-month gain  $17.24   4.76%

The q-charts symbol for this commodity is (gc01v), which is the
October futures symbol.  Some subscribers may want to monitor
this to get a feel for the MARKET's perception to various
currency risks.

The best bet for investors looking for some sort of guidance
regarding the future of the markets is to try and sit tight
the first couple of days of trading.  This will allow some
trends to develop where we can better interpret what the
market is saying.  The first priority for many investors will
be to protect/hedge their current investments in their accounts.

I've said before, that it is very difficult to simply watch one
index by itself and make any type of analysis based on how that
index trades.  For the Gold/Silver Index and gold stocks, this is
very true.


Options Issues: Update
By Eric Utley

It would appear that September options are going to expire on
schedule.  That is, the Saturday following the third Friday of
the month.  That means September contracts expire on their
regularly scheduled date of September 22 - next week.

It's not fair to those long theta, and I can only send my
sympathies with our readers who are.  I'm in the same situation.
But all things considered, the loss of a little bit of time
value is not nearly as devastating as what some people lost
last week.

In a correspondence from the Options Clearing Corporation (OCC)
late last week, a spokeswomen relayed an excerpt from the
Characteristics and Risks of Standardized Options that I
thought I would pass along to our readers.

The following rule appears in Chapter VIII, pages 49 and 50:

"In highly unusual circumstances (e.g., where a brokerage firm is
unable to receive instructions from its customers), a firm may be
authorized under applicable rules to make an exception to its
regular cut-off time.  However, in order for an option to be
exercised, the brokerage firm must in any event pass on its
customer's exercise instructions to OCC before expiration.  OCC
may allow exercises for a limited time after expiration in the
unlikely event that OCC is unable to follow its normal procedures
for receiving exercise instructions from Clearing Members on the
expiration date.  Subject to that very limited exception, OCC has
no authority to extend the expiration of any option.  Once an
exercise instruction is given by a Clearing Member to OCC, it
cannot ordinarily be revoked except to correct a bona fide error
that is specified in a request filed by the Clearing Member prior
to a deadline specified in OCC's rules."


Call Play of the Day:

QQQ - Nasdaq-100 $34.10 (+0.40 last week)

See details in sector list

Call Play of the Day:

DJX - CBOE Dow Jones Industrial Average $96.06 (+0.00 last week)

See details in sector list

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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.


No Dropped Calls for the weekend.


ACF $39.79 (-0.21) There is little doubt that Financial stocks
will come under heavy selling pressure when the markets re-open
on Monday.  We are dropping coverage of our ACF play this weekend,
not because we think the downward move is over, but because we do
not want to profit from last week's tragedy.  Our efforts can be
better spent (and we'll sleep better too!) by focusing our efforts
on stocks that are likely to benefit from the recovery following
the disaster.

AIG $74.26 (+1.11) Once again, AIG provided a profitable play
for us, and odds favor a substantial selloff once trading
resumes on Monday.  In light of last Tuesday's tragic events,
we are uncomfortable continuing to profile this stock to the
downside.  Each individual investor must decide what to do in
the coming days, but we're dropping coverage of AIG this weekend.
We don't want to profit from this tragedy and the incredible
suffering that has come with it.

BA $43.46 (-1.72) Even without the severe blow to the airline
industry that occurred on Tuesday, BA's fundamentals had been
weakening, yielding a very profitable put play for our readers.
There is likely to be significantly more downside to the stock in
The days ahead as air travel (and therefore orders for new
airplanes) is likely to see a dramatic reduction.  We'd be more
than happy to continue riding this stock down, but not under
these conditions.  We aren't interested in gaining from the
suffering of our fellow citizens, so we are dropping coverage
of BA this weekend.

JPM $37.26 (+0.26) The damage to the center of the Financial
World will clearly have a deleterious effect on major Brokerage
firms and the extent of the damage will be difficult to gauge in
for some time to come.  Rather than profit from the calamity, OIN
would prefer to avoid such plays and focus our efforts on those
companies that will likely benefit from their efforts to
recover from the damage inflicted by this terrorist act.
Accordingly, we are dropping coverage of JPM this weekend.

MER $46.85 (+0.76) Determining the costs of the damage inflicted
to the Financial infrastructure of the United States will take
time to assess.  While there are those that might look to profit
from the disaster, we are not among them.  We'll drop coverage of
MER this weekend and look for plays that will move on their own
merits, rather than suffer from the catastrophe foisted upon
our country by those that do not understand the strength of our
capitalistic system.

PGR $124.43 (+3.94) Insurance companies across the board will
suffer huge losses in the wake of Tuesday's terrorist acts, and
PGR is certain to be among them.  Gaining at the expense of
others' suffering is not where we want to focus our efforts at
this time of crisis and are dropping coverage of PGR this weekend.
There will be plenty of opportunities to profit over the weeks and
months ahead.  We'll focus our efforts on locating these
opportunities with a clear conscience.

TSG $39.43 (-1.17) Americans, as well as citizens around the world,
are expected to dramatically curtail their air-travel in the wake
of Tuesday's terrorist acts.  TSG will likely be hit hard by the
cutback in travel plans and could fall sharply in the days and
weeks ahead.  Rather than exacerbate the problem by featuring the
stock as a Put play, we'll drop TSG and look for other, more
palatable trades.


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.

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.


QQQ - Nasdaq-100 $34.10 (+0.40 last week)

The Nasdaq-100 Index Tracking stock encompasses the largest and
most actively traded companies on The Nasdaq Stock Market.  Its
components include Microsoft, Intel, Qualcomm, Cisco, Oracle,
and Amgen, among others.

When trading opens Monday it's sure to be volatile and wild.
The consensus among market participants going into next week's
session is for a large gap lower on heavy selling pressure,
followed by a large rebound.  If that scenario unfolds, we're
looking to play it through the QQQs.  In the QQQ itself, we're
looking for the contract to dip down to the $29 level then come
back up through the $30 level.  If that happens, we're looking
to use the advance back above the $30 level to enter new call
positions for a trade.  However, some readers might use any
such dip as an entry for longer term positions.  If the QQQs
only dip slightly then all bets are off for the aforementioned
entry strategy.  When looking for a reversal, bullish traders
should keep close tabs on the large components of the QQQs,
such as MSFT, CSCO, QCOM, INTC, and ORCL.  The QQQs have
short-term resistance at the 10-dma at $36, which may serve
as an exit point.  Because its price action is uncertain,
we're not setting a stop in this play initially.  Also, bullish
traders should focus on the distant month contracts due to
the expected increase in volatility next week.

BUY CALL OCT-29 QAV-JC OI=  273 at $6.00 SL=5.00
BUY CALL OCT-30*QAV-JD OI= 1282 at $5.20 SL=4.00
BUY CALL OCT-31 QAV-JE OI= 1062 at $4.50 SL=3.50
BUY CALL OCT-32 QAV-JF OI= 4209 at $3.80 SL=3.00
BUY CALL OCT-33 QAV-JG OI= 5027 at $3.10 SL=2.25
BUY CALL OCT-34 QAV-JH OI=16581 at $2.60 SL=2.00
BUY CALL OCT-35 QQQ-JI OI=50943 at $2.15 SL=1.25

Average Daily Volume = 55.0 mln

DJX - CBOE Dow Jones Industrial Average $96.06 (+0.00 last week)

The DJX, which was developed by The Chicago Board Options
Exchange, is an exchange-traded fund (ETF) that tracks the
performance of the Dow Jones Industrial Average.  Its components
include General Electric, Intel, Citigroup, Walt Disney, Merck,
and other blue chip American companies.

With analyst reports suggesting that many Dow components could
see significant selling, the index may be set up for a sharp
drop when it reopens next week.  But the buyers could very well
step in following any big dip.  Stocks such as Boeing, and even
Citigroup and JP Morgan are expected to see heavy supply Monday
morning.  If the Dow does decidedly slip, we're looking to buy
the proverbial dip.  The index's March lows are between the 9100
and 9400 area, depending on which relative low is used.  We're
looking for buyers to step in around the 9200 level, and use
the DJX.X tracking index to play any such dip.  The options
contracts on the DJX are adequately liquid and could provide a
solid trade if the Dow rebounds from any dip.  So our entry
strategy is simple: Use a dip down to 9200 in the Dow, 92.00 in
the DJX, to enter call plays.  Exit points could been seen as
low as 9400 to as high as 9600 over the very short-term.  We'll
refrain from using a stop initially, but might revisit using
some sort of risk management strategy once we get a handle on
next week's trading.

BUY CALL OCT- 90 DJV-JL OI=  27 at $8.00 SL=6.50
BUY CALL OCT- 92*DJV-JN OI=  25 at $6.40 SL=5.00
BUY CALL OCT- 94 DJV-JP OI=   0 at $5.10 SL=4.00  Wait for OI!!
BUY CALL OCT- 96 DJV-JR OI= 589 at $3.80 SL=2.25
BUY CALL OCT- 98 DJV-JT OI=2795 at $2.70 SL=1.75
BUY CALL OCT-100 DJV-JV OI=8178 at $1.80 SL=1.00

Average Daily Volume = N/A

ATK - Alliant Techsystems $65.29 (-2.11 last week)

Alliant Techsystems conducts business through three industry
segments: Aerospace, Conventional Munitions and Defense
Systems.  Within these segments, Alliant has four business
lanes: Propulsion and Composites, each of which falls within
the company's Aerospace segment; Conventional Munitions, which
corresponds to the Company's Conventional Munitions segment;
and Precision Capabilities, which corresponds to the company's
Defense Systems segment.

The defense sector should see a boost in earnings over the
next few months if some of that $40 billion makes its way into
new defense spending.  The sector could be set up for a short
term trade higher in light of the proposed increase in
spending.  The traditional defense plays might not be as
responsive to new spending because it's not really a traditional
war that the U.S. is about to embark upon.  As such, we've
turned to a defense play that may benefit, but is still a
relatively larger company.  ATK is a relatively diversified
defense company that could see its stock move higher over the
short-term, or perhaps even the next several months.  The stock
pulled back during last Monday's session, but could rebound
rather quickly Monday.  Look for a bounce from the $65 support
level for new entries or an advance above the $67.50 level on
heavy volume.  We'll look to set stops early next week once
trading is underway.  Finally, the irregular strike prices in
ATK's options reflect a recent 3-for-2 stock split.

BUY CALL OCT-60 AKA-JL OI= 60 at $7.20 SL=5.50
BUY CALL OCT-63 AKA-JW OI=  0 at $4.70 SL=3.50  Wait for OI!!
BUY CALL OCT-66 AKA-JX OI=  5 at $2.95 SL=1.50
BUY CALL OCT-70 AKA-JN OI=  5 at $1.65 SL=0.75
BUY CALL NOV-70*AKA-KN OI=268 at $4.90 SL=3.50

Average Daily Volume = 152 K

NBR - Nabors Industries $24.75 (+0.15 last week)

Nabors operates in two primary business segments within the
oilfield services industry, contract drilling and manufacturing
logistics.  The company provides drilling, workover,
well-servicing and related services on land and offshore in the
lower 48 states of the United States, Canada and Alaska, as well
as international markets.

The oil service sector has been on the slide since earlier this
spring.  But that may change in the wake of last Tuesday's
terrorist attacks on the United States.  NBR's daily chart
pretty well sums up the price action in the group as demand
has slumped and the price of oil has remained relatively low.
But any military action in the coming days, weeks, or even
months is likely to send the price of oil much higher.  That,
in turn, is likely to carry service companies higher, such
as Nabors.  It could turn out that this play is very short
term in nature if signs of significantly slumping demand begin
to show up.  Nevertheless, the stock could work higher over
the short-term if the price of oil does spike.  Make sure to
watch the Oil Service Index (OSX.X) when gaming this play.
In terms of entries, look for NBR to clear its 10-dma at the
$25.18 level for an entry point.  Initially, we're not
implementing a stop in this play.

BUY CALL OCT-22 NBR-JX OI= 10 at $3.40 SL=1.75
BUY CALL OCT-25*NBR-JE OI= 32 at $1.90 SL=1.00
BUY CALL OCT-27 NBR-JY OI=567 at $1.00 SL=0.50
BUY CALL OCT-30 NBR-JF OI=139 at $0.45 SL=0.00

Average Daily Volume = 2.74 mln

Tired of waiting on trades to execute?
Does your broker offer Stop Losses on Options?

Trade instantly with Stop Losses at PreferredTrade Inc.
Stop Losses based on the option price or the stock price.
Move your trading into the next millennium with PreferredTrade.

Anything else is too slow!



Please read our disclaimer at:


For more information on advertising in OptionInvestor Newsletter,
or any Premier Investor Network newsletter please contact:

Contact Support

The Option Investor Newsletter                   Sunday 09-16-2001
Sunday                                                      3 of 5

To view this email newsletter in HTML format with embedded
charts and graphs, click here:

Tired of waiting on trades to execute?
Does your broker offer Stop Losses on Options?

Trade instantly with Stop Losses at PreferredTrade Inc.
Stop Losses based on the option price or the stock price.
Move your trading into the next millennium with PreferredTrade.

Anything else is too slow!



Questions from readers
By Jeff Bailey

I have been inundated with subscriber e-mail regarding different
questions and comments.  The most reoccurring question is that of
hedging as I had written an article on one way a trader might
want to look to hedge.

To quickly revisit the Hedging a Position article, click here:


Q:  Isn't it to late to think about hedging?

A:  I don't know.  No one knows for sure.  Every investor must
begin (if they haven't already) and search for that answer deep
within them.  Here's the process I go through.  I go through this
process BEFORE I ever buy/call a stock or short/put a stock.  I
ask myself.  At what point are you going to sell for a profit?
At what point are you going to sell for a loss?

Now that the markets are halted, it is very much a possibility
that a stock gaps below my previous stopping point.  This is not
a time that I throw my trading strategy and discipline out the
window, but I MUST reassess the situation and have a contingency
plan in place.  This is where account management comes into play.

How am I positioned?  If I've been playing the market from both
sides (bullish and bearish) then I will have some stocks that I'm
short/put showing gains should the markets open lower.  I may
have some bullish positions turn against me.  The IMPORTANT thing
as it relates to investing is how your account performs over

I would argue that the markets in the U.S. were not in the best
of shape before the recent tragedy.  Many of our subscribers that
have been reading my intra-day market commentary were well aware
of that.

The ultimate question as it relates to investing/trading is "how
is my account positioned?"  Then.... at what point do I need to
begin taking preventive action?  A trader that is on margin in
his/her account needs to take utmost care.

Note:  Nobody predicted or could have predicted recent events.  I
do feel a trader that is long a stock takes a "neutral" position
once a hedge is established.  A hedge is not necessarily
established to totally eliminate losses!  A hedge is designed to
help lessen the blow should a decline take place or continue.

Q:  Jeff.... shouldn't a trader actually buy two put options on a
stock with a high delta to hedge his/her position?

A:  Perhaps.  The example I have was for shares of United
Airlines (NYSE:UAL) and it has historically had less volatility
associated with it.  There will be different types of volatility
associated with different stocks that traders may be looking to
hedge.  Traders have until Monday to do their research and put
together their action plans to determine what (if any) hedge
strategy is appropriate for their accounts.

Q:  If the market starts out free falling, how do you actually go
about buying the put option before it is too late, that is,
before the stock has fallen considerably?  I am not sure how to
make whatever put order necessary to execute.

A:  Since the markets are closed, we have not been able to buy a
put option on any stocks traded here in the U.S. on our
exchanges.  I would argue that many institutions have created
their hedges in foreign markets.  For example... British
Petroleum (NYSE:BP) trades here in the U.S. and well as in
London.  I'm willing to bet that much of the volatility we've
seen in overseas markets has been a result of various hedge
strategies taking place against those stocks to help hedge
positions here in the United States.

Depending on the investment that a trader holds, they should
immediately establish a trading plan under three levels of what
we will call conditions.

Best case, the stock opens at or near
where it closed on Monday.  This would allow the trader to
consider multiple hedging strategies if you predict weakness in
the equity such as selling a covered call or buying a protective
put (take into account, even if you are fortunate enough to have
the stock open near where it closed on Monday option premiums are
likely to be slightly inflated due to expected market volatility
..more specifically with the VIX being high, call premiums are
going to be light.

Bad case, stock gaps to a level where the trader on MARGIN now
becomes at risk for a margin call.  A trader that is on margin is
currently in a tough position and they need to know at what level
they may be subjected to a margin call.  If you have not hedged a
position prior to a margin call an can not meet your margin
requirements the stock will be sold for you by your broker.

Worst case, the trader is trading on margin and was already near
margin call levels before Tuesday's events (this is assuming the
investment is in a sector that will experience selling pressure).
Any time a trader is met with a margin call it is a sign that
some type of preventative action needs to be taken.  Those unable
to meet a margin call should currently be ranking their
investments from weakest to strongest.  Then the trader can
decide on buy/sell decisions of these investments.  This is what
I would consider to be a "too late" scenario.

The other way to view the reader's question is what happens if
their stock ABCD that was trading at $30 on Monday gaps down to
$25 on September 17th?  That's a hefty loss and some investors
may feel that it may be too late to purchase a "protective" put,
especially now that put premiums have likely gone up.
Unfortunately, investors need to consider what their total risk
is in the stock investment.  That $25 stock could go to zero.  It
is unlikely but consider this...prior to Tuesday's events, who
could have imagined that a year ago, JDSU, which was trading near
$120, would now be less than $7.  Was it too late to hedge JDSU
at $100, at $50...?  Each individual trader has had to answer
questions like these relating to JDSU and ABCD.  It all depends
on the trader/investor's risk tolerance.

Q:  Do you put an order into buy put at market instead of a limit

A:  This is a very difficult question.  I prefer to place a LIMIT
order.  For example... let's say that the ABCD December $20 put
option begins trading at $4 and I want to buy that put to create
a hedge against my stock.  A "MARKET order" could get filled
anywhere in a fast market.  I could conceivably get filled at $5
or $6.  A MARKET order is an order to buy at the market and in a
fast market that price can be wide ranging.  What I will do with
a limit order is this..... I will plan for the worst.  Even
though the offer is $4, I understand I may be in a "fast market"
and place a LIMIT order for $4.50.  This is an amount GREATER
than the stated market price.  I could get filled anywhere from
$4 to $4.50, but no more.  If a trader is able to watch the
ticker in real time, they can better control and get a feel for
how trading is taking place.  If the premiums of a put option are
considered by the investor as "too rich", then one could turn
to a deep in the money call option (say the ABCD Jan $5 or Jan
$10) and sell that call.  The other alternative is to either hang
in there or sell the stock.  Only you the investor can know
what is best for you.  Selling call options on stock you own is
considered a covered call but there is always a risk you can be
called out of your position.  You need to weigh the potential
losses versus any capital gains you might have in the position if
you did not plan to be called out (that is a buyer of a call
option exercises their right to buy your stock you sold the
options on).  This would only be expected to happen if the stock
price was above the strike price of the option you sold at or
near the options expiration.  However, investors should take
note, most equity options are American-style which means you can
be called out at any time before expiration but this is uncommon.
Thus selling a deep in-the-money call has its own set of risks.
Do you expect the stock to recover before the option expires?  If
you do choose to sell deep ITM calls then most of the premium you
receive will be based on intrinsic value which should help offset
losses in the stock price - the whole reason we're looking into
this strategy to begin with.  Selling out of the money calls
would be "safer" but the premium you receive is likely to be a
lot less, especially on a stock that is dropping.  As you can
see, there are several options that a trader has, but you'd
better start planning now, not when the markets open for trading.

Q:  In recent example of United Airlines (NYSE:UAL), shouldn't we
also ask ourselves, "How long will the stock trade below our
theoretic purchase price of $35?  What about selling call

A:  The subscriber has a point here, but selling an at the money
or out of the money call option would not be considered a "true
hedge."  Even in my above example, selling a deep "in the money
call option" is only a hedge until the strike price of that
option is achieved (if achieved at all).  Nonetheless, if a
trader feels that a stock will not significantly violate a
particular strike price, then the writing of a covered call may
be a way to partially hedge a decline, but the trader must be
willing to deliver the stock should he/she be exercised.

These are just a few of the questions from readers that I am
finding.  The bulk of questions are regarding my recent hedge
article.  Hopefully some of the above answers are addressing
these types of questions properly.

Also... I want to take a moment to thank those subscribers that
have taken time to write such wonderful and uplifting comments in
recent days.  It is often said that the Premier Investor Network
think of its employees and subscribers as "family."  Recent e-
mails from our subscribers also give strong statement to the FACT
that America is a family and will recover from recent events
stronger and more united than before.

Portions of reader e-mail.  Comments and perseverance.

   ..... I am proud to be an American; I am proud of our
   President; I am proud of our financial system.  You have
   stated how many of us feel at these difficult times.
   (Subscriber, individual)

   ..... Our only wish is that for all New York exchanges (NYSE,
   NASDAQ, AMEX) stay closed until after the weekend.  Americans
   need time to absorb this before making rash stock decisions.
   Nobody will benefit from panic decisions in the next few days.
   The exchanges can help provide assurance to the US public -
  and not give a moral victory to "the enemy" - by not
  demonstrating a pricing rout. (Subscriber, individual)

  ..... Thanks for the uplifting editorial (Special Update)
  Wednesday.  I just got around to reading it and found it
  extremely uplifting and showing a considerable amount of
  restraint and good taste.  To avoid profiting from tragedy at a
  time when it is very tempting to make a buck any way possible
  is an admirable quality.  I believe your editorial should be
  forwarded to the SEC, NASD, Department of the Treasury, Federal
  Reserve System, and many of the other major regulatory offices.
  This morning on CNBC Squawk Box I heard Vince Farrell echo
  similar sentiments about not taking profits from a tragedy.
  (Subscriber, individual)

  ..... Agree.  Please pray for God's help at this time. For
  passing on if you wish.  A fund has been established to aid
  the families of the firefighters who were killed. To donate,
  send checks or money orders payable to the fund to:

     New York Firefighters 9-11 Disaster Relief Fund
     c/o Firehouse.com
     9658 Baltimore Ave - Suite 350
     College Park, MD 20740
     Please, do not send cash.

  The United Way of New York and The New York Community Trust
  have established a fund to help the victims of Tuesday's
  attacks and their families. Anyone wishing to contribute may
  call (212) 251-4035. You can donate securely online to the
  United Way: https://www.uwnyc.com/epledge/sept11.cfm
  (Subscriber, individual)

  I have been an avid reader of your work for many years now and
  do enjoy your writings.  While today's article on hedging, puts
  and calls may be a valid "everyday trading" strategy, I would
  like to point out that, as we all know, these are not normal
  times. In view of the great tragedy that has swept the
  financial community, your readers, their families, and their
  loved ones: I would like you to ask your reader's, and all
  Americans the following: Let us not give into the aims of
  terrorists when markets reopen soon, let us not be fooled into
  panic selling! I am sure these terrorists would like for
  nothing more than to see us falling all over ourselves in an
  endless financial panic driving our markets and our economy
  into an emotionally, and evilly inspired meltdown.  Let us
  stand together as investors from across America and around the
  world who will not be frightened by evil doers into panic
  selling, rather let us show our faith in America and BUY
  America shares tomorrow in our great economy. Let us put our
  wallets where our hearts are and thwart these terrorist's
  goals. Clearly some may have to sell for financial reasons, but
  let those of us who feed from the speculative trough take a
  break from our speculative natures and resist the temptation to
  sell short or engage in any unnecessary panic selling. Let us
  show the world we still believe in America and will not let
  these cowardly acts terrorize us into acting without reason. If
  we do this and rally our markets, we will not only have no
  reason to hedge, but we may help our nation avert a more
  serious financial crisis.
  (Subscriber, Member New York Stock Exchange)

Personally, I think we have a great group of subscribers!

Jeff Bailey


A Survival Guide For Monday
by Jon Farnlof

Portfolios have already been hammered by the bear market and
now...this.  With good reason, many frightened investors are
wondering whether to swallow losses by dumping long positions on
Monday.  They are concerned that short sellers and computerized
program traders will push the markets into panic selling and a
precipitant decline.  However, before leaping, it may pay to
understand the rules, conditions and historical precedents under
which the equity markets will be operating when they reopen on
Monday.  It may also be useful to consider what trading strategies
are available to you.  Here is a summary of some items to consider:

What To Do - Personal Strategy
As far as existing long positions, if you think you are in a sector
vulnerable to a significant drop, your options may be limited if
you are on margin as opposed to owners of cash accounts.  Once an
investor gets a margin call, he/she will need to transfer new funds
to cover the call or they may have no choice but to liquidate
until they are in compliance with their broker's margin
requirements.  It may be a good idea to check with your broker a
head of time to know exactly where you stand before being forced
to make a snap decision.  Owners of cash only accounts are more
fortunate, they have four options: ride it out, hedge, set stops or
sell outright.  Riding it out requires nothing more then patience
and a tolerance for pain.  However, the others require a level of
skill and forethought.

For those of you who are fairly new or inexperienced to the
gyrations of Wall Street, it is important that you have an
understanding of the use of stop loss and stop limit orders in
volatile markets.  This may also be a good time to become
knowledgeable about some of the hedging strategies used by the
pros.  Hedging a position reduces risk by enabling an investor to
in effect buy a form of insurance to offset declines in long
positions.  Our master market strategist Jeff Bailey covered both
these topics this week.  Following are links to those articles:

A Traders Personal Defense: Definition of various stop orders

Hedging a position

There was a swarm of reader emails following Jeff's original
hedging article.  You can read his responses elsewhere in this

As far as selling outright is concerned, traders need to be aware
that there is no way to predict at what price market orders placed
prior to the market open will be filled.  Market makers will gauge
order flow to determine the opening prices of shares.  After that,
your market order would be fed into a crush of orders and where it
comes out nobody knows.  It might be safer to stick with limit
orders.  Many investors will wait for 15 minutes to an hour after
the opening bell to give the markets a chance to settle before
making their sells.

Historical Behavior Of Markets Following Crisis Events
Unfortunately, this is not the first national tragedy that the
markets have had to endure.  Fortunately, if history repeats
itself, after a sharp decline on Monday the markets will rebound
within a short period of time.  The day after the assassination of
President Kennedy the Dow Industrials dropped 2.9-percent, but was
up 12-percent after two months.  The closest recent event in terms
of affecting the price of oil and creating waves of travel
cancellations was the Desert Storm war in the Persian Gulf.  The
DOW lost 4.3-percent in the weeks leading into the war, but
regained 20-percent in the next two months.  This pattern repeated
itself following the terrorist attack on Pan Am #103, the 1993
bombing of the World Trade Center and the destruction of the Murrah
Federal Building in Oklahoma City.  In fact, according to
markethistory.com, in the three weeks following 25 occurrences of
US military action since 1941, the Dow Jones Industrial Average has
risen by an average of 3-percent in 84-percent of those

Bullish Factors
This crisis has exacted a terrible human cost, but it has not dealt
a crippling blow to the US economy.  After an initial negative
reaction, the factors that influenced the market before the tragedy
will likely reassert themselves as the primary arbiter of market
strength or weakness.  And even though we were knee deep in a
deflating economy, signs were in existence that a bottom was in

Of great significance for Monday's trading, the SEC has suspended
the rules that require companies to file before repurchasing its
own stock. This means that attempts to short stock could be
countered by companies buying their own stock to support their
price.  Woe to the company CEO whose shareholders discover he or
she did not take advantage of this relaxation to do his or her
patriotic and practical duty.

A difficult factor to gauge will be old-fashioned patriotism.  This
pain has had a profound affect on even the most cold-blooded money
managers.  Many of the largest players have come forward to say
they will restrain their short ways and not take advantage of the
crisis.  Will they?  Or, if the markets begin to implode, will
their fiduciary responsibilities overcome their patriotic

In a bittersweet fashion, some of the expected declines may be
mitigated by gains in the defense and security sectors.

Bearish Factors
These have been well covered elsewhere, but suffice to say the
insurance and travel industries, in particular airlines, hotels and
aircraft manufacture have and will suffer substantial financial
losses as a consequence of last Tuesday.

Trading Curbs and Circuit Breakers
(Thank you to Buzz Lynn of our www.Indexskybox.com sister site for
this information)

For starters, it is important to realize that roughly 30% of all
NYSE stocks traded each week on the NYSE, give or take a few
percent, are traded by computer programs responding to volume and
prices triggered by previous trades. Such is true when an index
trades outside of fair value of its underlying securities. There is
then an automatic computer-driven execution of trades by any number
of financial institutions to arbitrage minute spreads between
underlying stock values and the indexes they make up in a never-
ending constant hedge.

If an index exceeds fair value of its underlying stocks, stocks are
purchased while the index is sold in order to re-create balance.
Similarly, if fair value of an index becomes to cheap in relation
to its underlying stocks, computers trigger the purchase of the
index and sell the stocks in an arbitrage or hedged action until
both arrive back at parity.

However, in times of unbridled conviction or uncertainty, euphoria
or fear, and extreme liquidity or panic, the system can go haywire
as triggered orders heavily favored in one direction act in domino-
like affect triggering yet more orders. Usually, the domino action
takes place to the downside, but not always. It is for this reason
that we humans need to have a method of pulling the plug on
snowballing markets in either direction. That is where curbs come
in. Curbs are designed to restore human thought to the selling or
buying process, which theoretically allows cooler heads to prevail
over meltdown (or melt up) market conditions.

Here is how it works. No need to reinvent the wheel here. I have
cut and pasted the exact language taken from the H. L. Camp &
Company website and provided a link below.

"A collar on program trading firms instituted by the NYSE is most
commonly referred to on CNBC as "Curbs In". The Exchange applies
program trading curbs whenever the Dow Jones Industrial Average
moves 200 points higher, or 200 points lower than the previous
day's closing price. The NYSE restriction on program trades stays
in place until the Dow Jones returns to within 100 points of the
previous day's closing price; or, until the end of the trading day
at 3:00 CT. The restrictions will be re-imposed each time the Dow
Jones advances or declines 200 points. NYSE Trading Curbs apply
only to our firm's (and other program trading firm's) computer
assisted program trades.

The NYSE defines a Program Trade as:
1. A basket of 15 or more stocks from the S&P's 500 Index.
2. A basket of stocks from the S&P's 500 Index valued at $1 million
or more.

Once the NYSE program trading collar is in place, Program Selling
can be executed only on an up-tick. That means that the last trade
was executed at a higher price than the trade before it. Program
Buying can be executed only on a down-tick. That means that the
last trade was executed at a lower price than the trade before it.

Program Trading "Circuit Breakers"

If the Dow Jones Industrial Average falls 10%, trading is halted on
the New York Stock Exchange for 60 minutes. If the Dow Jones
rallies 10%, there is no restriction. Why? Because program buying
and the accompany rally is always perceived as "good". If the Dow
Jones Industrial Average falls 20%, trading is halted on the New
York Stock Exchange for two hours. There is no trading halt if it
rallies 20%, as that would be perceived as "very very good".

If the Dow Jones Industrial Average falls 30%, trading is halted on
the New York Stock Exchange for the day. There is no trading halt
if it rallies 30%, as that would be perceived as "the best thing
that ever happened in the history of the world".

According to the NYSE the current 10, 20 and 30 percent decline
levels, respectively, in the DJIA will be as follows: A 1,000 point
drop in the DJIA will halt trading for one hour if the decline
occurs before 2 p.m.; for 30 minutes if before 2:30 p.m.; and have
no effect between 2:30 p.m. and 4 p.m. A 2,000 point drop will halt
trading for two hours if the decline occurs before 1 p.m.; for one
hour if before 2 p.m.; and for the remainder of the day if between
2 p.m. and 4 p.m. A 3,000 point drop will halt trading for the
remainder of the day regardless of when the decline occurs.

Point levels are set quarterly by using the DJIA average closing
values of the previous month, rounded to the nearest 50 points. The
percentage levels are adjusted quarterly on Jan. 1, April 1, July 1
and Oct. 1."

For more information from HL Camp & Co. visit:

Add It Up
These are by no means the only factors that will be making a taffy-
pull out of trading sessions over the next few days.  Futures
traders are a real wild card.  They have been sitting on short and
long positions since last Tuesday growing increasingly anxious with
every halted trading day.  As they maneuver to extract themselves
from positions, the market could react with a number of artificial
bullish and bearish moves.  No one of them indicative of a true
market trend, but just the result of a technical move by a big
money player looking to square a position.  Given this level of
volatility, for all but the most nimble and aggressive traders the
best advice may be to trade lightly and not attempt to dance with
the elephants.

For more information that could aid you on Monday
we encourage all of our readers to check out previous
special reports on the site.  You'll find additional
links for them in a separate section of this email newsletter.


BRCM - Broadcom $30.59 (+0.82 last week)

Broadcom Corporation is a provider of highly integrated silicon
solutions that enable broadband communications and networking of
voice, video and data services. Using proprietary technologies
and advanced design methodologies, Broadcom designs, develops and
supplies system-on-a-chip solutions for applications in digital
cable set-top boxes and cable modems, high-speed local,
metropolitan and wide area and optical networks, home networking,
Voice over Internet Protocol (VoIP), carrier access, residential
broadband gateways, direct broadcast satellite and terrestrial
digital broadcast, digital subscriber line (xDSL), wireless
communications, server solutions, and network processing.

The trading in BRCM - the volatile stock that it is - is going
to be wild at the opening bell Monday morning.  The stock had
held support at the $30 level for the two weeks prior to last
week's trading halt.  However, its 10-dma had also kept a lid
on shares.  In fact, the 10-day, which currently resides at
$32.34, has contained shares of BRCM since mid-August.  The
$30 level, however, may very well fail to support BRCM early
next week.  It's impossible to predict, with any certainty,
how the market is going to react once trading resumes next
week.  If the stock is met with overwhelming supply, BRCM may
not find support until down around the $25 level, or possibly
even as low as $20 - its spring lows.  If the stock does gap
measurably lower, it may be a good strategy to wait for a
reversal back above the opening price Monday morning.
Conversely, if the market does stage a substantial rally
Monday, look for BRCM to finally breakout above its 10-dma,
which would signal that demand is overwhelming supply.  We're
choosing to remove our stop from the play because of the
uncertainty around the opening of trading.

BUY CALL OCT-25 RCQ-JE OI= 184 at $7.30 SL=5.00
BUY CALL OCT-30*RCQ-JF OI=1084 at $4.30 SL=3.50
BUY CALL OCT-35 RCQ-JQ OI=2377 at $2.35 SL=1.50
BUY CALL NOV-30 RCQ-KF OI= 441 at $5.50 SL=4.25
BUY CALL NOV-35 RCQ-KQ OI= 736 at $3.40 SL=2.50

Average Daily Volume = 10.2 mln

IMCL - ImClone Systems $53.73 (+0.43 last week)

ImClone Systems, Inc. is a biopharmaceutical company that is
developing a portfolio of targeted biologic treatments designed
to address the medical needs of patients with a variety of
cancers. The Company focuses on three strategies for treating
cancer, growth factor blockers, cancer vaccines and angiogenesis
inhibitors. The Company's lead product candidate, IMC-C225, is a
therapeutic monoclonal antibody that inhibits stimulation of a
receptor for growth factors upon which certain solid tumors
depend in order to grow.

It remains to be seen how the biotech sector is going to react
once trading resumes Monday.  Our initial speculation is that
the sector should be relatively immune from last Tuesday's
terrible acts of terrorism.  Then again, the sector may suffer
from collateral selling pressure across the broader market if,
in fact, that does occur.  Again, it's very difficult to say
which way the stock is heading over the short-term.  As such,
only those with the ability to actively trade should pursue
new entries.  For those with open positions, managing risk is
also going to be difficult.  We might look for IMCL to open
around its 10-dma at $52 if the market gaps lower.  But the
stock did behave exceptionally well in last week's one day
of trading, making a run on the $55 level.  If the stock does
get above that level early Monday, it may be a sign that IMCL
is heading higher over the short-term, and allow traders to
gain new entries on the breakout.  It should also be noted that
we have dropped our stop on IMCL in light of the uncertainty
surrounding the opening bell Monday.

BUY CALL OCT-50 QCI-JJ OI= 476 at $7.10 SL=5.50
BUY CALL OCT-55*QCI-JK OI= 671 at $4.30 SL=2.50
BUY CALL OCT-60 QCI-JL OI= 496 at $2.50 SL=1.50
BUY CALL NOV-55 QCI-KK OI=2966 at $5.90 SL=4.00
BUY CALL NOV-60 QCI-KL OI=1036 at $4.10 SL=2.50

Average Daily Volume = 1.34 mln

TSM - Taiwan Semiconductor $12.67 (-0.27 last week)

Taiwan Semiconductor Manufacturing Company Ltd. is a
dedicated semiconductor foundry. As a foundry, the Company
manufactures semiconductor designs using its advanced production
processes for its customers based on their own or third parties'
proprietary integrated circuit. The Company offers a
comprehensive range of wafer-fabrication processes, including
processes to manufacture CMOS logic, mixed-signal volatile and
non-volatile memory BiCMOS chips.

Shares of Taiwan Semi lost finished limit down during its
Asian session last Friday.  The stock is listed on both the
NYSE and the Taiwan Stock Exchange, and its shares on the
latter fared poorly in the wake of last week's events.  We
expect a gap down in the stock once trading resumes next
Monday, but it may be a good rebound candidate if the market
does reverse course or is met with heavy buying pressure
early Monday, thus our reason for maintaining coverage on the
play.  The trading in Asian and indeed European markets has
been extremely illiquid, so it's hard to place much credence
on TSM's price action in Asia.  Nevertheless, we're cognizant
of it and traders should take it into account when strategizing
for Monday's opening of the U.S. stock market.  The stock has
major support below at the $12 level, but it could potentially
fall as low as $10 before rebounding.  If that does occur,
an entry around the $10 might provide for new plays in this
stock.  Our stop has been removed in this play.

BUY CALL OCT-10.0*TSM-JB OI=  25 at $3.00 SL=1.50
BUY CALL OCT-12.5 TSM-JV OI= 567 at $1.30 SL=0.50
BUY CALL JAN-10.0 TSM-JB OI=  53 at $3.50 SL=2.00

Average Daily Volume = 4.70 mln

AMGN - Amgen $64.13 (+0.23 last week)

Amgen is a global biotechnology company that discovers, develops,
manufactures, and markets human therapeutics based on advances
in cellular and molecular biology.  The company manufactures and
markets four human therapeutic products, Epogen, Neupogen,
Infergen, and Stemgen.

Before last Tuesday's tragedy, Amgen was one of the stronger
stocks in one of the stronger sectors of the market.  We'd like
to think that that dynamic will remain once trading reopens
next week.  But, it's impossible to know exactly what's going
to happen.  One might assume that the biotech sector would be
relatively unscathed, economically speaking, by what occurred
last week.  But again, that remains to be seen.  In terms of
technicals, AMGN has solid support down around the $61 level,
which may be a site to look for a bounce if the market falls
under heavy selling pressure early Monday.  Conversely,
resistance to the upside is located at the $66 level.  If that
level is broken above early Monday, it may very well signal
that AMGN is heading higher over the short-term.  In either
case, make sure to monitor the AMEX Biotechnology Sector (BTK.X)
for potential insights into AMGN's short-term price action.
We had a stop in place for our AMGN play at $63.50, but are
removing that stop this weekend and waiting to see how trading
unfolds next week before initiating a new stop.

BUY CALL OCT-55 YAA-JK OI= 8301 at $10.00 SL=7.75
BUY CALL OCT-60*YAA-JL OI= 6698 at $ 6.60 SL=4.75
BUY CALL OCT-65 YAA-JM OI=13212 at $ 3.50 SL=1.75
BUY CALL OCT-70 YAA-JN OI=21400 at $ 1.50 SL=1.00

Average Daily Volume = 3.13 mln

BGEN - Biogen, Inc. $60.31 (-1.68 last week)

Biogen is a biopharmaceutical company primarily engaged in the
business of developing, manufacturing and marketing drugs for
human healthcare.  BGEN currently derives revenues from sales
of its Avonex product for the treatment of relapsing forms of
multiple sclerosis and from royalties on worldwide sales by
the company's licensees of a number of other patented products.
Other products include certain forms of alpha interferon,
hepatitis B vaccines and hepatitis B diagnostic test kits.  In
order to maintain its leadership role in the industry, BGEN
continues to have an active research and development program.

After inching higher since early July, BGEN was on the cusp of
a breakout over the $62 level before the tragic events of last
Tuesday.  Monday's trading saw the stock fall back to the
ascending trendline near $60, also the site of the 200-dma.
Under normal circumstances, we would be looking for a bounce
near current levels, but in light of the disruption to the
Financial markets, we would expect to see greater volatility
when trading resumes.  Additional support exists near $59 and
then $56.50 and a strong bounce from either of these levels
could provide for an attractive entry for aggressive traders.
It is hard to see how BGEN would be adversely affected over the
long term by this disaster, so any dip should be short-lived.
An alternative entry strategy will be to wait for signs of
strength in the Biotech index (BTK.X) to propel the stock
through the $62 level on continued strong volume.

BUY CALL OCT-60*BGQ-JL OI=4676 at $4.20 SL=2.50
BUY CALL OCT-65 BGQ-JM OI=9792 at $1.90 SL=1.00
BUY CALL OCT-70 BGQ-JN OI=4749 at $0.85 SL=0.25
BUY CALL JAN-60 BGQ-AL OI=2009 at $7.50 SL=5.25
BUY CALL JAN-65 BGQ-AM OI=2366 at $5.20 SL=3.00
BUY CALL JAN-70 BGQ-AN OI=2594 at $3.50 SL=1.75

SELL PUT OCT-55 BGQ-VK OI=3772 at $1.45 SL=3.00
(See risks of selling puts in play legend)

Average Daily Volume = 3.07 mln

LH - Laboratory Corp. of America $74.17 (-1.03 last 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

Although it has failed to get moving yet, our LH play is still
resting right on its ascending trendline near $74.  Prior to
Tuesday's disaster, the stock was looking like it was ready to
stage a bounce-back rally, but now the future is less clear.
Healthcare-related stocks should be relatively immune from any
negative economic effects of the damage, and we could see the
stock rally based on a flight to quality.  Below current levels,
there is support near $72 and then $70.  An early dip and bounce
from either of these levels could provide for attractive entry
points into the play, although we would only recommend taking
new positions if the buying volume is strong.  Overhead
resistance has been forming in the $76-77 area, and more
cautious traders will want to wait for LH to clear that level
on robust trade before committing to new positions.

BUY CALL OCT-70*LH-JN OI=  4 at $6.70 SL=4.75
BUY CALL OCT-75 LH-JO OI= 23 at $3.90 SL=2.50
BUY CALL OCT-80 LH-JP OI= 22 at $2.00 SL=1.00
BUY CALL NOV-75 LH-JO OI= 55 at $5.20 SL=3.00
BUY CALL NOV-80 LH-JP OI=168 at $3.20 SL=1.50

SELL PUT OCT-70 LH-VN OI= 20 at $2.05 SL=3.50
(See risks of selling puts in play legend)

Average Daily Volume = 559 K

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The Option Investor Newsletter                   Sunday 09-16-2001
Sunday                                                      4 of 5

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CHKP - Check Point Software $32.99 (+2.42 last week)

Check Point Software is the worldwide leader in securing the
Internet.  The company's Secure Virtual Network (SVN)
architecture provides the infrastructure that enables secure
and reliable Internet communications.

Prior to last week's horrific events, we had been gaming the
deteriorating fundamental picture of Check Point Software.
The stock had steadily fallen to the $30 level before slightly
rebounding last Monday on the heels of favorable comments.
Some may disagree with OI's decision to maintain some of its
put plays in light of last week's tragic attacks.  But we
feel that it would best serve our readers to maintain a
balanced play list.  In the end, it's up to the individual to
decide whether or not to trade in either direction when the
market opens.  Check Point may see continued selling if it
is believed that its fundamentals have not improved over the
past week.  Although it's an Israeli-based company, we feel
that it is relatively independent of what took place last
week.  As such, we feel by maintaining coverage that we're
not directly trying to profit from last week's events.
To reiterate, we're simply trying to keep a balanced play
list and serve our readers the best we can.  With that
said, perhaps the best strategy going into next week will
be to wait for fundamentally weak tech stocks to rally up
to resistance before looking for entry points.  For CHKP,
that means the $35 level.

BUY PUT OCT-35*KEQ-VG OI=11985 at $5.40 SL=3.50
BUY PUT OCT-30 KEQ-VF OI= 3291 at $3.00 SL=1.50

Average Daily Volume = 10.5 mln

GMST - Gemstar-TV Guide $25.44 (-0.20 last week)

Gemstar-TV Guide is a global media and technology company focused
on developing, licensing and providing products and services that
simplify and enhance consumer entertainment.  Many of the
company's products have a special emphasis on television oriented
technologies and services, in particular, program guidance
products including those marketed under the TV Guide name.

Through last Monday's session, GMST had continued along its
path of lower lows in its overwhelming descending trend.  There's
reason to expect that stock to continue lower going into next
week's session independent of what took place last Tuesday.
The company's fundamentals and the Justice Department's probe
have weighed heavily on shares and would've probably continued
to do so judging by the stock's trend.  As such, we're
maintaining coverage on the play this weekend, which may not be
agreeable with some of our readers.  We're by no means trying
to profit from last week's events.  However, we were gaming
GMST's weakening picture prior to last Tuesday's events and
we're gaming the same deterioration going into next week's
trading.  Traders with open positions should use any large
gap lower Monday morning to book profits.  In terms of new
entries into the play, it'll be best to wait for the stock
to advance up to a significant resistance level before engaging
in new trades.  That may take a few days to transpire, but look
towards the $25 level, or higher around $30 for resistance.
Our stop has been lifted in this play.

BUY PUT OCT-30*QLF-VF OI=322 at $6.00 SL=4.75
BUY PUT SEP-25 QLF-VE OI=475 at $2.80 SL=1.50

Average Daily Volume = 3.70 mln

VZ - Verizon $50.70 (+1.65 last week)

Verizon Communications Inc. provides communications
services. The Company has four reportable segments, which it
operates and manages as strategic business units and organizes by
products and services. Domestic wireline communications services
principally represent the Company's 16 operating telephone
subsidiaries that provide local telephone services in over 30
states. Domestic wireless products and services include cellular,
Personal Communications Services, paging services and equipment

The broad deterioration of the telecom business was the premise
behind our bearish play on Verizon when we initiated coverage.
And it's the premise behind our maintaining coverage on the play
going into next Monday's reopening of the stock market.  The
stock is technically weak and the company is fundamentally
weak.  Although, VZ did stage a rebound during last Monday's
session, which will have us on alert going into next week.
We're dropping our stop in this play in light of the uncertainty
surrounding Monday's opening, but further strength above the
$51 level might give us inclination to drop the play.  If the
stock does, however, advance all the way up to the $52.80 area,
it might provide a relatively low risk entry into new put
positions.  That level is the current site of the stock's 200
day moving average.  On the flipside, weakness down to the $48
level should offer those with open positions an opportunity to
exit plays.

BUY PUT OCT-55*VZ-VK OI= 5129 at $5.10 SL=3.75
BUY PUT OCT-50 VZ-VJ OI=13195 at $1.80 SL=1.00

Average Daily Volume = 4.40 mln

HDI - Harley Davidson $44.18 (+0.25 last week)

Harley-Davidson, Inc. conducts business in two segments:
Motorcycles and Related Products and Financial Services. The
Motorcycles and Related Products segment includes the group of
companies doing business as Harley-Davidson Motor Company, which
are subsidiaries of H-D Michigan, Inc., and Buell Motorcycle
Company. The Motorcycles segment designs, manufactures and sells
primarily heavyweight touring, custom and performance motorcycles
as well as a complete line of motorcycle parts, accessories and
general merchandise. The Financial Services segment consists of
the Company's wholly owned subsidiary, Harley-Davidson Financial
Services, Inc. (HDFS).

HDI settled below its 200-dma a week ago, then retested that level
during last Monday's session.  The 200-day currently sits at the
$44.70 level and might be a good site to watch for rollovers
going into next week's trading.  Then again, further weakness
below current levels may also offer momentum traders new entries
into put positions.  For example, a volume-backed breakdown below
the $43 level would signal further weakness over the short-term.
Although momentum traders may pursue new entries on further
weakness from current levels, the more prudent strategy might be
to wait for a rebound up to significant resistance then watching
for a subsequent rollover.  As we mentioned above, the 200-dma
may serve as significant resistance.  But, if that level is
broken, look for a rollover around $46 or higher up around the
$47 level, which is the stock's 10-dma.  Our stop was initially
placed at the $46.50 level, but removing that stop in light
of the uncertainty that lies ahead.

BUY PUT OCT-50 HDI-UJ OI= 783 at $6.80 SL=5.00
BUY PUT OCT-45*HDI-UI OI=1221 at $3.60 SL=2.00
BUY PUT OCT-40 HDI-UJ OI= 133 at $1.50 SL=0.75

Average Daily Volume = 1.49 mln

PHA - Pharmacia $40.15 (-0.12 last week)

Pharmacia Corporation is a pharmaceutical company that
operates in three segments: Prescription Pharmaceuticals,
Agricultural Productivity, and Seeds and Genomics. The
Prescription Pharmaceuticals segment involves the business and
activities engaged in, supporting or related to the research,
development, registration, manufacture and sale of prescription
pharmaceutical products. The Agricultural Productivity segment
consists of crop protection products, animal agriculture and the
environmental technologies business lines.

Even before Tuesday's tragic events, PHA was having a hard time
finding any buying interest.  While the Pharmaceutical index
(DRG.X) has been struggling to regain an upward trend, shares of
PHA have been locked in a persistent downtrend since the
beginning of the year.  Fundamentally unchanged by the terrorist
attack, our PHA play is looking attractive for fresh entry
points right now.  Daily stochastics began to roll over last
Monday, and we would look for any continued weakness to provide
attractive entries as the stock falls below recent support at
$39.50.  It is difficult to see whether Drug stocks will see
strength or weakness next week, and any short rally could
provide fresh entries on a rollover near the $41 resistance
level.  The prudent approach may be to stand aside until the
dust settles a bit on Monday before venturing into new positions.

BUY PUT OCT-40*PHA-VH OI=2234 at $1.90 SL=1.00
BUY PUT OCT-35 PHA-VG OI=2691 at $0.55 SL=0.00

Average Daily Volume = 4.67 mln

QCOM - Qualcomm, Inc. $50.54 (+1.36 last week)

Based on its proprietary CDMA technology, QCOM is engaged in
developing and delivering digital wireless communications
services.  The company's business areas include integrated
CDMA chipsets and system software and technology licensing.
QCOM owns patents that are essential to all of the CDMA
wireless telecommunications standards that have been adopted
or proposed for adoption by the worldwide standards-setting
bodies.  Currently, QCOM has licensed its CDMA patent portfolio
to more than 80 telecommunications equipment manufacturers
around the world.

It is hard to ascertain how last week's tragedy might impact
Technology stocks, which leaves us with the technical picture
to focus on.  And that isn't a pretty picture for QCOM.  After
falling precipitously during the prior 2 weeks, the stock has
found some tenuous support near $48.  The rebound was just
getting started, and any nervousness could send the stock south
again on Monday.  But buying renewed weakness is not the high
odds entry we want to focus on.  Look for a short rebound to run
out of steam near the $54 or $56 resistance levels.  Should
selling volume increase near either of those levels, it could
provide an attractive entry for the next downward leg.  A drop
through the $48 support level will likely mean the bears have
regained the upper hand again and will take a run at the April
lows near $48.

BUY PUT OCT-50*AAO-VJ OI=19694 at $5.30 SL=3.25
BUY PUT OCT-45 AAO-VI OI= 4390 at $3.20 SL=1.50

Average Daily Volume = 12.3 mln

QLGC - QLogic Corporation $26.78 (+0.02 last week)

Somebody has to make the equipment that lets your computer talk
to all its peripheral equipment, and QLGC does it well.  A
leading designer and supplier of semiconductor and board-level
input/output (I/O) management products, QLGC has been providing
SCSI-based connectivity solutions to this market sector for over
12 years.  QLGC's I/O products provide a high performance
interface between computer systems and their attached data
storage peripherals, such as hard disk and tape drives,
removable disk drives and RAID (redundant array of independent
disks) subsystems.  The company is also the market share leader
in Fibre Channel host bus adapters, a market segment that is
receiving tremendous attention from investors.

In the aftermath of last week's terrorist attack, we could
actually see a bit of a bounce in shares of Technology stocks.
If so, QLGC is primed for a bounce, and could be setting up to
give the bears a fresh entry point.  What we want to see in
order to consider fresh positions is a rally that runs out of
steam near the $30 resistance level.  Nothing about the
company's business or fundamentals has changed, and that means
that odds favor a renewed decline after the initial volatility
is shaken out of the stop.  We could very well see shares of
QLGC decline to challenge the April lows near $18, but rather
than jumping into renewed weakness on Monday morning, the
higher-odds approach will be to wait and fade the rally when
it begins to weaken.

BUY PUT OCT-30*QLC-VF OI=879 at $5.90 SL=4.00
BUY PUT OCT-25 QLC-VE OI=755 at $3.10 SL=1.50

Average Daily Volume = 7.35 mln

SEBL - Siebel Systems $19.58 (+0.62 last week)

Siebel Systems is a provider of eBusiness applications.  The
company's products enable organizations to sell to, market to,
and service their customers across multiple channels, including
the Web, call centers, resellers, retail, and dealer networks.
SEBL's eBusiness applications are available in
industry-specific versions designed for the pharmaceutical,
healthcare, telecommunications, insurance, energy, apparel,
automotive, and finance markets.  Through SEBL's applications,
companies can create a single source of customer information
that sales, service, and marketing professionals can use to
tailor product and service offerings to meet each of their
customer's unique needs.

There hasn't been much positive to say about the Software
sector (GSO.X) in the past 3 months, and shares of SEBL have
reflected that weakness, recently declining to new 52-week
lows.  Despite the possibility that Technology stocks could
see some buying next week, it is likely to be short-lived for
stocks like SEBL, which are fundamentally weak.  So we'll look
for a brief rally that brings the stock up to resistance in the
$21-22 or even $25.  Such a move would likely be motivated by
excessive optimism and put plays entered at that point could
provide some easy profits.  Clearly, nobody knows what to expect
on Monday, and the prudent approach will be to watch the early
trading and only enter new positions when the stock is moving in
a manner that is consistent with a bearish strategy.

BUY PUT OCT-20.0*SGQ-VD OI=1075 at $2.90 SL=1.50
BUY PUT OCT-17.5 SGQ-VW OI= 802 at $1.65 SL=0.75

Average Daily Volume = 14.3 mln

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Picking Up The Pieces...
By Mark Phillips
Contact Support

Along with my fellow Americans and most other citizens around
the world, I have spent the past several days in stunned and
stupefied silence.  Oh, I have had plenty to say, but it hasn't
been fit for print, as I have struggled to come to terms with
the anger I've felt in the wake of the despicable actions of a
small band of small-minded cowards.

Competing with my anger in recent days has been my intense pride
at the actions of my fellow citizens and particularly the
behavior of New Yorkers, as they have begun the long and painful
process of recovering from this tragedy.  Innumerable acts of
individual heroism have had a profound effect on me since
Tuesday morning and more than at any time in my life, I feel an
intense sense of pride in calling myself an American.  As has
happened many times throughout history, the current tragedy has
served to bring out the best in people, providing a stark
contrast to the sub-human scum that perpetrated Tuesday's

To all those that have given selflessly of themselves in recent
days, I salute you.  You are a living testament of what it means
to be American, and more importantly, compassionate members of
the human race.

I had intended to write an article on utilizing LEAP Puts last
Wednesday, but decided that doing so would be insensitive,
inappropriate and tasteless.  The series of Special Reports that
were published in the newsletter after Tuesday's terrorist
attack were far more timely, informative and important than any
strategy-specific article I could have written.  Reading these
articles throughout the week provided me a powerful reminder of
the integrity, dedication and professionalism of my fellow OIN
writers.  My intention is to still write the article, but only
when I feel it is appropriate to do so.  As we see trading
return to some semblance of normalcy, I will feel much more
comfortable discussing the use of specific strategies that can
be applied to profit from falling stock prices.

Although there has been very little market action since our last
visit, the events of the past week have had a profound effect on
our equity markets and have placed them at a critical juncture.
Like the rest of my colleagues, I truly do not have any hard
data on which to base a conclusion as to what to expect.  Sure,
I can see sectors that will likely suffer, such as Airlines and
Insurers, as well as the likelihood that certain Defense
companies will benefit from increased spending.  But how is the
overall market likely to respond.  We'll probably drop at the
open, but what to expect after that point is what is truly
important.  I've heard speculation from certain economists that
this will be the catalyst to finally push the U.S. economy
firmly into recession.  I've also heard certain analysts,
pointing to the severity of the current oversold market
conditions, predict that the initial dip could be met with
strong buying volume -- coming from patriotic individual
investors, the massive influx of capital from the Federal
Reserve and companies defending their own stock prices through
massive share buy-backs.

Which viewpoint will win out?  I truly don't know, but allow
me to share with you some of the factors that are helping to
shape my opinion.

Prior to Tuesday's attack, the Volatility Index (VIX) had moved
as high as 37.25, and in the wake of the current market
uncertainty, it is a foregone conclusion that it will run well
above 40 once U.S. markets reopen for business.  It is hard to
predict how high it will move in the early going after trading
resumes, but suffice to say that this rubber band will be
stretched very tight and in need of release.

The Federal Reserve is pumping enormous amounts of cash into the
world economy and analysts expect significant interest rate cuts
in the first few days of renewed trading.  Additionally, red
tape has been removed, allowing companies to vote with their own
wallets buying back their own shares to support the price.
Cisco Systems (NASDAQ:CSCO) was the first one to wade into that
pool, authorizing a $3 billion share buyback over the next 2
years.  I expect many other major companies to follow CSCO's
lead in the days ahead.

There are more and more reports from various analysts stating
that the aftermath of Tuesday's events will push both the U.S.
and global economies firmly into recession.  Certainly, the
outlook is grim for specific sectors of the market, but others
will likely benefit.

We have known that the markets would need a substantial wall of
worry to climb before they would be able to stage a meaningful
recovery, and it seems clear to me that we have that wall now.
Will we rally straight up from here?  Not a chance.  But neither
do I expect a dramatic and protracted broad market selloff.  I
have no doubt that we will see a sharp drop on Monday, but I
expect a solid bounce-back in the markets, likely led by
Defense, Consumer and Energy-related stocks.

Turning to our current list of plays, I think we are well
positioned for the days and weeks ahead, but only time will
tell.  Philip Morris (NYSE:MO) and Clorox (NYSE:CLX) have
performed rather well in recent weeks and may continue to do so
in the near future.  Global Marine (NYSE:GLM) has been
struggling of late, but concerns about the smooth flow of oil to
our country may revive interest in the Oil Service sector,
lending strength to our play.  The Portfolio play that will
likely run into problems in the days ahead is Walt Disney
(NYSE:DIS), as leisure and travel activities are likely to see
significant cutbacks in  the near future, leading to significant
pressure on profits.

The extreme volatility that I expect to see next week could have
an unfortunate effect on our plays with the stops that are
currently in place.  Accordingly, I am suspending the listed
stops until we see how trading proceeds.  Each investor must
decide for themselves how to balance risk and reward.  I expect
a sharp drop in many stocks, which could be met with just as
sharp a rise.  I don't want to be stopped out of our Portfolio
plays, only to watch them continue their upward trends.

The Watchlist has several plays which could benefit
substantially from trends that will begin to emerge after
trading resumes; among these are Enron (NYSE:ENE), Calpine
Corporation (NYSE:CPN) and General Electric (NYSE:GE).
Inquiring minds will likely wonder why we didn't take a position
in ENE last Monday.  That's a valid question, and looking just
at the chart, I should have taken the position.  But after the
dramatic events of last week, I felt the prudent approach would
be to refrain from taking a position at this point and wait to
see how things develop over the days ahead.  It may turn out
that I will have missed a good entry point, but I'd rather take
that risk than the risk that certain readers would have blindly
followed us into the position after this weekend's column
without properly weighing the risks.

Determining logical and prudent entry points at this juncture is
a game of "Pin the Tail on the Donkey" at this point, as it
remains to be seen how the investing public will actually react
next week.  Accordingly, I would be much more cautious about
initiating new positions, until the dust begins to settle.  I
have left the entry targets unchanged and you can use the
currently listed levels as reference points, but not as hard
entry targets.  Instead, I would recommend looking at historical
price charts and looking for solid levels of support.  If buyers
emerge near those levels in the days ahead, I would consider
that a viable entry point, provided we see the daily and weekly
stochastics oscillators also recovering from oversold levels.
Next week we will have price action to look at and I will be
able to provide much better guidance as to where strength will
likely be seen and what entry targets make the best sense.

The week ahead will be fraught with peril and filled with
opportunity.  There will be winners and losers, and unless you
like to live dangerously, I would caution patience and
restraint.  We are in this game for the long-term and the
prudent approach will be to wait for some stability to enter
the markets as well as the political scene before placing more
money at risk in the markets.  There will be plenty of time to
position our Portfolio for profit in the weeks ahead, and I am
content to stand aside until I see solid signs of strength.  If
conditions change sufficiently to warrant it, I will use my
Wednesday column to provide updates to both the Portfolio and
Watch List, as well as any significant changes to my perspective
on the market.

In the meantime, do what you can to help those affected by this
tragedy and take the time to count the many blessings we all
share and strive to protect in this great country.

Best Wishes!

Mark Phillips
Contact Support

LEAPS Portfolio

Current Open Plays


CLX    03/13/01  '03 $ 35  VUT-AG  $ 6.10  $ 8.60   40.98%  $ 38
MO     07/30/01  '03 $ 45  VPM-AI  $ 6.10  $ 8.00   31.15%  $ 47
GLM    08/15/01  '03 $ 20  OML-AD  $ 3.30  $ 2.65  -19.70%  $ 14
                 '04 $ 20  KLW-AD  $ 4.70  $ 4.20  -10.64%  $ 14
DIS    08/30/01  '03 $ 30  VDS-AF  $ 2.05  $ 1.80  -12.20%  $22.50
                 '04 $ 30  LWD-AF  $ 3.60  $ 3.10  -13.89%  $22.50

LEAPS Watchlist

Current Possibles


CPN    07/08/01  $29-30        JAN-2003 $ 30  OLB-AF
                            CC JAN-2003 $ 25  OLB-AE
                               JAN-2004 $ 30  LZC-AF
                            CC JAN-2004 $ 30  LZC-AF
ENE    07/29/01  $29-30        JAN-2003 $ 30  VEN-AF
                            CC JAN-2003 $ 25  VEN-AE
                               JAN-2004 $ 30  LYN-AF
                            CC JAN-2004 $ 30  LYN-AF
LLY    08/05/01  $73-74        JAN-2003 $ 75  VIL-AO
                            CC JAN-2003 $ 70  VIL-AN
                               JAN-2004 $ 80  LZE-AP
                            CC JAN-2004 $ 70  LZE-AN
GE     08/12/01  $38-39        JAN-2003 $ 40  VGE-AH
                            CC JAN-2003 $ 30  VGE-AF
                               JAN-2004 $ 40  LGR-AH
                            CC JAN-2004 $ 30  LGR-AF
PCS    08/26/01  $21-22        JAN-2003 $ 25  VVH-AE
                            CC JAN-2003 $ 20  VVH-AD
                               JAN-2004 $ 25  LVH-AE
                               JAN-2004 $ 20  LVH-AD
GD     09/16/01  $72-74        JAN-2003 $ 75  VJH-AO
                            CC JAN-2003 $ 65  VJH-AM
                               JAN-2004 $ 80  KJD-AP
                            CC JAN-2004 $ 70  KJD-AN
TYC    09/16/01  $42-44        JAN-2003 $ 45  VYL-AI
                            CC JAN-2003 $ 40  VYL-AH
                               JAN-2004 $ 50  LPA-AJ
                            CC JAN-2004 $ 40  LPA-AH

New Portfolio Plays


New Watchlist Plays

GD - General Dynamics $75.97

In the wake of Tuesday's terrorist attack, it appears that there
will be an intense and possibly protracted war against terrorism,
and Defense stocks such as GD are likely to benefit from an
increase in spending on the products the company provides.  GD
has been on a steady rise since early 2000, and while we may see
some near-term volatility, the changes that are likely to
materialize in the Defense industry should help the stock to
continue its upward trend over the months ahead.  The ascending
trendline is currently resting at $72.50, and there is
significant historical support in the $72-74 area.  Depending on
the market reaction next week, we could even see a test of lower
levels of support in the $67-70 range.  We are starting the play
out with a target of $72-74, but keep in mind that we will only
take a position on a strong (read:volume) bounce from this level.
With the daily and weekly Stochastics now in oversold, the stock
could be primed for a solid rally, as the fundamental picture has
changed so dramatically.  The prudent approach may be to wait
until the early volatility begins to subside, and then target
new entries after that.

BUY LEAP JAN-2003 $75.00 VJH-AO
BUY LEAP JAN-2003 $65.00 VJH-AM  For Covered Call
BUY LEAP JAN-2004 $80.00 KJD-AP
BUY LEAP JAN-2004 $70.00 KJD-AN  For Covered Call

TYC - Tyco International $47.71

Although less prominent in most investors' minds than GE, TYC is
another large and diversified manufacturing and service company.
Involved in the manufacture of electronic components, undersea
communications systems, medical supplies, electronic security
systems and flow control systems, TYC sports a reasonable PE
ratio (16) and a Return on Equity of better than 25%.  As a
testament to its strong growth, TYC has held up rather well in
recent months, keeping its long-term uptrend intact.  The
ascending trendline is currently resting at $44, and this is
backed up by the 200-week moving average at $42.  Near-term
volatility s likely to cause a test of these levels and possibly
the April lows near $40.  Add in weekly and daily stochastics
that will likely be well into oversold in the days ahead and we
could be looking at an attractive entry point.  We're setting
our entry target in the $42-44 range, but I feel the need to
caution that any new positions in the next few days carry
additional risk due to the expected market volatility.

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



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The Option Investor Newsletter                   Sunday 09-16-2001
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The Numbness: When Does It Go Away?
By Mark Wnetrzak

I planned to offer a selection of plays this week but I cannot.
The data available is pre-WTC and the next time the market opens
will be post-WTC.  Heck, there is a good chance that our military
'boys' will be in harm's way by Monday.  Are we so callous that
in the midst of destruction we can only look for ways to profit?
I am sorry, but that is not my way.

I take solace in the outpouring of support here in Anchorage and
across America:  the blood bank overwhelmed; a rally raising
over $27,000.00 for disaster relief in just a few hours; the
flags that have sprouted across the city.  American patriotism
awakens and will be needed for the task ahead.

I am still waiting for the shock of what happened in New York
to wear off.


Note:  Margin not used in calculations.

Stock  Price  Last   Call  Strike Price   Gain   Potential
Symbol Picked Price  Month Sold   Picked  /Loss  Mon. Yield

LCBM    6.35  10.55   SEP   5.00  1.75  *$  0.40  13.2%
RCOM   10.41  10.70   SEP  10.00  0.85  *$  0.44  10.0%
CCRD   10.20  10.21   SEP  10.00  1.15  *$  0.95   9.1%
UNFI   20.31  20.04   SEP  20.00  1.10  *$  0.79   8.9%
IMNX   17.83  18.01   SEP  17.50  1.00  *$  0.67   8.6%
NSM    31.61  31.05   SEP  30.00  2.60  *$  0.99   7.4%
AVIR   25.01  24.59   SEP  22.50  3.10  *$  0.59   5.9%
BPUR   22.36  21.18   SEP  20.00  3.10  *$  0.74   5.8%
GSPN   16.24  14.67   SEP  15.00  2.30   $  0.73   5.7%
FFIV   14.59  13.94   SEP  12.50  2.85  *$  0.76   5.6%
CCUR   11.60  10.62   SEP  10.00  2.15  *$  0.55   5.1%
SCTC   13.33  13.04   SEP  12.50  1.20  *$  0.37   4.6%
NMTC   28.87  25.10   SEP  25.00  5.10  *$  1.23   4.5%
NEV    18.05  18.30   SEP  17.50  0.90  *$  0.35   4.4%
ANSR    9.01   7.50   SEP   7.50  1.80   $  0.29   4.4%
DP     44.05  42.48   SEP  42.50  2.40   $  0.83   4.3%
NETA   16.36  14.86   SEP  15.00  2.45   $  0.95   4.2%
INTU   37.78  36.34   SEP  35.00  3.70  *$  0.92   4.1%
DAVX   10.26   9.80   SEP  10.00  0.75   $  0.29   2.7%
NTIQ   36.40  28.75   SEP  30.00  8.10   $  0.45   1.2%
ISSI   15.00  13.90   SEP  15.00  1.25   $  0.15   0.7%
CTIC   31.39  27.90   SEP  30.00  3.20   $ -0.29   0.0%
PRGN   26.18  22.97   SEP  25.00  2.70   $ -0.51   0.0%
SPCT   15.85  13.17   SEP  15.00  2.05   $ -0.63   0.0%
GERN   16.01  13.49   SEP  15.00  1.60   $ -0.92   0.0%
R      22.59  20.97   SEP  22.50  0.65   $ -0.97   0.0%
PTEC   15.05  12.87   SEP  15.00  1.20   $ -0.98   0.0%
WBSN   19.19  15.79   SEP  17.50  2.35   $ -1.05   0.0%
PRIA   17.89  15.09   SEP  17.50  1.55   $ -1.25   0.0%
ARTC   31.67  26.89   SEP  30.00  3.50   $ -1.28   0.0%
HLIT   16.04  11.67   SEP  15.00  2.20   $ -2.17   0.0%
PMCS   34.40  24.74   SEP  30.00  6.50   $ -3.16   0.0%

*$ = Stock price is above the sold striking price.


See Above.

Positions Closed:

Netiq (NASDAQ:NTIQ); SEP-$35, IGEN International (NASDAQ:IGEN),
Photon Dynamics (NASDAQ:PHTN), Alamosa Holdings (NASDAQ:APCS) ,
Vical (NASDAQ:VICL), Integra LifeSciences (NASDAQ:IART), and
Seachange International (NASDAQ:SEAC).


Due to the uncertainty in the markets and the lack of accurate
option prices, there will be no candidates in the Covered-Call
section this week.  However, there is always an overwhelming
desire for discussions on trading systems and for that reason,
we have included an educational article on the subject.

Trading Basics:  A Plan for Success!
By Mark Wnetrzak

The recent volatility in the market has magnified the need for a
well designed trading plan.  As with any structure, the key to a
successful system is in its foundation.  In any approach to the
financial markets, a number of issues must be resolved.  First,
how much risk do you want to incur?  What ratio of success do you
expect to achieve?  What style or method of trading will you use
to accomplish your goals?  Do you plan to utilize technical
analysis, trading ranges or trends?  Will you focus on volatility
or disparity in option pricing, selling premium when the market
is active and buying potential when the trend is stagnant?  These
decisions will significantly affect the fundamental design of your
system.  As an example, if your stop-loss limits are relatively
liberal, then your potential success ratio will be increased.  At
the same time, the possibility of substantial loss will also be
magnified.  The best way to find a happy medium is to start with
realistic expectations and build a pattern of success before you
worry about increasing the potential returns.

Regardless of the type of markets you trade, the same fundamental
approach can apply to a number of different systems.  The basic
requirements for a successful design are determined by its core
objectives.  With trading systems, you need an market outlook, a
strategy with which to profit and a method for timing the entry
and exit.  Then you must decide on a money management system - a
set of rules or guidelines for determining potential risk.  Most
experts suggest that ideally you should not risk more than 3-5%
of your capital on any one trade, to avoid the possibility of a
catastrophic loss.  In addition to these details, you should also
outline a stop-loss policy and a method to determine the correct
position size for a particular transaction.  The administration
of stop-losses will often define the success of your system.  In
fact, the placement of the stop is vitally important, because if
the stop is vulnerable, then so is the entire system.  It would
follow that the relationship between your entry point and profit
target or exit stop is the key to profitability.  Unfortunately,
this is the essential element that cannot be reached simply by
logic, rather it evolves through observation, critical study, and
continuous testing and refinement.  The ultimate arrangement will
be strict yet flexible, with a plan for adjustments as the trade
progresses.  The ideal process entails far more than a mechanical
system that simply follows the trend and waits for a stop to be
hit.  In every case, it should identify the proper entry point and
manage the position for maximum profit.

The first step in constructing a profitable system is observation.
Study the rhythms and cycles of the market.  Examine how specific
stocks and sectors are behaving in the current environment and
try to identify the best ways to take advantage of the activity.
The simplest approach to directional trading is through the use
of technical analysis.  Identifying trading ranges and trends is
a relatively easy task, but then you must define how to profit
from them.  With trading ranges, it's best to look for extremes
and enter opposing positions when these peaks (or valleys) are
reached.  With trends, traders generally initiate new positions
when a particular system indicates that the primary movement is
well established and the correct bias is in place.  Obviously,
trends can be defined in a number of different ways but the most
important aspect of this type of trading is selecting the correct
time frame.  After the time frame is identified, you can analyze
the appropriate periods for specific trading signals.  Long-term
data is more stable and will provide very accurate indications
with regard to primary trends or market direction.  In contrast,
most short-term statistics are generally better for entry and
exit timing and strategies that profit from correctly identifying
reversals or changes in momentum.  Despite the shortcomings of
each individual approach, traders have a variety of indicators
with which to determine the future character of the market.  The
most difficult task is to choose those indicators that will best
help achieve one's objectives.

Good Luck!


Success Basics: Is It Time To Become An Investor?
By Ray Cummins

With the recent decline in equity values, many of the so-called
market "gurus" have begun to proclaim the pitfalls of the "buy
and hold" concept.  Some hype the rewards of short-term, high
profit trading strategies while discounting the advantages of
long-term portfolio investments.  Others try to convince you to
avoid stocks altogether, comparing equity ownership to legalized
gambling as they tout the returns in annuities and money-market
accounts.  Regardless of what these self-serving consultants
suggest, there is merit to this type of investing when it is
incorporated into a balanced approach to financial security.  In
addition, it is still the most (statistically) successful theory
today in all of the financial markets.

Most experts say that a combination of investments will provide
the best balance of risk and reward in a long-term portfolio.
A diverse group of long-term stocks is a good foundation for
any novice investor and a qualifying retirement account can help
defer capital-gains taxes.  Investors who use the buy-and-hold
approach should focus on selecting quality companies with current
market values that are at a discount relative to their underlying
economic value.  By accumulating these issues selectively and
maintaining a balanced portfolio, an investor can reduce trading
costs and maximize the potential of long-term profits from the
company's increasing share value.  With the historic relationship
between corporate earnings growth and share price appreciation,
there is certainly wisdom in this methodology.  Stocks can also
be used to supplement portfolio proceeds and investors who need
current income can choose from a vast number of dividend paying
securities, many of which also have an excellent record of share
price growth.  Investors who choose to avoid specific types of
business activity (based on ethical or financial principles) can
find many value-based stocks that meet their personal criteria.
Those who wish to achieve the same performance as an individual
industry or sector can purchase stock indexes and other financial
instruments that mirror specific groups of equities.  "Diamonds"
and "Spyders" allow traders to buy or sell entire indexes as a
single share on the American stock exchange (Diamonds represent
the 30 Dow stocks and Spyders the S&P 500) and WEBS (World Equity
Benchmark Shares) permit investors to buy entire portfolios of
stocks in foreign markets such as Japan, Canada, Germany, Spain,
Hong Kong, the UK, and the Netherlands.  More aggressive traders
can apply value-investing principles to blue-chip issues; buying
stocks that are undervalued and selling those that are overvalued.
As a portfolio matures, investors can eventually diversify into
bonds or treasury instruments to benefit from market and interest
rates fluctuations.

While strategy is important, it is also imperative to approach
investment activities with the right attitude and expectations.
Trying to achieve too much from a portfolio can put the account
in the red quickly (greed can lead to terrible decisions!) and
accepting returns that barely surpass current inflation rates
will prevent a portfolio from growing.  Although buy-and-hold
has worked well throughout the last quarter of the century, the
recent slump in corporate share values demonstrates the need to
be proactive with your core holdings.  While most investors who
make the effort to learn about the financial markets are rarely
satisfied to achieve the same return as the Dow or the S&P 500,
others will actively seek mediocrity and history suggests that
the general public is comfortable losing what the market loses
and gaining no more than the market gains.  That's surprising
because the ease of access to global trading forums provide a
vast number of profit opportunities and there are numerous stock
and derivative strategies for the average investor.  The key to
success is to follow a carefully planned approach with precision
and discipline.

Some of you may be wondering what rate of return is a reasonable
expectation?  Most professionals who participate in historically
profitable strategies will easily average 15%-20% return on an
annual basis.  Over the long-term, 10% per year is the typical
return for broader-market stocks and Warren Buffett accumulated
his fortune (Berkshire Hathaway is worth over a billion dollars),
by focusing on a mere 15% annual return on assets.  His primary
goal however, was to maintain a substantial margin of safety in
all of the portfolio's holdings.  Based on the recent activity
in the stock market, that approach is even more valid today and
it's something to keep in mind when you start shopping for the
new additions to your long-term portfolio.

Good Luck!

                      *** WARNING!!! ***
Occasionally a company will experience catastrophic news causing
a severe drop in the stock price. This may cause a devastatingly
large loss which may wipe out all of your smaller gains. There is
one very important rule; Don't sell naked puts on stocks that you
don't want to own! It is also important that you consider using
trading STOPS on naked option positions to help limit losses when
the stock price drops. Many professional traders suggest closing
the position when the stock price falls below the sold strike or
using a buy-to-close STOP at a price that is no more than twice
the original premium from the sold option.


Stock  Price  Last   Call  Strike Price   Gain   Potential
Symbol Picked Price  Month Sold   Picked  /Loss  Mon. Yield

BRCM   31.41  30.59   SEP  25.00  0.55  *$  0.55  17.5%
CTXS   31.48  30.48   SEP  27.50  0.60  *$  0.60  14.2%
FDP    15.18  15.30   SEP  15.00  0.40  *$  0.40  13.8%
ICST   19.00  17.30   SEP  15.00  0.25  *$  0.25  13.4%
SCTC   13.05  13.04   SEP  12.50  0.30  *$  0.30  13.1%
PPD    20.50  19.20   SEP  15.00  0.80  *$  0.80  11.8%
MDCC   20.50  23.61   SEP  17.50  0.95  *$  0.95  11.2%
GERN   14.50  13.49   SEP  12.50  0.55  *$  0.55  11.0%
CENT    8.98   9.41   SEP   7.50  0.35  *$  0.35  10.3%
HDL    15.46  15.50   SEP  15.00  0.40  *$  0.40   9.9%
PLXS   36.19  30.12   SEP  30.00  0.80  *$  0.80   9.6%
ALLY   18.23  19.00   SEP  15.00  0.50  *$  0.50   9.5% Adj 2-1 split
LBRT   14.32  13.64   SEP  12.50  0.25  *$  0.25   9.1%
KDE    28.00  26.25   SEP  25.00  0.50  *$  0.50   8.7%
ILUM   33.20  35.90   SEP  30.00  0.60  *$  0.60   8.5%
IMCL   53.30  53.73   SEP  45.00  0.50  *$  0.50   8.0%
LBRT   15.35  13.64   SEP  12.50  0.25  *$  0.25   7.7%
PPD    21.09  19.20   SEP  15.00  0.40  *$  0.40   7.5%
ISIL   39.20  34.12   SEP  30.00  0.90  *$  0.90   7.5%
SAGI   17.75  15.35   SEP  15.00  0.40  *$  0.40   7.3%
URBN   15.04  15.65   SEP  12.50  0.25  *$  0.25   7.3%
CTXS   32.95  30.48   SEP  27.50  0.35  *$  0.35   6.6%
NEM    21.48  21.15   SEP  20.00  0.55  *$  0.55   6.2%
ILXO   29.15  27.00   SEP  25.00  0.45  *$  0.45   6.1%
PRGX   13.75  13.86   SEP  12.50  0.30  *$  0.30   5.7%
IMCL   44.89  53.73   SEP  30.00  0.70  *$  0.70   5.2%
VPHM   35.59  28.94   SEP  30.00  0.95   $ -0.11   0.0%
PPD    22.28  19.20   SEP  20.00  0.50   $ -0.30   0.0%

TERN    7.01   7.10   OCT   5.00  0.30  *$  0.30  12.8%

*$ = Stock price is above the sold striking price.


The stock indexes closed higher on Monday, the last day that
equities traded in the United States and even with the brief
respite, investors remain concerned over the economic outlook
following the recent employment data and unfavorable consumer
spending forecasts.  Technology stocks were among the best
performers due to a late session rally but the NASDAQ remains
poised to test April's low near 1,619 unless there is a strong
change in sentiment.  Analysts say that uncertainty in the
aftermath of Tuesday's terrorist attacks and concerns about
corporate earnings will limit near-term upside potential.  In
addition, the latest jobs report showed another increase in
unemployment claims and that data is likely to put additional
pressure on stocks when the markets reopen for trading Monday.
Most of the markets around the globe have stabilized following
the initial reaction to the horrific events and although the
delay in opening the U.S. markets may help dampen the bearish
activity, the latest information suggests the American economy
is on the verge of a recession.  With that outlook in mind, it
is imperative that you evaluate your long-term outlook for any
portfolio positions and act accordingly.  Plexus (NASDAQ:PLXS),
ViroPharma (NASDAQ:VPHM), Pre-Paid Legal (NYSE:PPD) and Sage
(NASDAQ:SAGI) are currently on the watch-list, but there are
a number of issues that could suffer substantial losses in a
broad market sell-off, so monitor your plays diligently in the
coming week.

Positions Closed:

Powerwave (NASDAQ:PWAV), Advanced Fibre Comm. (NASDAQ:AFCI),
Alamosa Holdings (NASDAQ:APCS), Standard Pacific (NYSE:SPF),
and Geron (NASDAQ:GERN).


Due to the uncertainty in the markets and the lack of accurate
option prices, this week's plays are simply list of candidates
to supplement your search for profitable trading positions.  No
one knows how stocks will react when the equity exchanges open
for trading on Monday, thus you must first evaluate the market
activity and then decide if the selections meet your criteria
for potential plays.  In addition, we suggest you "target-shoot"
the initial entry prices, allowing for ample downward movement
in the event of an unexpected decline in share values.  These
positions will not be included in the monthly summary.

Sequenced by Company
Stock  Last  Put  Strike  Option  Last Open  Cost   Days  Target
Symbol Price Mon. Price   Symbol  Bid  Int.  Basis  Exp.  Yield

ILUM   35.90 OCT   30     ILU-VF  0.55  11   29.45   35    5.3%
IMNX   18.01 OCT   15     IUU-VC  0.30  242  14.70   35    5.8%
LBRT   13.64 OCT   12.5   IEY-VV  0.80  40   11.70   35   13.6%
MDCC   23.61 OCT   20     MCQ-VD  0.65  301  19.35   35    8.7%
NTPA    5.85 OCT   5      NQD-VA  0.30  186   4.70   35   14.6%
OEI    19.85 OCT   18     OEI-VW  0.45  279  17.05   35    6.5%
PRGX   13.86 OCT   12.5   FPQ-VV  0.35  15   12.15   35    6.7%
PROX   12.60 OCT   10     WQG-VB  0.25  5     9.75   35    7.8%

Sequenced by Target Yield (monthly basis)
Stock  Last  Put  Strike  Option  Last Open  Cost   Days  Target
Symbol Price Mon. Price   Symbol  Bid  Int.  Basis  Exp.  Yield

ILUM   35.90 OCT   30     ILU-VF  0.55  11   29.45   35    5.3%
IMNX   18.01 OCT   15     IUU-VC  0.30  242  14.70   35    5.8%
OEI    19.85 OCT   18     OEI-VW  0.45  279  17.05   35    6.5%
PRGX   13.86 OCT   12.5   FPQ-VV  0.35  15   12.15   35    6.7%
PROX   12.60 OCT   10     WQG-VB  0.25  5     9.75   35    7.8%
MDCC   23.61 OCT   20     MCQ-VD  0.65  301  19.35   35    8.7%
LBRT   13.64 OCT   12.5   IEY-VV  0.80  40   11.70   35   13.6%
NTPA    5.85 OCT   5      NQD-VA  0.30  186   4.70   35   14.6%

Company Descriptions

LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even
point, DE-Days to Expiry, TY-Target Yield (monthly basis).

ILUM - Illuminet Holdings  $35.90  *** Break-Out! ***

Illuminet Holdings (NASDAQ:ILUM) operates an unaffiliated Signaling
System 7 network in the United States, and provides complementary
intelligent network and SS7 services to telecommunications carriers.
The majority of the company's products and services are directly
related to its SS7 network, as either part of the connectivity,
switching and transport function of the network or as intelligent
network services.  In addition, the company provides clearinghouse
services and licenses specially designed software for measuring
network usage.  On July 19, the network services provider reported
that second-quarter earnings more than doubled as core database and
wireless roaming services business remained strong.  Revenues rose
30% in the second quarter to $47 million up from $36 million a year
ago.  The company expects revenues to grow 23-25% year-over-year,
with operating income margins of about 30% and they are comfortable
with First Call's consensus estimate of $0.28 earnings per share in
the third quarter.  In addition, ILUM recently agreed to purchase
BellSouth's International Wireless Services (BSI-WS) unit, which
provides roaming services that connect wireless telephone carriers
in 23 countries in the Americas and the Caribbean.  The move to a
recent high on heavy volume bodes well for the future share value
of the issue.

OCT 30.00 ILU-VF LB=0.55 OI=11 CB=29.45 DE=35 TY=5.3%

IMNX - Immunex  $18.01  *** Low Risk Entry Point! ***

Immunex (NASDAQ:IMNX) is a biopharmaceutical company dedicated
to developing immune system science to protect human health.
Applying its scientific expertise in the fields of immunology,
cytokine biology, vascular biology, antibody-based therapeutics
and small molecule research, the company works to discover new
targets and new therapeutics for treating rheumatoid arthritis,
asthma and other inflammatory diseases, as well as cancer and
cardiovascular diseases.  Immunex's product revenues come from
products in two major therapeutic classes, anti-inflammatory
and specialty therapeutics, principally oncology and multiple
sclerosis.  Immunex continues to forge a Stage I base and the
improving technicals suggest a bullish resolution.  Use this
position to establish a favorable cost basis in the issue.

OCT 15.00 IUU-VC LB=0.30 OI=242 CB=14.70 DE=35 TY=5.8%

LBRT - Liberate  $13.64  *** Telecom Sector ***

Liberate Technologies (NASDAQ:LBRT) is a global provider of a
comprehensive software platform for delivering content, services
and applications to a broad range of information appliances.
Information appliances, which include television set-top boxes,
game consoles and personal digital assistants, are devices that
are enhanced by Internet capability.  Network operators, such as
telecommunications companies, cable and satellite television
operators and Internet service providers, can use the company's
server software to deliver Internet-enhanced services to numerous
information appliances and millions of consumers.  Information
appliance manufacturers can use its client software to enable
their products for Internet use.  Liberate recently signed an
agreement to develop an interactive TV delivery system with an
AT&T subsidiary and investors believe it will be the key to their
success in the near-term.  The deal opens the door for Liberate to
power as many as 6 million digital set-top boxes already in the
market, including AT&T's 3 million digital cable subscribers, and
it also marks an opportunity in a highly competitive market that
is expected to rebound up after years of dismal consumer interest.

OCT 12.50 IEY-VV LB=0.80 OI=40 CB=11.70 DE=35 TY=13.6%

MDCC - Molecular Devices  $23.61  *** Merger Target? ***

Molecular Devices )NASDAQ:MDCC) is a developer of high-performance
bioanalytical measurement systems that accelerate and improve drug
discovery and other life sciences research.  The company's systems
enable pharmaceutical and biotechnology firms to leverage advances
in genomics and combinatorial chemistry by facilitating the high
throughput and cost effective identification and evaluation of drug
candidates.  Their instrument systems are based on an advanced core
technology, which integrate the company's expertise in engineering,
molecular and cell biology and chemistry.  The company's systems
are fundamental tools for drug discovery and life sciences research,
and its MAXline series of microplate readers and its FLIPR Cell
Analysis systems are well-known leaders in their respective markets.
ABN Amro recently said Molecular Devices is a leader in the drug
discovery tool niche, and forecast improvement in spending on labs
in 2002 that could strengthen the sector's fundamentals.  Analysts
say other bullish factors are MDCC's new 1.5 million share buy-back
and its attractiveness as an acquisition candidate.

OCT 20.00 MCQ-VD LB=0.65 OI=301 CB=19.35 DE=35 TY=8.7%

NTPA - Netopia  $5.85  *** Bottom Fishing! ***

Netopia (NASDAQ:NTPA) develops, markets, and supports broadband
Internet equipment and e-commerce Web platforms for small and
medium-size businesses.  The company's platforms are designed to
enable carriers and service providers to create and offer value
added, bundled service offerings for their small and medium-size
business customers.  These bundled service offerings often include
digital subscriber line service bundled with back-up, bonding,
virtual private networking, and Internet web-site and e-store
hosting.  NTPA will be showcasing its ADSL & G.shdsl broadband
(an international standard and a new technology that provides
more economical, higher quality symmetric DSL service) at the
Networld+Interop trade-show in Paris this month.  Investors are
apparently interested and the issue is a great "bottom-fishing"
candidate, based on its recent technical indications and the
new buying support near our cost basis.

OCT 5.00 NQD-VA LB=0.30 OI=186 CB=4.70 DE=35 TY=14.6%

OEI - Ocean Energy  $19.85  *** Oil Sector! ***

Ocean Energy (NYSE:OEI) is an independent energy company engaged
in the exploration, development, production, and acquisition of
crude oil and natural gas.  North American operations are focused
primarily in the shelf and deepwater areas of the Gulf of Mexico,
the Permian Basin, Mid-continent, and Rocky Mountain areas.  In
the international segment, Ocean conducts oil and gas activities
in Equatorial Guinea, Ctte d'Ivoire, Angola, Egypt, Tatarstan,
Pakistan, and Indonesia.  OEI is a solid company in the Oil and
Gas Drilling sector and Deutsche Banc Alex. Brown recently said
that it began coverage of the company with a "buy" rating and a
$27 target on its share value.  The brokerage noted, "OEI is a
uniquely-positioned upstream player with multiple opportunities
for meaningful growth."

OCT 17.50 OEI-VW LB=0.45 OI=279 CB=17.05 DE=35 TY=6.5%

PRGX - Profit Recovery Group  $13.86  *** Entry Point! ***

The Profit Recovery Group (NASDAQ:PRGX) is a provider of recovery
audit, expense containment and knowledge application services to
large and mid-size businesses having numerous payment transactions
with many vendors.  The company's specialists use sophisticated
proprietary technology and advanced recovery techniques and other
methodologies to identify overpayments to specific vendors and tax
authorities.  In addition, the specialists review clients' current
practices and processes related to procurement and other expenses
in order to identify solutions to manage and reduce expense levels,
as well as apply knowledge and expertise of industry practices to
assist clients in improving their business efficiencies.  With the
profit levels falling in almost every industry, PRGX has a unique
product that can be used almost universally.  The rally in August
was probably due to the fact that the U.S. Trade Commission and
the Justice Department have granted an early termination of the
necessary waiting period with respect to PRG's planned acquisition
of Howard Schultz & Associates International.  Regardless of the
reason, this issue appears poised for future gains.

OCT 12.50 FPQ-VV LB=0.35 OI=15 CB=12.15 DE=35 TY=6.7%

PROX - Proxim  $12.60  *** Wireless Networking ***

Proxim (NASDAQ:PROX) designs, manufactures and markets performance
wireless local area networking products and building-to-building
network products based on radio frequency (RF) technology.  The
company focuses on supplying spread spectrum RF transceiver
modules and wireless LAN adapters to OEM customers for integration
into mobile computing platforms, handheld data terminals and
portable peripheral devices.  Proxim designs its products to be
small, lightweight, cost-effective and power efficient.  Top chip
maker Intel (NASDAQ:INTC) recently outlined a broad strategy for
the emerging business of wireless computer networking, joining the
board of an industry group that backs one standard while unveiling
plans for a line of speedier networking equipment using another
standard; 802.11a, which can transmit and receive a heftier array
of audio, video and other data.  Proxim also offers that standard
and experts say these systems can deliver more "bits per buck" by
enabling up to five times more bandwidth.  Investors are bullish
on the company's future and traders can establish a discounted
cost basis in the issue with this position.

OCT 10.00 WQG-VB LB=0.25 OI=5 CB=9.75 DE=35 TY=7.8%



There are no supplemental candidates this week.


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The State Of A Nation: Our First Priority - Concern and Prayers!
By Ray Cummins

All of us at the OIN are deeply saddened and horrified by the
recent unprovoked terrorist attack on America and our foremost
wish is that prayers and assistance will go out to the victims,
their families, and all the people who have been affected by
this unthinkable tragedy.

                         - MARKET RECAP -
Friday, September 14

The stock indexes remained closed Friday with Wall Street's work
force battling numbing sorrow while trying to prepare the major
exchanges for the expected opening on Monday of next week.  The
U.S equity markets have been idle since Tuesday morning, when an
unprovoked terrorist attack toppled buildings at the World Trade
Center and killed thousands of innocent Americans.  The New York
Stock Exchange, the world's largest stock market, remains closed
and off-limits with the rest of lower Manhattan as rescue crews
sift through the wreckage of the neighborhood where 50,000 people
once worked.  An untold numbers of victims, including economists,
brokers, strategists and their support staff, are missing in the
rubble.  Despite the unbelievable carnage, officials at the NYSE,
NASDAQ, and American Stock Exchange assured investors they would
reopen on Monday if a series of equipment tests over the weekend
are successful.  Some local traders suggested that a resumption
might not be possible so soon, due to the fact that the financial
district is little more than a smoking ruin and even if trading
begins as planned, there is still much apprehension as to how
stocks will react to this national catastrophe.  Most analysts
predict a volatile opening session, as traders are caught in the
battle between their knowledge of the bleak outlook for corporate
earnings and a seemingly moral obligation not to sell the markets
short when they eventually re-open.  While no formal declaration
has been made among trading firms, a quiet, unwritten commitment
not participate in "unplanned" selling has circulated throughout
the financial community and that unique form of patriotism may be
the only thing that prevents a broad market sell-off when trading

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

Clorox     (NYSE:CLX)   JAN45C/35P   $0.30   credit   synthetic
Chevron    (NYSE:CHV)   SEP85P/90P   $0.60   credit   bull-put
Elec. Arts (NSDQ:ERTS)  OCT70C/65C   $0.55   credit   bear-call
Photon     (NSDQ:PHTN)  SEP30C/30P   $4.40   debit    straddle
Broadwing  (NYSE:BRW)   SEP15C/15P   $1.60   debit    straddle
Smartforce (NSDQ:SMTF)  SEP25C/25P   $0.00   debit    straddle

Our new credit-spread in Chevron provided an acceptable entry
price and even though Electronic Arts plunged to a recent low
in Monday's session, the position offered a reasonable opening
credit for traders who are bearish on the issue.  Clorox was
a popular stock and our new synthetic position is off to a good
start.  In the Debit-Straddles group, Smartforce provided some
excitement, plunging below $20 during the first few minutes of
trading after being downgraded by Needham & Co.  However, SMTF
managed to fight its way back to positive territory, recovering
to close virtually unchanged.  The volatile movement prevented
any logical entry in the play but it's safe to say the issue
can be very active.  Photon was also a big mover, trading in a
$3 range throughout the day.  The opening debit in Broadwing
was slightly better than expected and that issue continued its
volatile activity with a 10% price swing during the session.

Portfolio Activity:

There was little significant activity this week in equity share
values, since Monday's trading was the only indication of market
direction and the major indices ended that session relatively
unchanged.  Although the U.S. stock exchanges have been closed
since the attack, trading in Europe and Canada has been active
and investors are anxious to see how the recent horrific events
will affect stocks when they begin trading next week.  Analysts
say there is little likelihood of a severe drop, but the damage
done to the financial community along with the austere outlook
for the economy may result in additional losses until confidence
in the stock market is restored.  The best suggestion I can make
is to define your position limits and exit/adjustment strategies
before trading resumes and monitor the market closely until it
is obvious that equities have achieved a reasonable climate of
stability.  Only then will you be able to make a knowledgeable
judgment about the future outlook for stocks and your portfolio.

Questions-comments on Spreads/Straddles to Contact Support
                          - NEW PLAYS -

Tuesday was a terrible day for the United States and everyone in
the investment community.  The thoughts and prayers of all of us
here go out to the victims and families of the tragic terrorist
activity.  Despite the loss of lives and property, and the utter
feeling of despair, it's important that we focus on putting this
country back in "working" order so the terrorists won't achieve
any prolonged affects from their cowardly activities.  With the
lack of accurate quote data and the likely volatility that the
markets will experience on Monday, it is not practical to offer
any new combination plays this week.  Instead, I have included a
popular narrative regarding the fundamentals of option pricing.

Buying the Right Option
By Ray Cummins

The last I time discussed this fundamental subject for option
traders, some interesting comments emerged from the readership.
Many of the replies were in regard to my statement that novice
investors lose money not only because they "buy" options, but
also because they pay little attention to the "fair value" of
the position they are purchasing.

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

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

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

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

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

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

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

Good Luck!

Tired of waiting on trades to execute?
Does your broker offer Stop Losses on Options?

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Stop Losses based on the option price or the stock price.
Move your trading into the next millennium with PreferredTrade.

Anything else is too slow!



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

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