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Daily Newsletter, Sunday, 06/23/2002

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The Option Investor Newsletter                   Sunday 06-23-2002
Copyright 2001, All rights reserved.                        1 of 5
Redistribution in any form strictly prohibited.

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Posted online for subscribers at http://www.OptionInvestor.com
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MARKET WRAP  (view in courier font for table alignment)
******************************************************************
        WE 6-21          WE 6-14          WE 6-07          WE 5-31 
DOW     9253.79 -220.42  9474.21 -115.46  9589.67 -335.58  -179.01  
Nasdaq  1440.95 - 63.79  1504.74 - 30.74  1535.48 - 80.25  - 45.76 
S&P-100  489.42 - 12.34   501.76 -  5.56   507.32 - 21.88  - 10.72 
S&P-500  989.13 - 18.14  1007.27 - 20.26  1027.53 - 39.61  - 16.68 
W5000   9389.98 -159.74  9549.72 -202.97  9752.69 -353.80  -144.15 
RUT      461.07 +  2.00   459.07 - 11.44   470.51 - 16.96  -  6.17 
TRAN    2755.64 + 82.50  2673.14 - 13.52  2686.66 - 62.60  +  5.59 
VIX       31.28 +  1.35    29.93 +  3.28    26.65 +  3.75  +  1.64 
VXN       59.30 +  3.63    55.67 +  3.43    52.24 +  6.29  +  3.09 
TRIN       2.01             1.34             1.30             1.11 
Put/Call   1.27             1.15              .79              .73 
******************************************************************

 
Retest Complete?  
by Jim Brown

I guess that depends on what retest you are discussing. The 
markets closed at the lows of the year and that has to be a 
retest of sorts. The keyword missing from the title is 
"successful". Successful retests in the recent context (4 yrs) 
normally involved rocket rebounds when the prior levels were
"tested". I think Friday's market action offers yet another
clue to future direction.

Chart of the Nasdaq


 

Chart of the Dow


 

Friday started with another flurry of downgrades. JP Morgan
downgraded the enterprise software sector in view of the 
increasingly pessimistic IT spending outlook. MSFT, ORCL, 
SEBL, PSFT, etc, all suffered another drop. Remember the 
big after hours spike in ORCL to near $10? Well ORCL came 
really close to hitting $8 on Friday. I bet those shorts
are really glad they covered. SEBL is about to hit a new
post 9/11 low at $13. Same with PSFT at $16. Microsoft has
been the best performer until Wednesday. The company began
a slide from over $56 to near $52 at the close today. The 
worry it seems is that there are rumors beginning to float 
about an impending earnings warning. Considering the rumors 
last week were about an impending positive surprise we have 
come full circle. Microsoft's June low is $49.17.

The networking sector was downgraded by Banc of America on
concerns the spending freeze could drag out into 2003. JNPR, 
LU, CSCO, CIEN, etc, all took another hit. Cisco continued
its drop towards $12 with a -.34 loss to $13.73. All the 
other stocks in the sector are already under $10. 

One fish swimming against the current was Salomon (pun) Smith
Barney. SSB upgraded Dell to buy from neutral saying PC demand
is not as bad as it seems. Interesting call but Dell still 
struggled to stay positive in the days trading closing up
only a nickel at $23.97. SSB said they thought all the slowing
component sales were due to excess inventory from the 1Q and
not a slowing of demand. They felt demand was stable. Time
will tell.

Qualcomm said on Friday that results would meet or exceed 
the high end of its previous forecast. The sector spiked at
the open but closed lower. Qualcomm said sales of phone chips
were on track and it was experiencing strong order input for
the fourth quarter due to increasing demand for CDMA technology.
One of the continuing sector problems was a downgrade of the
sector to negative from stable by Moody's on Friday. They
warned they might downgrade some of the debt soon. 

Dow component Merck hit a four-year low today after it was 
revealed that they had counted as income money that was not
received. It appears their Merck-Medco unit claimed as income
the co-payments that people make when buying drugs on insurance.
The drugstores keep all or part of the co-payment and the drug
companies never see it. Merck-Medco reportedly claimed these
payments as a way to boost income. MRK lost -2.22 to $49.99.

Martha Stewarts broker may be making crafts soon and it 
won't be for recreation. After the close Friday Merrill Lynch
announced that new information had come to light regarding
trades in IMCL stock by Martha and IMCL CEO Samuel Waksal and 
the information had been turned over to authorities. The broker, 
Peter Bacanovic, and an associate, Douglas Faneuil had been
placed on leave. Let's see, if it was good news I doubt they
would have been sent home. According to Merrill the story
just started to unravel in the last 48 hours. Oops! Wonder 
how good Martha is at teaching crafts in confined places?
Nobody has admitted any wrongdoing but anyone can play 
connect the dots. According to news reports the mystery of
the missing stop loss order has been solved. It never
existed.

Next week is going to be a challenge economically. Tuesday
we get Consumer Confidence again and Existing Home Sales. 
Wednesday is Durable Goods orders and New Home Sales. Wrap
those reports up in a two day FOMC meeting ending Wednesday
and top with a GDP report on Thursday and you have a recipe
for market worry. The desert on Friday is Personal Income and
Spending, Consumer Sentiment and PMI. A very busy week! Just
what the market needs.

The market had a bad week to put it mildly. This was the fifth 
weekly loss in a row for the Dow and the lowest close of the 
year. The Dow took out last week's intraday low of 9261 with 
a drop to 9220 but rebounded slightly on minor short covering 
to close at 9253. The Dow is still well above the post 9/11
numbers of 8062 but appears destined to close that gap. 
The closest Dow support is in the 9075 area and the close on
Friday was below the current down trend channel. The S&P also
took out last weeks lows and closed under 1000 again. The
Nasdaq took out last weeks lows and closed only 17 points
away from the post 9/11 close of 1423. In a word, ugly.

A new pattern has appeared. Sell in the morning and sell again
in the afternoon. Simple and efficient. Get the bulls to buy
the morning dip and then knock them down again in the afternoon.
Monday could see more selling at the open with margin calls 
picking up (remember those) and total frustration being the
order of the day. There was a huge imbalance of sell on close
orders that will have to be reconciled at the open on Monday. 

Working in our favor is an expected post expiration bounce
and extreme oversold conditions. With stocks not restrained
by market makers trying to protect expiring positions they
will be free to move unrestricted. Unfortunately with the 
current trend the initial move may not be up. The volume 
increased on Friday with the NYSE trading 1.725 billion shares.
A huge day with 1.23 billion down volume. The Nasdaq volume
was less than the NYSE at 1.785B but still the biggest day
of the week. The capitulation topic continued to be discussed
and while Friday was ugly, it was not capitulation. It is 
still coming to a market near you soon. 

Despite the bearish sentiment the conditions are not bad 
enough historically. Only 8% of the S&P are at 52 week lows
despite the 4:1 down volume over up volume on the S&P. The
Nasdaq, despite the carnage, only saw 6% of its stocks at
new lows. There were still 81 new Nasdaq highs on Friday. As I
mentioned in my Thursday night commentary I think the leading
indicator for market direction is the NDX, the top 100 Nasdaq
stocks. It is well below the 9/11 lows and still dropping 
fast. It is at Jan-1998 levels (1035) and after minor support
at 1025 it could fall all the way to 950. Multiply that across
all the indexes and you can see the possibilities. 

For next week there are two conflicting camps of speculators. 
One camp thinks Monday will be a blow off day and then a 
rebound on Tuesday/Wednesday. Since that is chock full of 
economic reports and a FOMC meeting that could say nasty
things I am not leaning in that direction. The other camp
thinks Monday will rebound after three triple digit down days
on the Dow. Tuesday will be flat with the bear market returning
for the balance of the week. There are multiple cycle theories
that suggest a temporary bottom the end of next week. Of course
everybody has a theory. One reader wrote me on Friday and said
"If support holds next week the market will go up". No kidding.
If it does not hold and goes down, he is right, if it holds
and goes up he is right. Not much risk in that market call.

My best guess is the latter of the two camps. A close higher
on Monday with possibility of another intraday dip. The bounce
will run out of steam on Tuesday and start drifting lower again
to coincide with the FOMC announcement on Wednesday. All of
this speculation will of course be dependent on the economic
reports mentioned above. They could change the direction or
accelerate it. Warning season is about to come to a close but
we have one more big week left. The major fear is a warning
from a big company like MSFT or IBM. While IBM is expected
the severity of the warning would be key. Any warning from
Microsoft would be like a lightning bolt on a sunny day and
the results could be catastrophic. I don't expect a MSFT event
and think it is pure speculation. Still there are hundreds of
other companies that can warn and like we saw last week any
3-4 on the same day could push us over the brink.

Despite what we like to think we are not on our own. The 
world markets are sinking with us as the events impact the
global economy. On Friday for instance The Nikkei lost -258
points, the Hang Seng -162, Venezuela -280 and Brazil -511. 
Brazil is the festering sore that is impacting those other
markets and it will eventually take us down another notch. 
Many older traders can remember several Brazil induced crashes
in the last decade and the situation is not getting any better.
Add in the terrorist threat for the July-4th weekend and you
have numerous reasons to not be long stocks over the next
couple of weeks. 

I don't want you to think we have turned into permabears as 
one reader said Friday. "All OIN wrote about this week was 
gloom and doom. Terrorists, earnings, scandals, falling 
markets, broken support levels and your negative outlook.
Can't you write positive things about the market?" We would 
love to. How about this email I received on Friday: 

"Jim, Went heavily into IBM (100 puts) needless to say I was 
a little nervous when it went up on a downgrade. Just got out 
for a $50,000 profit-- Did the same with OMC (should be OMG 
for Oh my God). Think I'm going to Disney World (just kidding)
Thank you Thank you Thank you." (Name withheld)

Unfortunately we don't make the markets, we just report on 
them and suggest ways to profit from whatever trend is present.
That trend is down until it changes and we will continue to 
report that as well. How you choose to react to the information
is your business. Have a great weekend!

Seminar update: Confirmed speakers now include:

John Bollinger, Creator of the Bollinger bands
Jon Najarian, Dr "J" from the CBOE, President Mercury Trading
Robin Dayne, Profiled as "The Traders Coach" on 20/20 and CNBC 
Steven Price, Options Instructor, Market maker at CBOE
Jeffery Verdon, Trading and Tax law specialist
Leigh Stevens, Chief Market Strategist, Option Investor
Jeff Bailey, Mr Point and Figure himself!
Others will be posted as we get closer. 

Sign up now at the discounted price"
http://www.OptionInvestor.com/seminar/fall2002/ 

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


Editors note: 

Are You A Successful Trader and Frustrated Writer?

One part of this job I really like is getting emails 
from fellow traders with tips, tricks and different
insights into the markets. Everybody has a different view
of the same market and how to profit from it. I have readers
every week who send lengthy comments about particular trade
setups or market forecasts. Quite a few are nothing short of
amazing. We are going to start next week a "Guest Trader" 
column. If you have a particular trading technique, market
view, trend analysis or just a hot stock tip, we invite you
to submit it for publication. We will review it and publish 
the best ones in the newsletter. They don't need to be 
pretty or professional, just well thought out with enough
documentation to prove your case. If you are a successful
trader in this market then others want to know your secrets!
Email jim@OptionInvestor.com


********************
INDEX TRADER SUMMARY
********************

WATCH THE KEY STOCKS
by Leigh Stevens

TRADING ACTIVITY AND OUTLOOK - 

I learned from my market/trading mentor to follow everything, 
overlook nothing, but especially keep your eye on key stocks to 
understand the direction of the indexes and the market. You can 
look at maybe 4 stocks to see when the market is capable of 
turning around: GE, CSCO, MSFT and INTC. All but Cisco is in the 
Dow 30. Microsoft, Intel and Cisco are HUGE in tech and the 
Nasdaq.  They are "bellwethers" - as they go, so goes the market.  
It used to be IBM, but that was in a much simpler era. 

Anyway, back to my mentor - I talk about him enough in my book so 
I won't here, but he is one of the greatest index, stock and 
ptions traders on the planet.  Which is why HE is in (the book) 
Market Wizards and I am not - at least as a featured market 
player.  

I would note in passing that you do not hear about any of the 
"wizard" traders - AT ALL.  They don't write about the market, 
"sell" trading systems, go on Wall Street Week, or any of that 
"public" stuff generally. They are private traders and want to 
keep it that way.  They are all about making MONEY trading the 
markets, not about TALKING about the markets.  

My take-me-under-his-wing trading giant happened to LOVE to talk, 
but only about the market and not in a public forum. One thing I 
remember is that he used to calculate very accurately where the 
Dow was going by analyzing all 30 stocks and projecting where 
each was headed then coming up with a projection for the average 
- an interesting "bottoms up" approach. 

So, today I took a look at 3 of the Nasdaq bellwethers cause I 
was wondering what the likelihood is that the Nasdaq 100 and QQQ 
have bottomed, or the Dow, or any segment of the market - except 
the small cap sectors, which are hanging in like a "rock" - after 
"only" a 50% correction of the Sept to June advance. See my 
Sector Trader wrap for more on this.

3 STOCKS THAT TELL THE STORY -


      

Certainly at least tech is not going to turn around until Cisco 
oes.  The key events here: "filling in" its big upside chart gap 
and still heading south, after a reversal at its down trendline 
and at its 200-day moving average and failure again at the 50-day 
average.  CSCO is MAYBE getting to the low end of a possible 
trading range in the area of the late-Feb lows and most of the 
cluster of low in late-April. This will be an area to watch - the 
$13-14 area in CSCO.   




   

The key chart event was the double top and rally failure right at 
the May price peak. It then did not take a genius to see to 
short//buy puts on the stock. And to figure that, for example, 
QQQ was not going anywhere - this was the "leading" stock in the 
Q's in terms of the one being in a rally.  Oracle is a 
"lightweight" compared to the monster of Seattle. The $50 area is 
now going to be the key area to watch for "breakage", or not. 



 

The key chart/technical "event" was the reversal just above the 2 
key moving averages (50 & 200-day), followed by a downside 
penetration of them - it was all declining momentum after that. 

The second monster event was the huge downside chart gap followed 
by the total inability to rally back "into" the gap area, which 
acted as total resistance - why? - the gap is where sellers could 
NOT sell (at least during regular trading hours) on the 
"overnight" news - you can bet that the sellers welcomed the 
chance to do so on any return of prices into this price zone 
where they could not exit before. So, the gap tells us where 
prices are "capped" due to supply (willing sellers). 

If a stock has a strong lid on it, chances are it will still move 
but has only one direction to go in - the stock has to get 
cheaper as sellers continue to overwhelm potential buyers. 

S&P 100 Index ($OEX.X) - Daily/Hourly charts:

It's not shown on the daily chart, but the OEX is nearing its 480 
September low. I would say that it is not going to get this close 
to re-testing its fall "panic" low with going there.  There are 
of course many ways to get there however.  



 

The OEX is completely oversold on its hourly chart - NOT on a 
daily chart basis - and is at the lower envelope lines ("bands") 
that usually marks the area of an EXTREME in price AND is back to 
last Friday's low in the 488 area - given all that, what is the 
likelihood that there will be at least a short-term short-
covering type rebound. The odds would "normally" be good, 
especially considering the Friday expiration influence, which is 
in some sense an "artificial" one that is now removed. 

Do I want to bet on it by playing the long side, even for a 
bounce? - NO, unless I see it develop intraday and can catch it 
quick SO that I can stop out on a move to a new low.  Overhead 
resistance (selling interest) can be expected on a move back up 
to those prior lows - the cluster of them in the 497-500 area; 
then, in the 509-510 area.  

As far as buying - it's easier to sell the rallies - just wait.  
And, for sure I think we do not have to "worry" about a BIG 
upside move developing until we get even more oversold and 
raders get even MORE bearish than they are - and they are getting 
PRETTY bearish or at least fearful, judging by the steady climb 
of the CBOE volatility index, VIX, which closed at 31.28.  The 
Nas 100 volatility index, VXN is now almost to 60 (59.3) - 
readings above 60 have previously been associated with market 
bottoms.  

Dow Index (1/100: $DJX.X) - Daily/Hourly charts:

The downside target implied by the Dow Head & Shoulders Top (see 
my 6/18 or 6/20 Wrap) to 88.6 in DJX or Dow 8860 is a less 
distant target certainly.  While I am encouraged for the economic 
recovery by the steady eddy Dow Transportation average, it not 
uncommon for one Dow average to move independently of the other 
for lengthily periods of time such as a few weeks to a few 
months.   



 

As with the S&P 100, the DJX is at most of the lower extremes 
(just NOT the Daily oversold stochastic reading) from which I 
would normally expect a rebound - where, the probabilities of 
these things would favor bullish plays - however, this is one 
BEAR of a bear market. 

If you have vivid memories of how "extreme" the market got at the 
top a couple of years ago, you will know that the pendulum is now 
(naturally) at the opposite "extreme" - its just that we LIKED 
that prior extreme MORE as most traders feel more "natural" 
trading stuff that keeps going UP. 

On balance, we have the possibility of setting up a double bottom 
if we open steady to higher on Monday.  I can't suggest playing 
it - or I could, but figure this market is too unpredictable to 
make a projection in an end of day commentary. The key stocks I 
started off with DON'T have potential double bottoms.  Of course, 
with the Dow there are some still strong bullish trends.  Too 
close to Call!  

We can "call" resistance at that cluster of prior lows between 
94.5/94.7 and the 96 area. Implied support by the low end of the 
hourly channel (off the bottom) intersects in the 90 area. If its 
more of the same fear & loathing of stocks next week and more 
free fall, this is my next target in DJX.  


Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts:

NOTE: The "centered" moving average on the hourly charts that is 
not shown, unlike like on the daily chart - the average on which 
the moving average "envelopes" are based - is 21, meaning, on the 
hourly chart, that the lower band is a line that "floats" at 5% 
below the 21-hour moving average based on the average of the 
close of the last 21-hours.  Don't worry, help is on the way, I 
going to write my THIS week's TRADER'S CORNER (Thursday) article 
on the "ins and outs" of moving average envelopes.  

This past Thursday's Trader's Corner column was on using the Arms 
Index (TRIN) to detect changes in trend direction.  Which reminds 
me: use the TRIN as a barometer for Monday's trading direction - 
watch for low TRIN readings well under 1.00 (e.g., .50 - bullish 
- shows buying "pressure") or well above 1.00 (e.g., 1.50 or 
higher - bearish - selling pressure) as a clue to the buy/sell 
bias at that moment - and, then WATCH for when this Index starts 
to move AWAY from any such extreme, as a possible change in the 
immediate trend.   



 

I got the most recent prior hourly low (26.2) in Red for 
Resistance - it is now that.  What was a prior low now has 
"become" resistance and a place to mark where we are in terms of 
suggesting a bullish or bearish near-term outlook.  Bearish as 
long as we trade under this prior low, bullish (short-term) if 
the Q's start trading above it (26.2).  Simple, yes!  The dashed 
level line at 27.00 on the Daily chart is another such point, as 
this is the level of the important Sept. low.  

Notice how the QQQ trend moves down the lower curved envelope 
line (blue; "5%")- it acts as "curved trendline" so to speak. It 
is telling us that, at an oversold (downside) "extreme" the rate 
of downside momentum S-L-O-W-S down at least.  24.7, at the low 
end of the hourly downtrend channel, is implied support or a next 
downside target potentially.  Again, watch 26.2 as the "pivotal" 
mid-point number for QQQ. 

MINI-TRADER'S CORNER -

QUESTION:
" Great article last night - relating to the premium of index 
futures to the Index, can you tell me what the PREM.X is on Q-
Charts? I can see it is the futures over the cash, but are there 
any parameters Etc. and how we might interpret the info. 
Thanks..." 

RESPONSE: PREM.X is simply the nearest S&P futures (the "front 
month" - as of today, September) contract level minus the SPX 
"cash" value - so, it’s the premium of futures to cash. However, 
unless you are getting "real time" futures quotes, or at least 
the Chicago Mercantile Exchange (CME) where the S&P 500 futures 
trade, PREM.X will be a delayed quote on the futures side. It 
then has little ability to identify sudden sharp shifts in the 
premium of futures to cash - these changes happen quickly when 
there is a index futures-related arbitrage buy or sell "program" 
going on. 

But back to the significance of the PREM.X levels from day to 
day. Watching the levels from day to day will give you an ideas 
when the premium starts falling or rising, relative to the 
"norm", which tends to indicate rising bullish "sentiment" 
(rising premium level) or rising bearish sentiment (falling 
premium level). 

However, there is another missing comparison number, which is 
"Fair Value" of futures relative to cash; i.e., what "should" 
futures be trading at to be "fairly" valued to the actual basket 
of stocks. For example, you know that fair value is 250 (2.5) 
points (futures over cash) today and you see that PREM.X is 
running at 350 most of the day - this is usually a result of a 
bullish sentiment and willingness to pay a "premium" price in the 
index futures in the belief that the index will be rising. On the 
other hand, if PREM.X is running 100 or even -100 to nearby 
futures - and fair value is 250 - then bearish sentiment 
predominates. 

When PREM.X gets "rich' to cash, it invites buy programs - sell 
the futures, buy the basket of (S&P) stocks ("cash"). When the 
premium gets "undervalued, they unwind (liquidate) the previously 
done arbitrage programs by executing "sell programs" - buy the 
futures, sell the stocks. It's hard to INITIATE arbitrage that 
buys the futures and SHORTS the stocks, because of the "uptick 
rule" on shorting stocks. Arbitrage works on the rapid execution 
on each "side" of the trade - you cannot assume usually that you 
can short all the stocks you need to at the SAME time. 


Leigh Stevens
Chief Market Strategist 
lstevens@OptionInvestor.com


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

Russell-3000

This is the week to capitalize on the Russell Shuffle. At
the end of June each year the Russell kicks out the non
performers and adds an entirely new crop of stocks. I am 
going to focus on that today.

First however let's recap some of the expiration week plays
from last Sunday. I am not going to list them all but we
had some pretty decent gains. See the "weeks high = "

IMNX $21.72 Jun-$22 call IUU-FX $.50 Weeks High = $1.10
ESST $17.03 Jun-$17 call SEQ-FW $.80  Weeks High = $2.50
HLIT $4.98 Jun-$5 put LOQ-RA $.40  Weeks High = $1.30
HPQ $17.35 Jun-$17 put HHY-RW $.55 Weeks High = $1.20
SEBL $14.86 Jun-$15 put SGQ-RC $.95 Weeks High = $1.80

Best of all was GENZ. The June $25 put at $.65 cents
turned into a home run when GENZ warned on Wednesday.

GENZ $26.75 Jun-$25 put GZQ-RE $.65  Weeks High = $5.70


 

Even a blind squirrel finds an acorn once in awhile!


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

Russell-1000, 2000, 3000 rebalancing

Each year the Russell indexes are rebalanced at the end of 
June. This rebalancing is based on the market capitalization 
of each of the stocks as well as their price. Stocks trading 
under $1 are dropped and new stocks are added. 

For instance JBLU and KFT are new stocks that were not 
around last June. Stocks are weighted by market cap, which 
means the higher cap stocks will require funds to buy more 
shares to match the index results. When stocks are delisted, 
acquired, or for some other reasons are dropped from the 
index during the year they are not replaced until the end 
of June. This means there are many more stocks added than 
dropped during the reshuffle. 

The stocks involved in the Russell rebalancing are announced 
in mid-June with the changes taking place on June-30th. 
Stocks that are going to be dropped will see selling as the 
month draws to a close. Stocks being added will see heavy 
buying as the thousands of funds add them to their holdings. 
Since the funds attempt to match the index values exactly 
the majority of trading is done very close to the end of 
the month. However arbitragers will attempt to position 
themselves in these stocks beforehand to capitalize on the 
buying.

For your trading pleasure I have produced several lists of 
these new stocks. Just having the list of stocks is no real 
help without the market cap. This is the clue as to which 
will move the most. I have included that tidbit of 
information and sorted them by market cap. I created a 
separate Qcharts Quote file of the additions (in their 
entirety) and the deletions. I edited the deleted list to 
only show those stocks still trading near or over $5. Since 
stocks trading under $5 don't offer many shorting 
opportunities I dropped them. I also created two comma 
delimited files for those who don't use Qcharts. This allows 
you to import the lists into Excel or whatever quote system 
you use. 

Note: These are the additions to the Russell-3000. The top 
one third of the 3000 stocks then make the Russell-1000 and 
the bottom two thirds become the Russell-2000.

Here are the links:

Russell 3000 Deletions (Quote sheet)  
Http://www.OptionInvestor.com/downloads/R3K_deletions.quo

Russell 3000 Additions (Quote sheet)  
Http://www.OptionInvestor.com/downloads/R3K_additions.quo

Russell 3000 Deletions (text file) 
Http://www.OptionInvestor.com/downloads/R3K_deletions.csv

Russell 3000 Additions (text file) 
Http://www.OptionInvestor.com/downloads/R3K_additions.csv

Deletions:

I reviewed the Russell deletions and these are some suggestions. 
The "O" means optionable.

ENMD - O
NOVT - O
MXWL - O
ZIXI - O
EMIS - O
VXGN - O
HIFN - O
TAXI - O
KANA
STRC
SKP
BCII
ANST
AMTR

These stocks could react negatively to the drop as fund 
managers leave them. Remember, most of the drop will occur 
in the last week of the month and the first couple days of 
July.

Additions:

I just reviewed the Russell additions and these are my 
favorites. The "O" means optionable. A "**" means it has
possibilities.

KFT - O ** Higher cap means more buying
PRU - O ** Higher cap means more buying
PFG - O ** Higher cap means more buying
ATH - O ** Higher cap means more buying
ADS 
AAP - O
AHS - O
TSCO - **
IMH - **
JAS.A - **
UNTD
HPLA - O
MFA 
RAS
INVN - O ** 
OVTI - O
RGX - ** 
CCRD - O ** 
HGR - **
LABS
DKWD - O **
MGAM - O
HOLX - O
DCO 
MVL - O 
RNDC 


I stopped scanning when the market cap fell under $200 
million. Some of these stocks are already moving. They 
should continue up until the first week in July unless the 
arbitragers over buy and have to dump with insufficient 
fund buying. 


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


Remember, these are all high risk plays and should only be made
with 100% risk capital.

Good Luck

Jim Brown    


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

Somebody Please Pass The Towel
By Eric Utley

This market is uglier than Tyson's last defeat versus Lewis.  Will
this fight end in a TKO too?  The bulls are still standing, but it
feels like they're using only one of the four available appendages.
Meanwhile, it feels good to be a bear, doesn't?  Having your way
with the market, sticking and jabbing, every once in a while
throwing down a roundhouse power punch.  Let's take a look at
how the judges are scoring this one.

The Dow Jones Industrial Average ($INDU) is about 600 points away
from its 200-dma -- an important moving average for gauging long
term trends.  The S&P 500 (SPX.X) is about 125 points away from
its 200-dma, and the Nasdaq-100 (NDX.X) is about 400 points below
its long term moving average.  However many deviations away from
the 200-dma we are now I'm not quite sure.  But I do know this:
It's at an extreme.

Friday's best performing sector was the Utility Index (UTY.X)
with a whopping 0.57 percent gain.  This was once a grandma
sector until the boys of Enron, Dynergy (NYSE:DYN), and
Williams (NYSE:WMB) came along.  Still, there may be some
defensive appeal in the utilities names, explaining Friday's
bid.  At the other end of the spectrum, the Software Index
(GSO.X) was the worst performing sector of the day with its
4.66 percent plunge below September's lows.  Software is
technology.  Need we go further?

For the first time in a long time the four put/call ratios
tracked in this column all finished above 1.0, meaning that
more puts traded than calls Friday.  I really hate it when
these interesting observations take place around expiration,
particularly a triple witch expiration, because I have no way
of telling how much the expiration played into these numbers.
Sometimes it can artificially inflate one side of the market,
which I think is what happened Friday.  I'd like to see the
same observation next Tuesday, which would tell us a lot more
about the sentiment of the market.

Surprisingly, the bullish percent numbers were not hit hard.
Sure, the Dow Jones Bullish Percent ($BPINDU) reversed back
into bear confirmed, but the NYSE, NDX, and SPX numbers held
up pretty well.  And I'd like to point out once again that
the Nasdaq-100 Bullish Percent ($BPNDX) is still in a bull
alert position even after Friday's decline.  So there was a
bit of a divergence there between the price of the NDX itself
and the internals of the market.

For the first time in more than a week, the ARMS numbers
moved back towards extreme oversold readings.  What's
interesting about this particular time is that the longer
term readings are getting up there in conjunction with a high
reading in the short-term indicators.  So while the 5 and
10-day numbers have been gyrating, the 21 and 55-day numbers
have been moving steadily higher.  The higher the longer term
numbers, the closer we are to a very significant turning
point in the market, or so the theory goes.  At any rate,
the shortest of them all in the 5-day popped up to 1.48 last
Friday.

The advance/decline line was not as negative as I had hoped
for in last Friday's session.  In fact, it wasn't bad at all
with a 13/18 ratio on the NYSE, and a 16/17 reading for the
Nasdaq.  See, there are still some bulls out there.  But they
had better not look at the new high/new low numbers.  Ugly!
About 200 new lows were hit on the Nasdaq, and 145 on the
NYSE.  

Then there's the goings on in the Commitment of Traders (COT)
report.  From a very anecdotal observation, it looks to me
as if the commercial interest in the three big futures
markets are buying into the weakness in the averages.  That's
to say, they're bringing in short positions and adding long
positions along the way, reducing their net bearish positions,
or increasing net bullish positions.  This divergence is so
indicative of a market turning point that it's silly.  It
can't be that obvious, can it?

The thing that strikes me as disconcerting is that so many now
are calling for capitulation.  Even the folks over at CNBC are
asking the floor traders when the market is going to wash out
and rebound into an extended summer rally.  I don't like that
so many people are asking for the capitulation; nevertheless,
the numbers here in this column certainly point to that end.
We could see it next week.  Stay tuned!

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

Market Averages

DJIA ($INDU)

52-week High: 11350
52-week Low :  8062
Current     :  9254

Moving Averages:
(Simple)

 10-dma: 9540
 50-dma: 9936
200-dma: 9835



S&P 500 ($SPX)

52-week High: 1316
52-week Low :  945
Current     :  989

Moving Averages:
(Simple)

 10-dma: 1017
 50-dma: 1068
200-dma: 1104



Nasdaq-100 ($NDX)

52-week High: 2071
52-week Low : 1089
Current     : 1036

Moving Averages:
(Simple)

 10-dma: 1106
 50-dma: 1234
200-dma: 1410



Utility ($UTY)

Wow!  The UTY was the best performing sector during Friday's
market meltdown.  Oh yea, the UTY gained 0.57 percent on the
day.  Wow!

Leading to the upside included shares of Northeast Utility
(NYSE:NU), Duke Energy (NYSE:DUK), Progress Energy (NYSE:PGN),
DTE Energy (NYSE:DTE), and American Electric Power (NYSE:AEP).

52-week High: 376
52-week Low : 301
Current     : 316

Moving Averages:
(Simple)

 10-dma: 316
 50-dma: 332
200-dma: 327


Software ($GSO)

The GSO was the worst performing sector during Friday's session.
It lost 4.66 percent, on its way below September's lows.

The Amdocs (NYSE:DOX) warning was the primary driver for the
weakness in the group.  Not by surprise, the stock was the
worst performing component of the GSO with its 41 percent
plunge.  Other notable downside movers included Rational
Software (NASDAQ:RATL), off by 9.40 percent, I2 Tech
(NASDAQ:ITWO), down by 7.82 percent, and Intuit (NASDAQ:INTU),
lower by 6.43 percent, and helping along the weakness with its
own negative news item. 

52-week High: 234
52-week Low : 106
Current     : 106

Moving Averages:
(Simple)

 10-dma: 115
 50-dma: 126
200-dma: 154

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

Market Volatility

I hope, I truly hope, that the VIX's weakness Friday was a product
of the triple witch expiration, and not lower on its own merits.
That would be something, wouldn't it?  We'll know more next week,
but like my buddy Mr. Phillips said, "I don't like the zag in the
VIX."

The VXN did what it was supposed to Friday.  It's nice when it
works that way.  It kissed the 60 level, but fell a bit lower
as the day wore on.  Still, it's getting up there, which is a
good thing.

CBOE Market Volatility Index (VIX) - 31.56 -0.94
Nasdaq-100 Volatility Index  (VXN) - 59.29 +1.36

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

          Put/Call Ratio  Call Volume   Put Volume
Total          1.27        652,242       828,451
Equity Only    1.16        463,867       539,982
OEX            1.43         57,085        81,421
QQQ            1.94         34,059        65,908

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

Bullish Percent Data

           Current   Change   Status
NYSE          52      - 1     Bull Correction
NASDAQ-100    20      - 1     Bull Alert
DOW           43      - 3     Bear Confirmed
S&P 500       45      - 1     Bear Confirmed
S&P 100       47      - 2     Bear Confirmed

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  1.48
10-Day Arms Index  1.40
21-Day Arms Index  1.47
55-Day Arms Index  1.38

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.

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

Market Internals

        Advancers     Decliners
NYSE       1378          1805
NASDAQ     1668          1749

        New Highs      New Lows
NYSE       91             145
NASDAQ     61             199

        Volume (in millions)
NYSE     1,805
NASDAQ   1,962

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

Commitments Of Traders Report: 06/18/02

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

Get this, S&P commercials grew less bearish by a wide margin last
week.  They brought in their net short position by about 18,000
contracts.  Not by surprise, small traders grew less bullish by
about 12,000 contracts. 

Commercials   Long      Short      Net     % Of OI 
06/04/02      369,298   440,027   (70,729)   (8.6%)
06/11/02      388,751   457,018   (68,267)   (8.1%)
06/18/02      437,530   487,956   (50,426)   (5.4%)

Most bearish reading of the year: (111,956) -   3/6/01
Most bullish reading of the year: ( 36,481) - 10/16/01

Small Traders Long      Short      Net     % of OI
06/04/02      167,713    58,885   108,828     48.0%
06/11/02      174,357    69,464   104,893     43.0%
06/18/02      181,178    88,517    92,661     34.3%

Most bearish reading of the year:  36,513 - 5/01/01
Most bullish reading of the year: 114,510 - 3/26/02
 
NASDAQ-100

Nasdaq commercials eased off of their recent bullishness by
adding back a few more shorts.  Small traders went in the
opposite direction by adding a few more longs than shorts.

Commercials   Long      Short      Net     % of OI 
06/04/02       47,875     39,100     8,775    9.3%
06/11/02       45,946     36,878     9,068   10.9%
06/18/02       54,816     49,169     5,647    5.4%

Most bearish reading of the year: (15,521) -  3/13/01
Most bullish reading of the year:   9,068  - 06/11/01

Small Traders  Long     Short      Net     % of OI
06/04/02       12,162    21,420    (9,258)    27.2% 
06/11/02       14,561    25,330   (10,769)    27.0%
06/18/02       20,883    29,153    (8,270)    16.5%

Most bearish reading of the year: (10,769) - 06/11/01
Most bullish reading of the year:   8,460  -  3/13/01

DOW JONES INDUSTRIAL

Dow commercials bought into the weakness last week to the tune of
more than 3,000 contracts added to their net bullish position.
Small traders made the money.  They added to their net short
position by more than 4,000 contracts.

Commercials   Long      Short      Net     % of OI
06/04/02       20,564    16,169    4,395     11.0% 
06/11/02       20,369    17,172    3,197      8.5%
06/18/02       25,995    19,115    6,880     15.1%

Most bearish reading of the year: (8,322) -  1/16/01
Most bullish reading of the year: 15,135  - 10/16/01

Small Traders  Long      Short     Net     % of OI
06/04/02        7,114     9,639    (2,525)   (14.7%) 
06/11/02        7,500     9,925    (2,425)   (13.9%)
06/18/02        5,379    11,813    (6,434)   (37.2%)

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

Half Way There
By Eric Utley

The second quarter ends next week.  So does the first half of the
year.  And what first a half it has been.  The S&P 500 (SPX) is
down by about 14 percent year-to-date.  And if something doesn't
change quickly, the market looks to be heading for its third
consecutive year of losses.  Which brings up an interesting piece
of history: The market has not finished lower in four consecutive
years since 1941.  Curiously enough, that was following one of the
great asset bubbles in this country after the 1929 crash.  The
years that followed were slim indeed, with stocks pretty much
going nowhere for 20 years.  What's most disconcerting about this
particular post-bubble slump is that the bubble itself was the
most widely participated in, arguably the largest asset bubble
ever.

The point and figure charts that appear in this column were
created using www.StockCharts.com.

Please send your questions and suggestions to:

Contact Support 

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

QLogic (NASDAQ:QLGC)

I've been watching QLGC for a bearish entry.  Don't you think
the stock should be lower?  What's your opinion? - Ken

Thanks for the question, Ken, and I tend to agree with what
you alluded to.

QLogic is involved in the data storage business, which has
obviously taken a hit due to the slowdown in information
technology spending.  With little rebound in sight for
business spending, you have to think that the data storage
business will remain a very tough one for at least another
year, if not longer.  But despite the woes of its peers
and customers, QLGC has held up very well in this market
environment.

What I find interesting is to look at the charts of QLGC's
big customers who include Sun Microsystems (NASDAQ:SUNW),
IBM (NYSE:IBM), Dell Computer (NASDAQ:DELL), and Hewlett
(NYSE:HPQ).  Most of the stocks are trading at or below
their September lows, while QLGC is well above its lows from
last fall.  QLGC bottomed right around $18 last fall.  It
closed at $42 and change last Friday.

Given the overwhelming weakness in the others in the data
storage business, including the software makers like Veritas
(NASDAQ:VRTS) and other infrastructure plays like Brocade
(NASDAQ:BRCD), I can't imagine that QGLC is doing well
enough to justify its loft price and valuation.  The stock
is selling for about 58 times last year's earnings, and about
12 times last year's sales.  Those are very expensive measures
versus even the rest of the tech sector.

The only thing that I really found that could be giving support to
the stock is the relatively high short interest.  There are about
13 million shares sold short in this stock, which is a fairly
high number given its float of just over 90 million shares.  The
heavy short interest can oftentimes keep a stock from going down
because of the emotion involved with shorting a stock with too
many others.  The fear of the upside can often overwhelm the
weak shorts, who in turn cover prematurely and keep demand in the
stock, keeping the price up even though it should by most
measures be much lower.

Technically, the stock appears to be stuck in between a long term
neutral wedge, or perhaps a slightly descending wedge, which would
be a little more bearish than a neutral pattern.  I'd be willing to
bet that the stock eventually breaks down below its wedge and goes
on to much lower prices, but it may take a big short covering
rally in the broader market before that happens, which would help
to remove the weak shorts in the stock and clear the way for more
supply and less demand in the stock.  Given the oversold nature of
the market right now, I wouldn't be as inclined to short QLGC at
its current levels.  But it's an interesting bearish play up near
resistance, perhaps near its descending resistance line right
around the $50 level.

QLGC - Daily


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

Corinthian Colleges (NASDAQ:COCO)

I was scanning the new high list and noticed a few stocks from
the private education sector that look very strong.  I was
wondering what your charts show for these stocks.  I'm
particularly interested in COCO. - Thanks, Peter

Thank you for the question, Peter.

I don't know what it is about these private education stocks,
but they've going like mad this year.  I've heard the idea
that the soft job market has caused a dramatic increase in
demand for secondary education, and the professional type of
education that many of these private educators provide.  It
seems that a lot of people are going back to school.  From
what I gather, that is the primary driver behind these stocks,
but there could be more to the story that I may be unaware
of.

For its part, COCO offers post secondary education services.  It
runs about 50 schools in 20 different states.  The company
targets mainly the career oriented student with degree
programs for healthcare, electronics and information tech
studies.  Earnings are expected to grow by 39 percent this
year, and by about 26 percent next year.  That's pretty much
the reason that the stock has done so well: Earnings!

Technically the stock is doing very well and looks very, very
strong.  Amazingly it broke out of its short term base last
Friday on heavy volume.  The stock has been trending higher above
its supporting trend line which it has rebounded from about three
times this year  The stock was having some trouble getting above
the $30 level over the last month and a half, but easily broke
and closed above that level during last Friday's session.  Again,
the volume was very heavy, and judging by what the price has
been doing, I'd guess that the stock remains under heavy
institutional accumulation.  But given the breakout above short
term resistance already, I wouldn't be aggressively pursuing this
stock.  Instead, I think COCO is a good one to look for a pullback
to support where it would offer a very smart buying opportunity.
More often than not, after a stock breaks out from a short term
base it will normally come back to retest what is known as the
platform of the support, which is the previous resistance at the
$30 level.  That former resistance should now offer support for
the stock, and an entry point into bullish positions.  I'd place
my stop somewhere just below the ascending trend line if I were
to buy on a pullback to $30.

COCO - Daily


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

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.


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

==================================================
Market Watch for the week of June 24th
==================================================

------------------------
Major Earnings This Week
------------------------

Symbol  Company               Date           Comment      EPS Est

------------------------- MONDAY -------------------------------

SONC   Sonic Corporation      Mon, Jun 24  After the Bell    0.34
WAG    Walgreen               Mon, Jun 24  -----N/A-----     0.25

------------------------- TUESDAY ------------------------------

COMS   3Com                   Tue, Jun 25  After the Bell   -0.02
APOL   Apollo Group           Tue, Jun 25  Before the Bell   0.24
CHBS   Christopher & Banks    Tue, Jun 25  -----N/A-----     0.33
EMMS   Emmis Communications   Tue, Jun 25  Before the Bell  -0.08
FDO    Family Dollar Stores   Tue, Jun 25  Before the Bell   0.35
FDX    FedEx Corp             Tue, Jun 25  Before the Bell   0.77
KBH    KB Home                Tue, Jun 25  Before the Bell   1.11
KR     Kroger                 Tue, Jun 25  Before the Bell   0.44
MU     Micron Technology      Tue, Jun 25  After the Bell    0.07
PAYX   Paychex                Tue, Jun 25  Before the Bell   0.19
RAD    Rite Aid Corporation   Tue, Jun 25  -----N/A-----    -0.07
SJR    Shaw Communications    Tue, Jun 25  After the Bell     N/A
UOPX   Un. of Phoenix Online  Tue, Jun 25  Before the Bell   0.13

-----------------------  WEDNESDAY -----------------------------

STZ  Constellation            Wed, Jun 26  After the Bell    0.37
GIS  General Mills            Wed, Jun 26  Before the Bell   0.25

------------------------- THURSDAY -----------------------------

AM  American Greetings        Thu, Jun 27  Before the Bell   0.43
CAG  ConAgra Foods, Inc.      Thu, Jun 27  Before the Bell   0.33
NKE  Nike                     Thu, Jun 27  After the Bell    0.75
TKS  Tomkins                  Thu, Jun 27  Before the Bell    N/A

------------------------- FRIDAY -------------------------------

None

----------------------------------------------
Upcoming Stock Splits In The Next Two Weeks...
----------------------------------------------

Symbol  Company Name              Ratio    Payable     Executable

KSWS    K-Swiss Inc.              2:1      06/21       06/24
JNC     John Nuveen Co            2:1      06/21       06/24
PNRA    Panera Bread              2:1      06/24       06/25
PENN    Penn National Gaming, Inc.2:1      06/24       06/25
THC     Tenet Healthcare Corp.    3:2      06/27       06/28
GMRK    GulfMark Offshore, Inc.   2:1      06/27       06/28
TRBS    Texas Regional Bancshares 3:2      06/27       06/28
STJ     St. Jude Medical, Inc.    2:1      06/28       07/01
JILL    J. Jill Group             3:2      06/28       07/01
MMC     Marsh McLennan Companies  2:1      06/28       07/01
CMC     Commercial Metals         2:1      06/28       07/01
FPU     Florida Public Utilities  4:3      06/28       07/01
BER     W.R. Berkley              3:2      07/02       07/03
COH     Coach Inc                 2:1      07/03       07/05
SII     Smith Inte                2:1      07/05       07/08
THO     Thor Industries           2:1      07/05       07/08
MLAN    The Midland Company       2:1      07/05       07/08


--------------------------
Economic Reports This Week
--------------------------

Micron Technology and FedEx report earnings on Tuesday.  But the big 
market movers this week--other than unforeseen global disasters, of 
course--are likely to be a pile of economic reports hitting the 
wires Tuesday through Friday: Housing numbers, Consumer Sentiment & 
Confidence, the Final GDP...pretty much everything but the kitchen 
sink!  And of course don't forget that Doc Greenspan and his FOMC 
boys hold a two-day chitchat on Tuesday and Wednesday. 

==============================================================
                       -For-           

Monday, 06/24/02
----------------
None

Tuesday, 06/25/02
-----------------
Consumer Confidence (DM)Jun  Forecast:  109.6  Previous:    109.8
Existing Home Sales (DM)May  Forecast:  5.63M  Previous:    5.79M
FOMC Meeting (2-Day)(DM)

Wednesday, 06/26/02
-------------------

Durable Orders (BB)     May  Forecast:   0.5%  Previous:     0.8%
New Home Sales (DM)     May  Forecast:   915K  Previous:     915K
FOMC Meeting (2-Day)(DM)

Thursday, 06/27/02
------------------
Initial Claims (BB)    06/22  Forecast:    N/A  Previous:    393K
GDP-Final (BB)            Q1  Forecast:   5.6%  Previous:    5.6%
Chain Deflator-Final (BB)Apr  Forecast:   1.0%  Previous:    1.0%
Help Wanted Index (DM)   May  Forecast:    N/A  Previous:      47
FOMC Minutes             5/7

Friday, 06/28/02
----------------

Personal Income (BB)    May  Forecast:   0.3%  Previous:     0.3%
Personal Spending (BB)  May  Forecast:   0.0%  Previous:     0.5%
Mich Sentiment-Rev. (DM)Jun  Forecast:   90.8  Previous:     90.8
Chicago PMI (DM)        Jun  Forecast:   58.5  Previous:     60.8

Definitions:
DM=  During the Market
BB=  Before the Bell
AB=  After the Bell
NA=  Not Available


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The Option Investor Newsletter                   Sunday 06-23-2002
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THE SECTOR BEAT - 6/23
by Leigh Stevens

The red ink was flowing again Friday, which was to be expected in 
with the market again under extreme selling - there was however, 
no sector that off by even 5% - mostly, the weak got weaker, 
especially tech sectors like software, disk drives, chip stocks, 
etc., along with the drug stocks.  

Portfolio managers may have felt that the drug makers were under 
assault due to the risks inherent to the moment when their hugely 
profitable prescription drugs loose their patent protection. 

This happened with Prilosec, make by U.K.-based AstraZeneca, when 
the FDA made a Friday decision to allow Procter & Gamble to sell 
an over the counter version - while P&G would have a licensing 
arrangement with the drug's maker, it would reduce the cost by 
75%, dropping from $4 a capsule to $1 - still not cheap but its a 
one cap a day dosage.  Having been a daily user of the product, 
who stopped when even my monthly "co-pay" was outrageously 
expensive - I say (to the FDA) WELL DONE! 

It's OUTRAGEOUS what we have to pay for some of these drugs, 
while the drug companies are spending TENS OF MILLIONS on 
advertising these medications, so they can get more "users". 

Even more interesting in such a free-fall market like this one, 
is what sectors were UP and bucking the trend.  On Friday, the 
small cap Russell 2000 index was UP. The S&P SmallCap 600 Index 
was nearly UP ($SML.X -0.02%). So, too the Dow Transportation 
average - if anything bodes well for the future direction of our 
economy it is the transport stocks (trucking, rail, airfreight – 
not the airlines).  

The Defense stocks were UP again on Friday, rebounding during the 
week after their recent sell off. The home builder stocks were 
unchanged on Friday, after a mostly up week.  Not so the 
Healthcare (HMO) stocks at week's end - with this sector, the 
technical internals have been "signaling" a reversal - I'll take 
a look at these sectors.     

HIGHER ON THE DAY ON Friday - 


 


DOWN ON THE DAY on Friday - 


 


SECTOR TRADE RECOMMENDATIONS & REVIEW -

NEW TRADE RECOMMENDATION(S) - 

Buy IJS at 88.50 
(S&P 600 Small Cap Value fund iShares) 
Stop at 87.60
COMMENT - I THOUGHT WE WOULD GET FILLED ON THE IJS LIMIT PRICE 
TODAY - WITH THE DOW DOWN 170 PTS, YOU WOULD THINK SO - WRONG!!

Also suggested purchase of IWM around 91.00
(Russell 2000 iShares) 
6/20 low was 91.32; Close: 91.80
COMMENT - LOW ON IWM WAS 91.20 AGAIN TODAY - REMINDS ME OF THE 
SAYING THAT "LIMIT" ORDERS LIMIT YOUR PROFITS - HOPE "AROUND" 
QUALIFIER WAS HELPFUL!

Buy BBH at 79.10  
(Biotech HOLDR's Trust stock)
Stop at 76.00


OPEN POSITIONS - 
Long IJS at 91.25
(S&P 600 small cap value iShares) 
Stop: 87.60


 
TRADE LIQUIDATIONS -
NONE 



SECTOR HIGHLIGHT(S) -

Biotechnology Index ($BTK.X)
STOCKS: ABGX; ADRX; AFFX; AMGN; BGEN; CELG; CEPH; CHIR; CRA; DNA; 
ENZN; GENZ; GILD; HGSI; ICOS; IDPH; IMCL; IMNX; INCY; MEDI; MLNM; 
MYGN; PDLI; TARO; TEVA; VRTX; XOMA

The Biotechnology sector is not following the rest of the market 
to new lows.  BTK is falling back toward the low end of its 
downtrend channel.  Another move to this area may offer a buying 
opportunity in this sector - at least they would offer a 
potential low risk entry, because an exiting stop can be placed 
just under the prior lows, which is close by - making for a 
"tight" stop/exit point. (The Biotech HOLDR's look like they may 
offer a buying opportunity and are featured in the trade 
recommendation section above.)  



 

A daily close above 376 in the BTK Index is needed to suggest an 
upside reversal and possible bottom.  Closing move above 375-376 
still is a key to a turnaround. Conversely, a close below 325 
would suggest the possibility of another down "leg" developing.  
UPDATE: 6/23

Defense Index; Amex ($DFI.X)
STOCKS: ATK; BA; COL; DRS; EASI; EDO; ERJ; ESL; FLIR; GD; INVN; 
ITT; LLL; LMT; NOC; OSIS; RTN; SSSS; TDY; TTN; UIC



 

SOME PRIOR COMMENTS: Thought that a "bear flag" was forming – 
NOT! Saw further downside, perhaps back to 600 area. 

NOW: Close above 655 and the 50-day moving average is a bullish 
plus, but the 660-661 level is the key "line" of technical 
resistance - a close above here, AND the ability to stay above it 
on subsequent pullbacks, is needed to suggest that the bullish 
trend might be back on track.  However, there would still be the 
double top at 680 to overcome for DFI. More action is needed to 
say that this sector is not still building a top.
UPDATE: 6/23 


U.S. Home Construction Index ($DJUSHB) - Dow Jones
STOCKS: BZH; CLPO; CPH; CAV; CTX; CHB; CMH; DHI; DHOM; FRTG; HOV; 
KBH; WLS; MDC; MHO; MTH; MODT; NHCH; NUR; OH; OHCA; OHCB; OHB; 
PHHM; PHM; RYL; SKY; SEHI; SPF; TOL; WLT; WCI; WTMK; WLFO    



 

Looks like the Home Builder stock sector could make a top if the 
Index stalls in the 397 area - stay tuned!

Healthcare Index; Morgan Stanley ($HMO.X)
STOCKS: AET; AHG; ATH; CAH; CI; FHCC; HUM; MME; OHP; OPTN; PHSY; 
TGH; THC; UNH; WLP

SOME PRIOR COMMENTS: Potential for a top, even with move to new 
high above 645 - possible downside reversal is suggested by the 
bearish price/RSI divergence. 



 

NOW: A close below the prior top at 645 provides initial evidence 
for a downside reversal, but "confirmation" would be on a close 
under 630 at the up trendline. 

What I found bearish in the chart (besides already noted higher 
highs on decline relative strength) is the rising bearish "wedge" 
pattern that is outlined (magenta converging lines) on the chart. 
Move below 630 support, then a close below the 50-day moving 
average would "confirm" a bearish reversal.  

There is not a HOLDR or iShares that represent this sector that I 
have found. Shorting/buying puts on individual stocks in the 
sector is a way to play this group however. 
UPDATE: 6/23

Transportation Average; Dow Jones ($TRAN)
STOCKS: Airborne Inc. (ABF); Alexander & Balwin (ALEX); AMR Corp 
(AMR); Burlington Northern (BNI); CNE Transportation (CNF); CSX 
Corp (CSX); Delta (DAL); FedEx Corp. (FDX); GATX Corp (GMT); 
J.B.Hunt Transport Services (JBHT); Norfolk Southern (NSC); 
Northwest Airlines (NWAC); Roadway Express (ROAD); Ryder System 
(R); Southwest Airlines (LUV); UAL Corp. (UAL); Union Pacific 
(UNP); US Airways (U); USFreightways Corp. (USFC); Yellow Corp. 
(YELL) 

SOME PRIOR COMMENTS: The DJ Transportation average has been 
"basing" above its 200-day moving average, performing better than 
the Dow Industrials in this regard. TRAN closed above its March-
May down trendline on recent rally. Chart picture continues to 
look bullish as long as 2620-2622 is not exceeded to the 
downside.  



  

NOW: Bullish breakout above its down trendline and to above the 
transports 50-day moving average is "confirming" bullish action, 
especially in the face of such a down market. 

There is no way to buy a sector type stock - no HOLDR or iShare, 
etc. – however, individual call and stocks purchases can be a way 
to play this group, especially if you can play 2-3 stocks.   
UPDATE: 6/23

Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com


***********************************************************
DAILY RESULTS
***********************************************************

Please view this in COURIER 10 font for alignment
*************************************************

CALLS              Mon    Tue    Wed    Thu   Week

DGX      87.15    1.62   0.93   1.06  -0.55  -1.09  Dropped
OHP      49.11    0.97   0.65  -0.47  -0.69  -0.22  Entry point??
BGEN     40.30    1.59  -1.11  -1.17  -0.79  -2.12  Dropped
AET      50.38    0.96   1.03   0.89  -0.29   1.48  Still strong
DUK      31.76    0.60   1.21  -0.09  -1.83   0.75  Nice rebound!
KFT      41.93    0.50   0.39  -1.46  -0.11  -1.02  Inside day!!!
ATH      72.50    2.11   0.25  -0.32  -0.89   1.11  Held up well
MIK      43.15    0.31  -1.27   0.82  -0.26   0.50  New, wedged up
DHI      26.74    0.54   0.71   0.50   0.79   3.03  New, housing!


PUTS               

MIL      31.04    1.33  -0.39  -0.60  -3.31  -3.03  Ready to break
HIG      60.92    2.24  -0.23  -0.13  -0.98   0.99  Dropped
ENZN     23.34    1.44  -0.60  -0.78  -1.45  -2.20  Take out lows?
IBM      68.75    0.97  -1.20  -2.59  -1.77  -7.42  Below $70!!!
ZLC      38.40    0.87  -0.79  -0.20  -0.18  -0.73  200-dma at $38
TDS      62.00    2.50  -1.05  -1.45   0.02  -1.15  Telecom tanker
NVLS     32.23    2.07  -0.85  -3.35  -1.88  -3.74  No bottom yet
EMMS     22.53    0.71  -0.12  -0.33  -1.80  -3.16  Look out below
TBH      20.60    0.90  -0.58  -0.45  -1.90  -3.83  New, Brazil!!
KMI      40.20    1.64  -0.56  -1.85  -0.27  -0.56  New, low gas


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

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

DHI – D.R. Horton Inc. $26.74 (+3.03 last week)

See details in play list




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

KMI - Kinder Morgan $40.20 (-0.56 last week)

See details in play list





**************************
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
^^^^^

BGEN – Biogen, Inc. $40.30 (-2.12) The Biotech bounce appears to
be dead, with the BTK index falling back to its closing lows from
a couple weeks ago.  The hint of strength that we were focusing
on in BGEN has been completely squashed as well, with the stock
falling back to just above the $40 level.  While our stop has yet
to be violated, the fact that it couldn't make any headway over
the past week is reason enough for us to pull the plug.  A
rebound next week should be used to exit open plays at a more
favorable point.

DGX $87.15 (-1.09) The strength that shares of DGX had been
exhibiting early last week vaporized on Friday, as the stock gave
up more than 4.5% on strong volume.  Although the bulls tried
valiantly to defend the $88 support level in the middle of the
day, the end of day slide was too much for them and they stepped
aside.  With our stop violated, it's time to push DGX off of the
playlist this weekend.  Use any sort of rebound on Monday to exit
open positions.


PUTS
^^^^

HIG $60.92 (+0.99) HIG just isn't acting right.  Our suspicion
grew last Friday as the stock actually managed to finish higher
while the market was crushed into the close of trading.  We
didn't like that divergence.  Instead of having the stock go
against us next week, we're dropping coverage this weekend.  Look
to exit plays into weakness early next week, or set a very tight
stop just above Friday's highs to protect against a short
covering rally.


***********
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.


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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 06-23-2002
Sunday                                                      3 of 5


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

MIK - Michaels Stores $43.15 (+0.50 last week)

Michaels Stores, Inc. is a national specialty retailer
providing materials, ideas and education for creative
activities. As of March 22, 2002, the Company operated 708
Michaels retail stores in 48 states, as well as in Canada,
averaging 18,100 square feet of selling space. Its stores offer
products for the do-it-yourself home decorator and arts and
crafts supplies. The Company also operated 142 Aaron Brothers
stores, as of March 22, 2002, primarily on the West Coast,
averaging 5,900 square feet of selling space. These offer photo
frames, a full line of ready-made frames, custom framing
services and a wide selection of art supplies.

Is the consumer losing strength?  Some retailers beg to differ.
MIK is one such retailer, whose shares have been on a tear this
year, up by about $10 year to date.  That's a pretty solid move
for a stock that began the year near the $33 mark!  The company
has been able to fend off any weakness seen in the other broad
line retailers with its specialty product mix.  The arts and
crafts chain reported same store sales rose by 6 percent during
the month of May, far outpacing the average retail sales report.
The company reported that total sales for the month had risen
to $175 million, above last year's $151 million during the same
period.  The stock has obviously responded to the strong
fundamentals of the company, and it looks to continue higher over
the short term judging by the pattern traced over the last two
weeks.  On an hourly chart, MIK has traced an ascending wedge
with an aggressive support line now below current levels at or
around the $42 level.  We've seen four rebounds from that level
in the last two weeks, which continues to support relatively
higher lows.  The upper end of the pattern is the resistance
portion of the wedge, which is at the $44 level.  A breakout
above there could lead to a quick trip back up to the stock's
relative highs up around the $46 level traced earlier this
month, which was also the stock's yearly high.  Traders looking
to enter on the breakout need only look for a strong move above
the $44 level on heavy intraday advancing volume in a rising
market.  Our stop is initially set at the $39.50 level.

BUY CALL JUL-40*MIK-GH OI=529 at $4.00 SL=2.75
BUY CALL JUL-45 MIK-GI OI=371 at $1.25 SL=0.50 
BUY CALL SEP-40 MIK-IH OI=627 at $5.20 SL=3.00
BUY CALL OCT-55 MIK-II OI=129 at $2.50 SL=1.25

Average Daily Volume = 549 K


DHI – D.R. Horton Inc. $26.74 (+3.03 last week)

D.R. Horton is a national builder that is engaged primarily in
the construction and sale of single-family homes in 39 markets
and 23 states in the U.S.  The company designs, builds and
sells its homes on lots developed by it and on finished lots
that it purchases, ready for home construction.  DHI also
provides title agency and mortgage brokerage services to its
homebuyers.  It does not retain or service the mortgages that
it originates, but sells the mortgages and related servicing
rights to investors.

Home is where the heart is, and lately it happens to be where
the money is too!  One of the best performing sectors since
the September lows is the Dow Jones US Home Construction sector
(DJUSHB), still up more than 100% from those lows.  May and the
first part of June saw some weakness in the sector as it
consolidated down to the $345 level, but the recent housing data
lit a fire in the bullish camp last week, resulting in a strong
bullish run.  DHI certainly can't be called a laggard in this
area of the market, as it rallied more than 12% last week and
ended right at resistance ($26.75).  All this occurred while the
broad market was once again taking a severe beating to the
downside.  Adding to the bullish tone in DHI, the stock saw
heavy buying volume with Thursday and Friday seeing nearly double
the averaged daily number of shares trade hands.  It makes one
wonder what the stock will do if the broad market ever manages
to rally again.  There is now support at the $26 level, although
it is much stronger at $24.50-25.00.  A dip and bounce from
either of these levels would make for an attractive entry point
into the play although we wouldn't turn our nose up at a breakout
over intraday resistance at $27, so long as volume remains strong.
The last vestige of resistance resides at $29, and we would expect
some profit taking to commence once that level is reached again.
Plan your trade accordingly.  Ride the bullish trend as long as
it lasts and monitor the DJUSHB for signs of continued strength.
Our stop is initially set at $24.

BUY CALL JUL-25*DHI-GE OI=506 at $2.50 SL=1.25
BUY CALL JUL-30 DHI-GF OI= 39 at $0.35 SL=0.00
BUY CALL AUG-25 DHI-HE OI=256 at $3.00 SL=1.50
BUY CALL AUG-30 DHI-HF OI=245 at $0.75 SL=0.25

Average Daily Volume = 1.56 mln



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and clicking on the link to the book on its home page.

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

AET - Aetna $50.38 (+1.48 last week)

Aetna Inc., incorporated in December 1982, is a health benefits
company whose business operations are conducted in the Health
Care, Group Insurance and Large Case Pensions segments. On
December 13, 2000, the Company was spun off, with the remaining
entity merged into a subsidiary of ING Groep N.V. The Health
Care segment consists of health and dental benefit products
including health maintenance organization, point-of-service,
preferred provider organization and indemnity products, and
group insurance products including life, disability and long
term care insurance products. The Group Life Insurance segment
consists principally of renewable term coverage, the amounts
of which may be fixed or linked to individual employee wage
levels. Large Case Pensions manages a variety of retirement
products, including pension and annuity products, offered to
qualified defined benefit and contribution plans.

It was an interesting week for the HMOs last week on the political
front.  The Supreme Court upheld state laws that require HMOs to
accept opinions from review boards about medical procedures.  The
news was received poorly by the broader sector noting the drop in
the HMO index in the two days following the court's decision.
But AET remained virtually untouched by the weakness in the broader
group, which was a sign of the stock's continued relative strength.
Instead of the issues impacting the other HMOs in the sector, AET's
weakness later in the week was mostly due to the broad market
weakness that pressured virtually all stocks lower, save it for a
few isolated cases such as the gold stocks.  In fact AET traced
another new yearly high last week, so clearly it's going to take
more than a round of broader market weakness to pull this stock
back to earth.  Moving forward, we would ideally like to see some
strength return to the broader market.  At least some
stabilization in stocks would help this play.  But AET may be
able to continue going it alone as it has done all year long.
Early next week, traders might start looking for a rebound from
current levels around the rising 10-dma, or slightly lower above
the $48 level.  A little pullback in here wouldn't be such a bad
thing as it would help to remove some of the stock's short term
overbought condition.  Otherwise, a breakout to new highs above the
$52 level on heavy volume can be used as an entry point into
strength above current levels and onto new highs.

BUY CALL JUL-45 AET-GI OI=1556 at $6.30 SL=4.75
BUY CALL JUL-50*AET-GJ OI= 739 at $2.75 SL=1.50
BUY CALL OCT-50 AET-JJ OI=2359 at $5.00 SL=3.00
BUY CALL OCT-55 AET-JK OI=1396 at $2.80 SL=1.75

Average Daily Volume = 1.16 mln


ATH – Anthem, Inc. $72.50 (+1.11 last week)

Anthem is a health benefits company serving over 7 million
members, primarily in Indiana, Kentucky, Ohio, Connecticut,
New Hampshire, Colorado and Nevada.  The company owns the
exclusive right to market its products and services using the
Blue Cross Blue Shield (BCBS) names in these states under
license agreements with the Blue Cross Blue Shield Association.
ATH's product portfolio includes a diversified mix of managed
care products, including health maintenance organizations
(HMOs), preferred provider organizations (PPOs) and
point-of-service (POS) plans, as well as traditional indemnity
products.  The company's managed care plans and products are
designed to encourage providers and members to select
cost-effective healthcare by utilizing the full range of its
medical management services.

Despite the fact that it gave back a lot of ground over the past
2 days in the wake of the Supreme Court ruling, the Health Care
Payor index (HMO.X) managed to end the week fractionally above
where it went out the week before.  That is pretty respectable
when compared to the carnage that was doled out in the broad
market last week.  Shares of ATH actually held up fairly well as
the week drew to a close, finding buying interest near the $71.50
level, aided by the 20-dma ($71.35).  Part of the stock's
strength is likely due to the company's statement that it expects
to reaffirm its earnings estimates, while the other positive
factor centers around the stock's pending addition into the
Russell index at the end of the month.  With strong support at
$71 (also the site of the stock's 10-week ascending trendline),
it looks like we are setting up for an attractive entry into the
play.  Take advantage of intraday dips near support to initiate
new positions on the rebound, using strength in the HMO index as
a confirming indicator.  Traders that would prefer to enter on
strength will need to see ATH clear the $74 level at a minimum,
but will likely need to see strong volume propel the stock
through its all-time highs at $75 before they'll be able to
breathe easily about new positions.  Our stop remains at $69,
allowing aggressive traders to target new entries on a more
extreme dip near the $70 level.

BUY CALL JUL-70*ATH-GN OI=4942 at $4.70 SL=2.75
BUY CALL JUL-75 ATH-GO OI= 329 at $1.95 SL=1.00
BUY CALL SEP-75 ATH-IO OI= 165 at $4.50 SL=2.75
BUY CALL SEP-80 ATH-IP OI=2232 at $2.45 SL=1.25

Average Daily Volume = 1.33 mln


DUK – Duke Energy Corporation $31.76 (+0.75 last week)

Duke Energy offers physical delivery and management of both
electricity and natural gas throughout the United States and
abroad.  The company is a leading domestic gatherer and processor
of natural gas and develops, constructs an operates energy
facilities worldwide.  DUK offers these and other services
through seven business segments: Franchised Electric, Natural
Gas Transmission, Field Services, North American Wholesale
Energy (NAWE), International Energy, Other Energy Services and
Duke Ventures.

While the rest of the market was melting down (again) on Friday,
the Utility sector (UTY.X) bucked the trend and actually bounced
from minor support near $312 to stake claim to the enviable claim
as one of only 4 sectors to show a gain on the day.  DUK managed
to follow suit, rebounding from the $31 level to close near the
high of the day on strong volume (50% above the ADV).  That's
pretty encouraging in light of the recent spate of selling in
the Utility sector and the all-consuming selling in the broad
markets.  So where do we go from here?  DUK isn't out of the
woods yet, as it still has to contend with the 2-month
descending trendline ($32.25) following by significant resistance
near $33.  But if the Utility sector can extend its rebound next
week, DUK stands a fighting chance of breaking through resistance.
Continue using intraday dips near the $31 level to initiate new
positions.  We are leaving our stop in place at $29 to allow us
to target new positions on a more severe intraday dip near the
$30 level. Be careful not to catch a falling knife though.  Wait
for the bounce before initiating your trade.

BUY CALL JUL-30 DUK-GF OI=3065 at $2.75 SL=1.25
BUY CALL JUL-32*DUK-GZ OI=3998 at $1.20 SL=0.50
BUY CALL OCT-32 DUK-JZ OI=1677 at $2.50 SL=1.25
BUY CALL OCT-35 DUK-JG OI=3667 at $1.45 SL=0.75

Average Daily Volume = 4.46 mln


KFT – Kraft Foods, Inc. $41.93 (-1.02 last week)

Kraft Foods, together with its subsidiaries, is engaged in the
manufacture and sale of branded foods and beverages in the
United States, Canada, Europe, Latin America and Asia Pacific.
The company has operations in 68 countries and sells its
products in more than 145 countries.  Kraft Foods North America
operates in the United States, Canada and Mexico and manages
its operations by product category, while Kraft Foods
International manages its operations by geographic region.

Here comes another Russell addition, and the fact that fund
managers will need to be accumulating KFT ahead of the
end-of-month Russell Shuffle, should give the stock a boost over
the next week.  Of course, it doesn't hurt that the stock has
been in a solid upward trend for the past 5 months.  The
ascending channel that contains the price action over that time
period defines support at $41 and resistance at $44.  While the
pattern won't last forever, it should continue to control the
trading action in KFT through the end of the month.  Note that
the lows over the past 3 days have been in the vicinity of $42,
so a rebound from that level next week might make for a decent
entry into the play.  But we would prefer to see a dip to that
ascending trendline to allow us to better manage risk and reward.
It is also interesting to note that the stock has been finding
support at the 30-dma ($41.95) over the past month.  With the
added support of the Russell addition, KFT should continue to
find support in the lower portion of that channel.  Stops are
currently set at $40.50

BUY CALL JUL-40 KFT-GH OI=   66 at $2.40 SL=1.25
BUY CALL JUL-42*KFT-GV OI=  474 at $0.90 SL=0.50
BUY CALL SEP-42 KFT-IV OI= 1764 at $1.85 SL=1.00
BUY CALL SEP-45 KFT-II OI=10033 at $0.80 SL=0.25

Average Daily Volume = 1.62 mln


OHP – Oxford Health Plans, Inc. $49.11 (-0.22 last week)

Oxford Health Plans is a healthcare company providing health
benefit plans primarily in New York, New Jersey and Connecticut.
The company's product line includes its point-of-service plans,
the Freedom Plan and the Liberty Plan, health maintenance
organizations, preferred provider organizations, Medicare+Choice
and third-party administration of employer-funded benefit plans.

Bullish investors want to know whether this is it for the Health
Care Payor's index (HMO.X), or if it is just another pause before
the sector charges to new highs.  Unless you've been hiding under
a rock, you remember the strong bullish run the HMO index had
earlier this year, led in part by a strong breakout and rally
from OHP.  Since its breakout over the $32 level in early
January, OHP has been riding a solid ascending trendline, which
currently rests at $48.50.  What we're focused on right now
though is the intraday support near $49.  If the bulls can manage
to kick the HMO stocks back into rally mode next week, then a
rebound from this level looks attractive for new entries.
Otherwise, we'll want to look for a bounce off the trendline to
provide access into the play.  We want to continue riding the
trend as long as it lasts, and expect that if the broad market
stages a comeback next week, the HMO index should continue to
outperform and OHP should be right there with the leaders.

BUY CALL JUL-47 OHP-GT OI= 513 at $3.00 SL=1.50
BUY CALL JUL-50*OHP-GJ OI= 494 at $1.50 SL=0.75
BUY CALL AUG-47 OHP-HT OI=  70.at $3.70 SL=2.00
BUY CALL AUG-50 OHP-HJ OI=2082.at $2.40 SL=1.25

Average Daily Volume = 782 K



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

KMI - Kinder Morgan $40.20 (-0.56 last week)

Kinder Morgan, Inc. is an energy storage and transportation
company in the United States, operating, either for itself or
on behalf of Kinder Morgan Energy Partners, L.P., more than
30,000 miles of natural gas and products pipelines. The Company
owns and operates Natural Gas Pipeline Company of America, a
major interstate natural gas pipeline system with approximately
10,000 miles of pipelines and associated storage facilities. The
Company owns and operates a retail natural gas distribution
business serving approximately 233,000 customers in Colorado,
Nebraska and Wyoming. The Company constructs, operates and, in
some cases, owns natural gas-fired electric generation
facilities.

Try as they might, the natural gas stocks can't get any
respect.  Managements of these companies are trying all that
they can to restore confidence.  For instance, KMI reaffirmed
guidance in late May saying that they were comfortable with
this year's numbers as they continued to realize strong gains
in each of the businesses.  Yet the market didn't take notice,
which goes to show just how negative the sentiment in the
energy sector has become surrounding the Enron debacle, and
the events surrounding other so called energy merchants such
as Williams and Dynergy.  With the negativity growing by
the day, and more skeletons to come out of the closet, KMI
appears to be heading back down to its lows traced in late
February down near the $37 level.  The stock traced a small
relief rally last week, which saw it trade as high as the
$42 level before reversing lower and ultimately failing in
Friday's session with the trade back down to the $40 level.  As
early as next week, the stock could retest its near term lows
down around the $39 level, which is the mark that we're watching
to act as potential support.  Look for that level to fail and
offer a momentum based entry point into weakness on further
selling in the energy sector and the broader market.  If the
stock does by chance try to rebound again, look for another
failed rally attempt near the 10-dma overhead just below the
$41 level, or slightly higher just below the $42 area near term
congestion.  Our stop is just above that short term congestion
at the $42.50 level.

BUY PUT JUL-40*KMI-SH OI=1393 at $2.05 SL=1.25
BUY PUT AUG-40 KMI-TH OI=1556 at $2.90 SL=1.75

Average Daily Volume = 743 K


TBH - Telecom Brasil Sa Te $20.60 (-3.83 last week)

Telebras HOLDRS operated as a telecommunication company until May
1998, whereby it spun-off 12 new companies. The Company's
controlling shareholders has announced their intention to
liquidate and dissolve the Company.

Fears are building over Brazil's economy.  The negative sentiment
reached panic level late last week.  Foreign investors are growing
cautious on Brazil's ability to meet its debt payments, which in
turn sent the country's currency, the real, to all time lows in
foreign exchange trading last week.  The root of the problem stems
from Brazi's ballooning $274 billion debt load, and its ability to
meet those obligations.  The growing turmoil in the currency
market is trickling down to the rest of the capital markets food
chain and into the stocks of the country.  One of the once high
flying issues of Brasil, TBH, is on the brink of a major break
down that could see the stock fall sharply lower into the coming
weeks.  TBH is merely a shell company that once was a large
telecommunications company that was spun off into a dozen
separate companies.  But the ticker TBH is still very much a
tradable asset.  What we're watching for is a big breakdown
below its multi year low at the $20 level.  The stock rebounded
from that level last fall, but it looks like it's going to be
breaking that support on this leg lower.  Watch for a high
volume trade to the $20 level as a sign that the selling is
continuing and that the troubles in Brazil are mounting.  Use
such a decline to enter new put plays and target the mid teens
to the downside.  Our stop is initially in place at the $25
level.

BUY PUT JUL-22*TBH-SX OI= 160 at $2.65 SL=1.25
BUY PUT OCT-20 TBH-VD OI= 100 at $2.45 SL=1.00

Average Daily Volume = 462 K



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

MIL - Millipore $31.04 (-3.03 last week)

Millipore Corporation is a multinational bioscience company that
provides technologies, tools and services for the discovery,
development and production of new therapeutic drugs. The
Company's products serve the worldwide life science research,
biotechnology and pharmaceutical industries. Millipore's products
are based on a variety of enabling technologies, including the
Company's membrane filtration and chromatography technologies.
In life science research, Millipore offers products for genomics,
proteomics, drug discovery and general laboratory applications.

It was another stellar week for the bears in MIL as the stock
lost another $3 during the week.  Recall that during the prior
week MIL shed about $3.  Obviously the downside momentum in
this stock shows no signs of letting up as the weakness in the
broader market is only adding to the weakness that is already at
work in MIL.  Of course the weakness in the Biotechnology Sector
Index (BTK.X) is certainly helping the cause of the bears in
MIL.  The further the BTK.X falls, the more downside we're likely
to enjoy in MIL as the company is tied closely to the sentiment
in the biotechnology industry.  Traders looking for new put play
entry points can consider entering into weakness below current
levels, but only in a falling market environment and on weakness
in the BTK.X.  A better entry point will probably come in the
next few days closer to a short term resistance level.  The big
decline last Friday which saw MIL trade from $34.41 down to
$31.10 might need to be partially retraced in next week's trading.
By that time, it's most likely that the downward sloping 10-dma
will be a lot lower than where it closed last Friday at the $34.13
level because the moving average will take into account the much
lower prices in the last two days.  Another rollover from that
10-dma should offer a solid entry point into new put plays just
like it did early last week.  Wait for the stock to come up to
that level if it shows signs of weakness, then look to pounce on
new put plays once it rolls over from the 10-dma.

BUY PUT JUL-35*MIL-SG OI= 24 at $4.50 SL=3.00
BUY PUT JUL-30 MIL-SF OI=196 at $1.25 SL=0.50

Average Daily Volume = 401 K
 

ZLC - Zale $38.40 (-0.73 last week)

Zale Corporation, and with its wholly owned subsidiaries, is a
specialty retailer of fine jewelry. As of July 31, 2001, the
Company operated 2,344 specialty retail jewelry stores and
kiosks located primarily in shopping malls throughout the
United States, Canada and Puerto Rico. The Company principally
operates under six brand names including Zales Jewelers, Zales
the Diamond Store Outlet, Gordon's Jewelers, Bailey Banks &
Biddle Fine Jewelers, Peoples Jewelers and Piercing Pagoda.
Zales Jewelers provides jewelry to a broad range of customers.

It's getting closer, and closer.  Can you feel it?  ZLC is on
the edge of a major breakdown and it feel one step closer
during last Friday's session.  The stock fell by about another
1 percent, or about 40 cents during the session.  In doing so,
ZLC crept ever closer to its 200-dma, which finished last
Friday at the $37.70 level.  The stock actually bounced from
the $37.90 level, just a few ticks above the 200-dma, so
obviously there were some bulls in there last Friday trying to
prevent the stock from breaking down one more day.  But we have
the feeling that those bulls will be disappointed next week
when ZLC finally breaks down below its short term support and
the 200-dma.  We expect some volatility to accompany any break
below the 200-dma, so we need to set forth a specific level to
spot and confirm a breakdown.  That level is the $37 level,
which is a little more than $1 away from the stock closed last
Friday.  The $37 level will not only confirm a breakdown below
the 200-dma, but it will also confirm a breakdown below the
short term support level at the $38 mark which has propped the
stock up three times in the last three months.  A break below
the $37 level should come on heavy volume as the longs still
in this stock see the obvious technical failure.  So simply
look for a breakdown below the $37 level on heavy volume in a
weak market environment.  From there, we'll target the $34
level to the downside.

BUY PUT JUL-40*ZLC-SH OI=55 at $2.65 SL=1.50
BUY PUT JUL-35 ZLC-SG OI= 0 at $0.35 SL=0.00

Average Daily Volume = 253 K


TDS - Telephone Data Systems $62.00 (-1.15 last week)

Telephone and Data Systems, Inc. (TDS) is a diversified
telecommunications service company with wireless telephone and
wireline telephone operations. TDS conducts substantially all
of its wireless operations through United States Cellular
Corporation (U.S. Cellular) and substantially all of its
wireline telephone operations through its wholly owned
subsidiary, TDS Telecommunications Corporation. TDS, U.S.
Cellular and TDS Telecom hold various investments in publicly
traded companies, the majority of which were the result of
sales or trades of non-strategic assets. Minority positions are
held in Deutsche Telekom AG, Vodafone plc, Rural Cellular
Corporation and VeriSign, Inc.

There's no relief in sight for the telecom sector.  In fact
the news just keeps getting worse and worse.  WCOM had its
debt rating cut by Moody's late last week.  SBC reported that
it had reduced its stake in a Latin American telecom investment.
Qwest Communications was downgraded by AG Edwards Friday
morning.  And the KPNQwest network was scheduled to be shut
down in a matter of days.  They say that it's always darkest
before dawn, but unfortunately for telecom, it just keeps
getting darker and darker, with no dawn in sight.  That spells
trouble for the high priced stocks in the telecom sector who
have become favorite targets of the short sellers.  And at
$62, TDS is one of the highest priced stocks in the group
seeing as most of the once telecom bellwethers sport single
digits now.  TDS' price action last week revealed the classic
short selling pattern of a sharp two day short covering rally,
followed by more selling the latter part of the week.  The
stock traded back down to near its relative lows during last
Friday's session, which puts TDS at risk for a big breakdown
going into next week's trading.  Traders can look for a high
volume decline below the $61 level next week on further
deterioration in the telecom sector.  And confirm weakness in
the broader market before entering a momentum based put play.
If the stock does go through another short covering rally,
just step aside and let the nervous shorts carry the stock up
to a more favorable entry point closer to the downward sloping
10-dma, which finished the week at the $65.24 level.

BUY PUT JUL-65 TDS-SM OI=110 at $5.30 SL=3.25
BUY PUT JUL-60*TDS-SL OI=193 at $3.00 SL=1.50

Average Daily Volume = 244 K


EMMS - Emmis Communications $22.53 (-3.16 last week)

Emmis Communications Corp. is a diversified media company with
radio broadcasting, television broadcasting and magazine
publishing operations. The Company operates the sixth largest
publicly traded radio portfolio in the United States based on
total listeners. The 20 FM radio stations and three AM radio
stations the Company operates in the United States serve the
nation's three largest radio markets of New York City, Los
Angeles and Chicago, as well as Denver, Phoenix, St. Louis,
Indianapolis and Terre Haute, Indiana. The 15 television
stations the Company operates serve geographically diverse
mid-sized markets in the United States as well as the large
markets of Portland and Orlando and have a variety of television
network affiliations, including five with CBS, five with FOX,
three with NBC, one with ABC and one with WB.

Communications stocks took another hit late last week,
specifically the radio communications stocks.  Last week,
Moody's cut the debt rating on industry heavyweight Cox
Radio (NYSE:CXR) based on their belief of only a moderate
rebound in the radio advertising market.  Moody's speculated
that radio advertising would likely remain weak into the next
year.  The negative sentiment surrounding the radio group
pressured EMMS ever lower into Friday's session which saw
the stock plummet below its 200-dma on a sharp increase in
daily trading volume which reached nearly 1.5 million shares
on the day.  The stock's sharp fall below its 200-dma was
surprising because a bounce was not even attempted.  No, the
stock just fell straight through that level and continued
much lower to close decidedly below its 200-dma, which should
have caught the attention of many institutional shareholders.
Looking forward, the 200-dma should now serve as strong short
term resistance.  Keep an eye on that level for entry points
during any intraday rally attempts followed by rollovers.  The
200-dma finished the week at the $23.09 level.  Looking to the
downside, the stock has some potential short term support
coming from the congestion developed in January around the $22
level.  But once that support is worked through, the stock
shouldn't find much help in terms of support until the $16
level.  If the stock continues lower next week, look for a
breakdown below the $21 level as a momentum based entry point
upon a break of the short term support.

BUY PUT JUL-25*QMJ-SE OI=38 at $3.40 SL=2.00
BUY PUT JUL-22 QMJ-SX OI=21 at $1.95 SL=0.75

Average Daily Volume = 711 K


NVLS - Novellus Systems $32.23 (-3.74 last week)

Novellus Systems, Inc. (Novellus) manufactures, markets and
services semiconductor processing equipment. The Company's
products are comprised primarily of advanced systems used to
deposit thin conductive and insulating films on semiconductor
devices, as well as equipment for preparing the device surface
prior to these deposition processes. Novellus is a supplier of
high productivity deposition and surface preparation systems
used in the fabrication of integrated circuits. Chemical Vapor
Deposition systems employ a chemical plasma to deposit all of
the dielectric (insulating) layers and certain of the metal
(conductive) layers on the surface of a semiconductor wafer.
Physical Vapor Deposition systems are used to deposit
conductive metal layers by sputtering metallic atoms from the
surface of a target source via high DC power.

It doesn't seem too long ago that the chip equipment
companies were forecasting better times ahead.  For NVLS,
it was only about a month ago that the company said that sales
and orders were increasing and that it actually guided higher
for the year.  But that guidance seems to have been
forgotten rather quickly after the warning from Intel and
the further bad news from Advanced Micro Devices.  The chip
equipment stocks had been the go to group in technology up
through the end of April and into early May, but that trend
has clearly reversed in an almost straight decline lower for
NVLS, among other leading chip equipment stocks.  And the
downward trend does not appear to be coming to an end any time
soon.  It was the strong and almost straight higher rally
last fall that left plenty of hot air underneath these stocks,
which has NVLS at risk of retesting its September lows over
the course of the next week or two, especially if its trend
continues to accelerate to the downside.  With the information
technology spending rebound being pushed out further and
further by the day, and more warnings from technology companies
likely to come to surface next week, NVLS should keep working
lower on heavy volume.  Momentum traders can look for a break
below current levels early next week if the selling in the
SOX and the broader technology sector continues.  If NVLS does
put together a rebound, look for the stock to rollover once
more near the upper end of its declining channel now at the
$35.50 area.

BUY PUT JUL-35*NLQ-SG OI=5144 at $4.70 SL=2.75
BUY PUT JUL-30 NLQ-SF OI=1549 at $2.05 SL=1.00

Average Daily Volume = 8.70 mln


ENZN – Enzon, Inc. $23.34 (-2.20 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 antibodies.  The company applies PEG technology
to improve the delivery, safety and efficacy of proteins and
small molecules with known therapeutic efficacy.  ENZN applies
its single-chain antibody technology to discover and produce
antibody-like molecules that offer many of the therapeutic
benefits of monoclonal antibodies while addressing some of
their limitations.

The Biotech beatings will continue until morale improves!
Although the rate of decline appeared to be slowing as the
Biotechnology index (BTK.X) approached its closing lows from a
couple weeks ago, the daily Stochastics is in full bearish
decline, and it looks like those lows will fall to the bearish
assault early next week.  Likewise, our ENZN play got beaten up
again in the latter half of last week, ending on Friday right at
major support near the $23 level.  Let the market serve up one
more bad-news story on a Biotech stock and it looks like the BTK
will be knocking on the door of the $300 level and that would
almost assuredly send ENZN down towards its next level of
significant support in the $15-16 area.  And that is still well
above the current bearish price target ($7) from the PnF chart.
So long as rallies continue to be sold by the bears, we can use
each one that fails to initiate new positions.  While a breakdown
under $23 would certainly be welcome for initiating new positions,
we're currently leaning toward an oversold rebound early in the
week.  Take advantage of any rally that fails below the $26.50
level (the site of our stop) to initiate new plays.  The
resistance level most likely to turn back the bullish advance
is at $24.50-25.25, followed by $26.25.  Until support fails,
we're keeping our stop at $26.50.

BUY PUT JUL-25*QYZ-SE OI=293 at $3.20 SL=1.50
BUY PUT JUL-22 QYZ-SX OI=373 at $1.75 SL=0.75

Average Daily Volume = 1.43 mln


IBM - International Bus. Machines $68.75 (-7.42 last week)

International Business Machines uses advanced information
technology to provide customer solutions.  The company provides
value to its customers through a variety of solutions including
technologies, systems, products, services, software and
financing.  IBM's three hardware product segments are comprised
of Technology, Personal Systems and Enterprise Systems.  Other
major operations consist of a Global Services segment, a
Software segment, a Global Financing segment and an Enterprise
Investments segment.

Investors have got to be wondering where support is for IBM.
After piercing the $75 level a couple weeks ago, it seemed a
foregone conclusion that the stock was heading lower...much
lower.  Sure enough, once the broad market bounce failed in the
middle of the week, shares of Big Blue have seen heavy selling
pressure, culminating with Friday's plunge under the $70 level.
So how far can she go?  Looking at the weekly chart shows the
first meaningful support at $67, with major support coming in at
$60.  In addition to that being strong support from 1998, it is
also the 62% retracement of the stock's rally from the 1993 lows
to the 2000 highs.  As if that weren't enough, the current sell
signal on the PnF chart is pointing to an eventual price target
of $61.  That makes a potent case for continuing to sell all
rallies in the stock and that's just what we intend to do.  While
highly unlikely, we'd we thrilled to get a rally up to the $74
resistance level for new entries.  But short of a broad market
rebound, that isn't likely to happen over the near term.  So
we'll have to set our sights a bit lower, looking for a failed
rally first at $71 and then at $72.50.  Of course if the selling
continues, new positions can be considered on a break below the
$68 level.  Just keep a sharp lookout for a short-covering rally
off the $67 level.  Lower stops to $74.25.

BUY PUT JUL-70*IBM-SN OI=29484 at $4.60 SL=2.75
BUY PUT JUL-65 IBM-SM OI= 7970 at $2.45 SL=1.25

Average Daily Volume = 8.70 mln



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*****
LEAPS
*****

How Many Bulls Can Dance on the Head of a Pin?
By Mark Phillips
mphillips@OptionInvestor.com

Not many, when there is one angry bear perched up there, swinging
powerful roundhouse blows at everything with horns or hooves!
Don't ask me where this mental image came from, but Friday night
I got this picture of the bulls scaling a near vertical rock face
to reach this narrow peak.  But once they got there (the head of
the pin) this psychotic angry bear would kick them off one by one,
resulting in a precipitous plunge back to earth.  Does that sound
anything like what we've been experiencing over the past several
weeks?  It does to me, as there hasn't been the slightest hint of
a rally that could stick since the middle of May.  

As I mentioned last weekend, I didn't have any confidence that
the rebound off the Friday lows had any hope of sticking.
You may wonder why I've had such a cynical view of all these
half-hearted rally attempts.  While I could say that my variety
of market indicators was telling me the markets were due for a
sharp fall (which they were), that really hasn't been the source
of my bearishness.  No, the key factor for me has been the action
of the VIX in relation to the broad market price action.  For the
past few weeks the VIX has shown a stubborn lack of willingness
to price fear into the marketplace, with each hint of a recovery
causing a sharp drop in the VIX.  This was particularly
disconcerting on days where a sharp plunge in the market would
produce a sharp rise in the VIX, but the afternoon recovery off
the lows would drive the VIX sharply lower, often times ending
at its low of the day.

That is not healthy action, as it tells us that every trader (and
their brother) is looking for this dip to be the bottom that they
can buy and hold.  In short, there was no fear in the market.  And
what little there was during the day would disappear faster than
rain in the desert.  Look at a chart of the VIX, specifically
focusing on the candles from 6/7 and 6/14.  Did the dips and
rebounds in the broad indices on those days amount to anything
significant for the bulls?  Of course not!

I've been pounding this drum for awhile now, that there will not
be another meaningful, tradable bottom in the market without the
VIX running to a bearish extreme (at or above the 30 level).
Well, we finally got above 30 and held there for the past 2 days
and that is encouraging, as we're starting to see a bit of stick
to the fear index.  But we're not there yet.  By the time this
cycle has run its course, I expect to see the VIX moving above
the 35 level and possibly into the low 40's.

I'm not going to go into a lot of detail on the broad markets
this weekend, as I'm sure Jim will do plenty of that,
but here are some of the benchmarks I'm watching for
that I think are necessary in addition to an extreme reading in
the VIX.  First off, the DOW needs to decline to the next solid
level of support at 9000-9075, although I wouldn't rule out a
dip into the 8800-8900 area (the 75% retracement of the rally
off the September lows).  With the S&P500 now below 1000, I expect
to see a retest of its September lows near the $945 level.  The
weakest of all is the NASDAQ, with the NASDAQ-100 currently
trading below the September lows.  Using the QQQ as my proxy for
this index, I've been looking for the PnF bearish price objective
of $25 to be achieved for several months now and that could very
well come next week.  I wouldn't be at all surprised to see the
QQQ decline down to the $23 level before that elusive bottom is
in place.

Simply put, fasten your seatbelts, as I expect the ride to be
very bumpy from here on out.  With that as preamble, let's peruse
our list of plays and candidates.

Portfolio:

MSFT - Up until Friday, MSFT had been holding up rather well, a
rare spot of strength in the severely whipped Technology sector.
The more than 3% decline on Friday came on heavy volume and it
looks like the next dip is underway.  The critical issue this
week will be whether the stock can managed to hold above the $50
level.  A rebound from that area would likely set up another
solid entry point, while a drop under our stop at $48 would be
bad news indeed.  If looking to play this one, wait for the
bounce!

XOM - While it may be boring, it certainly isn't getting taken
apart with the rest of the market.  I continue to think we are
near a solid tradable bottom for XOM.  That ascending trendline
(now at $38.75) continues to provide support, helped along by the
62% retracement of the rally off the September lows ($38.66).
Dips near this level are still buyable, although what we really
need to see is a convincing rally through the 200-dma and a close
over $40.50.

PG - Relative strength continues to be the theme with PG, as it
is once again holding up very well relative to the rest of the
stocks in the DOW.  Now in the middle of its ascending channel,
we could see a pullback into the $89-90 support level over the
next week or so, but I would then expect the bottom of that
channel to provide support once again.  Another rebound off the
bottom of the channel can be used for initiating new positions,
although we want to keep those stops in place.  I'm leaving it at
$86 so we don't get shaken out in the near-term market volatility.
Note the large increase in the Return column in the Portfolio
below.  This is due to a large increase in the spread, which
widened to $2.40 on the '04 LEAP as of Friday's close.  If we use
the bid price to calculate %Return, it falls to a return of only
20%.  Can you say volatility??  Traders with a large gain in the
position at this point might want to consider taking partial
profits and look to re-enter on the expected dip or when
volatility dissipates a bit.

BBY - Bye Bye BBY.  Yikes, that was painful.  See what happens
when trying to pick the bottom when the rest of the market isn't
there yet?  With a violated stop at $37, we've got to let this
one go.


Watch List:

WMT - Sure enough, WMT rolled over with the rest of the market
last week, but I'm starting to feel a lot better about this one.
Let the current decline run its course and target new entries
either on a rebound from the $53-54 level (the site of the last
2 lows, which could set up a H&S bottom) or on a sharp dip and
rebound from the $51 level (the site of the 61% retracement of
the rally off the September lows).

BRCM - The further the SOX drops, the better I like the BRCM
play.  That $18-19 level is looking like it might be the right
place to draw our line in the sand.  Don't catch a falling knife
if the stock falls through the $18 level, but right now our
entry strategy is looking good.

INTC - We're getting close now aren't we?  INTC is now trading
below its September lows and moved as low as $18.40 on Friday.
Keep a sharp eye on this one, as a rebound could be coming soon.
A dip into the $17-18 range should be a solid entry point as it
is the site of the lows from 1997-1998, so I am lowering the
entry target accordingly.  Just make sure to wait for the rebound
before initiating new positions.  As a benchmark, keep an eye on
the SOX index, which could be on its way to finding a meaningful
bottom in the vicinity of $340.

QQQ - If you haven't made the move over to PnF charting, you're
really missing out and it looks like early next week could see
the QQQ tagging that $25 target.  There's nothing magic about
that level though, so don't enter the play just because you see
a print at $25.  Wait for the rebound with some buying conviction.

BBH - Alas, it looks like I was too late to this party as well.
For some reason my timing has been off with the Biotechs lately
and we never got enough of a bounce to consider it a solid entry
point.  Consider it a missed opportunity.  The reason I'm leaving
the play alive is that I think with all the bad news in the
sector, we could see a series of solid entry points to the
downside before it gets healthy again.  I'm leaving the entry
point unchanged this week as we need to see what kind of rebound
materializes when we do put in a near-term bottom.

Needless to say, it was another rough week for the bulls, but the
good news is that we are that much closer to our next solid rally.
I thought long and hard about adding new Watch List plays this
weekend, but decided against it.  Too many choices cloud the
mind, so let's keep it simple.  We have some solid candidates
both on the Watch List and Portfolio that should perform quite
well once the capitulation that we have been patiently waiting
for occurs.  Note that on all of our plays we're looking to catch
an important bottom.  While I know the urge is strong to pick
the absolute bottom, please don't try to catch a falling knife.
Wait for the rebound to show itself before entering.  It is far
better to miss a couple $$ on the upside than catch a knife that
hasn't stopped falling yet.  Our failed play on BBY is a perfect
example of what can happen.  I still like that stock, but because
of jumping in too soon, I'm not in a position to benefit when
that elusive bottom does occur.

I know I have beaten incessantly on the topic of market
volatility in this column, specifically focused on the VIX.  A
big part of my obsession is that it is such a powerful sentiment
indicator especially at market bottoms.  But the other part of
my motivation is to try to show the fallacy of the silly
statements from many that perhaps the nature of the indicator
is changing.  Hopefully this latest spike in the VIX and decline
in the markets will put to rest (at least for a while) the
wrong-headed notion that the markets can ever stage a meaningful
rally at the same time that the VIX is
rising.  

Hopefully my highlighting of this important indicator can help
you stay out of hot water, preventing you from looking for
rallies in all the wrong places.  I think that listening to the
story told by history provides much more fertile ground for
cultivating long-term profits than trying to ask a leopard to
change its spots.  While I try to provide solid trade candidates
on a weekly basis, my principal aim is to help educate my readers
so that they won't need my commentary to navigate the ebbs and
flows of the financial markets.  My greatest pleasure comes from
hearing from you and how you have learned from what I've attempted
to teach.  That is because I know that when you truly learn a few
simple lessons that MUST BE learned, trading and financial success
will follow.  Thank you for allowing me to be your guide.

Have a safe week!

Mark



LEAPS Portfolio

Current Open Plays

SYMBOL OPENED     LEAPS    SYMBOL  ENTRY   CURRENT  CHANGE  STOP

Calls:
MSFT   05/13/02  '03 $ 55  MSQ-AK  $ 5.90  $ 6.10  + 3.39%  $48
                 '04 $ 55  LMF-AK  $10.20  $11.00  + 7.84%  $48
XOM    05/22/02  '03 $ 40  XOM-AH  $ 3.00  $ 2.60  -13.33%  $38.50
                 '04 $ 40  LXO-AH  $ 5.10  $ 4.70  - 9.80%  $38.50
PG     05/30/02  '03 $ 95  PG -AS  $ 3.70  $ 6.40  +72.97%  $86
                 '04 $ 95  KBJ-AS  $ 9.00  $13.20  +46.66%  $86


Puts:
None


LEAPS Watchlist

Current Possibles

SYMBOL  SINCE    TARGET PRICE  TARGETED LEAP  SYMBOL

CALLS:
BRCM   10/28/01  $18-20        JAN-2003 $ 25  OGJ-AE
                            CC JAN-2003 $ 20  ORD-AD
                               JAN-2004 $ 25  LGJ-AE
                            CC JAN-2004 $ 20  LGJ-AD
WMT    03/31/02  $50-51        JAN-2003 $ 55  VWT-AK
                 $53-54     CC JAN-2003 $ 50  VWT-AJ
                               JAN-2004 $ 55  LWT-AK
                            CC JAN-2004 $ 50  LWT-AJ
QQQ    06/09/02  $25, $23      JAN-2003 $ 28  OZC-AB
                            CC JAN-2003 $ 25  OZC-AY
                               JAN-2004 $ 28  LRI-AY
                            CC JAN-2004 $ 25  LRI-AJ
INTC   06/16/02  $17-18        JAN-2003 $ 20  NQ -AD
                            CC JAN-2003 $ 15  NQ -AC
                               JAN-2004 $ 20  LNL-AD
                            CC JAN-2004 $ 15  LNL-AC


PUTS:
BBH    06/09/02   $96-98       JAN-2003 $90  GBZ-MR
                               JAN-2004 $90  KOV-MR
                               JAN-2005 $90  XBB-MR


New Portfolio Plays

None

New Watchlist Plays

None

Drops

BBY - Catch a falling knife, lose a finger!  While I thought BBY
might see a dip into the $38-39 area following our entry last
weekend, I certainly didn't expect to see the stock fall apart
like it did this week!  Part of my decision to take a position
at the $40 level was due to the fact that was the bearish price
target from the PnF chart.  As Jeff says frequently, bearish
targets can be exceeded, and this one certainly was.  Obviously,
investors didn't like the slight downward guidance provided with
the company's earnings report on Monday.  With our stop at $37
violated, we have to drop the play this weekend.  I still like
the prospects for BBY longer-term, but I want to let a bottom
form before adding it back onto the Watch List.  


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

Selling Covered-Calls: Some Guidelines For Using This Section
By Mark Wnetrzak

Each week we receive a number of similar questions from readers
who are new to the Option Investor Newsletter.  Some of the most
frequent topics include portfolio diversity, position management
and use of the "supplemental plays" list.

New readers often ask how they should approach this section and
the range of candidates.  Should they attempt to participate in
all of the selections or focus on one or two issues with a larger
position?  The first requirement, before initiating any new play,
is comprehensive due diligence.  There are a number of factors to
consider with the most important being the overall condition of
the market and the sector or industry in which the target issue
resides.  Traders should also clearly understand the risk-reward
ratio of this particular strategy and use the technique only when
it conforms to their portfolio outlook and personal trading style.
As far as entering the positions, our prices are based on Friday's
closing quotes, so they may not be the same on Monday, or later in
the week.  With that fact in mind, each individual investor must
decide which candidates meet their criteria for acceptable profit
potential and downside capital risk, and enter those positions at
the appropriate cost basis.  Most of our readers use a "buy-write"
order to guarantee a fill only when the position is available at a
specific price.  After the position is initiated, money management
becomes the key factor to success.  Since this is a limited profit
strategy, no one can afford to have many losers and that's why it
is so important to monitor each issue on a daily basis and exit or
adjust any plays that experience a significant change in character.

Another popular question concerns the most difficult decision that
all traders face: when to exit a position.  The one outstanding
principle that novice investors fail to adhere to is the need to
outline a basic exit strategy before initiating any position to
eliminate emotional decisions.  This plan must be simple enough
to recall and implement while monitoring a portfolio of plays in
a volatile market.  In addition, these early-exit rules should
apply across a range of situations and be designed to compensate
for one's weaknesses and inadequacies.  To be effective in the
long term, they must be formulated to help maintain discipline
on a general basis and at the same time, offer a timely memory
aid for the most difficult situations.  Utilizing this type of
system addresses a number of problems, but the most significant
obstacle it eliminates is the need for judgment under pressure.
A sound exit strategy will also help you avoid exposing your
portfolio to excessive losses and this is important because the
science of successful trading is far less dependent on making
profits, but rather on avoiding undue outflows.  In fact, the
necessity to limit draw-downs and prevent failed trades from
significantly eroding capital should be a dominant theme in any
trader's approach to the market.  Further, not only must losses
be limited, but each individual position must be reviewed on a
regular basis to ensure that overall portfolio risk is kept to a
practical minimum.

Finally, readers often ask about the "Supplemental" picks and
why they are not included in the regular group of listed plays.
With regard to these added positions, the disclaimer offers a
general explanation: "The following group of issues is a list of
additional candidates to supplement your search for profitable
trading positions."  For one reason or another, they simply did
not make our final list, which is generally limited to 7 to 10
candidates.  However, the process of choosing the "published"
plays is highly subjective and quite often there are additional
issues that warrant individual consideration.  That is why we
now include some of the stocks that just missed our final cut
(for various reasons), so that our readers can decide if they
meet their personal criteria for favorable plays.  Our primary
task is to provide a list of potentially profitable positions,
greatly reducing the initial research for candidates in this
strategy.  At the same time, we expect our subscribers to decide
which plays meet their risk-reward profile and hopefully, with
examination and analysis far beyond that which we can provide in
the few hours between Friday's market close and the publishing
deadline, they will select only those positions that are winners.

Trade Wisely!


SUMMARY OF PREVIOUS CANDIDATES
*****
Note:  Margin not used in calculations.

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

USU     8.05   7.97   JUN   7.50  1.10  *$  0.55   8.9%
CLHB   11.76  13.52   JUN  10.00  2.15  *$  0.39   8.8%
COB     5.29   5.00   JUN   5.00  0.55   $  0.26   7.9%
SRP     7.81   7.47   JUN   7.50  0.75   $  0.41   6.5%
UNTD   11.00  10.89   JUN  10.00  1.75  *$  0.75   5.9%
USU     9.34   7.97   JUN   7.50  2.30  *$  0.46   5.7%
PCLE   10.59  10.23   JUN  10.00  1.15  *$  0.56   5.2%
MEDC   14.00  12.99   JUN  12.50  2.00  *$  0.50   4.7%
SIE    18.50  21.40   JUN  17.50  2.00  *$  1.00   4.4%
NTIQ   22.10  19.45   JUN  20.00  3.50   $  0.85   3.3%
ACXM   17.78  17.08   JUN  17.50  0.85   $  0.15   1.3%
INET    7.95   6.92   JUN   7.50  0.90   $ -0.13   0.0%
KROL   23.40  21.55   JUN  22.50  1.45   $ -0.40   0.0%
DLTR   40.27  38.17   JUN  40.00  1.55   $ -0.55   0.0%
VVTV   21.99  18.17   JUN  20.00  3.10   $ -0.72   0.0%
VVTV   21.75  18.17   JUN  20.00  2.40   $ -1.18   0.0%
VSNX   11.49   8.01   JUN  10.00  1.90   $ -1.58   0.0%

IPXL    8.01   7.55   JUL   7.50  1.10  *$  0.59   6.2%
HPLA   13.95  14.77   JUL  12.50  2.40  *$  0.95   6.0%
COB     5.35   5.00   JUL   5.00  0.70   $  0.35   5.5%
CANI   11.26  11.10   JUL  10.00  1.85  *$  0.59   4.5%
MCDT    8.99   8.05   JUL   7.50  1.90  *$  0.41   4.2%

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

Comments:

The market environment continues to favor the "Bears" and the 
horrid move lower on heavy volume by the DOW could send the 
NASDAQ and S&P-500 well below their September lows.  Money 
management remains the central theme for the covered-call
portfolio.  Monday's over-sold rally lost steam on Tuesday but
it did offer a reasonable (though quick) opportunity to exit
or adjust unfavorable positions.  We closed our positions as
each stock broke through near-term support, thus raising the
probability of further downside movement.  Remember, sitting
on the sidelines isn't a bad thing as the ITM Covered-Call
strategy requires a "neutral" to "bullish" outlook.  Keep a
close watch on any positions you retain as we move into the
summer doldrums.

Positions Closed: 

Northfield Labs (NASDAQ:NFLD), Endocare (NASDAQ:ENDO), AirGate PCS
(NASDAQ:PCSA), MIPS Technologies (NASDAQ:MIPS), CheckFree NASDAQ:
CKFR), Retek (NASDAQ:RETK), Med-Design (NASDAQ:MEDC) - $15 strike, 
Macromedia (NASDAQ:MACR), Extreme Networks (NASDAQ:EXTR), Given 
Imaging (NASDAQ:GIVN), Quest Software (NASDAQ:QSFT), Informatica 
(NASDAQ:INFA), and Urologix (NASDAQ:ULGX).


NEW CANDIDATES
*********

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

ABFS   25.48  JUL 25.00   FDQ GE  1.45 0     24.03   28    4.4%
JBHT   31.05  JUL 30.00   JHQ GF  2.15 16    28.90   28    4.1%
MCAF   14.26  JUL 12.50   CFU GV  2.25 122   12.01   28    4.4%
MIR     8.70  JUL  7.50   MIR GU  1.60 504    7.10   28    6.1%
NCEN   31.85  JUL 30.00   URE GF  3.40 537   28.45   28    5.9%
PETM   17.50  JUL 17.50   QPT GW  0.80 1436  16.70   28    5.2%
REV     4.96  JUL  5.00   REV GA  0.45 235    4.51   28   10.8%

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

REV     4.96  JUL  5.00   REV GA  0.45 235    4.51   28   10.8%
MIR     8.70  JUL  7.50   MIR GU  1.60 504    7.10   28    6.1%
NCEN   31.85  JUL 30.00   URE GF  3.40 537   28.45   28    5.9%
PETM   17.50  JUL 17.50   QPT GW  0.80 1436  16.70   28    5.2%
ABFS   25.48  JUL 25.00   FDQ GE  1.45 0     24.03   28    4.4%
MCAF   14.26  JUL 12.50   CFU GV  2.25 122   12.01   28    4.4%
JBHT   31.05  JUL 30.00   JHQ GF  2.15 16    28.90   28    4.1%


Company Descriptions

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

*****
ABFS - Arkansas Best  $25.48  *** Trucking Sector Ignites! ***

Arkansas Best (NASDAQ:ABFS) is a diversified holding company 
engaged through its subsidiaries primarily in motor carrier
transportation operations and intermodal transportation opera-
tions.  Principal subsidiaries are ABF Freight System, Clipper
Express and related companies.  The company's less-than-truck-
load (LTL) motor carrier operations are conducted through ABF 
Freight System, Inc., ABF Freight System (B.C.), Ltd., ABF 
Freight System Canada, Ltd., ABF Cartage, Inc., and Land-Marine
Cargo, Inc.  Clipper operates through Clipper Freight Management
and Clipper LTL, and offers domestic intermodal freight services.
ABF Freight System announced on Friday that it is revising its 
general rates and charges on August 1, 2002.  Typically, the 
increase will be 5.8%, although the amount will vary by lane and
shipment characteristic.  This week the trucking sector has 
gained the favor of investors as the companies are beginning to
see benefits from the recovering economy, saying shipping volumes
are turning up from sustained declines.  We simply favor the 
bullish move back above the 150-dma on increasing volume, which
suggests further upside movement.  With stocks in the trucking
segment currently in favor, this position in ABFS is an excellent
candidate for a broad market hedge.    

JUL 25.00 FDQ GE LB=1.45 OI=0 CB=24.03 DE=28 TY=4.4%


*****
JBHT - J.B. Hunt  $31.05  *** Trucking Sector - Part II ***

J.B. Hunt Transport Services (NASDAQ:JBHT) along with its wholly
owned subsidiaries, is a diversified transportation services
company.  Through its subsidiaries and associated companies, JBHT
provides a wide range of logistics and transportation services to
a diverse group of customers.  These customers request targeted
transportation services or they outsource their transportation
function to JBHT, or one of its associated companies.  J.B. Hunt
also directly transports full-load "containerizable" freight in
the continental United States and portions of Canada and Mexico.
J.B. Hunt Transport Services recently completed the sale of 5.1
million shares of common stock at $26 per share.  Standard & Poor's
also affirmed its ratings on the company, saying the equity offering
and debt reduction will modestly improve Hunt's capital structure. 
Traders who want to own a solid company in the trucking sector,
which has gained bullish momentum, should also consider this
position for their long-term portfolio.

JUL 30.00 JHQ GF LB=2.15 OI=16 CB=28.90 DE=28 TY=4.1%


*****
MCAF - McAfee.com  $14.26  *** Earnings Speculation ***

McAfee.com (NASDAQ:MCAF) provides personal computer security and
management application services and products for consumers and 
small to medium-sized businesses over the Internet.  Through the 
company's Website, consumers can subscribe to online services and
purchase products to secure, repair, update and upgrade their PCs.
As a managed services provider, McAfee.com generates revenue by
encouraging PC users to subscribe to one or more of its services,
which gives them online access to version-less PC security and 
management software applications that the company hosts on its 
servers.  Under this managed services model, consumers "rent 
versus buy" McAfee.com's software applications.  The company's 
software applications allow its subscribers to manage their PCs
by checking for and eliminating viruses, protecting their PC 
systems from intrusion by hackers and other online threats, 
optimizing PC system performance and repairing problems. In May,
J.P. Morgan raised the rating on McAfee.com to a "long-term buy"
from "market performer," with a new six-month price target of 
$20.  Analysts believe the company's quarter is tracking better
than expected in terms of new subscriber growth, and new service
offerings and the potential for a announcement with Microsoft.
The stock has formed a Stage I base with technical support near
our cost basis and this position offers investors a method of
obtaining a relatively low-risk entry point in the issue.  The
company's earnings are due July 10.

JUL 12.50 CFU GV LB=2.25 OI=122 CB=12.01 DE=28 TY=4.4%


*****
MIR - Mirant  $8.70  *** Bottom Fishing The Utilities ***

Mirant (NYSE:MIR) is a global competitive energy company.  Mirant
delivers value by integrating an extensive portfolio of power and
natural gas assets with risk management and marketing expertise.
The company has facilities in North America, the Caribbean, Europe
and Asia.  As of December 31, 2001, Mirant owned or controlled 
more than 22,000 MW (megawatts) of electric generating capacity
around the world, with approximately 6,800 MW under development.
On January 19, 2001, the company announced, as part of its separa-
tion from Southern Company, that it was changing it name and would
begin doing business as Mirant.  The company will likely beat the 
earnings guidance it provided investors for the 2nd-quarter, the
company's Chief Executive Marce Fuller said on June 17.  The 
suffering company is looking for a long-term deal to provide the 
company with increased liquidity for its trading operation.  The
company is in discussions with a third party to form a separate 
entity with an investment grade rating of at least "A-minus," 
giving Mirant access to additional capital to back its trading 
operation.  We simply favor the technical support area near our
cost basis as Mirant forges a Stage I base.  Investors who remain
bullish on Mirant's future can speculate on the future movement
of the stock with this conservative position.

JUL 7.50 MIR GU LB=1.60 OI=504 CB=7.10 DE=28 TY=6.1%


*****
NCEN - New Century Financial  $31.85  *** Bullish Outlook ***

New Century Financial (NASDAQ:NCEN) is a specialty finance
company that, through its subsidiaries, originates, purchases,
sells and services sub-prime mortgage loans secured primarily
by first mortgages on single-family residences.  The company 
offers both fixed-rate and adjustable-rate loans (ARMs), as 
well as loans with an interest rate that is initially fixed
for a period of time and subsequently converts to an adjustable
rate.  Most of the ARMs originated by the company are offered 
at a low initial interest rate, sometimes referred to as a 
"start rate."  At each interest rate adjustment date, New 
Century adjusts the rate, subject to certain limitations on 
the amount of any single adjustment and a cap on the aggregate
of all adjustments.  New Century Financial recently raised its
earnings estimate for fiscal 2002, partly due to strong loan
production.  The company increased its earnings estimate to a
range of $5.25 to $5.45 per share, from an earlier range of 
$4.35 to $4.55 per share.  Our outlook is also bullish, due
to the recent technical strength and this position offers a
low risk, short-term cost basis in the issue.

JUL 30.00 URE GF LB=3.40 OI=537 CB=28.45 DE=28 TY=5.9%


*****
PETM - PETsMART  $17.50  *** Stage II Climber ***

PETsMART (NASDAQ:PETM) is a provider of products, services and
solutions for the lifetime needs of pets.  As of Feb. 3, 2002,
the company operated 560 retail stores in North America, an 
Internet pet e-commerce site and several major branded catalogs
and affiliated Websites that market supplies for pets and horses.
The majority of its stores feature pet styling salons that offer
high-quality grooming services.  In addition, its stores offer 
complete pet training services.  Through its strategic relation-
ship with Banfield, The Pet Hospital, the company facilitates 
full-service veterinary care in approximately half its stores.
In early June, Petsmart posted sharply higher first quarter 
profits, helped by a growing pet services business, and the
company raised its earnings forecast for the full fiscal year. 
Petsmart President and Chief Operating Officer Bob Moran told
analysts that the company has the potential to boost pretax 
income from 5.6% of sales to 8%-9% in 2005.  The recent price
history of PETsMart reveals one of the better charts we've seen
in the broader-market groups and investors who want to diversify
their portfolio should consider this position.

JUL 17.50 QPT GW LB=0.80 OI=1436 CB=16.70 DE=28 TY=5.2%


*****
REV - Revlon  $4.96  *** Stage I Speculation ***

Revlon (NYSE:REV) manufactures, markets and sells an extensive 
array of cosmetics and skin care, fragrances and personal care 
products.  The company's products are marketed under such brand
names as Revlon Colorstay, Revlon Age Defying, and Skinlights, 
as well as Almay and Ultima II in cosmetics; Almay Kinetin, 
Vitamin C Absolutes, Eterna 27, Ultima II and Jeanne Gatineau 
in skin care; Charlie and Fire & Ice in fragrances, and High
Dimension, Flex, Mitchum, Colorsilk, Jean Nate and Bozzano in 
personal care products.  Revlon conducts its business exclusively
through its direct subsidiary, Revlon Consumer Products Corp. and
the company's products are sold in more than 100 countries across
five continents.  Revlon has been forming a Stage I base for over
a year with a fairly strong technical support area around $5.  
Traders can speculate on the near-term performance of the issue
with this conservative position.

JUL 5.00 REV GA LB=0.45 OI=235 CB=4.51 DE=28 TY=10.8%


*****

*****************
SUPPLEMENTAL COVERED CALL CANDIDATES
*****************

The following group of issues is a list of additional 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
and positions are suitable for your experience level, risk-reward
tolerance and portfolio outlook.  They will not be included in
the weekly portfolio summary. 

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

ZIXI    5.05  JUL  5.00   HQU GA  0.50 855    4.55   28   10.7%
WGRD    5.02  JUL  5.00   RUH GA  0.40 88     4.62   28    8.9%
OATS   15.25  JUL 15.00   QOQ GC  1.00 103   14.25   28    5.7%
CPKI   25.00  JUL 25.00   CUH GE  1.10 138   23.90   28    5.0%
HPLA   14.77  JUL 12.50   QHP GV  2.80 2023  11.97   28    4.8%
GG     11.05  JUL 10.00    GG GB  1.45 4736   9.60   28    4.5%
AMZN   17.53  JUL 15.00   ZQN GC  3.10 7671  14.43   28    4.3%


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

Success Basics: Q&A With The Naked-Puts Editor
By Ray Cummins

One of our readers submitted some great questions about the
differences between selling covered-calls and naked-puts and
the way we approach those strategies in the newsletter.

To: jim@OptionInvestor.com
Subject: Covered-Calls and Naked-Puts


Jim,

I wonder if you could be the arbitrator for OI.  In the weekend
naked puts/covered call sections, OI listed Carreker (NASDAQ:CANI)
as a candidate for both strategies.  I am using this as an example,
because I have seen several instances where OIN's target return
makes no sense.

In the covered call section, with the stock at $11.07 and writing
the ITM $10 July call with a premium of $1.60 , leaves a target
return of 4.9%.  In the naked put section, writing a July $10 put
with a premium of $.50 leaves gives a target return of 11.3%.
Essentially, these are the same trade, as you can see from the
cost basis of $9.47 on the covered write and $9.50 on the naked
put.  Why is the target return so different?  I do agree that the
brokerage requirement is a little less on the naked put, but the
return is not double.  Separately, why are both strategies here?
Doesn't the naked put always outperform the covered write?  The
requirements would always be less due to one transaction, not two
and the in-the-money amount reducing the naked put requirement.
I am sure many accounts, such as IRA's cannot write naked puts.
But, why isn't the candidate-list the same?

I have followed your columns for over two years and actively
watch the monitor.  Keep up the good work.

LE


Hello LE,

Jim forwarded your E-mail to me as I am the managing editor for
the two sections mentioned.  Your questions are valid and I hope
I can answer them to your satisfaction.

With regard to the return on investment (ROI) in the CANI position,
the calculations are correct and they are based on the standard
collateral formulas used by online brokers such as E-trade, Schwab
and Ameritrade.  The reason such a disparity exists is because the
covered-call returns do not include the use of margin (buying the
stock at 50% of its actual price), whereas the naked-put collateral
requirements are often only 20% of the underlying issue's current
value.  Such is the case in the Carreker (NASDAQ:CANI) positions,
where one play requires that you purchase the stock outright, at
full price (as in an IRA), while another involves the commitment
of portfolio cash or securities of a much smaller amount.

You mentioned, "the naked-put always outperforms the covered write"
and that fact is generally true, however our goal is to provide a
range of candidates in both strategies as there are many novice
investors who can not sell "naked" options (due to the requirement
for a higher level of experience and account value) as well as those
who are simply looking for ways to improve the performance of their
individual retirement (IRA) accounts.  Also, some investors aren't
comfortable writing "naked" options and many have yet to learn (as
you have) that buying and selling stock options outright can be more
profitable than strategies which involve ownership in the underlying
issue.

Finally, the duplication of a stock as a "New Play" in both sections
is rare and it is something we attempt to avoid (as we are trying to
provide a large selection of potentially profitable plays), but it
will happen occasionally when there is a shortage of good candidates
or we believe the position offers uncommonly favorable technical or
fundamental characteristics.  In this case, CANI was listed only as a
"Supplemental" position (explained in that segment of the newsletter)
in the Covered-Calls section while it was a primary candidate in the
Naked-Puts portfolio.

I trust this explanation helps you understand the difficulty we have
in producing these sections (for a variety of different traders) and
hopefully, you will eventually profit from some of the positions
we offer.

Ray



Reader's Response:

Ray,

Thanks for the explanation.  It was as well written as your columns
usually are.

I presume you agree that a buy write and a naked put are essentially
the same strategy.  I can't think of a situation where the result
shouldn't be the same, except the naked put usually has less
commissions and burns up less resources.  That said, is there any
reason I should not look at the covered call candidates in the same
vein as the naked put candidates?  Is there any difference in the
risk posture of the trades?

On another note, do I remember that in the past you have suggested
strikes in the 3-4% per month return category as being 2 standard
deviations out of the action?  When I see the return jumping up
above this threshold, I reduce the number of shares.  Do I
remember this correctly?

LE


Hello Again,

With regard to your generous comments, we try to answer all of the
E-mail inquiries in a timely manner and with as much guidance as
possible without encroaching on the area of personal financial
advice.  The SEC monitors the activity of companies like ours very
closely and we have very strict rules concerning the information
published in the newsletter and in individual correspondence (and
the guidelines vary significantly).

Your assessment regarding the similar risk/reward outlook in both
Covered-Calls and Naked-Puts is correct.  The are no fundamental
differences in the two strategies other than the collateral
requirements and commission costs, thus writing cash-secured puts
is almost always the most (theoretically) favorable of the two
techniques.  In addition, the Covered-Calls section of the OIN can
be used a Naked-Put candidate list as well, even though we try to
post a variety of viable plays in both portfolios.

The final question is a bit more complex and the answer is not as
definitive as you might expect.  I mentioned before that targeting
a 3-4% per month return in "premium-selling" strategies (using
options with historically average prices) will often require moves
(in the underlying) of 2 standard deviations to become unprofitable.
That fact also applies to writing "naked" puts, however I would not
use it as the only qualifier in selecting stocks for this strategy.
There are many occasions when the recent trend of the underlying
dictates that you should avoid the issue even with the most robust
option premiums.  Reducing the number of contracts (shares) sold is
one way to limit the percentage risk to your portfolio but it will
not adequately address the requirement to avoid losses in technically
or fundamentally unfavorable candidates.  Remember, statistical
probability is just one of the components you must evaluate when
selecting potential plays; recent price/volume trends (charting) in
both the issue and its industry group/sector and option premiums are
important factors as well.

I wish you much success!

Ray 

                          *** WARNING!!! ***

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


SUMMARY OF PREVIOUS CANDIDATES 
*****

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

EMLX   29.91  25.30   JUN  25.00  0.40  *$  0.40  11.7%
AMZN   19.47  17.53   JUN  17.50  0.65  *$  0.65  11.3%
ENDP   11.56  10.56   JUN  10.00  0.55  *$  0.55   9.5%
AMZN   19.16  17.53   JUN  15.00  0.40  *$  0.40   8.2%
QCOM   30.87  26.12   JUN  25.00  0.25  *$  0.25   8.1%
RMCI   27.46  24.60   JUN  22.50  0.70  *$  0.70   7.5%
GG      9.36  11.05   JUN   8.75  0.35  *$  0.35   7.3% 2-1 split
BJS    37.52  35.11   JUN  35.00  0.65  *$  0.65   7.2%
JBHT   26.95  31.05   JUN  25.00  0.30  *$  0.30   7.1%
PHSY   30.06  26.63   JUN  25.00  0.60  *$  0.60   6.9%
EMLX   30.11  25.30   JUN  22.50  0.30  *$  0.30   6.9%
JBL    22.96  19.96   JUN  20.00  0.35   $  0.31   6.8%
NOVN   24.37  24.72   JUN  22.50  0.50  *$  0.50   6.7%
SIE    19.88  21.40   JUN  17.50  0.65  *$  0.65   6.5%
PHSY   25.87  26.63   JUN  20.00  0.50  *$  0.50   6.4%
EBAY   56.67  59.75   JUN  50.00  0.45  *$  0.45   5.9%
AMZN   16.94  17.53   JUN  12.50  0.30  *$  0.30   5.9%
TDY    19.17  18.80   JUN  17.50  0.60  *$  0.60   5.6%
SRCL   35.00  38.57   JUN  32.50  0.30  *$  0.30   5.5%
INTU   44.03  44.20   JUN  40.00  0.35  *$  0.35   5.5%
RDC    26.12  22.25   JUN  22.50  0.50   $  0.25   2.5%
RMCI   31.23  24.60   JUN  25.00  0.55   $  0.15   1.9%
NOVN   26.61  24.72   JUN  25.00  0.40   $  0.12   1.8%
OSTE    8.30   7.29   JUN   7.50  0.20   $ -0.01   0.0%
NTIQ   23.12  19.45   JUN  20.00  0.45   $ -0.10   0.0%
PSFT   20.94  16.92   JUN  17.50  0.30   $ -0.28   0.0%
TDY    21.24  18.80   JUN  20.00  0.50   $ -0.70   0.0%
WIN    19.20  16.35   JUN  17.50  0.30   $ -0.85   0.0%
WFR     8.30   5.84   JUN   7.50  0.60   $ -1.06   0.0%
ADRX   45.22  31.36   JUN  35.00  0.70   $ -2.94   0.0%

CANI   11.07  11.10   JUL  10.00  0.50  *$  0.50  11.3%
SIE    19.20  21.40   JUL  17.50  0.65  *$  0.65   8.5%
FBR    10.65  11.54   JUL  10.00  0.35  *$  0.35   7.7%
SWFT   21.50  22.65   JUL  20.00  0.55  *$  0.55   6.2%
TALX   18.42  18.87   JUL  15.00  0.30  *$  0.30   6.1%
SCIO   28.94  28.80   JUL  25.00  0.55  *$  0.55   5.8%
ATTC   31.25  31.07   JUL  30.00  0.80  *$  0.80   5.8%
SKX    22.10  21.70   JUL  17.50  0.30  *$  0.30   5.5%
YCC    26.74  26.98   JUL  25.00  0.55  *$  0.55   5.0%

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

Comments:

There was "no joy in Mudville" this week as stocks continued to
plunge amid worries over earnings warnings, distrust of corporate
balance sheets, political conflict, and economic uncertainty.  As
if that wasn't enough, the "triple witching" expiration of stock
index futures, index options, and equity options created a spike
in the trading volume during the volatile session.  Investors who
were hoping for a recovery rally were sorely disappointed as the
major averages fell to lows not seen since the tragedy of 9/11.
Our portfolio was drastically trimmed during last week's slump
but unfortunately, we endured a few more losers as the expiration
period came to an end.  The only positive thing to be said is that
all of our July positions are in relatively good shape and the
downside appears to be somewhat limited from this point.

Positions Closed: 

Endocare (NASDAQ:ENDO), Plexus (NASDAQ:PLXS), Headwaters
(NASDAQ:HDWR), Dana (NYSE:DCN), Macromedia (NASDAQ:MACR),
Take-Two Intera (NASDAQ:TTWO), Checkfree (NASDAQ:CKFR),
Fleming (NYSE:FLM), Idexx Laboratories (NASDAQ:IDXX) and
Valuevision Media (NASDAQ:VVTV).



NEW CANDIDATES
*********

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

APN    10.85  JUL 10.00   APN SB  0.25 0      9.75   28    7.3%
CACI   36.51  JUL 32.50   KFQ SZ  0.80 137   31.70   28    7.6%
CLHB   13.52  JUL 10.00   QPB SB  0.40 289    9.60   28   14.0%
DG     18.50  JUL 17.50    DG SW  0.30 160   17.20   28    4.9%
LNCR   30.71  JUL 27.50   LQN SY  0.70 1000  26.80   28    7.8%
MOVI   20.18  JUL 17.50   QLV SW  0.35 45    17.15   28    6.6%
SWFT   22.65  JUL 20.00   SDU SD  0.35 355   19.65   28    5.6%
YHOO   15.49  JUL 12.50   YHZ SV  0.30 4847  12.20   28    9.3%

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

CLHB   13.52  JUL 10.00   QPB SB  0.40 289    9.60   28   14.0%
YHOO   15.49  JUL 12.50   YHZ SV  0.30 4847  12.20   28    9.3%
LNCR   30.71  JUL 27.50   LQN SY  0.70 1000  26.80   28    7.8%
CACI   36.51  JUL 32.50   KFQ SZ  0.80 137   31.70   28    7.6%
APN    10.85  JUL 10.00   APN SB  0.25 0      9.75   28    7.3%
MOVI   20.18  JUL 17.50   QLV SW  0.35 45    17.15   28    6.6%
SWFT   22.65  JUL 20.00   SDU SD  0.35 355   19.65   28    5.6%
DG     18.50  JUL 17.50    DG SW  0.30 160   17.20   28    4.9%


Company Descriptions

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

*****
APN - Applica  $10.85  *** Consumer Durables Sector ***

Applica (NYSE:APN) is a manufacturer, marketer and distributor of
a broad range of branded and private-label small electric consumer
goods.  In 1998, APN acquired Black & Decker's Household Products
Group, a supplier of brand name small household appliances in the
United States.  The company also makes and distributes a range of
professional personal care products, home environment products and
pet care products, including the LitterMaid cat litter box.  The
company manufactures and markets products under various licensed
brand names, its own brand names, and other private-label brand
names.  Applica's customers include mass merchandisers, specialty
retailers and appliance distributors primarily in North America,
Latin America and the Caribbean.  Applica recently said its pro
forma 2002 profit will be about 15% higher than expected due to
lower costs and stronger sales.  The company also reported it is
enjoying improved operating conditions and an enhanced product mix.
Investors who think those conditions will translate to higher share
values should consider this position.

JUL 10.00 APN SB LB=0.25 OI=0 CB=9.75 DE=28 TY=7.3%


*****
CACI - CACI International  $36.51  *** New Contract! ***

CACI International (NASDAQ:CACI) is a holding company and its
operations are conducted through wholly owned subsidiaries located
in the United States and Europe.  The company delivers information
technology and communications solutions to clients through four
major areas of expertise or lines of business: systems integration,
managed network services, document technology and basic engineering
services.  The company's markets, both domestic and international,
are agencies of national governments, major corporations and state
and local governments.  The demand for CACI's many services in large
measure is created by the increasingly complex network, systems and
information environment in which governments and businesses operate,
and by the need to stay current with new technology while increasing
productivity and performance.  CACI recently announced that it has
been awarded a $163.5 million contract to provide information and
technology support to the Space and Naval Warfare Systems Command
Systems Center in Norfolk, Virginia.  CACI's primary role under the
five-year contract, which has one base year and four option years,
is to implement the Naval Tactical Command Support System software
developed by SSC Norfolk, aboard Naval vessels and shore activities
around the world.  The award substantially increases the scope and
value of CACI's software and systems integration support with the
Navy and the news has helped CACI return to an old trading range
near $35.

JUL 32.50 KFQ SZ LB=0.80 OI=137 CB=31.70 DE=28 TY=7.6%


*****
CLHB - Clean Harbors  $13.52  *** Acquisition Approved! ***

Clean Harbors (NASDAQ:CLHB) provides a range of environmental
services to a diversified customer base in the U.S. and Puerto 
Rico through its subsidiaries.  The services provided by Clean 
Harbors are classified in four primary categories: treatment and 
disposal of industrial wastes (Treatment and Disposal); site 
services provided at customer sites (Site Services); specialized 
repackaging, treatment and disposal services for laboratory 
chemicals and household hazardous wastes (CleanPack), and out-
sourcing of customer's environmental management program (Onsite
Services).  Clean Harbors also provides transportation for all
hazardous wastes, analytical testing, information management and
training services.  Clean Harbors shares moved higher last week
after the company announced that the U.S. Bankruptcy Court in
Delaware approved the sale of Safety-Kleen's Chemical Services
Division to Clean Harbors.  The transaction is expected to close
in the third quarter of 2002 and based on the recent rally in
CLHB's share value, investors are pleased with the news.

JUL 10.00 QPB SB LB=0.40 OI=289 CB=9.60 DE=28 TY=14.0%


*****
DG - Dollar General  $18.50  *** Specialty Retail Sector ***

Dollar General (NYSE:DG) is a discount retailer of quality general
merchandise at everyday low prices.  Through conveniently located
stores, the company offers a varied assortment of consumable basic
merchandise including health and beauty aids, packaged food, home
cleaning supplies, house-wares, stationery, seasonal goods, basic
clothing and domestics.  Dollar General stores serve primarily low
and middle income families with over 5,000 stores in 27 states.
Morgan Stanley recently upgraded shares of Dollar General, based
on improved fundamentals and lessening concerns about accounting
issues at the discount chain.  The company restated its earnings
for 1998-2000 after incorrectly accounting for some leases and
liabilities.  Wachovia Securities backed the upbeat outlook and
investors who agree with a bullish future for DG can profit from
that outcome with this position.

JUL 17.50 DG SW LB=0.30 OI=160 CB=17.20 DE=28 TY=4.9%


*****
LNCR - Lincare Holdings  $30.71  *** Safe-Haven Sector! ***

Lincare Holdings (NYSE:LNCR) together with its subsidiaries, is
a provider of oxygen and other respiratory therapy services to
patients in the home.  The company's customers typically suffer
from chronic obstructive pulmonary disease, such as emphysema,
chronic bronchitis or asthma, and require supplemental oxygen or
other respiratory therapy services in order to alleviate the many
symptoms and discomfort of respiratory dysfunction.  In addition
to providing oxygen and other respiratory therapy services to its
patients in the home, Lincare also provides a variety of infusion
therapies in certain geographic markets.  Lincare supplies home
medical equipment, such as hospital beds, wheelchairs and other
supplies that may be required by patients.  Stocks in the health
care segment have performed well in recent weeks and the group's
future looks bright with the baby-boomer generation approaching
retirement age.  Investors who want a long-term portfolio issue
in the industry can establish a low risk cost basis in LNCR with
this position.

JUL 27.50 LQN SY LB=0.70 OI=1000 CB=26.80 DE=28 TY=7.8%


*****
MOVI - Movie Gallery  $20.18  *** Improved Outlook! ***

Movie Gallery (NASDAQ:MOVI) is a home video specialty retailer in
rural and secondary markets.  The company owns and operates over
1,400 retail stores in the United States and Canada, which rent
and sell videocassettes, DVD and video games.  Movie Gallery's
target markets are small towns and suburban areas of cities with
populations generally between 3,000 and 20,000, where its primary
competitors are independently owned stores and regional chains.
The company is also a low-cost operator of national home video
specialty retail chains.  They have developed and implemented a
flexible and disciplined business strategy that centers on driving
revenue growth, maximizing store productivity and profitability and
minimizing operating costs.  Movie Gallery recently said it expects
second-quarter results to be above the consensus estimate, and the
company raised its earnings per share guidance for the rest of the
year.  The CEO said the company's results continue to benefit from
stronger profit margins related to the ongoing transition to DVD
and he is pleased with the performance of new stores added through
acquisitions and internal developments.  Investors who want to
establish a discounted cost basis in the issue should consider this
position.

JUL 17.50 QLV SW LB=0.35 OI=45 CB=17.15 DE=28 TY=6.6%


*****
SWFT - Swift Transportation  $22.65  *** Hot Sector! ***

Swift Transportation (NASDAQ:SWFT) is a truckload carrier in North
America.  The company operates primarily throughout the continental
United States, combining regional operations with transcontinental
van operations.  The company transports retail and department store
merchandise, manufactured goods, paper products, non-perishable
food, beverages and beverage containers and building materials for
such companies as Kmart, Target, Costco, Sears and Wal-Mart.  The
company owns M.S. Carriers, a truckload carrier that operates in
the continental United States and the Canadian provinces of Quebec
and Ontario, and Mexico.  M.S. Carriers also transports truckload
shipments of general commodities, such as packages, retail goods,
non-perishable food, paper and paper products, household appliances,
furniture and packaged petroleum products.  Its customers include
Sears, Federal Express, Family Dollar and Home Depot.  Stocks in the
Freight Transport segment have been "hot" recently and investors
who want to diversify their portfolios with one of the leading
companies in the industry should consider this position.

JUL 20.00 SDU SD LB=0.35 OI=355 CB=19.65 DE=28 TY=5.6%


*****
YHOO - Yahoo!  15.49  *** Entry Point! ***

Yahoo! (NASDAQ:YHOO) is a worldwide Internet business and consumer
services company that offers a comprehensive, branded network of
properties and services to more than 219 million individuals around
the globe.  The company offers an online navigational guide to the
Internet via its www.yahoo.com Website, which is a guide in terms of
traffic, advertising and household and business user reach.  Through
Yahoo! Enterprise Solutions, the company provides business services
designed to enhance the productivity and Web presence of its clients.
Yahoo! has offices in the United States, Europe, Asia, Latin America,
Australia and Canada.  Yahoo! is the most widely used web portal in
the world and the company has value in a range of Internet segments.
Investors who wouldn't mind owning the issue at a discounted basis
can speculate conservatively on the future movement of YHOO's share
value with this position.

JUL 12.50 YHZ SV LB=0.30 OI=4847 CB=12.20 DE=28 TY=9.3%


*****

*****************
SUPPLEMENTAL NAKED PUT CANDIDATES
*****************

The following group of issues is a list of additional 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
and positions are suitable for your experience level, risk-reward
tolerance and portfolio outlook.  They will not be included in
the weekly portfolio summary. 

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

GMST    8.20  JUL  5.00   QLF SA  0.30 597    4.70   28   16.8%
APOG   15.11  JUL 15.00   QJA SC  0.70 0     14.30   28   11.5%
SIE    21.40  JUL 20.00   SIE SD  0.75 35    19.25   28   10.3%
YELL   31.08  JUL 30.00   YUX SF  1.15 504   28.85   28   10.0%
PHSY   26.63  JUL 22.50   HYQ SX  0.65 34    21.85   28    9.8%
CENT   17.82  JUL 17.50   EQH SW  0.65 0     16.85   28    9.5%
CPB    27.53  JUL 27.50   CPB SY  0.80 0     26.70   28    7.4%
EDMC   41.49  JUL 40.00   UKN SH  1.00 0     39.00   28    6.7%
ROAD   36.85  JUL 35.00   EJQ SG  0.65 25    34.35   28    5.2%
RBK    28.96  JUL 27.50   RBK SY  0.50 55    27.00   28    5.1%



SEE DISCLAIMER IN SECTION ONE
*****************************


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

No Bottom In Sight!
By Ray Cummins

******************************************************************
                         - MARKET RECAP -
******************************************************************
Friday, June 21

The bearish activity in stocks continued Friday as concerns over
weakness in the dollar, corrupt corporate accounting practices
and the potential for terrorism conspired to keep investors out
of the market.  

The Dow Jones Industrial Average plunged 177 points to 9,253 with
Merck (NYSE:MRK), United Technologies (NYSE:UTX), International
Business Machines (NYSE:IBM), Eastman Kodak (NYSE:EK), Johnson &
Johnson (NYSE:JNJ) and Microsoft (NASDAQ:MSFT) among the biggest
losers.  Only four components finished in the plus column and the
blue-chip gauge was dealt its fifth straight weekly loss for the
first time in over a year.  There was no relief for beleaguered
technology issues, with software and semiconductor stocks enduring
the worst selling pressure while wireless and networking shares
suffered from additional brokerage downgrades.  The NASDAQ index
did well to finish only 23 points lower at 1,440.  In the broader
market, the drug sector was spurned by traders as questions over
Merck's accounting methods emerged and stocks in the oil service,
financial, consumer and cyclical sectors generally retreated.  The
Standard & Poor's 500-stock index slid 17 points to 989.  Trading
volume reached 1.8 billion on the NYSE and almost 2 billion on the
NASDAQ.  Market breadth was negative, with decliners outnumbering
advancers 18 to 14 on the Big Board and 18 to 17 on the technology
exchange.  In the treasury market, bonds headed higher with the
10-year note up 6/32 to yield 4.70% while the 30-year bond gained
12/32 to yield 5.40%.  On the fund flow front, Trim Tabs reported
that all equity funds had outflows of $300 million during the week
ending June 19 compared with outflows of $5.2 billion in the prior
week.  Bond funds saw outflows of nearly $400 million compared to
inflows of $200 million in the prior week.


Last week's new plays (positions/opening prices/strategy):
						
Clear Chan. (NYSE:CCU)   JUL55C/JUL50C  $0.70  credit  bear-call
Gen. Motors (NYSE:GM)    JUL60C/JUL55C  $0.70  credit  bear-call
eBay        (NSDQ:EBAY)  JUL45P/JUL50P  $0.50  credit  bull-put
Oracle      (NSDQ:ORCL)  J0310P/SEP07P  $2.00  credit  put-combo
GoldCorp    (NYSE:GG)    OCT12C/JUL12C  $0.70  debit   calendar
Pharm. Res. (NYSE:PRX)   AUG35C/AUG25P  $0.30  credit  synthetic
Sei Invest. (NSDQ:SEIC)  SEP30C/SEP30P  $4.85  debit   straddle

Despite the recent volatility in the market, we were unable to
achieve the target prices in all of our new positions.  However,
the extreme activity in the financial services segment provided
a favorable entry opportunity in the SEI debit straddle and the
neutral-outlook position is already trading at a small profit.


Portfolio Activity:

After a brief surge during Monday's session, the selling pressure
in stocks continued almost unabated this week as investors became
more concerned about the lack of recovery in corporate earnings
and the slumping value of the dollar.  The outlook for equities
has changed from "cautious optimism" to an attitude of gloom and
trepidation in a very short period.  Fortunately, that may be the
first step to a capitulation sell-off; an event that many traders
believe must occur before the market can change direction for the
long term.  Some analysts thought the recent precipitous decline
in share values would instill a surge of bargain-hunting but that
did not occur and the results can be seen in many of the bullish
positions in our portfolio.  At the same time, we enjoyed success
in a number of bearish plays and the current trend bodes well for
issues in that category.  One element of the market that has been
very prevalent in recent weeks is volatility and many readers are
learning just how difficult that component can be in managing an
options portfolio.  A new reader asked some great questions about
the ways he might use spread and combination trading to offset the
adverse effects of an unpredictable market environment and I have
decided to share that discussion in today's narrative.

Questions & comments on spreads/combos to Contact Support
******************************************************************
                 - READER'S WRITE E-MAIL REPLIES -
******************************************************************

Attn: Spreads/Combos Editor
Subject: Strategy Selection
 
Dear Ray,

I am a new reader and I have enjoyed my trial membership to the
Option Investor Newsletter.  Although I am familiar with basic
option trading strategies, I have yet to try any spreads or
combination plays.  Since the market conditions seem to favor
this approach, I was hoping you could give me some suggestions
for becoming successful with these methods.  Also, do you use
some kind of system to take profits and limit losses with these
positions?

Thanks for a great product!

HG
   

Hello HG,

The options market is unique because it offers a variety of ways
to profit.  At the same time, the risk in some positions can be
substantial and as a trader, your primary goal must always be to
maximize returns and preserve capital.  The easiest way to achieve
this objective is to become familiar with reliable strategies and
acquire the knowledge to implement and manage them correctly.

The principal requirement for profitable trading is the ability
to achieve acceptable returns and control risk effectively.  A
thorough and deliberate approach to strategy selection is the
first step in the process.  After the principal techniques have
been identified, it is crucial to execute them with discipline
and consistency.  Discipline in option trading is the ability to
maintain self-control and implement a pre-determined plan.  The
most difficult skill that traders must learn is the ability to
overcome human (emotional) impulses.  When real money is at stake,
the influences of greed and fear (of loss) will attempt to sway
your judgment, hindering a rational thought process.  If you can
not overcome these effects, the chances of success are slim.  In
fact, that is the primary reason it is so important to utilize
strategies that promote a mechanical approach to trading.  These
types of techniques offer little opportunity for indecision and 
generally provide more consistent returns as they are exposed to
less risk than those with a high level of maintenance.


Strategy Selection

Profitable trading strategies have a number of common traits:
precisely defined principles, ease of execution and flexibility.
However, the most important characteristic for the majority of
investors is asset preservation.  In the options market, the most
successful systems are those which employ effective defensive
measures.  The ability to protect and conserve portfolio capital,
while achieving consistent returns is a fundamental quality of
any profitable technique.  Fortunately, numerous option trading
strategies satisfy this criteria and our goal at the OIN is to
help novice investors discover the most appropriate combination
of trading techniques and provide them with the tools necessary
to profit on a regular basis.

The majority of option traders use derivatives to speculate on the
directional movement of stocks.  The appealing feature of option
ownership is leverage with limited risk.  If a trader correctly
predicts the market direction and takes the appropriate position,
he can expect to make a profit.  Unfortunately, that technique has
a relatively low probability of success.  As all option traders
quickly discover, owning the correct position (CALL or PUT) when
the market moves in the predicted direction will not necessarily be
profitable.  The reason is, over short periods of time (while the
trader is waiting for the option to rise in value), the position is
at risk from a variety of changes in the market.  One method that
experienced traders use to overcome this problem involves simple
combination positions or spreads.  Spread trading is one way to
take advantage of mis-priced options and premium disparities, while
at the same time reducing the effects of short-term changes in
market conditions so that a position can be held to maturity.

The wonderful thing about option trading is its diversity.  There
are an incredible number of strategies available, one for every
type of market trend, character and outlook.  Positions involving
combinations of calls and puts, with different strike prices and
expiration months, along with index and futures options offer the
astute trader a variety of ways to participate in the market.  This
assortment provides even the most conservative investor the ability
to construct positions with an acceptable level of risk and reward
in almost any situation.  In addition, students of option pricing
theory can identify combinations with potentially superior returns
when the relationships between the options are theoretically skewed.
While there is no “perfect” position, successful traders learn to
maximize profits and hedge their risk in as many different ways as
possible, limiting the effects of short-term volatility and market
gyrations.  Obviously, there is no way to completely eliminate risk
but you can reduce it much more than that of a inexperienced trader
who does not utilize all of the available strategies.


Develop A System

Using a proven trading system is one of the best ways to become
successful in the market.  A plan of attack helps novice traders
learn proper money management and the correct use of technical
analysis in identifying precise entry and exit points.  Trading
in a systematic manner is far more likely to produce consistent
profits than a scheme based on intuition, emotion or the trend
of the day.  The benefits to this approach are many but most
importantly, you can eliminate the guesswork that comes from
trying to manage an active position without realistic goals or
loss limits.  The targets and exit strategies are predefined,
leaving no doubt as to when and how to get out of a position if
the market moves against you.  Potential risk is identified prior
to beginning the trade, with a fixed limit on maximum losses and
a formula for taking profits.  There are no positions initiated
without a complete assessment of the capitalization necessary to
carry out the entire strategy, even in the worst case scenario.
A thorough study of the underlying issue’s historical data is used
to provide objective goals for future movement, based on expected
volatility and technical indications.  With all of these elements
properly evaluated and arranged, you can develop an effective plan
that contains a suitable risk-reward outlook based on appropriate
strategies that are compatible with your personal trading style.

A major stage in developing a practical method for participating
in the market is to determine your comfort threshold and stress
level.  Think about the unique emotional effects of your trading
activities and managing a complex portfolio.  Are you ordinarily
a cautious person or do you feel comfortable traveling at warp
speed?  How will a specific type of trading affect you mentally?
Can you handle the volatility of day-trading options or are you
happier with conservative, longer-term plays.  After you identify 
the appropriate trading attitude, it is important to decide what
type of market activity is most favorable to your personal style.
Some traders prefer strategies that profit from trending markets
such as those characterized by a sustained advance or decline.
Techniques that benefit from this type of movement include Put or
Call buying and high-potential spreads or combinations.  Another
tactic might be to focus on changes in volatility.  Traders using
this approach buy or sell premium in an attempt to profit from
transitions in market character.  Some utilize neutral positions
such as calendar or ratio spreads when the technical outlook for
the underlying issue is range-bound or static.  Regardless of the
method you prefer, each category of price action demands a unique
type of trading system.  The key to success is to specialize in a
specific kind of market activity and utilize trading strategies
that perform well in that particular environment.

One of the most important steps in developing a profitable system
is identifying the appropriate level of complexity when selecting
trading techniques.  The simplest approach is most often the best
but every strategy has risk and it is impossible to classify any
particular technique as the absolute perfect method.  In most
cases, there is more than one favorable technique and even though
each strategy has different attributes, they can all be useful in
a trader's arsenal at the proper time.  The easiest way to become
successful is to become completely knowledgeable of the mechanics
of any technique that you are using and then construct a group of
diverse candidates based on the correct market outlook.  Of course,
you must remember that the individual investment objectives are
far more important than the merits of the technique itself.  If a
specific strategy is not suitable for you or your trading style
then it should not be used, no matter how attractive it appears.
In addition to selecting the proper trading techniques, you must
also identify the appropriate time frame in which to participate
in the market.  Most investors are suited to longer-term plays as
they require less attention and are easy to manage for those who
have full-time commitments to work or family.  Traders who have
the temperament and resources to follow the markets at all hours
should consider short term techniques based on intra-day data and
momentum-based trends.  Using the appropriate strategy when the
markets dictates action is the fundamental step in developing the
ability to trade in a disciplined manner.

After you have identified the characteristics of the market and
selected the correct technique to profit from future trends, the
next task is to determine specific entry and exit points for the
underlying instrument.  In most cases, technical analysis should
be used to ascertain the correct parameters for risk and reward.
With this approach, a simple mechanism for money management is
built into the initial position.  Entry timing can be based on a
number of different indicators and the criteria used to identify
a trading opportunity is a personal choice.  The great thing is,
you don't have to open any position until you are satisfied with
the probability of a profitable outcome.  You can search through
charts for the perfect pattern, perform extensive due-diligence,
and wait for the best combination of technical indicators and
favorable market conditions.  In short, you can forego any trade
until the number of reasons to participate becomes overwhelming.
Remember, the market does not care whether you play along or sit
on the sidelines.  In addition, when you trade without a system,
it's amazing how confusing the situation can become.  Once you
are committed, you are playing by the market’s rules, not your
own.

Good Luck!

******************************************************************
                           - NEW PLAYS -
******************************************************************

Traders sometimes ask why we don't offer more bearish "synthetic"
positions.  The answer is simple: most subscribers do not have
approval to write "naked" calls in their option trading accounts.
However, the current market internals suggest we may be in for
another big sell-off, so here are some speculative positions that
will profit from declining share values.  All of these positions
are based on the price of the underlying issue and its technical
trend or pattern.  Although these plays offer great risk-reward
potential, they must also be evaluated for portfolio suitability
and reviewed with regard to your strategic approach and trading
style.

******************************************************************
GS - Goldman Sachs  $70.55  *** Flagging Financial Sector! ***

The Goldman Sachs Group (NYSE:GS) is a global investment banking
and securities business that provides a wide range of services
worldwide to a substantial and diversified client base.  Goldman
Sachs operates offices in over 20 countries with its activities
divided into two segments: Global Capital Markets, and the Asset
Management and Securities Services division.  The Global Capital
Markets segment, which represented 64% of the company's 2001 net
revenues, consists of Investment Banking, and Market Trading and
Principal Investments.  Goldman Sachs' Asset Management segment
offers investment strategies and advice across all major asset
classes: global equity; fixed income, including money markets;
currency, and alternative investment products.  The company's
principal Securities Services activities include prime brokerage,
financing services and securities lending.

PLAY (speculative - bearish/synthetic position):

BUY  PUT   JUL-60  GS-SL  OI=1475  A=$0.50
SELL CALL  JUL-80  GS-GP  OI=5900  B=$0.40
INITIAL NET CREDIT TARGET=$0.00-$0.10  TARGET PROFIT=$0.75-$1.00

Note:  Using options, the position is similar to being short the
stock.  The collateral requirement for the sold (short) call is
approximately $1,900 per contract.


******************************************************************
KLAC - KLA-Tencor  $44.04  *** Elevator Going Down! ***

KLA-Tencor Corporation (NASDAQ:KLAC) is a supplier of process
control and yield management solutions for the semiconductor and
related microelectronics industries.  The company's comprehensive
portfolio of products, software, analysis, services and expertise
is designed to help integrated circuit manufacturers manage yield
throughout the entire wafer fabrication process, from research
and development to final mass production yield analysis.  KLAC
offers a broad spectrum of products and services that are used by
every major semiconductor manufacturer in the world.  Their many
customers turn to KLA-Tencor for in-line wafer defect monitoring;
reticle and photomask defect inspection; CD SEM metrology; wafer
overlay; film and surface measurement; and overall yield and fab
wide data analysis.

PLAY (speculative - bearish/synthetic position):

BUY  PUT   SEP-30  KCQ-UF  OI=1041  A=$1.15
SELL CALL  SEP-60  KCQ-IL  OI=2508  B=$0.85
INITIAL NET DEBIT TARGET=$0.00-$0.15  TARGET PROFIT=$1.25-$1.50

Note:  Using options, the position is similar to being short the
stock.  The collateral requirement for the sold (short) call is
approximately $1,000 per contract.


******************************************************************
QLGC - QLogic Corporation  $42.49  *** Key Moment! ***

QLogic Corporation (NASDAQ:QLGC) is a designer and supplier of
Storage Area Networking infrastructure building blocks.  Its SAN
infrastructure building blocks, comprised of semiconductor chips,
host board adapters and switches, are integrated into storage
networking solutions of the world's leading system and storage
manufacturers.  Companies such as Sun Microsystems, IBM, Dell,
Fujitsu Microelectronics, and Hitachi all use some or all of its
components in the storage and systems solutions they sell to the
world's largest information technology environments.  In addition
to its original equipment manufacturer relationships with these
and other companies, the company delivers selected Fibre Channel
building blocks through leading distributors, systems integrators
and resellers, thereby expanding its reach and visibility to the
information technology community.

PLAY (speculative - bearish/synthetic position):

BUY  PUT   JUL-35  QLC-SG  OI=2097  A=$1.35
SELL CALL  JUL-50  QLC-GJ  OI=3134  B=$1.00
INITIAL NET DEBIT TARGET=$0.10-$0.20  TARGET PROFIT=$0.70-0.95

Note:  Using options, the position is similar to being short the
stock.  The collateral requirement for the sold (short) call is
approximately $1,075 per contract.


******************************************************************
                        - CREDIT SPREADS -

These plays are based on the current price or trading range of
the underlying issue and its recent technical history or trend.
The probability of profit from these positions may also be higher
than other plays in the same strategy based on disparities in
option pricing.  Current news and market sentiment will have an
effect on these issues, so review each play individually and make
your own decision about the future outcome of the position.

******************************************************************
CEPH - Cephalon  $47.57  *** Drug Sector Decline! ***

Cephalon (NASDAQ:CEPH) is an international biopharmaceutical firm
dedicated to the discovery, development and marketing of products
to treat sleep disorders, neurological disorders, cancer and pain.
In addition to conducting a very active research and development
program, the Company markets three products in the United States
and a number of products in various countries throughout Europe.
Cephalon's United States products are Provigil for the treatment
of excessive daytime sleepiness associated with narcolepsy, Actiq
for pain management in cancer, and Gabitril for the treatment of
partial seizures associated with epilepsy.

PLAY (conservative - bearish/credit spread):

BUY  CALL  JUL-60  CQE-GL  OI=2258  A=$0.30
SELL CALL  JUL-55  CQE-GK  OI=4203  B=$0.85
INITIAL NET CREDIT TARGET=$0.60-$0.70  PROFIT(max)=14%


******************************************************************
HCA - HCA Incorporated  $50.40  *** Hot Sector! ***

HCA (NYSE:HCA) is a healthcare services company that operates
almost 200 hospitals which are comprised of general, acute care
and psychiatric hospitals as well as some joint ventures.  In
addition, the company operates approximately 80 freestanding
surgery centers.  The company's facilities are located in 23
states, England and Switzerland.  HCA's general, acute care
hospitals provide a range of services to accommodate such
medical specialties as internal medicine, general surgery,
cardiology, oncology, neurosurgery, orthopedics and obstetrics,
as well as diagnostic and emergency services.  Outpatient and
ancillary healthcare services are provided by HCA's general,
acute care hospitals and through the company's freestanding
outpatient surgery and diagnostic centers, and rehabilitation
facilities.  HCA's psychiatric hospitals provide a full range
of mental healthcare services through inpatient, partial
hospitalization and outpatient settings.

PLAY (conservative - bullish/credit spread):

BUY  PUT  JUL-45.00  HCA-SI  OI=353  A=$0.20
SELL PUT  JUL-47.50  HCA-SW  OI=191  B=$0.45
INITIAL NET CREDIT TARGET=$0.30-$0.35  PROFIT(max)=14%


******************************************************************
MO - Philip Morris  $52.65  *** More Lawsuits! ***

Philip Morris Companies (NYSE:MO) is a holding company whose
principal wholly owned subsidiaries, Philip Morris Incorporated,
Philip Morris International, Kraft Foods, and Miller Brewing,
are engaged in the manufacture and sale of various consumer
products. A wholly owned subsidiary of the parent company, Philip
Morris Capital, engages in a wide range of leasing and investment
activities.  The company's significant industry segments are
domestic tobacco, international tobacco, North American food,
international food, beer and financial services.

PLAY (conservative - bearish/credit spread):

BUY  CALL  JUL-60  MO-GL  OI=7178   A=$0.10
SELL CALL  JUL-55  MO-GK  OI=14449  B=$0.55
INITIAL NET CREDIT TARGET=$0.50-$0.60  PROFIT(max)=11%


******************************************************************
UTX - United Technologies  $65.75  *** Merrill Downgrade! ***

United Technologies (NYSE:UTX) provides a broad range of high
technology products and support services to the building systems
and aerospace industries.  The company conducts its business
through four principal segments: Otis (elevators, escalators,
automated people movers and service); Carrier (commercial and
residential heating, ventilating and air conditioning systems
and equipment, commercial and transport refrigeration equipment,
and aftermarket service and parts); Pratt & Whitney (commercial,
general aviation and military aircraft engines, parts, service,
industrial gas Whitney turbines and space propulsion); and also
Flight Systems (commercial and military helicopters, parts and
service, and aerospace products and aftermarket services).  The
company's quarterly earnings are due July 17.

PLAY (conservative - bearish/credit spread):

BUY  CALL  JUL-75  UTX-GO  OI=948   A=$0.20
SELL CALL  JUL-70  UTX-GN  OI=1272  B=$0.80
INITIAL NET CREDIT TARGET=$0.65-$0.70  PROFIT(max)=15%


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


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


************
MARKET WATCH
************

Will the bulls take control next week?  Or will the bears have 
their way again?


To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://members.OptionInvestor.com/watchlist/062302.asp


**************
MARKET POSTURE
**************

More breakdowns below short term support for the market.  Sectors 
were a little more quiet than normal.


To Read The Rest of The OptionInvestor.com Market Posture Click Here
http://www.OptionInvestor.com/marketposture/062302.asp


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**********

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