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Daily Newsletter, Monday, 09/17/2001

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The Option Investor Newsletter                   Monday 09-17-2001
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******************************************************************
MARKET WRAP  (view in courier font for table alignment)
******************************************************************
       9-17-2001           High     Low     Volume Advance/Decline
DJIA     8920.70 -684.81  9580.32  8883.40  2.6 bln    471/2820
NASDAQ   1579.55 -115.75  1629.10  1579.28  2.3 bln    795/3174
S&P 100   529.10 - 29.48   558.58   527.83   Totals   1266/5994
S&P 500  1038.77 - 53.77  1092.54  1037.46
RUS 2000  417.67 - 23.06   440.73   417.67
DJ TRANS 2271.68 -404.81  2675.47  2267.01
VIX        44.77 + 10.17    47.70    39.76
VXN        73.26 +  9.42    99.32    70.96
TRIN        0.98
PUT/CALL    1.14
******************************************************************

That Was Not Fun!

The market dropped as expected but the "patriotic bounce" failed
to appear. Yes, there was a rally off the early lows but as new
warnings were announced the weak rebound gave way to new waves of
selling. The volume on the NYSE was a record 2.5 billion shares
and all but 333 million shares of that was down volume. The fact
that the patched together NYSE could manage this much volume on
the first day back in business was a tribute to the hard work that
everyone has done over the last week.





The Federal Reserve cut the discount rate by 50 basis points before
the open which was quickly followed by the ECB, Sweden and Switzerland.
There are strong indications included in language from the Fed that
hints they will cut again if needed by October 2nd. Today's cut was
already factored into the markets and marks the 8th cut in this series.
They have also been injecting liquidity into the markets on a daily
basis for the entire week.

The airlines qualified as the most sold sector today and will probably
qualify on Tuesday as well. With the government bail out package still
unapproved the haircut on their stocks was severe. Led by Continental
which lost -19.58 to $20 or half its value, all the carriers suffered
heavy losses. AMR -15.78, UAL -13.32, U -6.05, SKYW -12.50. The
carriers are slashing routes, planes and employees to cope with the
-50% drop in passenger traffic. USAir said after the bell that they
would cut up to 25% of their capacity and lay off 11,000 workers to
meet the changing times. Continental said they would end service to
ten cities completely and reduce service to many others. Delta is
cutting capacity by 20%. Continental said it would miss $70 million
in financing payments and start a ten day grace period today before
going into official default. They are also laying off 12,000 workers.
Boeing fell -7.68 to $35.80 on expected order cancellations and loss
of future maintenance revenues. Several carriers have announced an
accelerated phase out of older planes. In all, the airline sector
lost -$12.5 billion in market cap on Monday alone. Based on the already
announced airline layoffs if the trend continues over 100,000 workers
could lose their jobs.

The number of companies announcing stock buybacks increased to over
forty as the relaxed SEC rules made it attractive for companies to
try and put a floor under their stocks. Companies that announced
included AKAM, SANM, SEBL, SBUX, CSCO, GE, BEAS, VRTY, VIGN, PEP, PFE.
How much it helped them today may never be known but a few of those
companies held their losses to under one dollar.

The -684 point Dow drop was the biggest point loss ever but at only
-7% it was not even close to the -22.6% drop in October 1987. The next
largest point drop was -617 on April 14th 2000. The Nasdaq drop pushed
the index to the lowest close since October 1998. The S&P-500 also
posted the lowest close since October 1998. The Nasdaq and the S&P
closed right at the lows of the day indicating that the selling may
not be over.

After the bell American Express warned that they would miss earnings
and take a charge for moving 5,000 workers to new locations due to
the damaged buildings. Oracle also warned that revenue would miss
estimates. United Technology warned during the day that they would
miss estimates due to the attack. This is just the tip of the iceberg
and we can expect a flood of these warnings in the coming weeks.
Auto sales reportedly dropped almost -40% in the last week and this
could be repeated in all retail sectors. When things change and war
begins people tend to hoard cash. At this period in the economy any
hoarding of cash is exactly the worst thing that could happen.

These warnings will not be cured by another rate cut. Hitting key
levels on the Dow, Nasdaq, S&P may provide temporary rebound rallies
but the only stocks trying to shake off the illness are drugs, defense
and stocks with high yields like Phillip Morris. Lower interest rates
make money market funds less desirable and stocks with high dividends
and even minor gains can beat those rates substantially.

The good news? Historically, after major crisis events, the markets
tend to rebound strongly and display the strong V chart that investors
love. The bad news? It may not happen anytime soon. The problem is
the success of the currently unknown military response. If the "war"
is seen as dragging out for years and involve troops on the ground
and more strikes by the terrorists, then consumers will run for cover.
Investors will move to cash and wait. Both of these options will not
provide a quick rally.

The economy was under attack well before the WTC event and that
event has likely pushed us not just into a recession but deep into
a recession. Entire sectors have been eliminated from the GDP, the
unemployment rolls are soaring and consumer confidence is diving.
For those who don't play puts you should seriously reconsider this
option. We dropped many "politically incorrect" put plays on Sunday
which were already highly profitable before the attack. Several of
the ones we kept are also highly profitable like GMST and QCOM. Call
players should reconsider this strategy until the markets find a
bottom. Expect an oversold bounce as early as Tuesday but be very
skeptical of its staying power.

Definitely, enter passively, exit aggressively!

Jim Brown
Editor


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

Down But Not Out

The Dow posted its biggest point drop ever on heavy volume, but
the fact that the trading went smoothly made today a success.

As expected, anything associated with travel sold off today.
Airlines, cruise lines, online travel sites, nothing was exempt.
So does a 40% drop make these stocks an attractive buy?  Based on
US Airways cutting 20% of its workforce and reducing 23% of its
flights, airline stocks might be flying low for a while.  But
then there is the pending government bailout package.

Does that mean today's buying in teleconferencing stocks was
justified?  There might be a small increase in the use of
teleconferencing, but I doubt Avistar Communications' business
will double.

Security stocks, anything that scans, X-rays, or detects, will
most likely see an increase in orders, but probably not enough to
justify Viisage Technology's 142% advance or ICTS International's
113% one day climb. Perhaps on a pullback these stocks might be
an interesting longer-term play.

Gold stocks looked like a safe bet when they rose 6% out of the
gate, but that fact that they only closed up 2.50% makes the
safety of gold a little less safe.

The safe stocks today were not just defense stocks, but defensive
stocks.  Some of the S&P 500 stocks that closed in positive
territory included Merck (MRK), Cardinal Health (CAH), Pepsi
(PEP), Unilever (UN), Phillip Morris (MO), Proctor and Gamble
(PG), and Heinz (HNZ).

A defensive posture looks best for bulls and bears alike until
market direction becomes a bit clearer.

*************************Sector Watch****************************

            Support                Close              Resistance
DJIA       | 8,650  |      |      | 8921 |      |      |   9,110|
NASD       | 1,490  |      |      | 1580 |      |      |   1,670|
S&P 500    | 1,000  |      | 1039 |      |      |      |   1,100|
Rus 2000   |   405  |      |  418 |      |      |      |     455|
Semis      |   453  |  463 |      |      |      |      |     538|
Biotech    |   445  |      |      |  461 |      |      |     475|
Internet   |    90  |      |      |   96 |      |      |     105|
Networking |   217  |      |  227 |      |      |      |     260|
Software   |   130  |  132 |      |      |      |      |     159|
Banking    |   565  |      |      |      |  586 |      |     595|
Retail     |   695  |      |  721 |      |      |      |     765|
Drugs      |   375  |      |  383 |      |      |      |     410|

Support and resistance levels have been reset due to Monday's trading.

Support Alerts:
Resistance Alerts:
            ____________________________________________________
           |   Long    |   Short   |   Strength    | Relative   |
           |   Term    |   Term    |     of        | Strength   |
           |   Trend   |   Trend   |    Trend      | vs S&P 500 |
DJIA       |  Bearish  |  Bearish  | Strengthening |  Negative  |
NASD       |  Bearish  |  Bearish  |    Strong     |  Negative  |
S&P 500    |  Bearish  |  Bearish  |    Strong     |    --      |
Rus 2000   |  Bearish  |  Bearish  |    Strong     |  Neutral   |
Semis      |  Bearish  |  Bearish  | Strengthening |  Negative  |
Biotech    |  Bearish  |  Bearish  |     Weak      |  Neutral   |
Internet   |  Bearish  |  Bearish  |    Strong     |  Negative  |
Networking |  Bearish  |  Bearish  |    Strong     |  Negative  |
Software   |  Bearish  |  Bearish  |    Strong     |  Negative  |
Banking    |  Bearish  |  Bearish  |    Strong     |  Neutral   |
Retail     |  Bearish  |  Bearish  |    Strong     |  Negative  |
Drugs      |  Neutral  |  Neutral  |     Weak      |  Positive  |

            _____________________________________
           | Short-Term  |          | Point and |
           | Overbought/ | Momentum |   Figure  |
           | Oversold    |          |   Signal  |
DJIA       | Oversold    |  Falling |   Sell    |
NASD       | Oversold    |  Falling |   Sell    |
S&P 500    | Oversold    |  Falling |   Sell    |
Rus 2000   | Oversold    |  Falling |   Sell    |
Semis      | Oversold    |  Falling |   Sell    |
Biotech    | AP OS       |  Falling |   Sell    |
Internet   | Oversold    |  Falling |   Sell    |
Networking | Oversold    |  Falling |   Sell    |
Software   | Oversold    |  Falling |   Sell    |
Banking    | Oversold    |  Falling |   Sell    |
Retail     | Oversold    |  Falling |   Sell    |
Drugs      | Oversold    |  Falling |   Buy     |
             AP OB = Approaching Overbought
             AP OS = Approaching Oversold
******************************************************************


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

The Merits of A Disciplined Trading Plan
By Mark Phillips

Never in my trading career have I seen market conditions that
more clearly demonstrate the need to have and follow a concrete
trading plan.  After 4 days of trading suspension following last
week's terrorist attack, it was a foregone conclusion that we
would get both a drop in the broad markets (led by Insurance,
Airline and Financial stocks) and a spike in volatility, as
measured by the VIX.  Sure enough, the VIX spiked to 47.70 at
the open this morning before declining slightly and holding in
the 44-46 range throughout the day.

With the wild and wooly markets that confronted us on Monday,
any trader that attempted to play the moves without a
well-considered plan were setting themselves up for failure.
Rather than my usual fare of providing a discussion of
profitable trading strategies or useful technical indicators, I
want to take our time together to show interested readers how
they could have avoided dangerous trading practices (although
they may have worked fine 2 short weeks ago) and possibly found
attractive trades with manageable risk.  I realize that this
might have been more useful prior to Monday's open, but from the
recent series of Special Reports, you can see there just wasn't
space to fit it in.  So, look at this article as an educational
piece to file away for the next time (possibly tomorrow) you are
confronted with volatile and unpredictable markets.

Protecting capital is always more important than making money,
so I want to focus on the dangers presented by today's market
conditions.  Towards the end of the article, I'll give a couple
pointers on how interested traders might learn about crafting
positions that could allow them to profit, without assuming
undue risk.  So let's go, shall we?

We've heard time and again that buying time when volatility is
extremely high is risky, but let's see if we can quantify that
level of risk.  Rather than focus on any specific equities
today, I want to use the S&P100 or OEX index for our examples.
It is the instrument most closely related to the VIX, and is a
good broad-based measure of the market.  Without taking sides,
I'm going to look at how an individual trader might have traded
options on the OEX, either with a bullish or bearish bias.

Although it clearly had little bearing on today's trading
action, here is the daily chart of the OEX as of last Monday's
close, prior to last week's disaster.



Clearly the bounce last Monday and the technical chart prior to
today's opening bell was useless in determining near-term
direction or support/resistance levels.  Anyone looking to trade
today's market action needed to trade the action as it developed.
Day-trading skills were those that would be useful, and we all
know that is a higher-risk approach than many of us are willing
to undertake.  Let's look at the day's trading activity and see
what opportunities nimble day-traders might have pursued, along
with the likely outcome.



The free-fall that ensued at the opening bell came to a
temporary end shortly after 10am ET, very close to the time at
which it was announced that all stocks were open for trading.
Trader's that piled into puts at that point would have likely
been filled at the high of the day, as the oversold bounce
began shortly thereafter.  On the other hand, those looking to
game the bounce could have jumped into calls shortly after 10am,
and they could have ridden the OEX up to the 540 level before
the buyers gave up and let gravity take hold again.  At that
point it was the put players' chance to shine again, as they
could have ridden the OEX down for a retest of the morning's
lows near 528.

So, that's the range of the OEX for the day with a couple of
inflection points.  Could we have reasonably made money on these
moves?  To find out, let's look at the intraday charts of the
OCT 530 Calls and Puts.



Let's look at the calls first.  While there was a single
contract that traded at $21 shortly after 10am, this happened
before the 5-minute chart of the OEX gave us even the slightest
indication of a buy signal.  We would reasonably have been
relegated to a call entry in the $27-28 level before a quick
move to $31.  That was all she wrote and you can see how quickly
the premiums began to deflate.  Welcome to the world of
volatility!  Eternal optimists might argue that they could have
grabbed the low at $26 (C1) and exited at the high of $31 (C2),
but I think that is rather unrealistic.  Trying to trade contrary
to the prevailing trend in a highly volatile market was not a
winning approach today.  The likely outcome for any that
attempted to game the bounce was buying near the day's highs and
holding on for a meaningful afternoon rally as premium evaporated
from their calls, ending the day below $24 (C3).

So if calls weren't the winning game today, then put players must
have made out like bandits, right?  Not necessarily!  Looking at
the right-hand chart above, optimists might argue the they could
have bought near $21 (P1) and exited near $29 (P2) for a solid
profit.  If so, then they are far better traders than I, and they
should be writing this column owing to their superior skills in
the trenches.  The likely outcome of trading puts today would
have been to buy in the $26-28 range and watch those premiums
deflate throughout the day, ending the session with the option
priced near $23 (P3) for a loss (at least on paper).

Once again, as volatility compressed somewhat throughout the
trading day, traders that just bought puts or calls would have
likely been faced with a loss.  And that is with moves on the
OEX of 8-12 points -- a range that would present significant
profits under more normal market conditions.

While simple Put and Call players would have clearly been taken
to the cleaners for trying to game the short-term moves today,
it doesn't mean that there weren't winning strategies that could
be applied.  In high volatility markets, selling time can be
quite profitable -- Credit Spreads, anyone?  As with any
strategy, dynamic and volatile market conditions are not the
time to learn a new trading approach.  Those that are
comfortable and experienced with spread trading could have
applied those skills in today's market, with far less risk than
just buying and selling puts or calls.  Another approach that
could have been taken would be to trade the S&P E-mini contract.
It is liquid and tradable, without any volatility effects.
Again...without a comfort and experience level in place prior
to today's opening bell, swimming in this pool would have been
highly dangerous.

In the past, numerous articles have been penned on various
spread-trading strategies and these are all stored for posterity
in the Options101 and Trader's Corner archives.  I would
encourage interested traders to take the time to read or re-read
those articles.  Now that you can see the inherent dangers of
our current market conditions, spreads may start to look more
attractive.

Austin Passamonte (over on our sister-site IndexSkybox.com)
recently did a great job of comparing and contrasting trading
of OEX options or trading the E-mini contract.  If you are
interested in trading the indices without being subjected to
the gyrations of volatility, I would highly recommend pointing
your mouse to the IndexSkybox site and reviewing those articles.
Who knows, you might find something you want to add into your
trader's toolbox.

So what's the point?  Education and discipline.  In a dynamic
market like we saw today (and are likely to see tomorrow), we
need to know what our plan is (along with the likely outcome) so
that we can quantify both the reward and the risk.  If you don't
have a strategy in your toolbox that you know from personal
experience (either paper trading or live market action), your
best approach may be to wait on the sidelines for more favorable
conditions.

We can't turn back the hands of time, so there is no way to go
back to Monday's trading action and ask for a "Do Over".
Besides, if I could go back in time, it wouldn't be to change
anything so trivial as my actions within the daily circus we know
as the equity and options markets.  Since time only moves in one
direction, we can only learn from our experiences and improve
over time.  Hopefully this little exercise will allow you to
expand your horizons, seeing clearly the dangers contained in
volatile markets.

Trade only when it is profitable to do so!

Mark
Contact Support


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


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

AMR - AMR Corp. $18.00 -11.70 (-11.70 this week)

AMR is engaged in the airline industry through its principal
subsidiary, American Airlines.  American provides scheduled jet
service to more than 169 destinations throughout North America,
the Caribbean, Latin America, Europe and the Pacific.

There's no doubt that heightened security measures will weigh
heavily on the airlines.  Obviously, the loss of business last
week will, too.  In fact, industry analysts estimate that the
airline business lost $300 million per day during the shutdown
last week.  And, it remains to be seen how future airline travel
will be impacted by the terrorist attacks.  The market did a
pretty good job of discounting the aforementioned variables into
the share prices of major carriers Monday.  But the market may
have overdone it.  Some airlines publicly stated the threat of
bankruptcy and/or insolvency over the weekend, which may have
exacerbated the selling Monday.  Whether it's right or not, the
U.S. government will not allow the airline industry to fail; a
government-backed bailout is imminent.  Starting Tuesday, airline
officials will be meeting with government leaders to work on a
relief package.  The government could do many things to save the
airlines, including taking over security operations, reimbursing
various expenses, and even suspending certain taxes.  Whatever
form government help takes remains to be seen, and we could hear
of the details as early as this week.  But, help is imminent, and
that could very well lead to a nice pop in shares of the
financially strongest carriers.  AMR is one such carrier, and its
stock stabilized in the latter-half of trading Monday, following
its early morning panic sell-off.  The stock held right around
the $18 level going into the close, and bullish traders looking
to enter this play might look for a lift from that level as early
as Tuesday morning.  Make no mistake about it, however, this play
is certainly aggressive and perhaps speculative.  Only those with
the appropriate risk disposition should consider gaming this play.
Furthermore, there are likely to be a lot of gaps in this play
as news filters from Washington concerning the terms of the
forthcoming government aid.  As such, bullish traders should be
careful in chasing the stock higher during any strength.  In
terms of entry points, entries at current levels are possible;
those who prefer momentum-based entries might look for an
advance above the $19 level.  Calls with higher deltas are the
preferred medium in this play.  But because of the stock's
precipitous drop Monday, there aren't any strikes currently
below $20.  Bullish traders will want to look for new strikes as
early as Tuesday, and should wait for open interest to build.
Our stop is in place at the $16 level initially, which is right
around AMR's intraday low Monday.

BUY CALL OCT-25 AMR-JE OI=0 at $0.75 SL=0.25  Wait for OI!!
BUY CALL NOV-20 AMR-KD OI=0 at $2.35 SL=1.25  Volume of 561
BUY CALL JAN-25 AMR-AE OI=0 at $1.35 SL=0.75  Volume of 177

Average Daily Volume = 823 K



MO - Phillip Morris $48.90 +0.75 (+0.75 this week)

Phillip Morris is a holding company whose principal wholly
owned subsidiaries, Phillip Morris Inc., Phillip Morris
International, Kraft Foods, and Miller Brewing Company, are
engaged in the manufacture and sale of various consumer
products.

We have two principal premises behind this play.  First,
Phillip Morris, by the very nature of its businesses, is a
defensive play.  As the above company description entails,
the company is engaged primarily in the food, tobacco, and
alcohol beverage businesses.  Each of these business lines
are relatively immune from the economy.  The second, and
perhaps primary premise, behind this play is the company's
dividend.  Currently, Big MO's $2.12 annual dividend yields
a little over 4 percent.  That is significant because the
Fed lowered interest rates for the eight time this year
Monday morning.  The Fed's cut early Monday took rates down
to 3 percent.  That cut, in turn, will take interest rate
bearing accounts, such as savings accounts and CDs, ever
lower.  As an alternative to interest bearing accounts
(Read: Cash), capital will make its way into stocks with
high and relatively safe dividend yields.  Phillip Morris'
dividend is safe and its stock could see some significant
appreciation over the coming weeks as capital is put to
work in high yielding stocks.  Furthermore, the Fed indicated
that additional rate cuts lie ahead, which will obviously
add to the attractiveness of MO's dividend.  The lower rates
go, the better MO's yield looks.  In terms of new entry points,
bullish traders might want to look for a low volume pullback
before entering new plays, following Monday's big reversal.
A retracement down around the $48 to $48.50 area may provide
a favorable entry point.  Then again, the stock could continue
higher, which would allow for momentum traders to enter new
plays on a move past the $49.50 level.  However, be cognizant
for the possibility of resistance forming around the $50
level.  That said, bullish traders should be patient in this
play.  We'd like to cover MO for an extended period of time
because we believe it has the potential to work higher over
the coming weeks, ahead of the Fed's next meeting in October.
Stops are initially in place at the $46.50 level.

BUY CALL OCT-45 MO-JI OI=0 at $5.10 SL=3.75  Volume of 16574
BUY CALL OCT-50*MO-JJ OI=0 at $1.85 SL=1.00  Volume of  1819
BUY CALL DEC-45 MO-LI OI=0 at $6.40 SL=4.75  Volume of    18
BUY CALL DEC-50 MO-LJ OI=0 at $3.20 SL=1.75  Volume of   253

Average Daily Volume = 5.89 mln



***********************************************************
Stop-Loss Adjustments
***********************************************************

Option Investor will continually address market conditions
over the coming trading days in order to implement new stops
on current Call and Put plays.  However, through Monday's
session, Option Investor has maintained its stance on holding
no stops for current plays.

***********************************************************
DROPS
***********************************************************

calls
^^^^^
No Dropped Calls for Monday


puts
^^^^
No Dropped Puts for Monday


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Anything else is too slow!

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


**********************
PLAY OF THE DAY - CALL
**********************

BGEN - Biogen, Inc. $57.91 -2.40 (-2.40 this 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.

Most Recent Update

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.

Comments

There was no fundamental shift in the biotech sector in the
past week.  But, the sell-off in BGEN Monday seemed to suggest
so.  If the selling in the biotech sector was market-related
Monday, we could see a snapback rally in leaders in the group
such as BGEN.  Bullish traders can use a strong advance above the
$58 level early Tuesday to gain new entries into this biotech
play.  Conversely, a bounce from support at $57 would also
provide a favorable entry in terms of risk versus reward.

BUY CALL OCT-55 BGQ-JK OI=2715 at $6.20 SL=4.25
BUY CALL OCT-60*BGQ-JL OI=4876 at $3.50 SL=2.25
BUY CALL OCT-65 BGQ-JM OI=9792 at $1.55 SL=0.75
BUY CALL JAN-60 BGQ-AL OI=2009 at $6.90 SL=5.00

SELL PUT OCT-55 BGQ-VK OI=3772 at $2.05 SL=4.00
(See risks of selling puts in play legend)

Average Daily Volume = 3.07 mln



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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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