Option Investor

Daily Newsletter, Wednesday, 09/19/2001

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The Option Investor Newsletter                Wednesday 09-19-2001
Copyright 2001, All rights reserved.                        1 of 1
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MARKET WRAP  (view in courier font for table alignment)
        9-19-2001          High      Low     Volume Advance/Decline
DJIA     8759.13 -144.27  8945.47  8480.21 1.67 bln   1228/1926 
NASDAQ   1527.80 - 27.28  1568.22  1451.31 1.83 bln   1440/2300
S&P 100   518.85 -  7.95   529.92   500.87   Totals   2668/4226
S&P 500  1016.10 - 16.64  1038.91   984.62
RUS 2000  503.20 -  8.46   413.44   391.38
DJ TRANS 2165.86 - 51.21  2247.68  2104.63
VIX        43.22 +  0.72    47.62    40.80
VXN        76.93 +  2.19    78.28    72.84
TRIN        0.88
Put/Call    0.67

Rejuvenating Rebound, But Will It Last?

Although the broader market averages finished in the red Wednesday,
they managed to climb well off their session lows.  The rebound
into the close was a refreshing change from the tedium that had
become the steady grind lower.  But, it remains to be seen if
Wednesday's late-day buying interest carriers over into Thursday's

Wednesday's early weakness stemmed from the realization of the
economic impact of last week's terrible events.  Although market
participants knew going into this week that business was
adversely impacted, the severity of such was the unknown.  But
the increasing number of lost jobs and earnings warnings Wednesday
morning revealed just how economically devastating last week's
attacks actually were.

The airline industry is revealing just how much financial damage
was realized last week, and how difficult it's going to be to
move forward.  Boeing (NYSE:BA), who's seen its shares drop some
25 percent following the attacks, reported Wednesday that it
would cut up to 30,000 jobs from its commercial airline division.
The company will reportedly start issuing pink slips in the next
few weeks, with the majority of layoffs to begin in about two
months, lasting through the end of 2002.  A Boeing spokesman said
the layoffs would occur across every level of employment,
geographic location, and airplane models.  But to reiterate, the
layoffs will be concentrated in Boeing's commercial airline
division, which currently employs about 94,000.

On top of Boeing's cuts, United Airlines (NYSE:UAL) said it
plans to cut about 20,000 jobs.  To put the number in perspective,
the airline employs about 100,000 people in all!  To make matters
worse, American Airlines (NYSE:AMR) announced Wednesday evening
that it would be forced to cut at least 20,000 employees.

Counting the job cuts announced earlier this week by Continental
(NYSE:CAL) and US Airways (NYSE:U), Wednesday's announced job
cuts brought the total number to about 100,000.  That's 100,000
lost jobs at major airline-related companies!!!  These lost jobs
only add to the pain of what the United States lost last week,
and their trickle down impact on the economy will be felt for
some time to come.  Hopefully, Congress will soon pass a relief
package for the airline industry.

The negative news, however, wasn't confined to the airline
industry Wednesday.  Adobe (NASDAQ:ADBE) reported third-quarter
numbers that fell short of expectations and guided lower for
fourth-quarter expectations.  The company's results were not
related to last week's attacks.  Instead, Adobe cited weakness
in Asian markets.  Shares of Adobe lost $4 Wednesday.

Eastman Kodak (NYSE:EK), a Dow Jones Industrial Average component,
lowered its third-quarter earnings expectations Wednesday
morning.  The company did cite the adverse effects of last week's
events.  In addition, the company hinted towards announcing job
cuts in the near future.  Shares of Kodak shed $2.22.

But not all news was bad.  McDonald's (NYSE:MCD), another Dow
component, reported that its third-quarter results would come
in ahead of expectations.  The company said that it would earn
about 2 cents more than Wall Street had expected, before
accounting for currency translation.  The continued slide in the
dollar versus the yen and euro might actually raise McDonald's
earnings further for the current quarter.

But the declining dollar is a double-edged sword.  While its
a positive for those multinationals that export a great deal of
business overseas, it also implies a flight of foreign capital
out of the U.S. markets.  In fact, some of Wednesday's earlier
selling of equities could've been from foreign accounts.  It
was only when the dollar stabilized Wednesday afternoon that
the major market averages were able to rebound from their lows.
This dollar dynamic is worth monitoring insofar as short-term
traders are concerned.  While a gradual decline in the dollar
wouldn't necessarily be a bad thing, panicked selling of
dollars would cause further weakness in stocks.  The chart of
the U.S. Dollar Index below, which was retrieved through QCharts
using the symbol DX01Z, depicts its weakness in past sessions.
What the bulls don't want to see is accelerating weakness in
this index.

The mention of the price action of the U.S. dollar may be
foreign to some readers.  However, realize that is a most
important pillar of the economy.  And bonds are, too!  The yield
curve steepened Wednesday, which would normally imply an
economic rebound and the inflation that usually accompanies
growth.  But, in light of the current climate, the steepening
of the yield curve is artificial by some measures.  It would
appear that bond market participants are selling longer dated
treasuries (30-Year) in favor for the relative safety of
shorted dated treasuries.  This flight to quality has been a
thorn in the side of the Fed's interest-rate-cutting actions
this year because the short-end of the yield curve continues
dropping below the rate of Fed Funds.  The flight to short-term
treasuries has also weighed heavily on stocks, and will
continue to do so as long as market participants shun the risk
that is currently associated with equities.

There's a reason for my detailing the dollar and bonds as it
concerns Option Investor readers.  It is my belief that
Wednesday's late day rally was no more than short covering
induced, and I'll try to reinforce that notion below.  We're
sure to witness additional short covering rallies between now
and whenever the bear market is finally over.  They will be
tradable just as Wednesday's was.  But the critical step in
attempting to trade from the bullish side is timing.  By
monitoring the price action of the dollar and bond market,
traders will be better prepared to attempt gaming the long

There's no real catalyst, over the short-term, for the "real
buyers" in the market to be buying.  And I define "real buyers"
as the institutional types, such as mutual funds, hedge funds,
and pensions.  There are, however, an overwhelming number of
sellers in the market, such as shorts, insurance firms raising
cash, foreign accounts exiting U.S. markets, margin calls from
brokers, and mutual funds meeting redemptions.  That leaves
shorts covering their bearish bets as the only en masse buyers
in the market.  But the shorts won't cover until after the
selling has subsided and their scared into doing so.  (It's my
opinion that that's what happened Wednesday.)

This is complicated, I know, but I'm trying to give my readers
some value.  Try to keep it in the simplest terms of supply and
demand.  If foreign accounts are selling, as measured by a weak
dollar, there's less of a chance for a rally in stocks.  And a
continued exodus to the short-end of the yield curve leaves less
demand for stocks, too.  But if the dollar is stable and bonds
are, too, the shorts will be on alert and more likely to cover.

I think it was nothing more than short covering Wednesday that
carried the broader market averages higher.  By any measure,
the Nasdaq, Dow, and S&P were greatly oversold.  Oversold doesn't
necessitate a rally, but it can put bullish traders on alert
to possible upside.  It's detecting the shift in supply and
demand (Read: Timing) that is the tricky part, and that's where
the dollar and bond market come in.

The reason I think Wednesday's rally was only short covering was
because of its velocity.  The 2-minute chart of the Nasdaq-100
(NDX.X) below reveals a sharp, short rally in the final
hour-and-half of trading.  And let it be known that "real buyers"
DO NOT buy stocks this way!  They don't chase 'em higher!  They
sit on the bid, absorb supply, and slowly, steadily carry markets

If Wednesday's reversal was no more than short covering-related
buying, then the lift was somewhat artificial.  That's not to
say a short covering rally can't last for a few days.  In fact,
we may see some follow-through going into Thursday's session,
and possibly Friday morning.  But I don't think that many traders
will want to hold bullish positions over the weekend, fearing
military action in Afghanistan.  Having said that, I think we'll
get another solid entry point into put plays sometime between
Thursday morning and Friday afternoon.  My sense is that
Wednesday's lows will eventually be taken out.

On a final note, I send my prayers to those brave Americans who
are on their way to defend our freedom.  May you return home

Eric Utley
Option Investor

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By Jeffrey Canavan

A rash of earnings warnings coupled with economic and political
uncertainty sent the Dow tumbling before a late-day rally took
hold.  A 144-point drop may not look good, but considering the
Dow was down over 420 points, it was a small victory for bulls.

Adobe's (ADBE) $4 drop contributed to a 2.86% decline in the
software sector after the company gave less than inspiring
guidance for the fourth quarter. Take Two Interactive Software
(TTWO) also warned of lower fourth quarter revenues due to
changes that would need to be made to the content of some of its
more violent upcoming video games.  Electronic Arts (ERTS) also
got caught up in the selling, losing 5.89%.  Symantec was the one
bright spot, up 3.74%, on the company's detection and repair
solutions for the Nimda virus.

Semiconductor Index Daily Chart

Software stocks had a rough day, but semiconductors were the
worst performing tech sector of the day, closing down 3.76%.
Rambus (RMBS) and Motorola (MOT) posted small gains, but $2 drops
by KLA-Tencor (KLAC), Novellus (NVLS), and Applied Materials
(AMAT) dragged the sector lower.  The sector was able to bounce
off a fitted 61.8% retracement at 389, and move higher to close
at 418.  Halfway between two retracement levels, the SOX looks
like a 50/50 proposition right now.

Wireless Telecom Index Daily Chart

But not all was glum in techland, anything that didn't require a
wire did well.  The Wireless Telecom Index (YLS) posted a 2.24%
gain.  Handset makers, service providers, and chipmakers all did
well, but will they continue to do so?  While wireless stocks
haven't fallen with the rest of the market, they have just
consolidated between 80 and 82 for the past five days.  If the
rest of the market rebounds, these stocks might get left behind.

Oil and oil service stocks fell again today, losing 4.13% and
7.74% respectively.  A possible decrease in demand due to a
slowing economy continues to weigh on oil stocks.

Gold stocks finished up 0.36%.  They're not falling, but they're
not posting consecutive gains either.

A snapback rally should see beaten down sectors do well, but
until then some of the boring Dow stocks like Procter and Gamble,
Alcoa, and Coke look like the safest long plays.

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

            Support                Close              Resistance
DJIA       | 8,650  |      | 8759 |      |      |      |   9,110|
NASD       | 1,490  |      | 1528 |      |      |      |   1,670|
S&P 500    | 1,000  | 1016 |      |      |      |      |   1,100|
Rus 2000   |   385  |      |  403 |      |      |      |     455|
Semis      |   385  |      |  419 |      |      |      |     538|
Biotech    |   405  |      |      |  438 |      |      |     475|
Internet   |    90  |      |   96 |      |      |      |     105|
Networking |   217  |  225 |      |      |      |      |     260|
Software   |   100  |      |      |  124 |      |      |     159|
Banking    |   565  |      |      |      |  583 |      |     595|
Retail     |   695  |      |      |  725 |      |      |     765|
Drugs      |   365  |      |  374 |      |      |      |     410|

Support Alerts: Rus 2000, Semis, Software, Biotech, Biotechs
Resistance Alerts:
           |   Long    |   Short   |   Strength    | Relative   |
           |   Term    |   Term    |     of        | Strength   |
           |   Trend   |   Trend   |    Trend      | vs S&P 500 |
DJIA       |  Bearish  |  Bearish  |    Strong     |  Negative  |
NASD       |  Bearish  |  Bearish  |    Strong     |  Negative  |
S&P 500    |  Bearish  |  Bearish  |    Strong     |    --      |
Rus 2000   |  Bearish  |  Bearish  |    Strong     |  Negative  |
Semis      |  Bearish  |  Bearish  | Strengthening |  Negative  |
Biotech    |  Bearish  |  Bearish  |     Weak      |  Negative  |
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      |  Bearish  |  Bearish  |     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    | Oversold    |  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 |   Sell    |
             AP OB = Approaching Overbought
             AP OS = Approaching Oversold



Now What?
By Mark Phillips
Contact Support

That is the question that is on every investors' mind after the
stunning events of the past 9 days.  The unprecedented terrorism
on U.S. soil has conclusively removed the possibility of a
2nd-half recovery from the radar screen and we are now asking
ourselves how low this market can go.  And when is it likely to
recover?  Sure it is oversold, but that doesn't mean that it has
to recover anytime soon.  I hope that it does, but given the
shock that our economic system has taken recently, many of the
factors that we were hoping for to propel us down the road to
recovery have been wiped off the map.  Consumer Confidence has
been decimated by recent events -- can consumer spending be far
behind?  What about the housing market; will it start to falter
now that investor and consumer confidence has been shaken?

As bad as things look right now, we are just about to enter
earnings warning season.  With the economic shutdown that
occurred last week, it seems a foregone conclusion that there
are going to be some ugly admissions coming out in the next few
weeks.  Are those likely warnings already factored into the
decline we have seen this week, or will it inflict more damage
to our already fragile markets?

As trading resumed this week, we saw the VIX charge above 47 on
both Monday and again today before declining back to today's
closing value (43.22), all while the markets have continued to
decline.  Today's afternoon short-covering rally was good to
see, but a look at the closing numbers shows that all the major
indices closed in negative territory again.  Volume was heavy,
which is encouraging, but was it capitulation?  Was there enough
fear at the lows today to give us more than a quick bounce?

Most of these are rhetorical questions and to be honest, your
guess is as good as mine.  But my job is to try to provide
actionable trading/investing advice so that you can make better
decisions and eventually profit from those decisions.  So let me
do my best to prognosticate.  We all know that 75-80% of a
stock's movements are dictated by the broader market trend and
right now that is clearly down...and steeply too!  So let's see
where we might expect the market to find some life before we
start blindly chasing our favorite play.

I have come to view the S&P500 (SPX.X) as the best measure of
the broad market, so I dredged up a monthly chart to see what
the long-term picture has to offer.  The good news is that the
end may be in sight.  The bad news is that it could be well
below current levels, meaning the bears are still in control.  I
applied some of the technical tools that I have discussed both
here and in my Monday columns, and I think this chart provides a
vivid example of the value of looking at these long-term charts
from time to time.

I started with a Fibonacci retracement, originating at the 1990
lows (not shown) and culminating at the highs just over a year
ago.  The 38% retracement level has been violated big time with
the recent market decline, leaving the next likely support level
at the 50% retracement, at 910.  This lines up nicely with
support between 900-950, dating from the latter half of 1997 and
late 1998.  Adding credence to the theory that there is still
more downside in the SPX is the Stochastics oscillator, which is
once again on the down-swing with the fast line now threatening
to break to its lowest level in over a decade.  Barring some
unseen positive factor, it seems inevitable that the oscillator
will enter oversold territory before finally bottoming and
allowing us to consider the possibility of a sustained recovery.

I know it's a grim picture, but I'm just trying to provide the
best advice possible for long-term investors.  Right now, the
best play I can conjure up is to hang onto that cash until we
see definitive signs of a bottom forming.  No amount of
patriotic sentiment or short-covering can stop the market from
going where it wants to go.  The disaster of last week just
hastened the current leg of this bear market.

Hindsight being 20-20, I noticed a couple of interesting things
on the SPX chart as highlighted below.  The bearish Stochastics
divergence made itself known as early as the beginning of 1999
and gave us a strong confirmation as the markets began their
decline after Labor Day a year ago.  One other bearish
confirmation signal was the drop November 2000 drop of the SPX
under its 20-month moving average (near 1400).  The 20-mma then
became resistance, before the decline picked up steam.  That
violation was a powerful signal that the bear had its claws
extended.  It was at that point that I should have changed my
focus from LEAP Calls to LEAP Puts.  I offer my sincere
apologies for missing the boat on that one.  I can honestly say
it is new to me like it is to many of you.  We haven't had a
protracted bear market like this since well before I entered
the financial markets, so it has been quite a learning
experience.  I am older and definitely much wiser for the

The reason I spent so much time on this tonight is not to
highlight a trade to take in the next week or month.  My purpose
is one of much greater importance and intended to be applied over
a much longer timeframe.  The conditions seen on this chart will
likely repeat in our trading careers -- more than once for many
of us.  This is a learning experience of monumental proportions.
Those that are able to internalize the lessons learned will be
prepared to profit handsomely when these basic conditions repeat,
while simultaneously ignoring the noise that emanates from the
self-proclaimed experts in the media.

It won't be in the next 5 years and I would be surprised if it
occurs in less than 10.  It will take time (lots of it) for the
pain of the recent decline to fade from investors' minds and
allow them to speculate wildly on the next "Tulip Bulb Craze",
but it will happen.  Human behavior repeats and it is our job
to recognize the repeating patterns and profit from them.

But that is for a time far in the future.  Closer to the here
and now, our beloved market will find a bottom and begin to find
its way down the road to recovery.  It won't be a rocket ride,
but when valuations have come down to reasonable levels and
signs of economic recovery can be clearly seen, LEAP Calls will
once again shine as the stellar investment vehicle they were
designed to be.

Despite my bearish diatribe, I think there are still attractive
long-term bullish plays.  But we have to be ever-mindful of
grabbing solid entry points and must nibble on those
opportunities, not gobble them up with blind bullish enthusiasm.
The short-covering rally this afternoon could be the opening
volley in that bottoming process, but we need to see some
serious follow-through in the days and weeks ahead to confirm
that hypothesis.

Tonight I'm giving the axe to our Walt Disney (NYSE:DIS) play
due to the dramatic change in the fundamentals for the whole
entertainment sector.  While we could place a stop just under
the lows of this week, with consumers less willing to
frivolously spend money, I would look at this play as unlikely
to recover in a timely manner.

On the brighter side, I have been encouraged enough by the
bullish comments coming out of the Wireless sector to step into
the Sprint PCS (NYSE:PCS) play.  Nokia (NYSE:NOK) got the ball
rolling earlier in the week with positive comments and PCS
cooperated by repeatedly bouncing from just above $22, the upper
end of our target zone.

Other than those two plays, we are in a holding pattern on the
rest of the Watch List and Portfolio.  Philip Morris (NYSE:MO)
and Clorox (NYSE:CLX) are holding their own, while Global
Marine (NYSE:GLM) took out our $14 stop and moved to the drop
list.  This is due to bearish sentiment in the Oil and Oil
Services sector on the heels of the changes to the political
picture in the Middle East.  Weakness has continued to plague
our Calpine (NYSE:CPN) and Enron (NYSE:ENE) Watch List plays
causing them to continue their declines.  ENE is now testing
the $25-26 level, but I'm not in a hurry to take a position.
The change in the fundamental picture could easily drive the
stock down to $24 or even the $20 area before buyers begin to
nibble again.  Similarly, CPN fell to the $21-22 area before
bouncing strongly at the end of the day.  A renewed bounce from
the $22-23 area could provide solid entries, although I would
not be surprised to see a drop into the $18-20 range before the
slide is over.  The main reason I have left both these plays on
the Watch List is that I feel the selling will be overdone,
providing us with attractive entries into plays that should
shine once the current economic uncertainty begins to clear up.

As a proxy for the broad non-technology market, General
Electric (NYSE:GE) has been hit hard over the past few days,
falling to $31, a level not seen since late 1998, before
recovering above $32 at the close of trading on Wednesday.
There seems to be a fair amount of support in the $32-33 level,
and that could provide for attractive entries, but ONLY if the
bounce comes on heavy volume.  Otherwise, I would caution
standing aside until the current volatility begins to subside
and the stock shows its willingness to observe levels of support.
Tyco International (NYSE:TYC) has been similarly punished,
falling into the middle of our target range.  Will we get an
attractive entry here?  Only time will tell, but remember the
critical importance of solid buying volume, not just one-day
short-covering.  If we don't get it, we don't want to nibble at
new positions.

Finally, we have our Drug play, Eli Lilly (NYSE:LLY) which is
showing its defensive nature by holding up rather well in the
current economic uncertainty.  While we may be looking at a good
entry point as the stock has fallen back to $74 and bounced, I
am holding off on new positions for now.  Patience is the key,
and in my opinion, it is better to miss a winning trade than
take an entry prematurely and suffer a loss.  Our newest Watch
List play provides a clear reminder of just what I want to
avoid.  Gapping sharply higher at the open on Monday, the stock
has spent the rest of the week falling back to earth.  Chasing
the stock higher and entering "at any price" would have had us
filled at the high and watching our losses mount.  We'll move
our entry target up slightly, as a dip below $75 appears
unlikely after the strong upward move seen this week.  Also, we
know that gaps almost always get filled, and we have a big one
between $76-80.  Fundamentally, the stock is well positioned to
benefit from any ramp-up in military spending.  If we can get
an attractive entry, it will make a nice addition to our

Volatility as measured by the VIX is quite high and could go
higher before it heads much lower.  Our best entries will come
as the VIX declines to more reasonable levels (in the low 30's)
in conjunction with an improvement in the broad market.  Should
those events coincide with an attractive entry setup in one or
more of our Watch List plays, then I'll be more willing to open
new positions.  But until then, I'll be very reluctant to throw
my cash into the market.

I hope you found this mid-week update useful in place of my
usual educational article.  Next week, I should be able to share
my first article on the topic of LEAPS Puts and how we can use
them to profit in both up and down markets.

Best Wishes for a safe and profitable week!

Mark Phillips
Contact Support

LEAPS Portfolio

Current Open Plays


CLX    03/13/01  '03 $ 35  VUT-AG  $ 6.10  $ 8.30   36.07%  $ 38
MO     07/30/01  '03 $ 45  VPM-AI  $ 6.10  $ 8.40   37.70%  $ 47
PCS    09/17/01  '03 $ 25  VVH-AE  $ 5.00  $ 6.10   22.00%  $21.50
                 '04 $ 25  LVH-AE  $ 7.10  $ 8.30   16.90%  $21.50

LEAPS Watchlist

Current Possibles


CPN    07/08/01  $22-23        JAN-2003 $ 25  OLB-AE
                            CC JAN-2003 $ 25  OLB-AE
                               JAN-2004 $ 30  LZC-AF
                            CC JAN-2004 $ 30  LZC-AF
ENE    07/29/01  $24           JAN-2003 $ 25  VEN-AE
                            CC JAN-2003 $ 20  OFE-AD
                               JAN-2004 $ 25  LYN-AE
                            CC JAN-2004 $ 20  LYN-AD
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  $32-33        JAN-2003 $ 40  VGE-AH
                            CC JAN-2003 $ 30  VGE-AF
                               JAN-2004 $ 40  LGR-AH
                            CC JAN-2004 $ 30  LGR-AF
GD     09/16/01  $76-78        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

PCS - Sprint PCS $23.20

It is hard to find a stock in any sector that has held up better
than PCS recently.  Even with the worsening recession and the
devastating effects of last week's tragedy, PCS has held support
near $22 and has spent the past 4 trading days recovering from
6-month ascending trendline.  That's right...the stock is still
posting higher lows in the face of economic and political
uncertainty.  Ironically, last week's tragedy has many consumers
that didn't think about it before, considering the need to have
a cell phone.  Stocks throughout the Wireless sector have been
showing signs of strength all week, but none have shown the
resilience or consistent buying volume of PCS.  We've been
watching the stock for some time now, as the weekly Stochastics
oscillator has been trying to enter a new uptrend.  And with the
strong surge seen on the daily chart this week, it looks like
the move may be underway.  With the stock's refusal to sell off
with the broad markets on Monday, we took our position, and from
the action over the past 2 days, it looks like it was a good
move.  Particularly encouraging is the strong buying volume
(more than double the ADV) seen on Wednesday as PCS powered
through its 20-dma (currently $24).  As good as things look
right now, we must keep in mind that the markets are still very
unsettled and we must protect our position with a tight stop.
We are initially placing it at $21.50, just below the stock's
recent lows and the ascending trendline.  Those that are
looking to initiate a new position will want to look for an
intraday dip into the $23-24 range that is met by solid buying
support.  The stock appears positioned to challenge its recent
highs at $26, and then $27.  If the bulls can clear those
levels, we could see PCS charge into the $30-32 range in the
months ahead.

BUY LEAP JAN-2003 $25.00 VVH-AE $5.00
BUY LEAP JAN-2004 $25.00 LVH-AE $7.10

New Watchlist Plays



DIS $18.50 The events of the past 9 days have had a devastating
effect on consumer confidence and their willingness to spend
money on entertainment.  DIS has taken a major hit, and in
Wednesday's trading, the stock fell below $17 for the first time
since early 1995.  While we could set a stop below the day's
lows and wait for the recovery, I think the stock will be hard
pressed to stage much of a recovery in the next several months.
One particular development that really has me concerned is the
way the company is going about its share-repurchase program.
DIS is selling $1 billion of bonds to raise cash so that they
can buy their own stock.  That just doesn't seem too smart to
me, and it will clearly have a depressive effect on the stock
as the company struggles to recover from the inevitable drop in
revenue.  I feel more comfortable taking the loss and finding a
more attractive play in the days and weeks ahead.  Use any
strength in the days ahead to exit open positions, but not to
initiate new plays

GLM $13.20 Contrary to what we would typically expect with
increased tensions in the Middle East, Crude Oil and stocks in
the Oil sector have come under strong selling pressure in recent
days.  Anticipation that OPEC will continue to keep supplies
flowing, while domestic demand for the black gold will fall
sharply has the entire sector feeling the attack of the bear.
Our $14 stop finally got smashed on Wednesday, and while we are
tempted to hang on for a sustained bounce, we will stick with
our discipline and exit the play tonight.  The fundamental
picture has clearly made a turn for the worse, and appears
unlikely to reverse any time soon.


CMVT - Comverse Technology $24.25 +1.58 (+2.26 this week)

Comverse Technology designs, develops, manufactures, markets
and supports computer and telecommunications systems and
software for multimedia communications and information
processing applications.

We're looking to take advantage of any further strength in the
Nasdaq with this play.  It is therefore predicated on a
follow-through of Wednesday's rebound into Thursday's session.
CMVT was one of the first stocks in the Nasdaq to turn into
positive territory Wednesday.  Following its dip down to the
$21.50 level earlier in the day, CMVT staged an impressive
rally going into the close.  The stock has some relative
strength working for it currently and we're looking to hop onto
the momentum train to the upside.  But we need to make it clear
that the Nasdaq needs to continue advancing into Thursday's
session for this play to be a success.  While we'd like to
maintain coverage for a longer time period, this could turn
out to be only a short-term play if the Nasdaq doesn't rebound
from its current levels.  In terms of execution, new positions
can be taken at current levels early Thursday, depending upon
market conditions.  If the Nasdaq advances out of the gate,
confirm direction in the Networking Sector Index (NWX.X) and
consider entering new positions in CMVT at current levels.  If,
however, the Nasdaq retraces some of its late day advance
Wednesday before heading higher, look for CMVT to pullback into
support around the $23.00 area.  To the upside, the stock will
face congestion starting around the $25.50 area up to $26.50.
That general area could provide an exit point for a very short
term trader if they gain a favorable entry into the play.
Our stop is initially in place at $21.50, but traders should
use their own discretion when determining their own unique

BUY CALL OCT-20*CQV-JD OI= 37 at $5.10 SL=3.75
BUY CALL OCT-22 CQV-JX OI= 61 at $3.40 SL=2.25
BUY CALL OCT-25 CQV-JE OI=771 at $2.10 SL=1.25
BUY CALL JAN-25 CQV-AE OI=866 at $4.30 SL=3.00

Average Daily Volume = 6.07 mln


QQQ  - call
Adjust from $00.00 up to $28.25

ATK  - call
Adjust from $00.00 up to $74.25

AMR  - call
Adjust from $16.00 up to $17.50

HDI  - put
Adjust from $00.00 to $42.00

P    - put
Adjust from $57.50 down to $56.00

CHV  - put
Adjust from $89.50 down to $88.00

NVLS - put
Adjust from $34.75 down to $34.00

SEBL  - put
Adjust from $18.50 down to $18.00

CHKP - put
Adjust from $34.00 down to $31.00


IMCL $56.60 +6.59 (+2.87) Bristol Myers announced that it would
pay $1 billion for a 20 percent stake of IMCL.  That news sent
shares screaming higher.  For those that entered on the dip
Tuesday, Wednesday's gains provided an excellent exit point.
We're dropping coverage in light of Wednesday's big rally.
Traders with open positions can use any further strength in
Thursday's session to exit plays.


No Dropped Puts for Wednesday

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QQQ - Nasdaq-100 $29.97 -0.53 (-4.13 this 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.

Most Recent Update

We're still waiting for the QQQs to come to us.  The contract has
yet to fall as low as the $29 level this week, but it could see
that level in the coming sessions.  To recall, we'd like to see
the QQQs trade down around the $29 level, which would have us on
bullish alert.  From there, a subsequent advance back above the
$30 level would offer an action point.  If the aforementioned
scenario unfolds this week, bullish traders would be well-served
to monitor the big dogs of the Nasdaq-100 in MSFT, INTC, QCOM,
CSCO, ORCL, and DELL.  The individual issues can offer insight
into the QQQs, and can often serve as leading indicators.


We got our entry into the QQQs Wednesday.  It's now a matter of
managing the trade and risk.  As oversold as the Nasdaq is, the
QQQs could have some significant upside from current levels if
the buyers continue carrying stocks higher.  Exit points will
vary with risk preference and trading styles.  Initially, we had
been targeting the $34.50 area, but that may be too high in
light of the QQQs further slide.  Those with shorter time
horizons might look for an exit area around $31.50 to $32.  Above,
the 10-dma at $33.70 may prove to be formidable resistance.

BUY CALL OCT-29 QAV-JC OI= 1060 at $3.00 SL=2.00
BUY CALL OCT-30*QAV-JD OI= 6420 at $2.45 SL=1.75
BUY CALL OCT-31 QAV-JE OI= 2539 at $1.95 SL=1.25
BUY CALL OCT-32 QAV-JF OI=12650 at $1.55 SL=1.00
BUY CALL OCT-33 QAV-JG OI=14869 at $1.20 SL=0.75

Average Daily Volume = 55.0 mln


Renewed Fear And Anxiety In The Equity Markets
By Ray Cummins

Stocks slumped to new lows today in the third consecutive session
of selling after last week's terrorist attack on the United States.
The broader market sank amid renewed worries of a global recession
after the Federal Reserve said the economy remained sluggish, even
before the recent tragedy and may indeed be headed for a recession.

Option Trading Mechanics: The Possibility of Early Assignment

With the recent downturn in share values, a number of readers have
asked about the likelihood of early assignment in "naked" option
positions.  In fact, one of the most common questions we receive
from new subscribers concerns the potential for early assignment
of "in-the-money" options.

In most cases, the probability of being "exercised" is relatively
low and only when you are short in an option position with no
extrinsic value does the likelihood of an unwanted assignment
become a concern.  However, one of the more popular strategies
used by aggressive traders; selling "deep-in-the-money" Puts,
involves a higher risk of assignment and there are some facts
you should know before participating in this technique.

When you sell an option, as an opening transaction, you are the
Seller or Writer.  Writers are obligated to buy the underlying
interest at the strike price (with a Put) or sell the underlying
interest at the strike price (with a Call) if the contract is
exercised.  With American Style options, the instrument can be
exercised on any trading day prior to the expiry date.  The last
day to exercise an American-style option is usually the third
Friday of the month in which the contract expires (expiration
Friday).  The option exchanges have a cut-off time of 5:30 P.M.,
Eastern Standard Time, for receiving an exercise notice.  However,
most brokerage firms have an earlier cut-off time that may affect
when you receive a notice of assignment.

When an option writer receives an exercise notice that obligates
him to buy the underlying security at the specified strike price,
he can simply buy the stock or initiate an offsetting transaction
such as buying another ITM Put (and eventually exercising it) or
shorting the underlying.  Due to pricing disparities, there may
be an advantage to one of these (or other) alternate "covering"
strategies.  As expiration approaches and the sold (short) Puts
become further in-the-money, you run a higher risk of having the
stock put to you.  It can, and sometimes does, happen prior to
expiration, but the actual percentage of early assignments is
statistically very low.  If there is a strong move in the stock
in the right direction, you might consider repurchasing the Puts,
especially with deep-ITM positions, because they have relatively
low Delta (great for sold Puts) and perform almost as well as a
position in the stock.  Of course, that also frees your portfolio
collateral for additional plays with greater (relative) profit
potential and eliminates the risk of early assignment.  Also, as
expiration approaches, you may consider rolling the position out
to a future date, where there is a lower risk of assignment due
to the additional time premium (extrinsic value) in the option.
The term "rolling" means that an existing option position is
liquidated and a similar position is established to replace it.
If the replacement position differs from the original position
with respect to only the exercise price, the position is said to
have been "rolled up" or "rolled down".  If the only difference
between the positions was the expiration month, you've "rolled
out" to a future position.

The Options Industry Council, a non-profit association created
to educate the investing public and brokers about the benefits
and risks of exchange-traded options, has recently distributed
some interesting facts concerning the topic of early assignment.
First, regarding the Options Clearing Corporation, the largest
clearing organization in the world for financial derivatives
instruments.  Operating under the jurisdiction of the Securities
and Exchange Commission, the OCC is the issuer and registered
clearing facility for all U.S. exchange-listed securities options.
To ensure fairness in the distribution of equity and index option
assignments, The Options Clearing Corporation utilizes a random
procedure to assign exercise notices to the accounts maintained
with OCC by each Clearing Member.  The assigned firm must then
use an exchange approved method (usually a random process or the
"first-in, first-out" method) to allocate those exercise notices
to accounts which are short the options.

With that in mind, here are some general guidelines concerning
the early assignment of short option positions:  Surprisingly,
only 10% (on average) of options end up being exercised and the
percentage hasn't varied much over the years.  That means option
exercises are not that common.  The majority of option exercises
(and the corresponding assignments) take place when the option
approaches expiration.  It usually doesn't make sense to exercise
an option which has any time premium over intrinsic value and
for most options, that doesn't occur until close to expiration.
In general terms, a Put which goes in-the-money is more likely to
be exercised than a Call (in similar circumstances) because the
trader who exercises a Put uses it to sell his shares and receive
cash.  A person exercising a Call option uses it to buy shares and
must pay cash.  Traders are more likely to exercise options when
they can receive cash sooner, as opposed to situation with Calls,
where exercise means you have to pay cash sooner.  However, the
simple fact is, there is no absolute method to predict when you
will be assigned on a short option position; it can happen any day
the market is open for trading.

Good Luck!

Summary of Previous Candidates (as of 9/18/01):

Covered Calls: (Margin not used in calculations)

Stock  Strike Strike Cost   Current   Gain   Potential
Symbol Month  Price  Basis   Price   (Loss)  Mon. Yield

GILD    SEP     50   48.06   49.05   $0.99      2.1%
TECD    SEP     40   38.67   37.01  ($1.66)     0.0%

Cubist (NASDAQ:CBST) was closed last week when the issue
broke below a recent support area near our sold strike
price.  Tech Data (NASDAQ:TECD) and Gilead (NASDAQ:GILD)
have exhibited similar technical indications and should
also be exited.

Naked Puts:

Stock  Strike Strike Cost   Current   Gain   Potential
Symbol Month  Price  Basis   Price   (Loss)  Mon. Yield

PDLI    SEP    40    39.00   44.99    $1.00     5.7%
GILD    SEP    45    44.20   49.05    $0.80     6.3%
CCMP    SEP    55    54.15   56.50    $0.85     5.6%
CCMP    SEP    55    54.40   56.50    $0.60     5.1%
CHIR    SEP    45    44.35   43.67   ($0.68)    0.0%
TECD    SEP    40    38.85   37.01   ($1.84)    0.0%

Cubist (NASDAQ:CBST) was closed last week when the issue
broke below a recent support area near our sold strike
price.  Chiron (NASDAQ:CHIR) and Tech Data (NASDAQ:TECD)
have exhibited similar traits and should also be exited.
The remaining bullish plays are on the "watch-list" and
should be closed on further weakness.  Cabot (NASDAQ:CCMP)
is at a "key" moment and should be closed if it fails to
recover at support near $55.

Previously Closed Positions: Synopsis (NASDAQ:SNPS),
Optimal Robotic (NASDAQ:OPMR), Analog Devices (NYSE:ADI).

Naked Calls:

Stock  Strike Strike Cost   Current   Gain   Potential
Symbol Month  Price  Basis   Price   (Loss)  Mon. Yield

NVDA    SEP    52.5   53.30  31.94   $1.40      6.2%

Debit Straddles:

Stock  Position    Debit  Target   Value    Gain    Status

TEVA  SEP70c/70p   $3.65  $4.40   $11.00   $7.35    Closed

The Sony (NYSE:SNE) debit straddle (SEP-$50) was closed
early at a "break-even" exit but the original position
eventually exceeded the target profit with an $8.00 profit
on $5.75 invested.

Sell Strangles (CALLS):

Stock  Strike Strike Cost   Current   Gain   Potential
Symbol Month  Price  Basis   Price   (Loss)  Mon. Yield

QCOM    SEP    70    71.25   46.37   $1.25      6.2%
NVDA    SEP    95    96.20   31.94   $1.20      6.6%
ENZN    SEP    70    71.00   50.00   $1.00      8.9%

Sell Strangles (PUTS):

Stock  Strike Strike Cost   Current   Gain   Potential
Symbol Month  Price  Basis   Price   (Loss)  Mon. Yield

NVDA    SEP    30    29.50   31.94   $0.50      4.8%

Previously Closed Positions: Qualcomm (NASDAQ:QCOM),

Credit Spreads:

Stock  Pick    Last     Position   Credit    C/B    G/L   Status

BBY   $58.72  $49.37   SEP70c/65c  $0.50   $65.50  $0.50   Open
GS    $78.55  $67.50   SEP90c/85c  $0.45   $85.45  $0.45   Open
NKE   $48.00  $43.04   SEP40p/42p  $0.40   $42.10  $0.40   Open
IVGN  $63.99  $62.65   SEP80c/75c  $0.75   $75.75  $0.75   Open
KMI   $54.33  $55.35   SEP45p/50p  $0.70   $49.30  $0.70   Open
BSC   $55.50  $45.63   SEP65c/60c  $0.65   $60.65  $0.65   Open
EBAY  $56.91  $50.00   SEP70c/65c  $0.75   $65.75  $0.75   Open
VGR   $42.70  $41.75   SEP35p/40p  $0.75   $39.25  $0.75   Open
IBM  $104.13  $96.40   SE115c/110c $0.70  $110.70  $0.70   Open

Positions Closed Monday:

AHC   $78.15  $72.10   SEP70p/75p  $0.65   $74.35 ($2.15) Closed
CHV   $93.01  $87.76   SEP85p/90p  $0.75   $89.25 ($1.49) Closed
UDS   $51.82  $49.16   SEP45p/50p  $0.65   $49.35 ($0.19) Closed

Previously Closed Positions: Banc Of America (NYSE:BAC), Bowater
(NYSE:BOW), Corinthian Colleges (NASDAQ:COCO), Lennar (NYSE:LEN),
Potash (NYSE:POT).

New Candidates:

This following group of plays is simply a list of candidates to
supplement your search for profitable trading positions.  As
with any investment, you must decide if the selections meet your
criteria for potential plays.  Only you can know what strategies
are suitable for your skill level, risk-reward tolerance and
portfolio outlook.  In addition, we recommend that you avoid any
strategy or technique in which you are not completely comfortable
with the potential loss, the necessary adjustments and the common
entry-exit strategies.  We monitor the positions marked with ***.


BULLISH PLAYS - Naked Puts & Combinations

This week's E-mail included a request for more conservative
credit-spreads.  Today's selection of candidates includes a
number of positions using that popular strategy.

ACS - Affiliated Computer Services  $86.90  *** New High! ***

Affiliated Computer Services (NYSE:ACS) provides a full range of
information technology services to clients, including technology
outsourcing, business process outsourcing and systems integration
services.  The company serves two primary markets: the commercial
sector and the Federal Government market.  Within the commercial
sector, Affiliated provides business process outsourcing, systems
integration services and technology outsourcing to a variety of
clients nationwide, including retailers, local municipalities,
state agencies, healthcare providers, telecom companies, wholesale
distributors, manufacturers, utilities, financial institutions and
insurance companies.  Services in the federal government market
are comprised of business process outsourcing, systems integration
services and technology outsourcing.  The company has offices in
North America, as well as Central America, South America, Europe,
Africa and the Middle East.

ACS is one of the very few (only?) technology stocks that posted
a new, all-time high in today's session.  Traders say the reason
for its recent success is that the company is fundamentally sound
and will benefit from increased spending by the U.S. government.
Indeed, Affiliated recently won a payroll services contract from
the U.S. Department of Defense worth $354 million over the next 10
years.  A report noted that the contract calls for Affiliated to
provide pay-related services to almost 2.5 million retirees and
annuity holders with a monthly payroll of $2.6 billion, making it
one of the company's biggest federal government contracts.  That
is great news for long-term investors and the premiums in this
conservative spread help provide a low-risk method to profit from
future recent bullish activity.

ACS - Affiliated Computer Services  $86.90

PLAY (conservative - bullish/credit spread):

BUY  PUT  OCT-75  ACS-VO  OI=313  A=$0.75
SELL PUT  OCT-80  ACS-VP  OI=4    B=$1.25

IMCL - Imclone Systems  $56.60  *** Bristol-Myers Alliance! ***

ImClone Systems (NASDAQ:IMCL) 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 major strategies for treating cancer,
growth factor blockers, cancer vaccines and unique 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.  IMC-C225 has been shown in Phase I/II trials to
have an acceptable safety profile, to be well tolerated and, when
administered with either radiation therapy or chemotherapy, to
enhance tumor reduction.

Even as the broader markets were retreating today, shares of IMCL
were up significantly on news of an alliance with Bristol-Myers
Squibb (NYSE:BMY) in which the two companies will co-develop and
co-promote a cancer treatment called IMC-C225 in the United States,
Canada and Japan.  Under the terms of the agreement, Bristol-Myers
will acquire approximately 14 million IMCL shares, roughly 20% of
the total outstanding, at a price of $70 per share.  The size of
the equity stake, in addition to the sizeable premium over IMCL's
current price suggests BMY may be considering an acquisition of
the company in the longer-term.  In addition to the stock purchase,
Bristol-Myers will pay the company a total of $1 billion in three
cash payments for the achievement of two milestones: one upon the
completion of the Biologics License Application submission with
the FDA, and another upon the marketing approval of IMC-C225 by
the FDA.  ImClone will also receive a significant share of future
product revenues.

The stock has excellent buying support near our target cost
basis and the favorable option premiums will allow traders to
speculate, in a conservative manner, on the future movement of
the company's share value.

IMCL - Imclone Systems  $56.60

PLAY (sell naked put):

Action    Month &  Option  Open   Closing  Cost     Target
Req'd     Strike   Symbol  Int.    Price   Basis   Mon. Yield

SELL PUT  OCT 40   QCI VH  115     0.70    39.30     5.9% ***
SELL PUT  OCT 45   QCI VI  73      1.05    43.95     8.6%
SELL PUT  OCT 50   QCI VJ  341     2.10    47.90    11.7%

JEC - Jacobs Engineering  $64.63  *** On The Rebound! ***

Jacobs Engineering Group (NYSE:JEC) is a professional services
company that offers four categories of professional services:
project services, including engineering, design, architectural
and other related products; process, scientific and systems
consulting services; operations and maintenance (O&M) services;
and construction services.  The company provides its services
through offices and subsidiaries located in the United States,
Europe, Asia, Mexico, Chile and Australia.

Shares of Jacobs Engineering have rebounded in recent sessions
as investors moved into companies with geographically diverse
profit sources and consistent earnings histories.  These unique
characteristics are surfacing in some of the consulting firms
and Jacobs continues to be one of the industry leaders, having
recently acquired a number of significant contracts as well as
achieving numerous design/product wins.  Analysts believe the
company's ability to benefit from additional contract wins and
future demand is still not fully reflected in the current share
value and our position offers a way to speculate conservatively
on that outlook.

PLAY (conservative - bullish/credit spread):

BUY  PUT  OCT-50  JEC-VJ  OI=690  A=$0.50
SELL PUT  OCT-55  JEC-VK  OI=317  B=$1.15

NOC - Northrop Grumman  $97.00  *** Defense Sector Rally! ***

Northrop Grumman Systems Corporation  (NYSE:NOC) is a global
aerospace and defense company.  Northrop provides technologically
advanced products, services and solutions in national defense and
commercial electronics, systems integration, current information
technology and non-nuclear shipbuilding and systems.  Northrop
Grumman has operations in 44 states and 25 countries, through
which it serves U.S. and international military, government and
commercial customers.  Earlier this year, the company completed
the acquisition of Litton Industries, making Litton a 97%-owned
subsidiary of Northrop Grumman.  Litton Industries designs, builds
and overhauls non-nuclear surface ships and is a major provider of
defense and commercial electronics technology, components and
materials for government and commercial customers world wide.

Few stocks have survived the recent market sell-off but with the
nation possibly gearing up for a long-term battle with terrorism,
defensive companies are seen as a solid bet to attract investors
in the coming months.  Today a number of defense issues received
a vote of confidence and NOC was one of the more-bullish stocks,
up over $2 to a recent high of $97 on heavy volume.  Since there
will likely be a consolidation during the next few days, we are
going to use a limited-risk spread position, with a cost basis
well below the current price of the stock, to profit from any
future bullish activity.

NOC - Northrop Grumman  $97.00

PLAY (moderately aggressive - bullish/credit spread):

BUY  PUT  OCT-85  NOC-VQ  OI=9   A=$0.70
SELL PUT  OCT-90  NOC-VR  OI=23  B=$1.65

VZ - Verizon  $53.90  *** Cellular Industry Surge! ***

Verizon Communications (NYSE:VZ) 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 wire-line communications services principally
represent the company's 16 operating telephone subsidiaries that
provide local telephone services in over 30 states in the U.S.
Domestic wireless products and services include cellular, Personal
Communications Services, paging services and equipment sales.  The
company's International segment includes international wire-line
and wireless communications operations, investments and management
contracts in the Americas, Europe, Asia and the Pacific.  Through
its Information Services segment, the company provides print and
online directory publishing and related content for communications
products and services.

Despite the austere economic outlook and the overall negative
sentiment following last week's terrorist attacks, the cellular
industry is experiencing an unexpected rise in sales activity.
Analysts say cellular companies are seeing a sales boost from the
crisis because there was a need for communication and people now
realize that cell-phones really are an important security tool.
In addition, industry forecasters see it as a new catalyst for a
technology sector that is already set for growth and advertising
executives believe that wireless and telecommunications companies
will be one of the few groups that will maintain their ad budgets
following the attacks.  Even before last week's tragedy, wireless
telephone firms were on track to post solid third-quarter results
and the U.S. wireless penetration rate, or the percentage of the
population that owns cellular phones, is one of the lowest among
developed nations.  According to SoundView Technology, the top
five wireless carriers are expected to post a 20% year-over-year
increase in total subscribers at the end of the third quarter and
that's ample incentive to bring investors back into the wireless
communications segment.

VZ - Verizon  $53.90

PLAY (conservative - bullish/credit spread):

BUY  PUT  OCT-45  VZ-VI  OI=6250   A=$0.30
SELL PUT  OCT-50  VZ-VJ  OI=17804  B=$0.95


BEARISH PLAYS - Naked Calls & Combinations

ABK - Ambac Financial Group  $48.00  *** A Big Mover! ***

Ambac Financial Group (NYSE:ABK), headquartered in New York City,
is a holding company whose affiliates provide financial guarantees
and financial services to clients in both the public and private
sectors around the world.  Ambac's principal operating subsidiary,
Ambac Assurance Corporation, is a leading guarantor of municipal
and structured finance obligations.  While remaining a leading
insurer of municipal bonds, Ambac has also grown its franchise and
has successfully applied its triple-A rated guarantee to markets
beyond traditional municipal finance.  Ambac is also a provider of
financial guarantees to the structured, asset-backed securities
sectors.  In addition, Ambac works with clients in Europe, Japan
and select markets in Latin America and Australia.

Ambac shares tumbled today after the financial services firm
said its net par exposure to the Port Authority of New York and
New Jersey following the recent terrorist attacks is over $350
million.  The company also provided information about its net
par exposure to U.S. airlines and the effect of widened credit
derivative spreads.  Ambac announced it has $530 million in
exposure in enhanced equipment trust certificate transactions
for three U.S. airlines, but doesn't currently expect material
losses from those obligations.  The widening credit derivative
spreads will however result in an unrealized "mark-to-market"
loss of up to $10 million, or approximately $0.05 a share that
will be excluded from the company's reported and core earnings.

The news, although apparently less negative than expected, was
bad enough to push the company's share value down almost 10%.
There will certainly be a technical rally in the coming weeks,
but it is unlikely the issue will reach our target position in
the next 30 days.

PLAY (aggressive - sell naked call):

Action    Month &  Option  Open   Closing  Cost       Target
Req'd     Strike   Symbol  Int.    Price   Basis    Mon. Yield

SELL CALL OCT 55   ABK-JK   2      0.75    55.75      5.9% ***
SELL CALL OCT 50   ABK-JJ   0      2.15    52.15     11.3%

PGR - Progressive  $119.01  *** Rolling Over! ***

The Progressive Corporation (NYSE:PGR) is an insurance holding
company.  Progressive has 76 subsidiaries as well as two mutual
insurance company affiliates.  Progressive's numerous insurance
subsidiaries and affiliates provide personal automobile insurance
and specialty property-casualty insurance and related services
throughout the United States.  The company's property-casualty
insurance products protect its customers against collision and
physical damage to their motor vehicles and liability to others
for personal injury or property damage arising out of the use of
those vehicles.

This play is simply based on the current price or trading range
of the underlying stock and its recent technical history.  The
near-term PGR price trend is bearish and reflects a pronounced
negative divergence from an intermediate-period moving average.
In addition, the decline has come on increasing selling pressure
and a recent support level near $128 has been violated.  With
the third consecutive failure at $135 in late July, a short-term
"triple top" formation is in place and due to the heavy overhead
supply at our strike price of $130, the share value has little
chance of moving back above that range in the coming month.

PGR - Progressive  $119.01

PLAY (conservative - bearish/credit spread):

BUY  CALL  OCT-135  PGR-JG  OI=178  A=$0.95
SELL CALL  OCT-130  PGR-JF  OI=265  B=$1.55



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