Option Investor

Daily Newsletter, Thursday, 07/18/2002

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The Option Investor Newsletter                Thursday 07-18-2002
Copyright 2002, All rights reserved.                       1 of 3
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MARKET WRAP  (view in courier font for table alignment)
      07-18-2002           High     Low     Volume Advance/Decline
DJIA     8409.49 -133.00  8621.95  8404.43 2.02 bln   1024/2138
NASDAQ   1356.95 - 40.30  1395.29  1356.80 1.80 bln   1025/2334
S&P 100   441.28 - 12.40   454.56   440.74   Totals   2049/4472
S&P 500   881.56 - 24.48   907.80   880.60 
RUS 2000  396.71 - 12.98   409.69   396.71 
DJ TRANS 2382.60 - 29.20  2435.12  2378.90   
VIX        39.95 +  0.15    41.33    38.24   
VXN        63.61 +  0.38    65.38    62.61 
Total UpVol   677.7M
Total DnVol 3,322.1M
52wk Highs   66
52wk Lows   436
TRIN        1.29
PUT/CALL     .93

Super Thursday!

For a day that started with five hours of pure boredom the close
proved that investors were not as convinced in their heart as 
they were in their mind that Microsoft would beat the street. 
The markets not only sold off into the close they accelerated 
as investors raced to avoid a negative surprise from MSFT, SUNW, 
EBAY, GTW and NT. The actual earnings were a mixed bag but the 
market internals at the close were very lopsided.

Chart of the S&P/Dow

Chart of the Nasdaq


The day started off good with jobless claims coming in at an 18 
month low. That was the end of the good news. The Philadelphia
Fed survey crashed with a drop from 22.2 in June to only 6.6 in
July. This was significantly below the 18.0 analysts expected and
the lowest number since December. Analysts tried to spin the 
release saying it was still positive and still represented an
expansion of the economy. It does not take a rocket scientist to
see that a drop from 22.2 to a seven month low just over zero is
a stark change in direction. This weighed on the markets as the
possibility of that double dip grows larger. The conference board
Leading Indicators were also flat and indicated the expansion could 
have topped.

This news weighed on the market along with the fear of negative
earnings surprises tonight. The market traded in a very narrow 
range until 2:PM and then the bottom fell out. Had it not been 
for the MSFT bulls holding up the stock in the morning and 
indirectly the Dow and Nasdaq it could have gotten much worse. 
At the end of the day the up volume across all exchanges was only 
677 million compared to 3.3 billion of down volume. For a day that
was flat until 2:PM it proves how narrow the bullish support really

The after hours earnings parade was led by several of the giants 
in the tech sector. Microsoft announced earnings of $.43 cents that
beat the street by a penny but included several charges not previously
announced. There was a lot of discussion in whether it was actually
a beat or possibly a serious miss but the revenue numbers outweighed
the decision. They beat the $7.08 billion revenue estimate with $7.25
billion. They affirmed on the surface the numbers for the next quarter
and revenue just barely under estimates. The preliminary outlook was
still cautious. They said the environment remained very challenging
which has become a familiar refrain. MSFT traded down about $1 in 
after hours. 

SUNW announced earnings that were inline with estimates at a penny 
and broke a string of losses for the last four quarters. SUNW was
optimistic and stressed gains in market share and sales of low end
and high end servers. They predict a slight loss next quarter due to 
very strong competition for sales that reduced selling prices in
the current quarter. They said their intention is to take market share
and return to profitability later. The shares were down -15% to $4.90
from $5.80 in early trading.

EBAY posted results of $.19 cents and inline with estimates but 
guided analysts slightly lower on revenue for the next quarter. They
affirmed earnings despite the lower revenue. Meg Whitman said they
hoped to see a rebound in the economy in early 2003. The current 
weak economy is hampering their ability to grow despite hitting 
estimates. Investors fear the "fad" will burn out eventually and 
the very high PE will drop back to more realistic levels. EBAY is
being added to the S&P at the close on Friday and will be added as
a put play on OIN on Sunday. 

GTW missed estimates by two cents when they announced a -.19 cent
loss after the close. They expect conditions to remain challenging
for the rest of the year and they are pinning their hopes on a
sudden back to school buying binge in August. Don't hold your breath!
The CEO said he was gaining share in the marketplace, which I am sure
is news to Dell. He was pressed with questions about what they were
having to do to gain this share and the answer was price. They are
constantly cutting prices to undercut the bigger players which means
their margins are shrinking. They were confident the business was 
going according to plan and would continue to improve. Let's hope
they are right because Steve Jobs said yesterday he saw no recovery
in the PC sector for AT LEAST nine months. 

PMCS beat the street by a penny. VTSS reported earnings inline with
estimates and said it would cut -200 more jobs to curtail research
expenses and consolidate facilities. Cypress Semi (CY) beat the street
by two cents on the third quarter of sequential revenue growth. 
XLNX reported earnings inline with estimates and said they saw 
continued steady sales of new chips. Reading between the lines on
the semi earnings above, it appears the chip sector is actually 
seeing a rise in bookings. Nobody said they saw a jump but all said
they were seeing business improve. Despite the gloom and doom that
appears to be covering techs I think this is a positive light at 
the end of the tunnel. The Book-to-Bill numbers will be out on 
Friday. SMH calls anyone?

The IBM spin results continued to amaze. The stock ran to over $74
intraday before closing at $72.11. Despite the post earnings
bullishness the stock may suffer from clearer heads next week. 
The comments about a slowdown in the global services business as
well as profits from the currency impact has thrown a cloud over 
their future. The dollar is not expected to fall much more but the 
services appear to be suffering. ADP dropped nearly -25% after 
warning of slower growth and weak economic conditions. This was 
the first quarter in 40 years that ADP did not grow in the double 
digits. EDS dropped another -1.50 on fears of shrinking services 
contracts. PAYX fell -3.72 on the same fears. There is a good 
possibility IBM will end up back on the put list on Sunday as well.

AOL took another hit at the close with the resignation of Pitman
as the CEO. This may actually be a positive as it ends the speculation
about when/if it was going to occur. AOL is suffering from a drop
in advertising revenue and the growing DSL market. Once you are on
DSL you don't need AOL and with the bloom off the Internet surfing
boom AOL is struggling to maintain dialup accounts. AOL traded under
$12 at the open as the result of two separate newspaper stories. 
The Washington Post called their accounting into question and said
they pumped up revenue to appear better than actual. 

Analysts have been making a big deal out of the results of the current 
round of earnings. According to First Call of the first 125 S&P 
companies to report earnings 76 have beaten estimates, 36 reported
inline and only 13 missed estimates. While that may look good on
the surface we need to remember that nearly all of those companies
have been guiding lower for the last three quarters. The bar is
so low a snake could cross it! What is not reported in these stories
are the number of companies lowering guidance for the next quarter
and that is most of them. A year ago analysts were projecting 
earnings growth for the 2Q of +113%. In December they were still
projecting +38% growth. In April those estimates had dropped to 
only +4% growth. The current estimates for the 3Q are +16% growth
and according to First Call need to come down to a more realistic
+1% growth. With the constant negative guidance from reporting 
companies these earnings downgrades should start to appear quickly.

With the market pause yesterday there were many traders who quickly
got their hopes up that a bottom had been seen and a rebound was
underway. Most would be surprised to learn that in the last five 
days there has only been two S&P-500 stocks that hit a new 52-wk
high. The advancing S&P stocks on Thursday were 65 to 428 declining.
This is not a picture of a rally in progress or even of consolidation
in progress. 

The Russell-2000, normally a leading indicator of any broad market
rally, has lost more than -65 points since the reshuffle highs on 
June-30th, nearly -15% of its value in three weeks. It closed today 
at 397.47 with a loss of a whopping -12.98. While I applaud the
positive comments from the semiconductor sector tonight I think 
the markets still have the confidence virus. They are afraid of 
the coming restatements of earnings beginning on or before August
14th. They are concerned about the possibility of a second recessionary
dip. They are concerned about an anniversary attack on 9/11. They
are afraid about holding stock overnight much less for weeks/months
at a time. The retail investor is withdrawing cash from mutual funds
in record amounts and there appears to be no end in sight. I believe
it will take more than a couple positive earnings surprises to make
the retail investor rush back into the markets. The stampede is still
headed south and any attempts by individual cows to turn around is
met with a swift end as they are run over by the herd behind them.

We blame everything on the shorts. Those dirty rotten scoundrels who
are profiting off the misery of retail investors. Surprise! In 
numbers released today only 2% of the recent high volume on the 
NYSE was short sales. Does that surprise you? It does me. Suddenly
the picture becomes clearer. If it is not the shorts then it must be
real sellers liquidating portfolios and moving to cash or worse 
foreign investors taking that cash back overseas. If it is millions
of individual sellers driving the markets down and not a few back 
rooms of fur coated bears then maybe this irrational pessimism is
actually rational. Alas, for my final thought, remember the herd is
always wrong on both ends. They are the last ones in and the last 
ones out just before the reversal comes. 

The direction for tomorrow is a toss up. Futures have been on both
sides or zero tonight as the earnings from more than 200 companies
today are being digested. The markets closed right at support based
on the S&P at 880. If that support fails then the next couple of
weeks are not going to be pretty. With the major earnings leaders
already announced we are back to depending on the second tier 
companies for inspiration. The earnings incentive to draw/keep 
investors in the market is basically over for the quarter. We are
now back to the age old question, "why buy now?"  

Enter Very Passively, Exit Very Aggressively!

Jim Brown

Did this commentary help you?


by Leigh Stevens

We're back to the slow grinding "bear machine" - this most recent 
rally held up longer than in awhile, but then all the same 
bearish influences then wore down buyers. To use a war analogy, 
the buyers coming in on the first assault, don't have a "second 
wave" behind them to keep going up the beach! 

Before I look at today, keep in mind the backdrop to tomorrow of 
unwinding of positions related to options expiration - OEX and 
SPX July options trading finished today, but settlement is at the 
opening tomorrow.  Then we have individual stock options and the 
SPX index changes going on - could be a volatile day again.  
MSFT company announced after the close that it earned $1.53 
billion, 28 cents a share, up from $65 million, on sales of $7.25 
billion. Excluding charges, the company earned 43 cents, a cent 
above expectations. Nevertheless, the stock traded a somewhat 
lower after hours, relative to its close.  I don't know what 
insights prompted this, but the reaction to earnings - at least 
this close to expectations - usually has more to do with the 
recent market "tone" and with talk from the company about what 
they project going forward.  And, there hasn't been much talk of 
how tech companies see glimmers of an upcoming turnaround in 
business spending.  

Sun Micro (SUNW) didn't indicate this - their earnings were also 
in line with Street expectations - revenue was UP from the year 
ago period, which seems pretty good to me.  Nevertheless, the 
stock fell after the close - go figure!  For companies that use 
technology to provide a service that consumers like and will pay 
to use, its another story - EBay is one such and its expectations 
are for substantially higher earnings ahead, also in line with 
previous expectations.   

Today, we had another down day, but due to yesterday, it was not 
7 in a row for the Dow. If it wasn't for "program trading" there 
ould not be nearly as much volume today, as I saw figures that 
indicated that program trading was accounting for as much as 50% 
of the NYSE daily volume.  

Speaking of program trading, I will be posting a Trader's Corner 
article tonight on "program trading", with special emphasis on 
the type of program trading that that involves index arbitrage or 
buying and selling baskets of stock versus taking an opposite 
position in index futures. 

This as opposed to "plain vanilla" program trading which is 
simply when a fund or other institution simultaneously buys and 
sells at least 15 stocks, each with a value of at least, I think 
it is $50,000 - there is an "official" definition of what 
constitutes a program trade.  

Buying and selling such "baskets" of stocks, occurs a lot, 
especially when Standard & Poor announces several "drops" and 
corresponding "adds" to the S&P 500 index such as seen today. 
Index funds and many other general funds, who are tied to the S&P 
500 (SPX) benchmark, like to do their buys and sells in a 
"basket", so that they get prices on both the buy and the sell 
side that is in line with where SPX is trading at the time.

Going out of SPX is RD, UN, NT, AL, ABX, PDG and N
Coming into the Index is EBAY, ERTS, UPS, GS, PRU, PFG and SDS

The Dow average, which was leading the market down on heavy volume - 
in a switch, Nasdaq held up the best! - rebounded on a 
positive pre-announcement by Kodak (EK - +11%). A climb in tech 
bellwether Intel (INTC) also helped considerably (+8.5%). There 
were rumors that the company would make a positive announcement, 
such as one raising their guidance on earnings - like many, if not 
most, of these floor rumors, it was unfounded at least as of this 

My suggested stop at 449.50 was a good guess for the approximate 
low as it turned out. Those with long call positions, at 455 or 
under or at whatever price you are in at - a suggested exit point 
is at 455, just below some near-support. The Omarket should keep 
going or the rally gets a bit suspect.  

There is plenty of "room" on the upside in terms of the broad 
hourly channel as seen above. The move to a new low, followed 
by an upside reversal on good volume is suggesting that the rally 
will carry further.  However, if the OEX gets up to resistance 
that starts around 480 up to 483, AND whenever the longer hourly 
stochastic gets up to an overbought reading again - take any 
call profits and RUN!   

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

 S&P 500 (SPX) Index - Hourly chart:
As I noted last night, there was "congestion" overhead on recent 
rallies as sellers put a cap on rallies.  The hourly chart 
pattern traced out a minor Head & Shoulder's (H&S) pattern with a 
"neckline" that was pierced around 448.50 today.  Given the 16.5 
points from the top of the Head to where it intersected the 
neckline directly below the top - deduct this amount from 448.50 
gives a possible or potential "minimum" downside objective to 432 
in OEX. 432 would of course be a new low, and keep the bearish 
pattern going; i.e., successively lower rally highs and lower 
(down) swing lows. 

A buying opportunity may set up if OEX gets into the 430 to 435 
area - wait and watch for what tomorrow brings and we should also 
pay attention to when the longer hourly stochastic gets fully 
oversold again.  Key overhead resistance is on a rebound to the 
448-450 area, back to the aforementioned "neckline". Only an 
hourly close above 450 would suggest we were seeing a bullish 

S&P 5100 (SPXOEX) Index - Hourly chart:


The Head and Shoulder's pattern is not quite as well-defined on 
the SPX intraday charts, but the equivalent move in the S&P 500 
suggests that the Index will take out its prior low - it was near 
to this on the close and the index had downside momentum going.  

I calculate a possible downside target of about 10 points under 
the recent low, or to the 866 area. Such a move would put SPX 
down near the low end of its current downtrend channel and not 
far under my lower trading envelope line at 871 - this line is 
now turning down, so we'll see how close the a next low might 
come to the lower envelope line I'm using.  

SPX has a substantial overhead resistance in the 896-897 area, 
the low end of the past two days trading and the "breakdown" 
point of today. 
I had my ONE lower hourly channel line, which is a line parallel 
to the upper trendline, drawn though the most number of lows 
rather than the absolute lowest low - WRONG! - sometimes this 
technique is what "works" EXCEPT when the market gets real 
extreme in a move. If so, you want the lower boundary line 
touching the LOWEST most extreme low, which offered the best 
outcome here. "Pulling" the lower parallel trendline down to the 
prior "extreme" low at 982 - the one that "stuck out" as a kind 
of "panic" low - then intersected the area of the lows today. 

Sometimes, for comparison, I will draw two trendlines (forming a 
buy/sell "zone") on one end or the other of my channels, which 
is again the case in the way I have the SPX chart above. 

I suggested the 916 area - stop at 912 - as the potential buy 
area for SPX in last night's commentary. However, it is often 
the case that an index gets somehow "pulled" to the even 100/1000 
levels as if by a magnet - this concept worked well today as SPX 
got within a hair's breadth of 900!

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


The same topping pattern is apparent in DJX - the potential 
downside objective based on the "minimum" downside measurement 
implied by the H&S top pattern relative to the intersection of a 
"neckline" at 85, is to 82.3 - guess what! - right around the 
prior low.  My guess is that the DJIA is now finding more 
stability than the broader market measures.  

Stay tuned for a possible double bottom. If this were to develop, 
it should offer a good buy point for a next trade - if so, exit 
puts and go for calls.   


What has kept me bullish or at least tempered my bearishness 
lately is by taking a "bottoms up" approach of always staying 
focused on "key" Nasdaq stocks, at least on a technical basis.  

MSFT (Microsoft) - got back to its 50-day moving average 
today at 52.92 - now MSFT needs a close above this level and 
then above 55.5 to get something going to the upside.  Thing 
the stock is forming a bottom, so my best guess on upcoming 
earnings is that they will be perceived as at least "OK", if 
not bullishly. 

INTC (Intel) - Minor upside reversal today - needs follow 
through to above resistance in the 18.8 to 19.5 price zone. 

CSCO (Cisco systems) - Also had minor upside reversal today 
- key overhead resistance now looks like 14.3, then 14.9. 

QCOM (Qualcomm) - Marking time. Could be bottoming, but 
stock looks like to will "follow" the others, rather than 

ORCL (Oracle) - Most bullish looking of the Nas 100 that I 
follow - move above $10 suggests a move to around 12.

Nasdaq Composite ($COMPX) Daily/Hourly charts:


It's more apparent (than in the Nas 100) in Composite chart above 
that the Nasdaq is still within its hourly downtrend channel. 
Sometimes you learn different things by looking at the different, 
but related, indexes.  

Notice also that a downside reversal occurred right at resistance 
implied by the 21-day moving average and, more importantly I 
think, a rally that failed to hold above its September low at 
1387.  The tech favorites - the big cap Nasdaq stocks in the 
Nasdaq 100 - may be rebounding, but there are still a lot of 
former fallen tech angels that are a dead weight in the overall 
Nasdaq market.

The 1315 low looms large as a important chart point - if the COMP 
turns higher at or above this prior low, its encouraging for the 
bullish case that the market is in a process of bottoming - 
however, just as it took months to "build" a top in 2000, it can 
take some months of bottoming action before there is a really 
sustained rebound.  But, hey, this current back and forth action 
makes for good trading market.     

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


As it appeared on the charts, there was too much overhead 
resistance for the Q's to make more upside headway. And, as we 
know, if they can't take em up, they take em down!  A well-
defined trading range is being established in QQQ it appears.  We 
haven't seen this in while - a range that can be defined by 
horizontal "level" lines and not down sloping channel lines. 
Again, this makes for a good trading market - the kind of market 
where such a trading range makes oscillator type technical 
indicators like stochastics "work" really well - in a way, that’s 
what they were "made" for.  You buy em when oversold, sell em 
when overbought in such a range-bound affair. 

The "emerging" up trendline apparent on the hourly chart 
intersecting around 24.5, may define support tomorrow - or, the 
Q's head back toward the low end of their range - to the 23.5-
23.7 area, where the stock would get fully oversold again. 

QQQ traders may have another buying opportunity in the 24-24.50 
area, but I suggest watching intraday to see how a next low 
shapes up.  The last rally up to the upper end of the range 
yielded a good trading opportunity - patience to wait for the 
next low should provide another good trade opportunity, this time 
on the buy side. 

As mentioned already, Microsoft an important influence within the 
Nas 100 QQQ tracking stock, announced their earnings after the 
close - and true to the MSFT chart pattern where the stock has  
been trending back toward its recent lows - the stock traded a 
buck lower initially in after hours trade as analysts picked over 
the numbers.  

Let the stock break out above this resistance without me. I 
would rather short the rally at some point or buy the next dip 
than surrender a profit, at least in this market climate. Or, 
if I want to stay long I'll buy ORCL or MSFT on a further 
breakout if I want to play the tech darlings. 

Support is anticipated in the 23.5-24.0 area; then down 
around 22 if there is another sharp break.  Above 25.5, 
resistance levels are at the prior highs at 26.5-26.8. 

Leigh Stevens
Chief Market Strategist 

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Note: Options involve risk. Risk disclosure: 


What Never Goes Up must Come Down
By Steven Price

What started out looking like a rebound, once again soured as the 
day went on, with a 200 point downward swing in the Dow Jones 
beginning around 2:00 PM ET.  The earnings season's heaviest day 
started out on a positive note with IBM posted slightly better 
than expected earnings after yesterday's close. A drop in jobless 
claims seemed to foretell a positive trend in the labor market.  
However, the index of leading economic indicators was not so good, 
and contributed to a tempered reaction.

As the day wore on, the retreat covered most sectors.  S&P 500 was 
down 24.48 to 881.56, the Dow fell 132.99 to 8409.49 and the 
Nasdaq dropped 40.30 to 1356.95.  The leading winners were Oil 
Services (OSX.X) and Gold and Silver (XAU.X).  Interestingly 
enough, the VIX was actually down fractionally on a very volatile 
day.  This may have had something to do with expectations of 
positive earnings news from Microsoft.  As Jim noted on the Market 
Monitor, we have reached some interesting support levels.  The Dow 
now hovers just over 8400, and the SPX is just above its 877 

Microsoft surpassed expectations by $0.01, earning $0.43 versus 
expectations of $0.42. Revenue also was up 10% to $7.25 billion.  
They did, however, reduce estimates for fiscal 2003, which began 
July 1.  Profits are now expected between $1.85 and $1.91 per 
share, down from analyst's expectations of $1.92.  After closing 
at $51.11, the stock was down slightly, trading at $50.80. 

AOL Time Warner Chief Operating Officer Robert Pittman has 
resigned, confirming the longstanding rumors that he was being 
forced out. That was the tip of the iceberg on a day when rumors 
circulated about the company improperly booking revenue, and a 
story in the Washington Post questioned unconventional deals AOL 
used to increase revenue before the Time Warner merger.

In other earnings news, EBay said they would match 3rd quarter 
earnings expectations, but revenue will be just under analyst 
predictions.  Gateway missed by $0.02, but confirmed targets for 
the rest of the year.  Sun Microsystems also met expectations.

The after hours markets have looked soft in these stocks, with Sun 
down almost 20% (trading just over $5 after a $5.79 close) and 
EBay down $1.25, in addition to Microsoft's slight pullback.  
However, Intel has done fine after disappointing earnings on 
Tuesday and IBM has been strong after beating expectations by a 
penny last night.

If the markets react negatively tomorrow we could be in for a very 
large down move. Below Monday's S&P 500 low of 876.46, the first 
real support appears to be under 800.  In the Dow, a drop below 
8400 could see us retesting September's closing lows, as we did 
earlier in the week.  Below that the next significant support 
looks to be in the 8000 range and then 7500.  The bearishness is 
underscored by the CBOE's Put/Call ratio, which has soared back to 
.93, representing almost as many puts traded as calls.

As I noted a couple of days ago, the bullish percent in the Nasdaq 
100 ($BPNDX) continues upward.  It has now surpassed the oversold 
level and appears on its way up.  The Bullish percent in the Dow, 
S&P 500, and OEX, however continue downward.  As long as the NDX 
continues to make new relative highs there seems to be a glimmer 
of hope.  Watch out, however, if the pattern reverses itself.


Market Averages


52-week High: 11350
52-week Low :  8062
Current     :  8409

Moving Averages:

 10-dma: 8811
 50-dma: 9542
200-dma: 9819

S&P 500 ($SPX)

52-week High: 1316
52-week Low :  876
Current     :  881

Moving Averages:

 10-dma:  929
 50-dma: 1016
200-dma: 1094

Nasdaq-100 ($NDX)

52-week High: 1782
52-week Low :  946
Current     :  994

Moving Averages:

 10-dma: 1007
 50-dma: 1132
200-dma: 1387

Gold and Silver ($XAU.X)

The XAU was back in contrarian mode today, rallying as the equity 
markets and dollar both slipped. The index has slipped, however, 
back to its 50% retracement level from its Nov 2001 to May 2002 
rally.  Last time the sector was here it rebounded to its 50-dma.  
Keep an eye on this factor as Placer Dome (PDG) and Barrick Gold 
(ABX) are removed from the S&P 500 at the end of tomorrow's trade.

52-week High: 89
52-week Low : 49
Current     : 70.69

Moving Averages:

 10-dma: 73 
 50-dma: 78 
200-dma: 65 


Market Volatility

The VIX was down slightly today, cracking back below the 40 level, 
to 39.63.  This is still a very high reading, and has maintained 
itself in this range since last week.  Periods of high volatility 
reflect fear in the market place on everyone's part, since the OEX 
option bids would be repeatedly hit and taken down if anyone had 
confidence that the market would return to normal soon.  This has 
not happened.

CBOE Market Volatility Index (VIX) = 39.63 -0.17
Nasdaq-100 Volatility Index  (VXN) = 62.99 -0.24


          Put/Call Ratio  Call Volume   Put Volume
Total          0.93        839,580       778,924
Equity Only    0.81        564,328       462,004 
OEX            0.70         73,306        51,657
QQQ            0.66         90,150        59,458


Bullish Percent Data

           Current   Change   Status
NYSE          36      - 1     Bull Correction
NASDAQ-100    35      + 6     Bull Confirmed
DOW           13      + 3     Bear Confirmed
S&P 500       21      - 1     Bear Confirmed
S&P 100       15      + 1     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  1.22
10-Day Arms Index  1.26
21-Day Arms Index  1.47
55-Day Arms Index  1.36

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 


Market Internals

        Advancers     Decliners
NYSE        994          2124
NASDAQ      982          2303

        New Highs      New Lows
NYSE        29            211
NASDAQ      66            177

        Volume (in millions)
NYSE     2,013
NASDAQ   1,591


Commitments Of Traders Report: 07/09/02

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

Commercials gave back only 700 of their net long contracts, a 
small percentage change, maintaining a bearish position.  Small 
Traders added back a couple of thousand contracts to their long 

Commercials   Long      Short      Net     % Of OI 
06/18/02      437,530   487,956   (50,426)   (5.4%)
06/25/02      378,214   438,775   (60,561)   (7.4%)
07/09/02      396,321   456,164   (59,843)   (7.0%)

Most bearish reading of the year: (111,956) -   3/6/02
Most bullish reading of the year: ( 36,481) - 10/16/01

Small Traders Long      Short      Net     % of OI
06/18/02      181,178    88,517    92,661     34.3%
06/25/02      134,380    62,792    71,588     36.3%
07/09/02      145,017    71,402    73,615     34.0%

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

Commercials added only slightly to their short position, 
maintaining the status quo. Small Traders reduced their long 
position by over 40%.

Commercials   Long      Short      Net     % of OI 
06/18/02       54,816     49,169     5,647    5.4%
06/25/02       27,238     35,926    (8,688) (13.8%)
07/09/02       31,227     39,592    (8,725) (12.3%)

Most bearish reading of the year: (15,521) -  3/13/02
Most bullish reading of the year:   9,068  - 06/11/02

Small Traders  Long     Short      Net     % of OI
06/18/02       20,883    29,153    (8,270)   (16.5%)
06/25/02       14,749     7,570     7,179     32.2%
07/09/02       12,520     8,348     4,175     20.0%

Most bearish reading of the year: (10,769) - 06/11/02
Most bullish reading of the year:   8,460  -  3/13/02


Dow Commercials brought their long positions back up to their 
previous levels, adding almost 2,000 contracts. Small Traders 
maintained their previous bullish levels. 

Commercials   Long      Short      Net     % of OI
06/18/02       25,995    19,115    6,880     15.1%
06/25/02       18,016    13,255    4,761     15.2%
07/09/02       20,761    14,122    6,639     19.0%

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
06/18/02        5,379    11,813    (6,434)   (37.2%)
06/25/02        6,414     6,597       183     1.40% 
07/09/02        6,831     6,623       208     1.50%

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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by Leigh Stevens

The sectors reflected the overall market with weakness in what 
had been up and minor bounces in some of the sectors that had 
been in corrections.  This could be summarized by saying that 
what was up was down and what was previously down, had "dead cat" 
bounces, was up. Bottoming out, if that is what is happening, is 

Bullish disappointments stemming from rally failures at first 
areas of technical resistance were plentiful.  The Biotech (BTK) 
sector failed to hold up above recently penetrated resistance.  
Rally failures at technical resistance today or in the past two 
sessions included: the Computer Tech index (XCI), Defense (DFI), 
Fiber Optics (FOP), Forest Products (FPP), Disk Drive sector 
(DDX), the High Tech index (MSH), Networking sector (NWX), 
Semiconductors (SOX) and the Wireless (telecom) group (YLS).

Accelerating to the downside and resuming their obvious bearish 
trends were: the Bank Index (BKX), Airlines (XAL), Cyclicals 
(CYC), the NYSE Financial sector (NF), Home builders (DJUSHB), 
Health Providers (RXH), Natural Gas (XNG), Oils (OIX), 
Pharmaceuticals (DRG), the Russell 2000 (RUT), Retail stock 
sector (RLX), and Utilities. 

You can’t even hide in Gold stocks anymore, as you can see from 
the XAU sector chart, highlighted below.  Its interesting to 
note, and very typical of the stage of extreme bearish sentiment 
that we are in that, unlike the case in the first half, there are 
no, none, nada sectors that are bucking the bearish trend.  

Some, are still holding up a bit, like the Internet stocks, but 
it seems like it is just a matter of time before bearish 
influences return to it. When will it end - when we give up all 
ideas that there is any area of the market, an industry group or 
category of stocks like small caps that will allow us to be long 
and to hold our own in the bear market.  Rather, the watchword is 
"be short and prosper" - tall people beware!          

UP on Thursday -


DOWN on Thursday -






Long HHH at 21.50  
(Internet HOLDR's)
STOP: 21.2

Long SMH at 28.30   
(Semiconductor HOLDR's) 
STOP: 28.70 



Gold & Silver Sector Index ($XAU.X)


No place to hide! - no longer can the gold bulls carry the secret 
smile of participating (long at least) in the a "silver bullet" 

With the sizable gap lower opening of yesterday and the inability 
of a rally to develop today, XAU looks lower. My long-standing 
target has been to the 67 area, equal to at least a 75% 
retracement with a possible lower objective to the area of the 
200-day moving average in the 65 area.  I would not rule out a 
move back to the March low at 60.50 even.  

I have been suggesting selling rallies in this sector.  At this 
point, if short any XAU stocks or holding puts in them or the XAU 
options, looks like there is still more downside ahead.  This 
sector is getting a bit oversold, but so is every other sector at 
this point. 
UPDATE: 7/18

Leigh Stevens
Chief Market Strategist

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The Option Investor Newsletter                 Thursday 07-18-2002
Copyright 2002, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


When we drop a pick it doesn't mean we are recommending a sell
on that play. Many dropped picks go on to be very profitable.
We drop a pick because something happened to change its
profile. News, price, direction, etc. We drop it because we
don't want anyone else starting a new play at that time.
We have hundreds of new readers with each issue who are
unfamiliar with the previous history for that pick and we
want them to look at any current pick as a valid play.


NVDA $18.99 –0.50 (-2.90) NVDA broke down below its 10-dma
during today’s session, then continued lower in today’s
session on a return of the sellers in the semiconductor
sector after the AMD earnings report, which was less than
stellar.  NVDA has suffered short term technical damage, which
gives us reason to drop the play.  Look for a relief rally
early tomorrow to exit plays.


EMC $8.40 (-0.23) As we said in yesterday's update, this play was 
closed last night ahead of today's earnings.  EMC reported break 
even numbers and said they were comfortable with analysts' future 
estimates. The CEO stated, however, that he did not see the IT 
spending environment improving in 2002 and that customers are 
extremely tight with their dollars.


OMC $49.99 -1.49 (-1.43) We are closing OMC ahead of our stop 
loss.  While this stock had been strong in the last week, after 
several days of struggling to hold its highs in the current 
market environment, we are punting.  While the stock came close 
to our first target of $55, trading over $54 on several 
occasions, it has fallen back each time and no longer looks as 
strong as it did.  All the negative press about AOL and a tough 
advertising climate lately has done little to support the bulls 
for OMC.  Any strong up move should be seen as an opportunity to 
close out for a profit.  While they have reassured investors 
since their accounting problems beat the stock down earlier in 
the year, OMC seems unable to sustain its recent rally.


XL $65.50 –9.00 (-12.60) Thank you, XL!  We certainly weren’t
expecting what happened today, but we’re very, very pleased
that it did.  There’s not much more to worry about at this
point in this very successful position other than to look to
take profits in tomorrow’s session.  Congratulations if you
took the play!


MRK $42.00 –2.50 (-3.70) We got exactly what we were looking
for out of MRK during today’s session after we added the
stock as the play of the day last night.  The –2.50 drop
offered traders with a quick trade ahead of the company’s
earnings report.  Look to book gains early tomorrow on
further downside movement.


Please view this in COURIER 10 font for alignment

CALLS              Mon    Tue    Wed    Thu   

NVDA     18.99    1.98  -0.54  -0.80  -0.50  Dropped, damage done
EMC       8.40    0.55   -0.10  -0.37  -0.23 Closed, earnings today
OMC      49.99   -0.99    0.80  -0.75  -1.49 Closed, out of gas
JNPR      8.93    0.35    0.25   0.91  -0.28 New, Nice strength!
STM      25.10    2.72   -0.03   0.32  -2.29 New, Chip Bounce?


XL       65.50   -0.65  -1.22  -2.38  -9.00  Dropped, take gains!
MRK      42.00    0.15  -1.69   0.49  -2.50  Dropped, book gains!
BJ       34.32   -0.53  -2.17   0.03   0.49  Inside day set up
SBC      27.74   -0.13   0.06  -0.68  -1.15  Break below support
VZ       34.05   -0.15  -0.15   0.36  -1.31  Rolled below 10-dma
INVN     25.10    2.72  -0.80   0.32  -2.30  Accelerating decline
CI       82.80   -0.95  -1.97  -1.00  -2.53  New relative lows!!!
BLL      38.25   -0.16  -0.93  -0.45  -0.45  New, break lower
GDW      60.68    0.50  -0.22   0.38  -1.60  New, 200-dma gone
JNJ      49.73   -1.50   1.10   1.14  -1.51  Weak side effects
VZ       34.05   -0.15  -0.15   0.36  -1.31  Breaking down

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STM – STMicroelectronics N.V. $25.20 +0.11 (+2.31 last week)

Company Description:
STMicroelectonics is a global independent semiconductor company
that designs, develops, manufacturers and markets semiconductor
integrated circuits and discrete devices used in a wide variety
of microelectronic applications.  These devices include
automotive products, computer peripherals, telecommunications
systems, consumer products, industrial automation and control
systems.  The company's products include standard commodity
components, full custom devices, semi-custom devices and
application-specific standard products for analog, digital and
mixed-signal applications.

Why We Like It:
As the NASDAQ has worked its way into a solid base over the past
2 weeks, the Semiconductor sector (SOX.X) has been struggling to
build a base near the site of its September lows.  And judging by
the series of solid earnings coming from the likes of PMCS, CY,
VTSS and XLNX, there just might be enough gas to get the job
done.  While INTC didn't "WOW" the street, neither did their
earnings prove a major disappointment.  Note that the SOX has
twice tested the September lows near $345 but has stubbornly
remained below the $400 resistance level.  Given the oversold
nature of the entire technology market, the SOX is that coiled
spring that just needs something to release that energy.  When it
comes, the short-covering rally could be explosive.  That draws
our attention to STM, which has been trading rather strongly in
recent sessions and appears to be trying to build a new level of
support near $25.  This is a highly speculative play, where we
are looking for a near-term catalyst to ignite some
short-covering.  The fuse is very short, as the company is set
to release earnings next Tuesday after the closing bell.  Look to
enter new positions on a rebound from the $25 level (or possibly
at stronger support down near $23.50-24.00), or else enter on a
volume-backed breakout through the $26.30 level (the site of
today's intraday highs).  Initial stops are set at $22.50.

BUY CALL AUG-22 STM-HX OI=  36 at $3.60 SL=1.75
BUY CALL AUG-25*STM-HE OI=  50 at $2.00 SL=1.00
BUY CALL OCT-25 STM-JE OI= 524 at $3.30 SL=1.75
BUY CALL OCT-30 STM-JF OI=2758 at $1.40 SL=0.75

Average Daily Volume = 1.56 mln


Juniper Networks - JNPR $8.93 -0.28 (+1.23 for the week)

Company Description:
Headquartered in Sunnyvale, California Juniper Networks engages 
in the business of delivery of core, edge, mobile and cable 
Internet services at scale for the New Public Network. 

Why We Like It:
Juniper Networks has been on a steep rise from the $5 level at 
the end of June.  It has held strong during the past week's 
swoon, and has continued upward since breaking through resistance 
around $8.00.  Juniper released earnings July 12, which beat 
expectations. They had a profit of $421,000.00, which came out to 
even per share, while analysts had expected them to lose a penny. 
Their revenues were also greater than expected, as they brought 
in $117 million, which was almost $8 million above predictions. 
This stock could benefit from a bounce in the Nasdaq, which has 
produced a positive reversal in its NDX bullish percent numbers 
in the last few weeks, recently breaking the oversold barrier of 
30% to close at 35%.  There is support at the 50-dma just above 
$8.00, which should be used as a stop loss.  Resistance could 
appear at the 100-dma of $9.70 and again at the $10.00 round 
number mark.  Beyond these points, the next level of resistance 
looks to be around $12.50.  Often resistance points around option 
strike prices act somewhat magnetically as short option sellers 
attempt to push the stock to the strike on expiration.  OI sees 
the current level as an entry point to go long but it would 
probably be prudent to confirm bullish movement in the Nasdaq 

BUY CALL AUG-7.50*JUX-HU OI=3251 at $1.95 SL=0.80
BUY CALL OCT-7.50 JUX-JU OI=1798 at $2.60 SL=1.30

Average Daily Volume = 13.7m

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BJ $34.32 +0.49 (-1.65) BJ traced the infamous inside day set
up during today’s session with its sideways trading on
relatively lighter volume.  Given the weakness in the broader
market and the long standing trend in BJ, its tight trading
range today was most likely a pause in that trend before
lower lows ahead.  Further weakness in the broader retail
space should continue to add pressure to shares, as well as
selling in the broader market.  Look for weakness to return
to stocks in general during tomorrow’s session by watching
for weakness in the S&P and Dow.  New momentum based entry
points can be taken in such a market environment on a break
below yesterday’s low at the $33.30 level from the inside
day traced today.  Confirm a return of intraday volume during
a breakdown as a sign that the sellers have returned with
conviction.  Intraday rollovers from just below the $35 level
would offer additional entry points.  Make sure to keep an
eye on the Retail Sector Index (RLX.X) for insights into the
sentiment in the broader retail space.


CI $82.80 -2.53 (-6.45) There hasn't been much in the way of
bullish price action in the Insurance stocks over the past 2
days and that is certainly apparent when looking at a chart of
CI.  After breaking below the long-term support near $88 earlier
this week, the stock looked vulnerable to further downside and
boy, was it ever.  The past 2 days have both presented us with
attractive entries into the play as CI has popped up near the
$88 area (now resistance) before dropping sharply in the
afternoon.  Thursday's action was even more bearish, with the
stock going out on the lows after breaking mild intraday support
in the $84.50 area.  XL Capital gapped down on news that it is
increasing its loss reserves and took the rest of the group down
in its wake.  Use a rebound to resistance near $85.50-86.00 or
even up at $87 to initiate new positions.  Lower stops to $87.50.
Support near $82 could be the catalyst for an oversold rebound,
so we want to avoid trading a breakdown until CI drops through
strong support at $80.


INVN $25.10 -2.30 (+0.72) There's nothing like catching the top
to make you feel like a genius.  Traders that followed our
recommendation to fade the rally in shares of INVN are feeling
like geniuses after entering this play as the stock rolled over
Wednesday morning.  The irrational pop higher following INTC's
earnings gave us a great entry as INVN moved right up to
resistance near $28.50 and then fell under its own weight.  The
real pain was inflicted today though, with the stock gapping
down and bleeding throughout the day, ending at $25 with a 8.5%
loss.  Unless buyers appear to prop support the stock near $24.50
(the bottom of Monday's gap, INVN looks destined to test major
support in the $22-23 area.  New entries can be taken on another
failed rally attempt near resistance (now at $26.75 and then
$27.50).  Consider harvesting gains should the $22-23 area be
reached.  We are lowering our stop to $28 tonight.  Don't forget,
the company is set to release earnings next Tuesday after the
close, so we'll be dropping it by then.


SBC $27.74 -1.15 (-1.90) Wednesday's early morning euphoric
ramp in the broad markets provided just the entry point we were
looking for in our SBC play.  The stock opened just over $30
before rolling over and heading down to close at the low of the
day.  Weighing on the stock was the Morgan Stanley estimate cut
for all the RBOCs due to a more conservative long-term outlook
for both top line revenues and margins.  The firm cut their price
target for SBC from $41 to $33, and that pretty much sealed the
stock's fate.  With the broad market unable to put together a
rally on Thursday and selling off into the close, SBC followed
suit, ending the day at its lowest level since August of 1997
and looking like it wants to head lower from here.  While there
is some mild support at $27, the next level of strong support
appears to be the site of the 1997 lows near $25.  Resistance
is firming up in the $28.50-29.00 area and we can use a failed
rally near that level to initiate new positions.  Lower stops
to $30.25.


Verizon Communications - VZ $34.05 -1.31 (-1.10) We originally 
recommended this put play with a trade under $35.  It has traded 
below 35 several times this week, but today was its first close 
below that level.  VZ struggled to get above the $36 mark earlier 
in the week, but has fallen back in its continuing downward 
channel. The last couple of days its intraday lows have actually 
fallen below that channel, and a close below $34 today would have 
been a significant close below it.  However, this pattern 
continues to look weak and signals bearishness ahead.  VZ 
continues to find resistance at its 21 dma, 10 dma and the $36.00 
mark. The North American Telecom Sector was one of the few up on 
the day, however not even that strength was enough to prop up 
Verizon.  We are adjusting our stop down from $37.75 to $36.50 to 
reflect the stocks current weakness.  Another failure at $36.00 
might be an entry point but given the last two days' attempts to 
do so, VZ looks like it's heading lower into the weekend!


GDW – Golden West $60.68 –1.60 (-1.44 this week)

Company Description:
Golden West Financial Corporation (Golden West) is a savings and
loan holding company, the principal business of which is the
operation of a savings bank business through its wholly owned
savings bank subsidiary, World Savings Bank, FSB (WSB). Golden
West also has two other operating subsidiaries, Atlas Advisers,
Inc. and Atlas Securities, Inc. These two companies were formed
to provide services to Atlas Assets, Inc., a registered open-end
management investment company sponsored by the Company. Atlas
Advisers is a registered investment adviser and the investment
manager of Atlas Assets' 14 portfolios (the Atlas Funds). Atlas
Securities is a registered broker-dealer and the sole
distributor of Atlas Fund shares. The principal business of the
Company, through WSB, is attracting funds from the investing
public and the capital markets and investing those funds
principally in loans secured by deeds of trust or mortgages on
residential real estate, and mortgage-backed securities.

Why We Like It:
Weakness is creeping into all corners of the market.  Those
sectors that were immune from the weakness in stocks since the
spring have now begun to show signs of technical deterioration.
The banks fall into that group as only recently the sector has
lost its upside momentum and shown signs of promising downside
movement.  Individual stocks are breaking down as well, showing
signs of major technical failures.  GDW is one such stock that
recently tested its long-term 200-dma, but finally closed below
that level during today’s session on continued heavy trading
activity.  The heavy volume is most likely a product of
institutional sell programs based on the stock’s break below
the 200-dma, which is a favorite indicator of institutional
trading desks.  The close below that level during today’s
session should usher in further weakness in the days ahead for
GDW.  But the stock first needs to breakdown below the $60
triple-bottom support level, which we’re anticipating that it
will do.  The stock needs to decline below the $60 level for
the breakdown to be complete, which would then point to a
decline down to the $55 level.  So we expect a momentum based
move down to the $55 level provided that GDW does indeed
decline below the $60 level first.  Look for that breakdown
in the early part of tomorrow’s session on an increase in
intraday declining volume.  If the stock bounces back to
resistance first, then watch for a rollover from the now
overhead 200-dma at the $61.42 level, which should cap any
intraday rally attempt from here forward.  The stop for this
play is initially above the 200-dma at the $62.50 level.

BUY PUT AUG-65 GDW-TM OI=140 at $5.20 SL=3.05
BUY PUT AUG-60*GDW-TL OI=197 at $2.70 SL=1.75

Average Daily Volume = 558 K


BLL - Ball Corporation $38.25 -2.88 (-2.92 this week)

Company Description:
Ball Corp. is a manufacturer of metal and plastic packaging,
primarily for beverages and foods, and a supplier of aerospace
and other technologies and services to commercial and
governmental customers.  Ball's principal business is the
manufacture and sale of rigid packaging products, primarily
for beverages and foods.  Polyethylene terephthalate packaging
is the company's newest product line.  The aerospace and
technologies segment includes civil space systems, defense
operations and commercial space operations.  The defense
operations business unit includes defense systems, systems
engineering services and advanced antenna and video systems, as
well as electro-optics and cryogenic systems and components.

Why We Like It:
If you need proof that this latest stock market decline is
widespread and hitting every sector, you need only look at some
of the secondary stocks that are being taken apart.  Due to its
involvement in the Defense industry, BLL experienced a stellar
rally following the September attacks and the expected ramp-up
in Defense spending.  That propelled the stock as high as $51
before the music stopped.  The rally in the Defense industry
came to an end in the late spring and the sector (DFI.X) has
been rapidly disintegrating in recent weeks, having recently
fallen back near its November highs.  Add in the slowdown in
the manufacturing sector, which hits BLL in its primary business
unit is involved in making packaging for food and beverages, and
it should come as no surprise that the stock has been falling
sharply in recent weeks.  After bottoming near $39 in early June,
it actually looked like the bulls were going to try for a rally,
but that timid series of higher highs and higher lows came to an
abrupt end when Merrill downgraded the stock on Monday.  BLL
gapped down and actually traded as low as $37.50 before closing
just below $40.  That was as good as it got this week, as the
stock has been drifting lower every day.  The real carnage
occurred on Wednesday when the bears pushed the stock down for
its first close under the 200-dma ($39.53) since late 2000.  The
PnF chart is now on a sell signal, with a bearish price target of
$29, giving us plenty of room to play the downside.  Use failed
intraday rallies below the $40 level to initiate new positions.
Aggressive entries can be considered on a volume-backed drop
under $37.50, but look out for a short covering rally.  Initial
stops are in place at $40.50.

BUY PUT AUG-40 BLL-TH OI=1183 at $3.20 SL=1.50
BUY PUT AUG-37*BLL-TU OI= 489 at $2.10 SL=1.00
BUY PUT AUG-35 BLL-TG OI= 770 at $1.25 SL=0.50

Average Daily Volume = 526 K


JNJ - Johnson & Johnson $49.73 -1.51 (-0.77 this week)

Company Description:
Johnson & Johnson, with approximately 106,100 employees, is the 
world's most comprehensive and broadly based manufacturer of 
health care products, as well as a provider of related services, 
for the consumer, pharmaceutical and medical devices and 
diagnostics markets. Johnson & Johnson has 197 operating 
companies in 54 countries around the world, selling products in 
more than 175 countries.

Why We Like It:
Johnson and Johnson has been under attack by Amgen, from who they 
licensed Eprex.  Amgen has developed newer drugs, which operate 
similarly, however they are trying to distance themselves from 
Eprex, which has some serious side effects.  JNJ came out and 
admitted these problems and warned patients not to use the 
product, which can lead to a blood disorder called PRCA that 
requires lifelong blood transfusions.  Technically, JNJ broke its 
psychological support line at $50, and looks to have little 
support between its current price of $49.73 and 45.  OI sees the 
recent failed rally at $52.30 near the top of its descending 
channel and the current price under $50 as an entry point to get 
short. JNJ reported earnings on Tuesday, which showed an increase 
in net income of 10% and beat earnings estimates by $0.02.  This 
news, combined with an upgrade from A.G. Edwards still has not 
been enough to boost this stock. The stock closed at $50.10 the 
day the news was released, as the bears were not impressed. It 
has been in sharp decline with the rest of the Pharmaceutical 
sector ($DRG).  One reason may be concerns over accounting 
practices in the sector after Merck's Medco problems.  OI sees a 
stop loss of $52, a level that the stock has tried to cross 
intraday, but has been unable to maintain.  JNJ is currently 
trading at a price-to-sales ratio of 4.9, which is more than 
three times the average of the S&P 500 (1.4). Of the drug sector 
stocks, the only ones to come in with a multiple under twice the 
average are Bristol-Myers (2.6) and Merck (2.3), which have 
already been beaten down.  There may be more room to fall in this 
sector, as the index has indicated.

BUY PUT AUG-50*JNJ-TJ OI=5068 at $2.80 SL=1.70
BUY PUT OCT-50 JNJ-VJ OI=2207 at $4.00 SL=2.50

Average Daily Volume = 8.54 m

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The Option Investor Newsletter                 Thursday 07-18-2002
Copyright 2002, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


BJ – BJ’s Wholesale Club $34.32 +0.49 (-1.65 this week)

BJ's Wholesale Club, Inc. is a warehouse club operator in the
eastern United States. As of February 2, 2002, the Company
operated 130 warehouse clubs in 15 states, and had
approximately 6.9 million members. Warehouse clubs offer a
narrow assortment of brand name food and general merchandise
items within a wide range of product categories. In order to
achieve high sales volumes and rapid inventory turnover,
merchandise selections are generally limited to items that are
brand name leaders in their categories. Since warehouse clubs
sell a diversified selection of product categories, they
attract customers from a wide range of other wholesale and
retail distribution channels, such as supermarkets,
supercenters, department stores, drug stores, discount
stores, office supply stores, consumer electronics stores,
automotive stores and wholesale distributors.

Most Recent Update

BJ traced the infamous inside day set up during today’s session
with its sideways trading on relatively lighter volume.  Given
the weakness in the broader market and the long standing trend
in BJ, its tight trading range today was most likely a pause in
that trend before lower lows ahead.  Further weakness in the
broader retail space should continue to add pressure to shares,
as well as selling in the broader market.  Look for weakness to
return to stocks in general during tomorrow’s session by
watching for weakness in the S&P and Dow.  New momentum based
entry points can be taken in such a market environment on a
break below yesterday’s low at the $33.30 level from the inside
day traced today.  Confirm a return of intraday volume during
a breakdown as a sign that the sellers have returned with
conviction.  Intraday rollovers from just below the $35 level
would offer additional entry points.  Make sure to keep an
eye on the Retail Sector Index (RLX.X) for insights into the
sentiment in the broader retail space.


BJ traced the classic inside day pattern during today’s
session that usually comes ahead of the next leg lower in a
long standing descending trend.  The stock should breakdown
from its inside day set-up in tomorrow’s session.  Watch for
such a breakdown on a decline below the $33.30 level.  Confirm
a breakdown attempt with high volume and weakness in the
retail sector.

BUY PUT AUG-35*BJ-TG OI=29 at $2.15 SL=1.25
BUY PUT AUG-30 BJ-TF OI= 4 at $0.50 SL=0.00

Average Daily Volume = 664 K

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Bullish or Bearish - Stay hedged, Make Money
Buzz Lynn

Everybody loves a bull.  Nobody loves a bear, except when he helps 
a former bull make money.  Call me "Buddy Bear".  (I think Jimmy 
Buffet (not Warren) wrote a song about "Buddy Bear" many years 
ago.)  That, Dear Reader, is my intent for today - to be your 
Buddy Bear.  It is no secret that we are locked into secular bear 
market, probably for years to come.  However, that doesn't mean we 
can't make money on the bullish side by trading a cyclical bull, 
which WILL happen.  It's just a matter of time.  Trouble is, we 
don't when this secular bull will show itself, and we could be 
killed by whipsaw volatility while waiting to be right.  
That's no fun.

What to do?  Maybe there is a way to use high volatility to our 
advantage rather than having it cost us money.  Maybe there is 
also a way to make money that doesn't require us to be right on 
market direction.  Will the market sink further from where we are 
now?  Or is the oversold condition of the market so tightly spring 
that markets can't help but explode to the upside beginning, ummm. 
. .tomorrow?  What if we could find a way to avoid picking sides, 
and to maximize profits in the process?  

The good news is that Fundamentals Guy is going to spare us all 
the usual rant tonight in order to demonstrate a potentially great 
trading opportunity that is market neutral and takes advantage of 
the current high volatility premiums on options.  Anybody think we 
want to buy options - puts or calls - in this environment and wait 
for them to rise?  Nope!  We want to SELL options to maximize our 
take while preserving our principle.  After all, huge premiums 
belong in our collective pockets so their value can evaporate on 
the "other guy".  So how do we do that?  What I'm about to show is 
a simple hedged straddle or strangle.

First the definitions:  A strangle is the hedged use of two 
DIFFERENT strike-price options.  A straddle employs the use of two 
of the SAME strike-price options.  For instance with the QQQ 
trading at roughly $24, a strangle would employ the use of say a 
$23 strike and a $25 strike while the straddle would employ the 
use of two $24 strikes.

Since the VIX (volatility measure of the S&P 100, or OEX) is 
historically high at 39.69, and the VXN (volatility measure of the 
NASDAQ 100, or NDX) is historically high at 63.61, let's sell some 
of that juicy premium!  For that we'll stick to our current 
example of the QQQ (NASDAQ 100), currently at $24.73.  

So here's what we do.  We simultaneously SELL a QQQ straddle of 
say the $25 strike price, which is to say we sell a $25 call and a 
$25 put.  Ideally we do this when the QQQ is exactly at $25, but 
we are close enough right now.  That begs the question of which 
one - current month or some back month option do we sell?  To aid 
in that decision, remember we want the biggest time premium 
evaporation possible, and that means current or front month, not 
back month where the duration to expiration is, by definition, 
longer.  We won't use July options because those will expire 
tomorrow and carry very little premium.  So August strikes will 
give us the biggest bang for the buck.  September strike don't 
suit our purpose either because of the lengthy term to expiration 
and volatility premium falls off the further off we are from 

Checking prices, we see that the AUG-25 call is $1.40 bid by $1.50 
ask, and the AUG-25 put is $1.60 bid by $1.70 ask.  If we sell the 
straddle at bid, we take in $1.40 for the call and $1.60 for the 
put for a total of $3.00 premium.  By definition, at expiration in 
August, one of those will be in the money and one will out of the 
money, but we don't know which yet.  And $3 may not be enough 
profit to cover a substantial move against us - say under $22 or 
above $28.  So we have a great short straddle with money in our 
pocket, but how do we protect it from moves that are guaranteed to 
call us out or put stock to us?

The answer is simple.  We hedge by going long or short actual 
shares in the direction of the trade.  Here are the two possible 
scenarios.  First, the price can move down from $25, which sets us 
up for having stock put to us at an expiration date close at under 
$25.  Anything under $25 has the QQQ put to us at the then closing 
price.  Conversely, the price can rise above $25, which sets us up 
for having the stock called from us at an expiration date close at 
over $25.  Let's follow each of these scenarios to see how the 
hedge is put in place that allows us to keep most of the sold 

Let's break this up into two parts.  What we will be watching for 
is a break in either direction at from $25.  Suppose we are 
watching and waiting for the perfect moment to enter our trade.  
We find it as the QQQ price hits $25.  Then and there, we sell the 
AUG-25 straddle for $3.  Let's see what the chart looks like here.

QQQ daily chart:


Notice that support and resistance has been pretty steady between 
$23.50 and $26.50.  In purely technical terms, I'm going to expect 
it bounce around in that range.  If this were to happen through to 
expiration, we would be forced to buy shares at $25 if put to us, 
which would then be sold at a loss, say at $23.50 worst case.  But 
that's OK because we collected $3 up front for a net gain on the 
whole trade of $1.50 on $25, or 6% for the month.  Not bad.  

Similarly, we could be forced to sell shares if called away at 
$26.50.  We would then buy the shares to cover at $26.50 and sell 
them at $25 to the call holder for $1.50 loss.  But remember we 
took in $3 up front so our net profit is still $1.50 here too.

However, once it quits bouncing around and makes a move outside of 
support or resistance, we hedge in the direction of the trade.  
I'll split this into two sides again.  Think of this as writing a 
covered call OR a married put simultaneously.

Let's say QQQ breaks over $26.50, we would then simply go long QQQ 
shares in an amount sufficient to cover our short call position.  
In essence we would have a covered call and a short put.  We could 
never lose more than $1.50 on the covered position because it is 
offset by our $3 premium we sold.  Even if QQQ goes to $30 or 
more, we win.  Why?  Because we own shares bought at $26.50, or 
slightly more, when we covered that are increasing in value right 
along side the call buyer's option.  

Now, let's say the price falls under $23.50.  We would still hedge 
in the direction of the trade, only this time we would short the 
number of shares to match our short put.  Remember, we are short 
put options which gives the right to the put buyer to "put shares 
too us" at a price of $25.  By going short the shares, we take in 
$23.50 per share and effectively build in a loss of $1.50 ($25 
cost minus $23.50 income from the short).  But remember again that 
we took in $3 in option premium at the start.  So we still have a 
net profit of $1.50 even if the price falls to $20 or less.  As 
our short put becomes more valuable to the put buyer and costs us 
money, we have an offsetting position of short shares (a married 
put) that gain equal value as the price falls.

The beauty of both of these examples is that we are hedged and we 
pick our hedge based on which way the QQQ moves.  We will want to 
be short shares at some point under $25 and long shares at some 
point over $25.

Of course, there will be adjustments, and we may want to pick our 
trigger points to get long at $25.50 or $26, or
and get short at $24.50 or $24, or

Now all that said, and despite that it's a great way to collect 
expensive premium, which evaporates on the "other guy", I 
encourage everyone to fully understand and plan this trade before 
we ever enter it.  The worst things we get around here are e-mails 
that say, "I took your recommended trade and the price got away 
from me and I'm going to get killed.  What do I do?"  First, this 
is not a recommendation to take a QQQ hedged, short straddle 
trade.  It's an example only.  The trade can be done on any 
optionable equity, and some are better-suited for this strategy 
than others.

Second, since prices fluctuate, a breakout or breakdown that 
causes us to get hedged following the strategy can reverse back, 
which forces us to adjust our hedge again.  And that gets into the 
whole question of where do we adjust?  We have not covered that 
here tonight, but will in another episode within the following 

Yes, bait to get you to read part II!  

But for the traders among us that have employed this strategy 
before, now is a good time to dust it off.  For there is no time 
like the present to take advantage of this markets high 
volatility.  Bull or bear, our job is to make money on this trade 
as a market agnostic.  No opinion necessary to make this strategy 

Trade smart and make a great weekend for yourselves!


By Leigh Stevens

A buy or sell program is simply the simultaneous purchase or sale 
of a diversified mix of stocks that is being "worked" at the same 
time or during the same session. Computers are used to keep track 
of the stocks, how many to buy/sell, how many remaining, etc. 

Sometimes, the orders are "triggered" by a computer that routes a 
bunch of buy or sell orders into the computerized order systems 
of the Exchanges - this is also the case in Index arbitrage 
related buy/sell programs. However, "program trading" in general 
most often is a means of rebalancing large institutional 
portfolios, such as involving pension or mutual funds. The fund 
manager may decide that they want to: 

1.) "Rebalance" their portfolio, moving from away from or toward 
more exposure to certain stock groups or sectors; e.g., into or 
out of tech stocks in general; more toward consumer related 
stocks, etc. 

2.) Reduce their equity exposure; e.g., reduce the percentage of 
the total fund value that is invested in stocks by 3%.

For the big funds, a 3% reduction in equities "exposure" could be 
a few hundred thousand shares of 50 different stocks. When they 
decide to shift things around like this there may concern is to 
wind up at the end of the day getting into or out of the stocks 
involved about in line with how the market ends up at the end of 
the day. 

To best accomplish the fund manager(s) often will turn to a 
specialist type firm like my old firm, Cantor Fitzgerald, or 
Jeffries & Co.; or, a specialized group within one of the large 
institutional broker- dealers like Morgan Stanley or Goldman, 
etc. (They do this for a fee.) The reason this buying/selling is 
farmed out is because the best results do not come about by just 
dumping the shares on the floor or out on the market in the case 
of Nasdaq. 

Sometimes literally hundreds of sales people will go out to their 
institutional clients that might be interested in buying a 
block(s) of certain stocks. They may negotiate a price, then 
"cross" the trade and send to the exchange where it is reported 
just like any other trade. The quoted price then affects the 
trading in that stock. This has been the approach of the "third 
market" firms like Cantor and Jeffries that purposefully were NOT 
member firms of the NYSE, in order that they are allowed to 
"cross" trades off the floor of the Exchange or to line up a 
buyer with a seller at an agreed upon price.  

The specialized portfolio trading group, and always in the case 
of NYSE member firms like Goldman or Merrill, might also be 
steadily "feeding" the stocks involved in program trade out to 
the specialist or market maker involved - they will maintain an 
active bid or offer on the stock(s) and keep dropping or 
gradually raising the bid/offers to move the amount. 

"Portfolio trading" is MOST of what "program trading" IS in terms 
of the total volume involved in all program trading - the term 
"program" is applied because it involved systematic activity and 
goals and is kept track of by a manager for that portfolio, or 
program, trade. 

The purpose of program trading is of two types:

1.) To manage adjustments to fund portfolios; we probably own 
shares of funds that benefit from program trading methods. In 
fact, heavy redemption of fund shares can kick off some sell 
program activity the next day. 

2.) To make a profit for an "index arbitrage" group involved in 
stock index futures/stock arbitrage. A larger "purpose" or 
function for this type of program trading is that it keeps 
futures premiums in line with the market; i.e., neither too far 
above or below the "fair value", which I will discuss next. 

"Fair value" is what the premium of futures over (above) the 
actual stock index "should" be so that being long an S&P 500 
futures contract is equal to owning the underlying basket of 
stocks; i.e., the 500 stocks in the S&P (SPX). Fair value is just 
what it implies - a value where futures are "fairly" priced 
relative to the stocks themselves, which is the underlying 
"commodity" for this type of commodity futures contract. 

Futures trade above the cash index normally because owning the 
stocks pays dividends and to be "fairly" priced, the futures need 
to trade at a "premium" to actual ownership of the stocks 
involved. This premium "converges" with cash the closer to 
expiration and also is reduced after some or many of the stocks 
involved have already paid their quarterly dividends. 

Fair value (FV) is a "spread" or point difference that a futures 
contract would normally have relative to the underlying index. To 
demonstrate its importance, most days CNBC gives its viewers 
theoretical prices for program trading, listing Fair Value, along 
with certain levels in the premium that would theoretically cause 
program buying or program selling to hit the stock market.  

In addition, every time that the NYSE puts on its "collars" (when 
the S&P is trading down a certain "trigger" amount), restricting 
index arbitrage groups from using the NYSE automated systems on 
which is depends, CNBC shows an on-screen graphic that says "CURBS 

Naturally a lot of traders and investors wonder what Fair Value is 
and what it means in terms of the type of program trading involved 
in stock index/futures arbitrage.  The formula for Fair Value is 
really quite simple. Here is the formula: 

FV = S [1 + (I - D)]

"S" is the S&P 500 Stock Index or SPX (sometimes "INX"). 

"I" is the amount of interest paid to borrow the money to buy all 
of the stocks in the S&P 500 Index. The interest is calculated 
based on a percentage lending rate (R) from the current date 
(today) until the date that the S&P Futures Contract expires in 
March, June, September or December (futures month symbols: H, M, 
U, or Z). 

"D" is the amount of Dividends paid from all of the companies 
owned by a holder of all stocks in the S&P 500 Index. The 
dividends are paid  based on the record dates for each stock in 
the Index that are announced between the current date (today) and 
until the date that the S&P Futures Contract expires (H, M, U, or 
Z). This dividend income is expressed as a percentage rate too. 

That's all there is too fair value - of course, calculating when 
each dividend is paid and so on requires accurate information and 
some computer power. 

Assume that today (July 18) Fair Value of the front-month or 
nearest to expiration S&P September futures contract is 1.00 (100 
points); i.e., SPX is at 900.00, Sept. S&P futures should 
theoretically be trading at 901.00. 

To say that the "trigger" point or level for buy programs is "at" 
2.35, means that IF the premium of Sept. SPX futures ran up to 235 
points above or "over" the actual index (often called "cash"), it 
would become profitable for index arbitrage trading groups to buy 
stocks and sell (short) futures - this is a "buy program". 

The buy program "works" when the index "arbitrage" group can "lock 
in" that spread difference of 235 points - because they have 
calculated that after their transactions costs and by the time of 
the expiration of September index futures in Sept., the futures 
price will "converge" or become equal to the actual index. So, 
worst case for the stock/futures arbitrage is that at the Sept. 
expiration, the arbitrage trading group can sell the stocks they 
own and, at same time, buy back their short futures contract, 
which closes out the contracts. 

A Index Arbitrage group is set up so that the stock orders for any 
given (index arbitrage) "program" are set to go to the floor of 
the NYSE via the exchange's automated order system - at the same 
time a trader is selling futures contracts equal to the amount of 
stock that is being bought. "Arbitrage" means operating in two 
different markets at the same time. By the way, it's not necessary 
to buy ALL 500 stocks - studies will show that perhaps 300-350 
stocks will approximate the 
S&P 500 index. 

On the other hand, if the premium of the nearby September S&P 
futures relative to the actual (SPX) index, FELL to minus (-) 185 
points under the actual ("cash') index, this "discount" of futures 
relative to the cash index, might be calculated as the "trigger" 
point for "sell programs" by the same index arbitrage groups that 
were long stocks/short futures; i.e., the liquidation of these 
positions is by selling the stocks owned and buying back and 
closing out, the short futures positions. 

The sell program "number" or spread difference is the point 
where, after all costs are paid, the desired profit potential is 
"captured" or realized - it is the profit pay off for doing the 
index arbitrage transaction(s).

Such a "negative" premium comes about when traders turn bearish 
and sell the stock index futures down below the cash index price, 
due to expectations that the index is going lower and will "catch 
up" with the futures price later. This situation then allows the 
index arbitrage traders to "unwind" their cash/futures arbitrage 
AHEAD of the futures contracts expiration date. 

The arbitrage players prefer to take the FIRST opportunity to 
execute such "sell programs" and unwind or liquidate their 
arbitrage (long stocks/short futures) as this allows them to 
realize the profit that they had "locked" in earlier by being 
long the (cheap) stocks versus short the (overpriced) futures. 

All the foregoing information may seem complicated at first read, 
but not so complicated that an individual investor/trader cannot 
understand the concept by analogy. It is like having a cheap 
equity credit line on your house. If you can borrow at 9% and 
lend out the same money at 18% percent, this "spread" is 
attractive and you may want to "lock in" the 9% difference, which 
becomes your profit. 

At some point most of us that trade index options will be 
affected by the sharp moves that are sometimes brought about, at 
least partially, by such Index arbitrage related buy/sell 
programs. And at some point we may wonder what is going on and 
why. This knowledge can help you keep a balanced perspective. 

For example - you hear that a "buy program" is going on and you 
see that the futures premiums are "normal" or in line with FV. 
You then know that this "program" is simply an institution buying 
a basket of stocks simultaneously and not the result of overly 
bullish trader "sentiment" bidding up futures. 

Conversely, you hear that there is a "sell program(s)" going on 
AND you also hear or see that futures premiums are at a 
substantial DISCOUNT to the actual/cash index - such a sell 
program(s) is the "result" of traders, some with excellent market 
knowledge, turning bearish on the market trend AND being willing 
to sell futures at LESS than fair value. 

This may not only be selling at less than Fair Value, but at a 
discount - when futures traders turn bearish, they may start 
selling (shorting) at prices that are LESS than the actual index 
value at the time; e.g., you short a futures contract even 
though, at the time, the contract is trading UNDER the index 
value (based on where you think the index is going rather than 
where it is at the moment). 

Knowing the facts about program trading and fair value for 
futures gives you added market knowledge and can give you an edge 
in knowing when to move into or out of a trade.  

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Bearish plays are working with much success.  Two more debut on 
the watch list tonight.

To Read The Rest of The OptionInvestor.com Market Watch Click Here


Several of our support levels have been broken and are approaching 
critical junctures.

To Read The Rest of The OptionInvestor.com Market Posture Click Here


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