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Daily Newsletter, Sunday, 10/14/2001

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The Option Investor Newsletter                   Sunday 10-14-2001
Copyright 2001, All rights reserved.                        1 of 5
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******************************************************************
MARKET WRAP  (view in courier font for table alignment)
******************************************************************
       WE 10-12          WE 10-7          WE 9-28          WE 9-21
DOW     9344.16 +224.39  9119.77 +272.56  8847.21 +611.40  -1369.7
Nasdaq  1703.40 + 98.10  1605.30 +106.50  1498.80 + 75.61  -272.18
S&P-100  560.78 + 11.40   549.38 + 16.28   533.10 + 41.40  - 66.88
S&P-500 1091.65 + 20.27  1071.38 + 30.44  1040.94 + 75.14  -126.74
W5000  10049.12 +212.01  9837.11 +274.18  9562.93 +662.48  -1203.9
RUT      428.59 + 13.62   414.97 + 10.10   404.87 + 25.98  - 61.84
TRAN    2234.73 + 25.31  2209.42 + 15.43  2193.99 +139.15  -621.65
VIX       36.45 +  1.79    34.66 -   .53    35.19 - 13.08  + 13.67
VXN       65.98 +  2.63    63.35 -  1.84    65.19 - 12.54  + 13.89
TRIN       1.08             1.14              .73              .60
TICK       +283             +290             +995              +21
Put/Call    .76              .96              .61             1.27
******************************************************************

 
Remarkable, Almost Unbelievable!
by Jim Brown

The markets pulled back some at the open after getting some economic
news that was not market friendly but the pullback was not surprising.
The market was due for some profit taking and the economic news was
simply the excuse. What was remarkable was the recovery after the
new case of Anthrax was discovered in New York. The Dow dropped
another -125 points after the announcement to 9193 and a -215 total
loss but then rallied again and gained strength into the close. 
Despite the monumental implications of Anthrax cases in multiple
locations the bullish under tones were starkly evident. Don't 
forget this is also October but it appears that nobody cares! 

 

 

It is amazing what a couple of positive earnings reports can do
for the bullish sentiment. Stocks that were written off as dogs
are now leading the parade and the faithful are lining up to send
in their orders. Broadcom has moved from $18.50 to almost $32 in
the last two weeks. Nvidia gained from $24 to close over $40 today.
Cisco is up from $11 to $17. Juniper $9 to $21. Have the good
times returned? Is this just a killer head fake that will take
the last dollar of everyone rolling the dice with their last
remaining IRA dollars?

Now that I have your rapt attention I will try and let you down
easy or at least try not to build up your hopes too high. Two 
weeks ago I suggested going long over 9050/1550 the day before the
markets broke over those levels. I wish I could say I knew it
was going to happen the next day but there are no guarantees.
I knew it would happen soon and I wanted our readers to be ready
regardless of the date. I believed that the markets would go 
higher because the sentiment was building on the bullish side.
Companies were not warning in droves as expected. The bad news
was already priced in and patriotic feelings about the coming 
war was rubbing off on the markets.

The news that everyone expected was simply not showing up on
the stock TV channels. John Chambers was no longer complaining
about how bad business was and trying to talk down expectations.
Michael Dell was buying his own stock back and both were expected
to warn. Neither did and both reaffirmed earnings. Surprise! Sure
there was Corning and Nortel warning for the umpteenth time but
nobody seemed to care anymore. Investors were starved for good
news. You could almost imagine them sitting in front of CNBC with
their hands over their ears to close out the constant drone of
negative news. They were instead like a man crossing a desert of
sand and wishing more than anything for a glass of water. His
total thoughts are on the water not the miles of hot sand around
him. If he got the water it would not make the sand go away but
the refreshing drink would enable him to travel several more miles
through the wasteland. We, the investors dying of thirst for good
news, were so excited by the few swallows we got last week that
we were almost dizzy. 

Cisco, Dell, Juniper, Sonus, YHOO, MOT, LRCX, NETA, DCLK, SSTI,
the dogs of the tech world surprised us all with better than
expected comments. Not necessarily better than expected earnings
but positive comments in a wasteland of despair. Other sectors
were seen posting gains as well including biotechs, brokers, 
homebuilders and oil while defensive stocks like gold and healthcare
were losing ground. This indicates that investors are becoming
more risk tolerant and expecting the techs to rise again. 

While you may think this is no big deal let me remind you that
we are in a war that is not only being fought overseas but on
American soil as well. We have daily warnings of imminent terrorist 
attacks by the FBI including new outbreaks of biological terror.
Just understanding the concept that the two confirmed outbreaks
of Anthrax were both launched weeks ago and they are not likely
to be the only two is enough to strike terror in every investors
mind. They are probably the only two that have been discovered and 
that is the scary part. There was a story late Friday that there 
was another possible case in Reno and there was a similar letter 
sent to the New York Times. Both letters were sent from Florida. 
Anti-American demonstrations were growing overseas and the coalition 
was showing signs of cracking. Uzbekistan withdrew permission for 
U.S. over flights due to pressure in the region.   
 
Many investors are proving to be very hardy and capable of ignoring 
the constant barrage of negative news. Unfortunately, not all
investors have shown this ability. TrimTabs.com said that stock
funds saw a -$3.2 billion cash outflow for the week ended Oct-10th.
Not all investors are ignoring the negative news and many waited
for the oversold rebound to bail out of the markets. 

The economic news that blunted Thursday nights positive earnings
news on Friday morning included the PPI number which came in at
+0.4% which was twice the consensus estimate. While the number
was not critical it was another shock for investors to see prices 
rising when the economy is falling. Evidence of the fall after
the WTC attack was evident in the retail sales report which fell
-2.4% in September. Clothing retailers fell the worst at -5.9%.
It does appear that consumers are adjusting to the new reality
however with the Univ Michigan Sentiment rising slightly from 
last month to 83.4. This is still the second lowest reading in
the last year but any rebound is encouraging. However many layoffs
have yet to take place and as many as 300,000 workers will be
hit over the next 60 days from previously announced layoffs.
Ironically the expectations component improved significantly
to 77.9 from 73.5 the prior month. This means consumers feel the 
worst is over and everything is under control. The lack of another
disastrous attack and decreasing rates of video replay of the 
falling towers has given way to a positive outlook as life goes
on.

Next week will be crucial to the eventual recovery. I said two
weeks ago that the coming week would be the timeframe for any
normal October crash. At the close on Friday we appeared to be
far from any crash fears. The averages were climbing strongly
at the close in the face of possible weekend events that could
tank the markets on Monday. This kind of bullish "contrarian"
sentiment is the bear worst nightmare. Art Cashin said the biggest
evidence of an impending rally was the tape. It is refusing to
accept reality and roll over as the bears and pundits expected.
The expectation of further positive earnings surprises next week
is overcoming the fear of an October crash. This is the good/bad
news. When people are expecting the worst, as in last week, any
good news can spark a rally. When people are expecting surprises
to the upside any lack of surprise or a negative surprise can 
be even more disastrous. Check out this chart of the Dow for
Sept/Oct 1999. Look familiar? 

 

Now lets roll the time forward a few weeks and see what happened.

 

The positive earnings surprises everyone expected did not come
to pass along with some global economic problems. I do not think
anyone would disagree with me that there are serious global and
economic problems today. There is also the bullish sentiment which
is expecting more positive surprises when earnings start in
earnest next week. IBM, INTC, MSFT, SUNW, NVLS, RFMD, RMBS, TLAB,
AOl, APPL, BRCM, CDWC, CLS, EMC, EXTR, SYMC, TXN, NT and about
300 other companies including over half the Dow components announce
next week. If lightning is going to strike, next week will be the 
week. It is also options expiration week and the volatility is 
going to be tremendous. The markets on Friday pulled back to
1650 and 9200 respectively along with the S&P to 1075. Based on
the overwhelming negative news on Friday I think we can safely 
say that these levels could now be considered support. If we can
rally from there while under terrorist attack on a Friday afternoon
then I would think those levels should hold on Monday unless we
see an even bigger attack by then. 

I guess you would call me cautiously bullish. I think it was 
remarkable that the markets did not sell off more on Friday. I have 
to temper my bullishness however with the low volume but low volume
on a down day is good. Only 1.3 billion traded on the NYSE and 2.1 
billion on the Nasdaq. Decliners did beat advancers but you would
also expect that during profit taking from the three weeks of gains.
My editors plays this week are all bullish and were picked to take
advantage of expiration week and cheap premiums. The game plan as
I see it is continue to go long until the market convinces us
otherwise. I would expect to close long positions by Thursday since
the majority of the major earnings will be over at Thursday's close.
Even the most bullish scenarios would include another pullback by
weeks end and bearish scenarios would be even worse. Remember, if
we are going to get a normal post earnings October crash it could
come in the five day period beginning next Thursday. Be prepared 
to close and move to the sidelines if the situation warrants.

Definitely, enter passively, exit aggressively!

Jim Brown
Editor


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

Expiration Week!

This is my favorite week of the month and it is even more fun
when it falls in an earnings month. Options are cheap and 
stocks gyrate wildly in both directions. What more could
an Option Investor ask for? Yes, I know, you want to know
which direction the next move will be! 

Based on Friday's amazing rebound while under bio-attack
I would hope the direction is up. The market has shown 
amazing resilience that gives us a bullish bias.

The plays for this month were all chosen for being near
a strike price but still cheap enough for a lottery play.

That is exactly what these are - lottery plays. That is 
when you buy slightly out of the money options with almost
no time remaining and then hope for lightning to strike 
and the stock to jump several dollars on earnings expectations
or actual earnings news.

This is the only type of play that we recommend holding over
an earnings report. Normally even on good earnings a stock
will trade down after the report. There are always a few
that buck the trend but not enough to make holding over the
event a routine strategy. Only in expiration week when options
are cheap and a miss will not break the bank.

This is not a recommendation of any of these stocks, just
a positive chart with the price at or near a strike and a
cheap option. I do not recommend trading them all. Just pick
two or three and roll the dice. I would suggest closing any
position for a profit or Thursday morning, whichever comes
first.

Stock Price Call  Symbol  Ask

GLW	 9.01	10.00 GLW-JB $0.25
SLR	14.50	15.00 SLR-JC $0.60
NT	 5.70	07.50	NT-JU	 $0.05
ABI	30.00 30.00 ABI-JF $1.30
ALGX	 6.41 07.50 QGX-JU $0.35
APCS	17.82 17.50 CUT-JW $1.00
ATML	07.99 07.50 AQT-JU $0.75
AXP	29.99 30.00 AXP-JF $1.00
BDX	38.00 40.00 BDX-JH $0.25
BEAS	14.81 15.00 BUC-JC $0.80
CRUS	10.02 10.00 CUQ-JB $0.75
CSCO	16.95 17.50 CYQ-JW $0.45
CSX	33.83 35.00 CSX-JG $0.50
DELL	24.13 25.00 DLQ-JE $0.50
EXTR	12.56 12.50 EXJ-JV $1.25
FDRY	10.96 10.00 OUJ-JB $1.35
FDRY	10.96 12.50 OUJ-JV $0.35
FLEX	22.88	22.50 QFL-JT $1.55
FRX	78.46 80.00 FHA-JP $0.95
GDT	40.21 40.00 GDT-JH $1.30
GE	39.00 40.00 GE-JH  $0.55
GNTA	12.48 12.50 GJU-JV $0.50 !
HWP	18.35 17.50 HHY-JW $1.05
ORCL	14.94 15.00 ORQ-JC $0.60
PRGN	16.25 17.50 GQP-JT $0.55
SUNW	10.04 10.00 SUQ-JB $0.55
VOD	22.75 22.50 VOD-JX $0.95
XMSR	06.29 05.00 QSY-JU $1.65


Remember these are very risky plays but also have a very good
chance of a big win if the trade goes in your direction.

Check the earnings date of any stock you decide to play and
create an exit plan that takes that into account.

Don't be greedy, set a profit target and a limit order and
get out early. There is no time value and Thursday could be
the turning point.

Good Luck!

Jim Brown


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

When You Dip, I Dip, We Dip
By Eric Utley

It's been a long time since buying dips has been fashionable.  I
wonder if that trend will be en vogue next week?

With the Dow Jones Industrial Average Bullish Percent ($BPINDU)
and Nasdaq-100 Bullish Percent ($BPNDX) in bull confirmed mode,
plus the other broad market averages in bull alert mode, I think
that buying the dips makes sense next week.  But that speculation
is independent of any future attacks -- I pray that they don't
come!

As I've written in the past few days, the bull confirmed mode of
the Dow and NDX should have traders in those two indexes operating
with a risk bias to the upside.  That doesn't mean all stocks will
rally while the two indexes are bull confirmed, so other tools
such as relative strength should be employed when picking trades.

Furthermore, as we pointed out last Thursday, excessive put buying
has taken place in the QQQs (AMEX:QQQ).  While the put/call ratio
came down a bit last Friday, it's still relatively high over the
short-term.  In fact, I think that part of the reason that the
NDX finished higher last Friday was due to the covering of those
puts we saw purchased the day before.

Those who follow the Commitments of Traders Report (COT) will note
that retail traders positioned to the group's most bearish reading
of the year in the Dow last week, while commercial interest grew
more bullish on a week-over-week basis.

While there are many variables to contend with next week including
third-quarter earnings season, it's my opinion that the risks are
weighted to the upside over the short-term.  Although I'd been
cautious on further upside recently due to the overbought nature of
the indices, it appears that the ball is in the hands of the bulls,
who could carry the market higher next week.  It's a dynamic game,
baby!

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

Market Volatility
    
VIX   36.45
VXN   65.98

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

          Put/Call Ratio  Call Volume   Put Volume
Total          0.76        707,304       538,564
Equity Only    0.63        613,437       385,755
OEX            1.36         14,216        19,399
QQQ            0.95         63,330        60,236
 
-----------------------------------------------------------------

Bullish Percent Data


           Current   Change   Status
NYSE          27      + 0     Bull Alert
NASDAQ-100    58      + 1     Bull Confirmed
DOW           40      + 0     Bull Confirmed
S&P 500       44      + 0     Bull Alert
S&P 100       39      + 0     Bull Alert

Bullish percent measures the number of stocks in an index 
currently trading on a buy signal on their point and figure 
chart.  Readings above 70 are considered overbought, and readings 
below 30 are considered oversold.

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

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


 5-Day Arms Index  0.91
10-Day Arms Index  0.95
21-Day Arms Index  0.95
55-Day Arms Index  1.23

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

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

        Advancers     Decliners
NYSE      1214           1857
NASDAQ    1654           1934

        New Highs      New Lows
NYSE       41             27
NASDAQ     34             48

        Volume (in millions)
NYSE     1,333
NASDAQ   2,146

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

Commitments Of Traders Report: 10/12/01

Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the 
Chicago Mercantile Exchange and Chicago Board of Trade. COT data 
can be found at www.cftc.gov.

Small specs are the general trading public with commercials being 
financial institutions. Commercials are historically on the 
correct side of future trend changes while small specs tend 
to be wrong.  

S&P 500

Commercials   Long      Short      Net     % Of OI 
09/25/01      357,873   407,036   (49,163)   (6.4%)
10/05/01      365,200   408,567   (43,367)   (5.6%)
10/12/01      369,049   407,804   (38,755)   (4.9%)

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

Small Traders Long      Short      Net     % of OI
09/25/01      122,613     71,721   50,892     26.2%
10/05/01      124,249     73,882   50,367     25.4%
10/12/01      122,292     74,539   47,753     24.0%

Most bearish reading of the year:  36,513 - 5/01/01
Most bullish reading of the year:  91,122 - 3/06/01
 
NASDAQ-100

Commercials   Long      Short      Net     % of OI 
09/25/01       26,761     36,812   (10,051)  (15.8%)
10/05/01       26,703     37,669   (10,966)  (17.0%)
10/12/01       24,662     38,020   (13,358)  (21.4%)

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

Small Traders  Long     Short      Net     % of OI
09/25/01       10,699     6,580    4,119      23.8% 
10/05/01       10,918     6,804    4,114      23.2% 
10/12/01       11,948     7,012    3,936      20.6%

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

DOW JONES INDUSTRIAL

Commercials   Long      Short      Net     % of OI
09/25/01       20,013     7,806   12,207     43.9%
10/05/01       22,755    10,124   12,631     38.3% 
10/12/01       24,873    10,194   14,679     41.7% 

Most bearish reading of the year: (8,322) - 1/16/01
Most bullish reading of the year: 13,348  - 9/18/01

Small Traders  Long      Short     Net     % of OI
09/25/01        4,530    12,621    (8,091)   (47.2%)
10/05/01        4,731    11,868    (7,137)   (43.0%) 
10/12/01        3,517    12,294    (8,777)   (55.5%) 

Most bearish reading of the year:  (8,777) - 10/12/01*
Most bullish reading of the year:   1,909  -  1/16/01

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


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

Oktoberfest
By Eric Utley

This month is particularly famous for its propensity to wreak
havoc on investors.  For others, it's the best time of the year.

Heck, even one of my readers asked about the "typical" October
events in one of the questions below.  I don't know if this
October is going to be any different.  So far, so good, though.
The Nasdaq-100 (NDX.X) is up by about 19%, the Dow's ($INDU) up
by almost 6%, and the S&P 500 (SPX.X) is working on 5%
month-to-date.  In like a bull, out like a bear?  Maybe.

Meanwhile, my kid sister, who's more grown up than most adults
I know, is gearing up for Halloween.  I think she's dressing as
a bear.  Trick or treat, huh?  

Speaking of sweet stuff, I've got a little Austrian in my
blood.  The last time I checked, Austria bordered Germany, and
from what I gather, citizens of both countries like to partake
of a certain malt beverage, especially during October.  Not
this cowboy, though, I'm kaput after "attending" the Great
American Beer Festival with my trusty spiritual advisor.

For me, it's off to the rivers this weekend.  You see, this
certain species of trout, salmo trutta, has the tendency to
get real aggressive during this time of year.  Or, in other
words, the big ones like to bite. 

 

You know, it's kind of funny how a silly little fish can
remind one that there's so much more to life than the market.
Aufwiedersehn!

Please send your questions and suggestions to:

Contact Support 

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

Long-Term Equity Anticipation Securities

This is my first time writing you, though I have been enjoying
your site and services for almost 2 years now.  Two stocks I
would like your input on, if you are able:  AMAT and CPN.

I have been following both of these recently, and both look like
they are shaping up to be good long term call/LEAP plays soon.
However, I am a little reluctant to jump in right now, due to the
knowledge of what past Octobers have done to the markets.  I know
this may not be a "typical" October due to where the economy is to
begin with, but also due to the recent terrible current events,
and events undoubtedly still to come. 

I would appreciate any insights you may have regarding these two
plays, and/or the markets in general, with regard to this
impending October. - Thanks for all I have learned from you in the
past 2 years, Neil, Palm Beach

Thanks for the question, Neil, let's leap into your requests.

First, let me just say that I cannot, with any intelligence,
predict what will happen this October.  Nor can I say, with any
accuracy, how any future "terrible events" will impact the
market.

With that said, from where I sit currently, the Dow and Nasdaq-100
are positioned to move higher over the next week.  And the S&P 500
looks pretty good, too.  But there are plenty of unknowns floating
around.  However, I think that I can make some observations
independent of the unknowns on Applied Materials (NASDAQ:AMAT) and
Calpine (NYSE:CPN).  I'm cognizant of the fact that neither of
these stocks exist in a vacuum, but I think there are some things
that I can address that are of benefit.

Calpine

Let's start with Calpine.  The company is an independent power
producer, so naturally I'm going to reference either the Utility
Sector Index (UTY.X) or the Dow Jones Utilities Averages ($UTIL)
when examining the stock.  Last time I checked, Calpine was NOT
a component of either index, but most of its larger competitors
were, such as AES (NYSE:AES).

In this case, let's take a closer look at the UTIL.  The average
has been in a severe descending trend since the beginning of the
year.  Granted, the UTIL did consolidate for most of the summer,
but that consolidation only led to further deterioration in
price.  Since mid-summer, the UTIL has been in a clearly defined
descending trend, but found a relative low a few weeks back
along with the rest of the market.  Just by taking a look at the
price action of the UTIL, I'm not too hot on the idea of buying
LEAPS on Calpine.

 

A few weeks back, Calpine reaffirmed its guidance for the quarter,
which gave the stock a nice pop.  Around that same time, however,
its competitor in AES blew up.  In addition to the reaffirmation
of numbers, Calpine's debt rating was recently upgraded, following
a large bond offering.  A debt rating upgrade is a big deal
because it reduces interest payments.

But, with two pieces of recent good news, I have two questions:
Why have insiders been selling near a 52-week low?  And why has
price continued lower?

With as ugly as its sector is and little in the way of base
work completed, I think it would be wise to wait for some
consolidation.  The potential benefit of buying a stock/LEAPS at
a relative low, however, is that the risk is generally the greatest
at that level so if you're right about a rebound, then the reward
will be the greatest.  But I'm not smart enough to pick bottoms,
so I instead opt for some consolidation before buying stocks
near their lows.  But, I often miss the big moves from relative
lows.

 

Applied Materials

The current set up of Applied Materials is somewhat similar
to the Calpine example above.  The stock is much closer to its
lows than its highs, although it's come about $10 from its
relative lows recently.

AMAT is a component of the Chip Sector Index (SOX.X), which has
been trading poorly relative to the broader market as defined
by the S&P 500.  Now, while I don't mind TRADING stocks in
sectors that are under performing the broader market, I don't
like INVESTING in stocks in sectors that are under performing.
I prefer to be in the strongest sectors of the market over longer
time periods.

In the case of the SOX.X currently, at the very least I'd like
to see the sector go on a buy signal on its point & figure
chart relative to the S&P 500.  The chart below displays that
current dynamic, and you can see that the SOX.X's relative
strength is still on a sell signal.

 

In AMAT, if I'm thinking about holding a position for a longer
time period, then I want to see some progress made on the
relative strength front.  Also, the stock has run-up almost $10
from its relative low.  And since the stock and its sector are
still trading poorly relative to the broader market, I should be
less willing to pay top dollar for the stock.  So, I want to buy
my inventory "on sale" rather than paying top dollar for it,
especially if I'm going to hold over a longer time period.  That
being the case, I'd rather buy it on weakness from current levels
than chase it higher.  The only time I'm willing to chase stocks
higher is when I'm trying to buy "high quality" merchandise,
which is defined by relative strength.

 

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

Long-Term Investing Continued

I know the idea is for us to ask about a specific stock, but
I was wondering if I could get some ideas from you on some
long-term stocks to buy as I'm starting a long-term account
for my family.  My plan is to invest a set amount monthly. - 
Thanks, Anonymous

One of my excellent readers e-mailed in the above question
last week (http://www.OptionInvestor.com/ask/100701_1.asp) and
I began to explore a couple of ideas about investing in the
stock market over the long-term.

One idea I put on the table was the need for an investor to have
a methodology in place before making the first purchase in his/her
account:  

  A sound investing methodology must be in place before placing
  the first buy order.  Every good trader has a methodology
  with which he/she conducts business and so should every
  investor.  The number of sound investing methodologies are
  many and diverse in nature.  The methodology isn't as
  important, however, as the investor's adherence to it.  The
  point here is discipline.  The successful investor needs to
  have a set of guidelines, checks and balances, procedures,
  and rules before buying a stock.

I know so many people (investors) who aimlessly buy stocks for
reasons usually unclear to me.  For example, a guy that I don't
like very much bought a stock the other day because he read a
favorable magazine article on the company.  And without even
researching the company, he loaded up on a few thousands shares
of a stock that I would've gladly borrowed and sold to him
(Read: Short Sale).

That guy, who I don't like, doesn't have a methodology to select
stocks.  And that's a big problem.

But the very notion of picking a method and sticking to it can
be a daunting task for many people.  After all, the
methodologies of buying stocks are innumerable: aggressive
growth, undervalued, event-driven, market timing, distressed
companies, and so on.

One method that I've found beneficial over the past couple
of years has been the CANSLIM approach to picking stocks.  The
method is a product of William O'Neil, who is the founder of
Investor's Business Daily: www.investors.com.  O'Neil's book,
How To Make Money In Stocks, provides a complete discussion on
the CANSLIM method.

While this particular method isn't perfect, it does provide the
groundwork for an individual to begin carving out a methodology
with which to buy stocks.  It's a growth-orientated investment
method and also relies a great deal on the direction of the
broader market.

The acronym CANSLIM represents the following:

C - CURRENT earnings per share should increase by at least 15 to
20% quarter-over-quarter.

A - ANNUAL earnings growth should demonstrate solid growth of
around 15 to 20% year-over-year.

N - NEW companies producing NEW products or providing NEW services
can often have explosive earnings growth and share price
appreciation during their early years.  Also, O'Neil suggests
buying stocks going to NEW highs and forgetting about bottom
fishing for stocks around their lows.

S - SHARES outstanding of a company is often overlooked by many
investors.  The point here is to buy stocks that have a smaller
number of shares outstanding, which means they're usually smaller
companies as measured by capitalization.  (I don't completely
agree with this concept.)  Smaller companies, because they're
small, are poised for more growth, or so goes the argument.

L - LEADERS are the stocks to buy; leaders in price and leaders
in business.

I - INSTITUAIONALLY sponsored companies are in "strong hands,"
so O'Neil suggests buying stocks that have mutual funds, for
example, as big holders of the common stock.

M - MARKET direction is the most difficult step in the process.
The CANSLIM method requires an advancing market to reach its
full potential.  Needless to say, this method hasn't been as
successful over the past 18 months.

Like I wrote earlier, this method isn't perfect.  But it
incorporates many important ideas for investors such as focusing
on earnings.

What I've done is taken pieces of this methodology and augmented
them around a more specific approach to investing that better
fits my risk preferences and personality.  I think that readers
who are looking for an approach to long-term investing can use
the CANSLIM method for a foundation from which to operate.  At
the very least, investors can use the CANSLIM method as a system
of checks and balances before jumping blindly into a stock
purchase.

Next week, we'll delve into some specific examples using a
couple of different tools for long-term investing.

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

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


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The Option Investor Newsletter                   Sunday 10-14-2001
Sunday                                                      2 of 5

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

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

DELL - Dell Computer $24.10 (+1.56 last week)

See details in sector list




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

JPM - J.P. Morgan Chase $32.89 (-0.52 last week)

See details in sector list




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

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


CALLS
^^^^^

ATK $85.19 (-4.42) It looks like our run in ATK has run its
course.  The stock pulled back for the fourth straight day
last Friday.  The weakness may have been attributable to the
broader market weakness, but we're seeing a trend developing
and it's not in the right direction.  Those with open positions
might look for a relief rally early Monday to exit plays.

MO $50.64 (+0.48) MO pulled back again last Friday, but managed
to rebound from the $50 level, which is also currently the site
of its 10-dma.  The 10-dma is actually slightly above at $50.20.
Though MO has the potential to continue climbing, we're dropping
coverage ahead of the company's third-quarter earnings report
next Wednesday.  The company's earnings should be pretty safe
noting the defensive nature of its business, but we're playing
it safe and booking gains ahead of the numbers.
 

PUTS
^^^^
No Dropped Puts for the weekend.


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

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

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

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

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

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

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


*************
NEW CALL PLAY
*************

DELL - Dell Computer $24.10 (+1.56 last week)

Dell Computer is a direct computer systems company.  The
company offers its customers a full range of computer systems,
including desktop computer systems, notebook computers,
workstations, network servers and storage products, as well as
an extended selection of peripheral hardware, computing
software and related services.

With its reaffirmation of guidance more than a week ago, DELL
helped to perpetuate the rally in tech shares.  If the Nasdaq
is going to continue higher, DELL is most likely to lead the
charge.  Despite the poor fundamentals of the box making
business, DELL has been able to prosper during this recent
downturn, which the company made clear through its mid-quarter
update.  Through taking market share from beleaguered competitors
such as Gateway and Compaq, DELL has been able to more than
compensate for the poor macro business environment.  In
addition, the company is venturing into new segments of
technology, including the storage space.  With these added
revenue sources, the company is poised for future growth once
the economy rebounds.  For those reasons, DELL is a likely
candidate for those big mutual fund managers looking to gain
exposure to the tech sector.  We may continue to see some of
that big fund buying over the next several weeks, which is
why we're adding DELL as a call play this weekend.  Bullish
tech traders can look for DELL to advance back above the $25
level early next week for a possible entry point, but make
sure to confirm strength in the Nasdaq before entering a
momentum-based play.  The $23.50 level held last Friday, which
might be a good spot to look for future pullbacks and entries.
If the stock dips below that level, a bounce from the $22.50 to
$23 area may provide a solid entry point on weakness.  Since
the company doesn't announce earnings for awhile, we have time
to play DELL.  We'll target the $29 level over the next few
weeks as a possible exit point.  Our stop is initially in place
at $21.50.

BUY CALL NOV-22 DLQ-KX OI=15716 at $2.90 SL=1.50
BUY CALL NOV-25*DLQ-KE OI=31012 at $1.50 SL=0.75
BUY CALL NOV-27 DLQ-KY OI=33024 at $0.70 SL=0.25
BUY CALL JAN-25 DLQ-AE OI=42820 at $2.75 SL=1.75
BUY CALL JAN-27 DLQ-AY OI= 8180 at $1.80 SL=1.00

Average Daily Volume = 27.3 mln



ABGX - Abgenix $27.42 (+1.77 last week)

Abgenix is a biopharmaceutical company that develops and
intends to commercialize antibody therapeutic products for the
treatment of a variety of disease conditions, including
transplant-related diseases, inflammatory and autoimmune
disorders, cardiovascular disease, infectious diseases and
cancer.

ABGX has been working higher since mid-September using its
ascending support line.  The stock has traced a series of
higher relative lows and highs during the period, and just
last Friday rebounded from its most recent relative low.  With
its rebound from roughly the $26 level, ABGX traced its 5th
such relative low in its path.  At this point, the stock is
poised to trace above the $30 level if the pattern persists.
For ABGX to advance past $30, the AMEX Biotechnology Sector
Index (BTK.X) needs to work higher.  For its part, the BTK
rebounded back up to the 500 level last Friday at which it
settled.  If the BTK.X breaks out above the 500 level early
next week, bullish traders might look for new entries into
call positions around ABGX's current level.  The BTK.X could
make its way up to the 530 area if it breaks out early next
week, which should correspond with ABGX trading back above
$30.  On the other hand, if the BTK.X does pullback early
next week and drag ABGX lower with it, bullish traders might
look for another bounce from the $26 vicinity.  Stops are
initially in place at the $24.00 level.

BUY CALL NOV-25 AZG-KE OI=161 at $4.70 SL=3.50
BUY CALL NOV-30*AZG-KF OI=189 at $2.25 SL=1.50
BUY CALL JAN-30 AZG-AF OI=173 at $4.20 SL=3.25

Average Daily Volume = 1.51 mln



FFIV - F5 Networks $15.75 +1.00 (+5.16 last week)

F5 Networks is the leader in Internet Traffic and Content 
Management (iTCM), and delivers application aware networks 
through its open Internet Control Architecture. F5 features the 
industry's leading set of integrated products and services that 
manage, control and optimize Internet traffic and content. Our 
solutions automatically and intelligently deliver the best 
possible Internet performance, availability and content 
distribution for service providers, enterprises and e-businesses. 
Our products remove bandwidth congestion and optimize the 
availability and speed of mission-critical Internet servers and 
applications, including web publishing, content delivery, e-
commerce, caching, firewalls and more. Our solutions are widely 
deployed in large enterprises, the top service providers, 
financial institutions, government agencies, healthcare, and 
portals throughout the world. The company is headquartered in 
Seattle, Washington.  (source: company press release)

At first glance one might think that the horse has already left
the stable on this stock.  When you consider that the stock was
trading at $7 just two weeks ago it should make traders cautious.
More than doubling in ten days without much consolidation has
been due to massive amounts of short covering.  A quick glance
at other second tier networking stocks also show a similar pattern
with massive gains as bears run for cover and bulls trying to 
stampede them all the pain and suffering over the last several
months.  It would appear that market sentiment has changed 
drastically and now in this damn-the-economy bullish environment
may keep the momentum going.  Yet at the same time we have to be
cognizant of the potential dangers to trading with many gov't
officials expecting a terrorist reprisal at any time.  While we
absolutely refuse to trade without stops they could be rendered
ineffective (or less effective) if the stock gaps down due to
another attack.  Traders looking at FFIV should be willing to
take some heat as the stock could produce +10% swings as soon as
it attempts to digest these gains.  On a positive note the stock
has blasted through all moving averages and through resistance
at $13 and $15.  Friday's close near its high for the day is bullish
for Monday but we would be cautious on picking an entry point.
We would prefer to see the stock come back to $14.50 or $15 on
a dip as a potential entry.  However, a close over $16 may be 
our only option.  It's hard to imagine but the point-and-figure
charts predict a bullish price objective of $33.  Obviously, this
could take some time to be achieved but it probably scares any
shorts who have yet to cover.  The MACD turned up a few days ago
and the fast moving average has just crossed the zero line which
could further scare the bears into retreating.  The big concern 
now is where will the bulls decide to take some money off the
table?  Price resistance appears to be $17.50 and 18.00 to $19.00.
This is still another 10% to 15% higher from current levels which
should be enough to make these call options profitable (buying on
a dip is definitely preferred).  On a newsworthy note, the company
announced last Tuesday that their 3Q earnings would be affected by
the September attacks but you can see this has had little affect
on the share price.  Investors have almost two weeks before the 
company announces earnings on Thursday, October 25th.  We are
going to start our play with a stop at $13.90, which is about 12%
below Friday's close.  One spot we consider was $14.25 as it was
just below Friday's intraday support.

BUY CALL NOV-12 FLK-KV OI= 91 at $4.20 SL=2.20
BUY CALL NOV-15 FLK-KC OI=124 at $2.70 SL=1.25
BUY CALL NOV-17*FLK-KW OI= 99 at $1.60 SL=0.50 (look for a dip)
BUY CALL JAN-17 FLK-AW OI=288 at $2.85 SL=1.25
BUY CALL JAN-20 FLK-AD OI=221 at $2.10 SL=0.88

Average Daily Volume = 530 K
chart=



ORCL - Oracle Corp $14.94 -0.03 (+0.74 last week)

One of the giants in the software world, Oracle is a heavy weight 
in the database industry.  The focus their products at two different
areas: systems software and Internet business applications software.
Yearly sales have been over $10 billion with profit margins over
23% (both trailing twelve months).

Oracle's share price didn't suffer as much as many big cap tech
stocks after the September attacks.  The reason was the stock
had already been beat to death and was struggling to maintain
the $11 area before the tragedies.  The following week saw
shares dip to the 10.50 multiple times but the bears had pushed
it as far as it would go.  Since then the stock has seen a steady
climb with a strong move up followed by a few days of sideways
trading to digest the gain and then another strong move up.
The last two days have seen ORCL trading just under resistance at
$15 and we think it may be time for the next move up.  The $15
level is a key level of resistance that was formed in the middle
of August.  Those shorts that have not yet covered their positions
may be quick to change their minds if ORCL can trade above $15.
The software index is also at major resistance of 150 and a breakout
in the GSO index could be just what the bulls need to keep this
rally going.  For months software stocks have been beaten down 
due to deteriorating conditions in the industry and no expected
turnaround until the second half of 2002.  On that basis this rally
looks premature for software stocks but that won't stop us as 
traders from trying to capture part of the move.  Glancing at
the point-and-figure charts we don't see strong resistance until 
about $19.50.  Before you get to excited about a 30% move in ORCL
we do have price resistance on the daily chart at 17.50 but that's
still a nice gain.  Take note that the 200-dma is currently at
18.82.  One could expect potential buying at any dip to 14.50, 14.00,
13.50, etc.  We're going to place our stop at 13.50 which is 10%
from current levels.  Hopefully, should the stock see profit taking
the 50-dma at 14.00 and the 10-dma at 13.83 will protect us.  We
do like the stock here and any dip between $15 and $14.  More patient
traders may want to wait for that close over $15 to confirm the move.


BUY CALL NOV-12 ORQ-KV OI= 9118 at $2.95 SL=1.50 (50 cent premium)
BUY CALL NOV-15*ORQ-KC OI=25831 at $1.30 SL=0.40
BUY CALL NOV-17 ORQ-KW OI= 4022 at $0.45 SL=0.00
BUY CALL DEC-15 ORQ-LC OI=27476 at $1.90 SL=0.75
BUY CALL DEC-17 ORQ-LW OI=18116 at $0.95 SL=0.40

Average Daily Volume = 39.8M
chart=



AMAT - Applied Materials Inc $35.04 -0.82 (+3.49 last week)

Applied Materials, the largest supplier of products and services 
to the global semiconductor industry, is one of the world's 
leading information infrastructure providers. Applied Materials 
enables Information for Everyone(TM) by helping semiconductor 
manufacturers produce more powerful, portable and affordable 
chips. (source: company press release)

The chip sector like several tech sectors appear to be completely
ignoring bad news as the stocks make a strong advance (more on
the bad news in a bit).  Shares of AMAT have made a nice recovery 
from its lows near $27 in late September and early October.  
Actually, the chart of AMAT looks a lot like a chart of the SOX
both before and after Sept. 11th.  With the sector making a rebound,
no matter what the analysts say, we think that AMAT, right at a key
support/resistance level of $35, may be the chip stock to play if
the rally continues.  The strong bounce off of Friday's intraday
low of $33 and the close over $35 looks like a great set up for
the next leg up to $40.  We do see some overhead resistance at
$37.50 and the 50-dma at 39.17 but another strong week could 
easily put AMAT up another 10 to 15 percent.  We are going to
start the play with a stop at 32.75.  This is less than 7% so
the risk/reward looks good.  Now, to be fair, we mentioned that
there was some bad news to discuss.  The chip sector and AMAT
have seen some new downgrades lately.  Obviously, they have had
little affect on the rally but traders should be informed.  As
of Friday, AG Edwards downgraded AMAT from a "buy" to a "hold".
Another broker, JP Morgan, also downgraded the stock last Wednesday.
Their analyst felt that the Sept. 11th attack would stall the
sector's recovery and the trough we have seen in the industry will
carry over into the first part of next year.  This may be 100%
accurate but the markets are driven by emotion and right now 
investors are in "buy" mode.  We want to capture the next short-term
move up.  Fortunately, AMAT isn't expected to announce earnings until
the middle of November.  However, one may want to keep an eye on 
other chip stock announcements and see how the market reacts to their
numbers.

BUY CALL NOV-32*ANQ-KZ OI=1624 at $4.90 SL=2.50 premium $2.24
BUY CALL NOV-35 ANQ-KG OI=3778 at $3.50 SL=1.50
BUY CALL NOV-40 ANQ-KH OI=2275 at $1.45 SL=0.70
BUY CALL JAN-35 ANQ-AG OI=2653 at $5.30 SL=3.00
BUY CALL JAN-40 ANQ-AH OI=8591 at $3.20 SL=1.50

Average Daily Volume = 39.8M
chart=




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


**********
DISCLAIMER
**********

Please read our disclaimer at:
http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html


**************************************************************
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The Option Investor Newsletter                   Sunday 10-14-2001
Sunday                                                      3 of 5

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charts and graphs, click here:
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Note: Options involve risk. Risk disclosure:
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**************************************************************


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

PPG - PPG Industries $49.64 (+2.14 last week)

PPG manufactures a variety of products for the manufacturing,
construction, automotive and chemical processing industries.
The company also helps do-it-yourself homeowners brighten up
their house with its Lucite brand of house paints.  Paints,
stains, and other coatings account from almost half of the
company's sales, with the balance coming from the glass
products and chemicals divisions.  PPG has over 75
manufacturing facilities in 16 countries, but North America
accounts for 70% of company sales.

PPG's pullback last Friday was routine in nature, noting its big
run-up in the latter half of last week's trading.  However, we
made the observation Thursday that the stock had closed its
gap and had bumped against its 200-dma.  In retrospect, PPG's
"bump" against its 200-dma would've been an ideal exit point for
those traders with good gains built up in the play.  But the past
is not of concern to us.  Looking forward, we have about three
trading days remaining in this play ahead of the company's
earnings announcement next week.  PPG is scheduled to report
on Thursday.  Therefore, traders should begin thinking about
squaring positions ahead of the report.  PPG has the potential
to trade higher early next week if the S&P 500 and Dow do so.
But without the help of the broader market, the stock is likely
to continue retracing its recent gains.  Because of the potential
for further weakness, traders with open positions should at the
very least be thinking about tightening up stops to protect any
gains that have been captured.  We're doing that much by sliding
our coverage stop up to the $48 level.  As for new entries, we
want to be selective ahead of the company's earnings report.  A
quick trade may become available if PPG falls to the $48 level
then rebounds.  In addition, a solid advance above the $51 level
may offer a quick scalp trade.

BUY CALL NOV-45 PPG-KI OI= 22 at $5.30 SL=4.50
BUY CALL NOV-50*PPG-KJ OI=121 at $1.80 SL=1.00
BUY CALL NOV-55 PPG-KL OI=227 at $0.45 SL=0.00
BUY CALL JAN-50 PPG-AL OI=949 at $0.35 SL=0.00

Average Daily Volume = 548 K



TEVA - Teva Pharmaceutical $66.70 (+1.84 last week)

Producing drugs in all major therapeutic categories, TEVA is a
fully integrated global pharmaceutical company.  In the area of
proprietary drugs, TEVA has focused on products for the central
nervous system disorders, primarily the development of Copaxone,
a treatment for relapsing-remitting multiple sclerosis.  Through
its U.S.-based subsidiary, the company manufactures 137 generic
products in 210 generic forms, which are distributed and sold in
the United States.  TEVA also manufactures over 270 generic
products, which are sold primarily in the Netherlands, the
United Kingdom and Hungary.

TEVA shed a little over 1 percent last Friday while the AMEX
Biotechnology Sector Index (BTK.X) ended unchanged.  TEVA's
under performance last Friday was a bit discouraging, but at
the same time, we need to take into account that the stock has
outperformed its sector to the upside over the past two weeks.
With that being the case, it's reasonable to expect that the
stock would pullback on a day when profit taking, on the part
of longs, was prevalent across the broader market.  In the
event of further weakness from current levels, bullish traders
with open positions should be thinking about tightening stops
on plays with profits.  On the other hand, further weakness from
current levels might not be bad thing for those looking for new
entries into this strong biotech play.  TEVA has some strong
support between the $65 and $66 levels.  And if the stock dips
down to that area, bullish traders might target shoot bounces
on an intraday basis if the BTK.X rebounds and confirms
strength.  Momentum fans who prefer to enter new plays on
strength might look for a quick advance above the $68 level to
book some short-term gains on a potential move up to the $70
level.

BUY CALL NOV-60 TVQ-KL OI= 25 at $8.30 SL=6.50
BUY CALL NOV-65*TVQ-KM OI=363 at $4.80 SL=3.50
BUY CALL NOV-70 TVQ-KN OI=408 at $2.35 SL=1.25
BUY CALL DEC-70 TVQ-LN OI=320 at $3.80 SL=2.25
BUY CALL DEC-75 TVQ-LO OI=488 at $2.15 SL=1.25

Average Daily Volume = 1.26 mln



ENZN - Enzon $59.40 (+3.00 last week)

Enzon is a biopharmaceutical company that develops and
commercializes enhanced therapeutics for life-threatening
diseases through the application of its two proprietary platform
technologies: polyethylene glycol (PEG) and single-chain antibody
(SCA).  The company applies its PEG technology to improve the
delivery, safety and efficacy of proteins and small molecules
with known therapeutic efficacy.

Through Friday, we had captured about $7 in ENZN since the play's
inception on September 27th.  That's just in the underlying!  For
those who were early to the play, a little profit taking may be
in order.  We say that because ENZN may pullback from its current
levels early next week if the Biotechnology Sector (BTK.X)
weakens.  For its part, the BTK finished last Friday unchanged.
While that alone doesn't portend short-term weakness, we would've
liked to have seen the BTK lead to the upside last Friday.
Nevertheless, the BTK remains one of the stronger sectors of the
market and ENZN is one of the stronger stocks in the group.  As
such, any rebound in the BTK next week should carry ENZN along
for the ride.  A move back above the $60 level in ENZN may serve
as an entry point into new positions if the BTK is advancing at
the same time.  Otherwise, we'll look for support between the
$57 and $58 levels.  We'll be focusing on $57 for that level is
currently the site of ENZN's 10-dma - a level that the stock
has not traded below since September 26th.  Meanwhile, the $58
level has attracted buyers in the past and may do so again on
any future weakness.  A bounce from either of the aforementioned
levels can be used for a possible entry point with an
accompanying tight stop to manage risk in the event of further
sector weakness.

BUY CALL NOV-55 QYZ-KK OI= 778 at $7.60 SL=5.00  
BUY CALL NOV-60*QYZ-KL OI= 490 at $4.70 SL=3.75  
BUY CALL NOV-65 QYZ-KM OI=1160 at $2.65 SL=1.75  
BUY CALL FEB-65 QYZ-BM OI= 838 at $6.90 SL=4.75  

Average Daily Volume = 1.37 mln



IP - International Paper $37.90 (+1.80 last week)

International Paper is a global forest products, paper and
packaging company that is complemented by an extensive
distribution system, with primary markets and manufacturing
operations in the United States, Canada, Europe, the Pacific
Rim, and South America.

The beauty of trading big listed stocks is that the implied
volatility in the options is generally low.  Therefore, a decent
advance in the underlying can lead to a more-than-decent gain
in the options.  We saw that take place last week in IP as the
stock soared more than $2 in two days.  Hopefully traders were
in before that move and were able to book some solid gains in
the options because we only have two more trading days before
the company reports its third-quarter numbers.  IP's numbers
may have suffered during the third-quarter in the wake of a
further deterioration in the economy, so holding positions over
the actual report may be a risky proposition.  As such, traders
should consider their individual risk tolerances ahead of the
report when determining whether or not to hold over.  With
earnings just around the corner, we're going to be very
selective with adding new positions at current levels.  Then
again, a big Dow rally could carry IP above its so a quick
momentum play early next week may be in the works.  A sharp
advance back above the $38 level may good for a $1 if the Dow
works higher.

BUY CALL NOV-35*IP-KG OI=6422 at $3.90 SL=2.75
BUY CALL NOV-37 IP-KU OI=1677 at $2.15 SL=1.25
BUY CALL JAN-37 IP-AU OI=3548 at $3.50 SL=2.25

Average Daily Volume = 2.47 mln



PLCM - Polycom $33.37 (+4.50 last week)

Polycom develops, manufactures and markets communications
equipment that enables enterprise users to access broadband
network services and leverage increased bandwidth to more
conveniently conduct voice, video and data communications.

PLCM quickly rebounded back above the $32 Friday morning after
it briefly traded as low as the $31.31 level.  The stock dipped
below that level again during midday trading, but quickly
rebounded and finished strongly into the weekend.  We elaborate
on the $32 level because that may be a good spot to look for
future bounces and thus entry points on an intraday basis.
Someone is in there defending the stock at that level and bullish
traders looking for new positions might consider a bounce if
the buying continues at that level.  At the same time, though, we
need to see PLCM continue along its path of relatively higher
highs in the coming sessions.  Ideally, we'd like to see the
stock trade past the $34.50 level early next week to reinforce
its leadership.  A rally up to that general area - about $1 from
current levels - would allow traders a favorable exit point.
The company reports next Wednesday, so traders will want to plan
positions around that event.

BUY CALL NOV-30 QHD-KF OI= 109 at $5.70 SL=4.50
BUY CALL NOV-35 QHD-KG OI=1897 at $2.95 SL=1.75
BUY CALL NOV-40 QHD-KH OI=  48 at $1.35 SL=0.75
BUY CALL JAN-35 QHD-AG OI=3945 at $4.95 SL=3.75

Average Daily Volume = 1.87 mln



SEPR - Sepracor $40.31 (+2.04 last week)

Sepracor is a research-based pharmaceutical company dedicated
to treating and preventing human disease through the discovery,
development and commercialization of pharmaceutical products
that are directed toward serving unmet medical needs.

SEPR under performed the broader biotech sector in a big way
last Friday.  The stock shed almost 5% while the BTK.X finsihed
the day virtually flat.  We highlighted the $43 level as an exit
point for good reason and hopefully traders took advantage of
SEPR's strength up to that level Friday to book some short-term
gains.  The stock fell back towards the $40 level Friday, and
was able to hold it into the close.  If SEPR continues to hold
that level in the coming sessions, then traders might look for
a lift from that level if the BTK.X is advancing.  Otherwise,
a failure of the $40 level might see SEPR trade down to its
next major short-term support level at $38.  With that being
the current risk scenario, traders with open positions might use
a stop beneath the $40 level to protect against any further
downside.  If, however, the stock does lift from that level,
bullish traders might confirm any rally attempt with an advance
back above the $41 level.  For further confirmation of trend,
we need to see SEPR break above the aforementioned $43 level
followed by an advance past the 200-dma currently at $43.50.

BUY CALL NOV-35 ERQ-KG OI=406 at $7.10 SL=5.25
BUY CALL NOV-40*ERQ-KH OI= 42 at $4.00 SL=3.00
BUY CALL NOV-45 ERQ-KI OI= 73 at $2.00 SL=1.25
BUY CALL JAN-40 ERQ-AH OI=728 at $6.30 SL=5.00

Average Daily Volume = 775 K
 


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The Option Investor Newsletter                   Sunday 10-14-2001
Sunday                                                      4 of 5

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NEW PUT PLAYS
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No New Put Plays for the weekend.


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CURRENT PUT PLAYS
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JPM - J.P. Morgan Chase $32.89 (-0.52 last week)

JPMorgan Chase is a global financial services firm with
operations in over 60 countries.  The company's principal
bank subsidiaries are The Chase Manhattan Bank, Morgan
Guaranty Trust Company and Chase Manhattan Bank USA, National
Association.

JPM traded lower last Friday in synch with the Dow and S&P.
However, the stock once again rebounded from the $32 level.  In
fact, JPM's intraday low Friday was traced at $32.01.  There
appears to be a buyer lurking around that level, therefore we'll
need to see a breakdown below $32 in the coming days to confirm
the potential for further downside from current levels.  A
breakdown below the $32 level in the next few trading days could
lead JPM back down towards the $30 level and allow traders to
book some quick gains from current levels.  But much of JPM's
trading in the next few days will depend upon the Dow, S&P,
and most importantly the Bank Sector Index (BKX.X).  Bearish
traders will want to keep an eye of all three broad market
indicators when gaming JPM.  Furthermore, the company is slated
to report third-quarter results next Wednesday, which gives us
only a few days left to play this stock to the downside.  We
could get a decent move in the next two days if the
aforementioned market indicators weaken, but any new trades put
on at current levels should only be done so with a short time
period in mind ahead of the company's earnings report.

BUY PUT NOV-35*JPM-WG OI=3038 at $3.00 SL=2.00
BUY PUT NOV-30 JPM-WF OI=2629 at $0.90 SL=0.25

Average Daily Volume = 6.23 mln



CIMA - Cima Labs $59.55 (-2.49 last week)

Cima Labs develops and manufactures pharmaceutical products
based on its proprietary OraSolv and DuraSolv fast dissolve
technologies.

There's something up with CIMA and it's not its price.  The
stock continues to blatantly under perform the broader biotech
sector as measured by the AMEX Biotechnology Sector Index
(BTK.X).  That makes this a play on CIMA's relative weakness.
Last week, on days when the biotech sector rallied, CIMA didn't
follow suit as much as the broader group.  And on Friday when
the biotech sector was flat, CIMA shed 2%.  So if we get any
further weakness in the biotech sector, then we expect that
CIMA will measurably slide lower.  The question, however, is
whether or not the biotech sector is going to weaken in the
coming days.  So bearish traders in this play will want to pay
close attention to the price action in the BTK over the next
several days when gaming CIMA.  If the BTK begins trending
lower, bearish traders might use a breakdown in CIMA below the
$58 level as an entry point.  In contrast to that momentum
based strategy, those who like to enter new put plays near
resistance might look for CIMA to rally then subsequently
rollover near the $62 level.  A rollover at that level in this
point in the trend would mark yet another relative low in
CIMA.

BUY PUT NOV-60*UVK-VL OI=10 at $5.00 SL=3.75
BUY PUT NOV-55 UVK-VK OI= 0 at $2.80 SL=1.75

Average Daily Volume = 383 K



MBI - MBIA Inc. $48.14 (-0.83 last week)

MBIA is engaged in providing financial guarantee insurance and
investment management and financial services to public finance
clients and financial institutions on a global basis.  Financial
guarantee insurance provides an unconditional and irrevocable
guarantee of the payment of the principal of, and interest or
other amounts owing on, insured obligations when due.

MBI rebounded last Friday despite the weakness in the broader
markets and the stock's sectors.  Both the Bank Sector Index
(BKX.X) and Insurance Sector Index (IUX.X) traded lower last
Friday, which was in concert with the weakness in the S&P
500 (SPX.X).  MBI's divergence is a cause for concern for those
of us leaning on the bearish side in this stock.  Although MBI
traced a new relative low at the $46.38 early Friday, its
rebound into the close was discouraging for us bears.  The
stock's strength into the end of the day may have been no more
than routine short covering, but we'll want to keep close tabs
on any further divergence in price in the coming sessions.  If
the stock rallies along with the IUX and BKX, then bearish
traders might look for a rollover near the $48.78 level, or
possibly higher up around the $50 level.  But if the stock
continues higher on its own merits, without the help of its
sectors and the broader market, then bearish traders would do
well to step out of the way.

BUY PUT NOV-50*MBI-WJ OI= 436 at $4.10 SL=2.75
BUY PUT NOV-45 MBI-WI OI=1387 at $2.05 SL=1.00

Average Daily Volume = 559 K



TGH - Trigon Healthcare $63.25 (-3.13 last week)

Trigon Healthcare, through its subsidiaries, is a managed
healthcare company in Virginia, serving over two million
members primarily through statewide and regional provider
networks.  The company divides its business into four
segments, which include health insurance, government programs,
investments and all other.

TGH displayed further weakness in Friday's session, but really
didn't offer a favorable entry point.  The stock gapped lower
and actually bounced from our first downside target at the
$62 level.  We'll want to monitor the $62 level closely going
forward because that level appears to have attracted the dip
buyers last Friday.  Further weakness below that level may
allow for new entry points into put positions, but traders should
be aware of the possibility that TGH may bounce from that level
also.  TGH's rebound last Friday has set the stock up to
rollover near resistance, which acted as support only a few
days back.  The level we're referring to is the $63.50 level.
That level served as support just recently on two separate
days, it may now be a site of resistance.  As such, bearish
traders should look for a rollover as an entry point at the
$63.50 level early next week but only if the Health Care Sector
Index (HCX.X) is trading weak.  The HCX actually finished higher
last Friday, which may have been a product of sector rotation
into defensive issues.  The fact that TGH finished lower is a
testament to its relative weakness and was encouraging for us
shorts.  The HCX is near its 200-dma currently, so like TGH, it
may rollover in the coming trading sessions especially if the
growth areas of the market such as technology attract capital
away from defensive issues like TGH.

BUY PUT NOV-65*TGH-WM OI=0 at $4.30 SL=3.50
BUY PUT NOV-60 TGH-WL OI=0 at $2.00 SL=1.00

Average Daily Volume = 231 K



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