Option Investor

Daily Newsletter, Wednesday, 07/24/2002

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The Option Investor Newsletter                Wednesday 07-24-2002
Copyright 2002, All rights reserved.                        1 of 2
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MARKET WRAP  (view in courier font for table alignment)
07-24-2002               High    Low     Volume Advance/Decl
DJIA     8191.29 +488.95 8202.02 7532.66 3218 mln  1949/1269
NASDAQ   1290.23 + 61.18 1290.40 1192.42 2207 mln  2003/1443
S&P 100   419.98 + 23.23  420.48  384.96   totals  3952/2712
S&P 500   843.43 + 45.73  844.32  775.68
RUS 2000  378.56 + 14.57  378.56  354.11
DJ TRANS 2183.92 + 23.57 2190.48 2090.32
VIX        45.29 –  5.19   56.74   44.92
VIXN       65.59 –  0.80   69.73   64.55 
Put/Call Ratio 0.87

To The Moon Alice

Today started off looking like a continuation of the recent 
plunge.  Support at 7400 on the Dow looked sure to be tested.  We 
traded as low as 7532.66, before rallying back more than 650 
points, all the way to 8191.29.  The Dow closed up 488.95 points, 
for the second largest point gain ever.  A rumor that the Federal 
Board of Governors might hold an emergency meeting to lower 
interest rates may have been the catalyst.  One other theory 
advanced by our Senior Market Technician, Jeff Bailey, is that 
the bearish count on the 5-year Treasury YIELD of 3.30% had been 
achieved, possibly triggering an institutional buy program on 
stocks that were rotating cash out of bonds and into stocks.  The 
thinking goes that some institutions moved their cash, generated 
from selling equities, into treasuries, earlier this year when 
the YIELD was higher.  When the YIELD reached its bearish 
vertical count this morning it may have triggered some models 
away from the 5-year YIELD to lock in gains on the price, and 
shift the cash back to stocks.   There are plenty of theories as 
to what caused this rally, but I suspect it is a result of the 
coil being wound a little too tightly the last couple of weeks.  
Remember the Dow had given up more than 1800 points since July 
5th, including this morning’s low.   A bear market rally, 
retracing half of that move, would amount to a 900-point bounce.

Chart of the Dow Retracement


The bounce from the 7500 range wasn’t that far off from 
predictions of 7400, which had permeated the market.  These 
predictions looked back to support in January and August of 1998, 
as well as October of 1997.  The rallies following these support 
levels in 1998 both reached the 9000 mark.

Monthly Chart of Dow


The S&P 500, which had lost more than 100 points over the last 
four days, rallied back 45.69 points, making back almost half its 
losses since last Thursday, to close at 843.43.    The S&P had 
fallen through support at both the 900 and 800 levels in a very 
short time and looked ready to test the 700 mark soon.  But 
certainly not today.  

The Nasdaq Composite ($COMPX) also looked ready to set new lows, 
breaking support at 1200 as it traded down to 1192.42 to start 
the day.  The index followed the rest of the market and finished 
the day up 61.18, more than 5%, to close at 1290.23.

The Market Volatility Index ($VIX) soared this morning, reaching 
a new relative high of 56.74, within 0.54 of last September’s 
high, before falling to 45.29 on the rally.  Only three times 
previously has the volatility index reached over 50: October 
1997, October 1998, and September 2001. In the past, extreme 
reading from the VIX, which reflect the volatility level of the 
options on the S&P 100, have foreshadowed a rally in the market.

Chart of The Market Volatility Index



The Gold and Silver index ($XAU.X) even got a reprieve, after 
being beaten up badly this week.  The index had fallen from a 
71.29 close on Friday, all the way to this morning’s low of 
56.05, before staging a convincing rally to close at 62.96, up 
3.72 on the day.

The day started out with images of the Rigas family being led off 
in handcuffs, after looting Adelphia Communications for hundreds 
of millions of dollars.  Company founder John Rigas, his two sons 
Timothy and Michael, and two other executives are accused of 
schemes which provided them funds to purchase stock , cover 
margin calls, and even begin construction on a golf course, all 
at the expense of company investors.

This was followed by news that the House of Representatives and 
the Senate have agreed on a corporate reform bill.  This bill 
will establish a new independent oversight board, overseen by the 
SEC, which has the power to investigate and punish accounting 
firms that audit publicly traded companies.   The new laws also 
focus on separation of stock analysts from investment banking 
services within the same firm.  Tougher criminal penalties, as 
well as extending the timeframe investors have to file lawsuits 
are also part of the reforms, along with additional protection 
for corporate whistleblowers.  In a provision aimed at executives 
who sell stock before a company bottoms out, there are also 
provisions that prevent company insiders from selling stock 
during a blackout period during which workers cannot make changes 
to their pension plans.

Amazon.com, which released earnings after the bell yesterday, 
posted a narrower than expected loss.  The stock, however, was 
hammered early, opening down more $2.18, before riding the rally 
up to close within $0.45 of yesterday’s close.  More interesting, 
however, is their announcement that they will begin expensing 
employee stock options as part of their accounting.  Many 
companies used stock options as an alternative to higher salaries 
during the boom-boom late 90s, which were not counted against the 
bottom line.  This practice, which has received much attention 
the last few months in the wake of exposure of "creative 
accounting" procedures at many companies, is surely to take a 
chunk out of the bottom line.  

TIAA-CREF, pension fund administrator and one of the nation’s 
largest institutional investors, came out with the announcement 
that they are sending requests to 1754 companies, asking that 
they now expense these options when reporting earnings.  This 
practice could significantly reduce earnings numbers in the 
future for many companies, depending on how many are currently 
excluding this cost.

Merrill Lynch announced that they will now include GAAP 
(generally accepted accounting principles) numbers in their 
research reports on companies.  This could significantly alter 
the financial appearance for many corporations, who have been 
reporting pro-forma numbers.  GAAP includes one-time charges, 
while pro-forma does not.  If a company is forced to write down 
the value of a purchase, settle a lawsuit, or restructure, these 
expenses are not currently reported under pro-forma guidelines.  
The flip side to this is that one-time profits, such as selling 
off a unit, are also included.

The Nasdaq announced today that they are awaiting approval of a 
new exchange, which will list futures on individual stocks.  It 
has been rumored for some time, and now appears to be close to 
reality, with Nasdaq/LIFFE rep Tom Ascher stating that if 
approved, the new exchange would open sometime this fall.  What 
does this mean to the options business?  Calls and puts are 
currently priced in relation to one another according to a finite 
formula, which takes into account the interest cost of carrying a 
long stock position, and the dividends that the stock pays.  The 
ability to hedge option positions with futures, which have none 
of these characteristics, could drastically alter option pricing 
on equities.  It will also provide a third leg in the option-
stock arbitrage formula, as stock futures will fluctuate around 
the current value of a stock based on what the belief is about 
the direction the stock is headed.  This can be seen currently in 
the way the S&P futures operate independently of the 500 stocks 
on which they are based, although they must eventually come into 
line as arbitrageurs take advantage of discrepancies.  These 
futures will also carry a 20% margin requirement, as opposed to 
the current 50% margin requirement for equities, which will allow 
more investors to trade them.  Another important aspect of these 
futures is the ability to sell short.  The uptick rule, which 
prevents short sellers from selling on downticks, was put in 
place to prevent markets from getting hammered by those already 
short an issue.  These single-stock futures will allow this type 
of activity. This will also allow certain types of option 
positions, which require the shorting of stock by market makers 
as a risk hedge, to be initiated more safely.  Liquidity may 
improve in equity option markets, as orders for these types of 
trades now remain unfilled until there is a stock uptick.

After the bell, the big news was AOL/Time Warner, which released 
earnings and a little bit of news as well.  The company reported 
earnings of 24 cents a share, which beat analyst’s expectations 
of 22 cents.  Revenue was also higher that expected.  CEO Richard 
Parsons said, however, that while subscriber revenue was up 20%, 
on-line advertising revenue was down 42%. Parsons also said that 
he sees no evidence of an on-line advertising rebound .  The big 
news, however, is that AOL is the target of a federal accounting 
probe, looking into unusual accounting practices, originally 
revealed by the Washington Post.  CFO Wayne Pace stated that the 
company’s results were audited and signed off on by Ernst and 
Young.  Ernst can’t be too happy about the probe after seeing 
what happened to Arthur Andersen.  AOL, which closed at $11.40, 
was trading down at $10.65 after hours.

Tomorrow should be quite a test to see whether the rally holds.  
Some pull back can be expected, however if it is small, the bulls 
may be back in business.  As we warned in last night’s market 
sentiment, a continued rally does not necessarily mean the end of 
the bear market.  It could however, provide some terrific trading 

Steve Price


by Leigh Stevens

Everyone has taken to calling the CBOE Volatility Index 
(symbol: $VIX.X) the index of market-related "fear" - with the 
idea that when fear gets really extreme, it forecasts a market 
bottom. How about today versus the post 9/11 low on Sept. 21.   

The VIX today almost exactly repeated the pattern of a sharp 
"spike" up to a peak followed by a sharply lower close from this 
peak - and an associated sharp turnaround in the S&P from its 
daily low. 

9/21/01 - VIX: High: 57.3, up from low of 45 the day before; 
CLOSE: 49, down 14% from the intraday peak
OEX low: 480 - close: 491

7/24/02 - VIX: High: 56.7, up from low of 47 the day before; 
CLOSE: 45.3, off 20% from its intraday top 
OEX low: 385 - close: 419

A lot, from the factual, including a rebounding dollar of late, a 
rebounding bank/financial sector led by a very oversold JP Morgan 
(JPM - up 16%) and Citigroup (C - up 9.6%) and likely 
Senate/House agreement on STRONG accounting reforms, to the 
whimsical - such as a rumor (from the Futures floor - where 
else!) about an "emergency" Fed meeting to lower interest rates.

The "defining" moment of the day for me - especially for it's 
"psychological" boost, was the picture of senior executives of 
Adelphia being led off in handcuffs.  I had the feeling that this 
was the "emotional" turn in sentiment to a more optimistic 
bullish one just as it was in the post-1987 crash years when the 
same handcuff scene was seen of corporate raider, Leon Boesky, 
busted for profiting from "inside information". 

Another telling event was the House/Senate compromise on the 
tougher Senate bill on accounting reforms, that included an 
independent audit oversight board with broad powers to both 
investigate and punish accounting firms that audit public 
companies - admin will be by the S.E.C. Added criminal penalties 
seemed to be another aspect well cheered by investors!

Art Cashin, the old seasoned floor pro, that is one of the more 
listened to floor "guest" commentators for CNBC, had it exactly 
right today when he said that the "reason he said yesterday that 
there was an increasing chance for a big turn in the market" 
basically reiterated a point I made last night and notated on the 
Wednesday OEX chart below.

There is a striking change in a market going down in an orderly 
fashion which we've had for weeks - one, with falling prices 
following a downtrend channel for a prolonged period and that is 
a more gradual decline - when you draw the line it has a moderate 
"slope" to it.  Then comes a sea change - the selling picks up 
such that prices fall "through" the floor of this channel and go 
into "free fall" so to speak.  

Such a move results in a chart pattern that goes from tracing out 
a downward sloping "arc" to one that falls over the (right hand) 
"edge" of a more "circular" pattern.  The resulting downtrend now 
starts to come closer to following a vertical line down. This is 
a "free fall" stage of "panic" - the accelerating down move is a 
last dramatic "capitulation" or "throwing in the towel" on 
stocks.  When the pain of seeing the falling value of your 
investment accounts says "GET ME OUT!" 

My OEX charts from YESTERDAY (Tuesday) - with chart notation 
about the "straight vertical fall" of the past week:

You'll notice how OEX "fell out" of the broader LESS STEEP hourly 
downtrend channel (between the dashed magenta lines) which the 
S&P 100 Index had been in many weeks and instead started the VERY 
steep decline defined by the steep solid green lines. A sure tip 
off that a major "turning point" is near is from the type pattern 
I've described of vertical "crash" type drop - as seen on the 
chart above BEFORE the turn.  

Going from BEFORE to AFTER, is the UPDATE of the OEX chart 
through today (Wed.) -

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


Assuming that the OEX can get above near resistance around 420, I 
see upside potential back up to the 440 area of the gap.
Downside support should be found on pullbacks to the 400-405 

The market may well have put in a "tradable" bottom for a longer 
time frame than past recent rallies - where 2-3 days was a 
maximum duration. Perhaps we'll now see an upward bias for 2-3 
weeks rather than days this time.  

Certainly a DROP in volatility will make long calls and puts a 
lot cheaper to play versus the recent high price of entry into 
long index options positions "carrying" so much premium. 

S&P 500 (SPX) Index - Hourly chart:


Well, ONLY a slide of another 20 points (under prior Tues's low 
at 796) and a re-drawn lower trendline as you see above, before 
there is a final "3rd." point at 776 for the line defining the 
downtrend channel. Meanwhile, the 5-hour stochastic model merely 
bottomed at a higher high at that point, a divergent buy 

876 is next chart resistance, at the prior swing low (see the SPX 
hourly chart) and there is a tendency for prior lows to "become" 
resistance on a rebound.  This is because this is first point 
where people who bought that bottom can get out at "break even" 
and some will do so.  

More major resistance is apparent in the 900 area - the fall 
through 900 preceded the recent sharp free fall - so, 900 was the 
recent "breakdown" point. Expect substantial resistance in this 
area. A lot more market players bought this area, as it was the 
low end of an trading range for a 3-day period. 

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


A 75 target, to the low end of its broad channel, presented 
itself clearly on the Weekly chart. I wish I had taken better 
note of this channel line ahead of today as the Dow gave the best 
set up for finding the low for this move.  

Hourly chart resistance comes in at 84-84.5, then 86; finally, at 
88, back up at the top of the broader hourly downtrend channel 
for DJX. I think we could be about midway in a move and this 
would suggest a 88 target and then some. 

Support is 77-78 - buy the DJX index calls on a move back into 
this range; between 7700 and 7800 on the Dow.   

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


Ha, the 22 area turned out to be a support turn around point in 
the QQQ Nas 100 tracking stock. Today's turnaround was from the 
area of the "narrower" steep set of (dashed lines) trendlines 
"bracketing" the recent steep downswing in the Q's.  So what next 
- a fair amount of technical resistance is not far over head, 
starting around 24 and extending to 24.5.  It’s a touch "slog" 
from there to 26.5, which was the last rally high. 

The Nasdaq rally today seemed noteworthy to me for the 
nervousness of its buyers/potential buyers.  Tomorrow ought to 
tell us if the old time enthusiasm for the tech "beauties" will 
come back with so much of the bloom off those "roses". Ah, an old 
flame still can rock!  

With the Q's I'm mildly bullish but a lot depends on some upside 
follow through from MSFT, CISCO and INTC.  ORCL and QCOM seem 
rally-ready, but there is still this tentative feeling to a rally 
and spill over buying owing as much to the S&P rally as to a real 
tech BASH. Institutions are more focused on the S&P right now and 
individual still feel tentative - when this market, so much more 
driven by the online set, catches a wave of enthusiasm, we will 
see it in the key stocks just noted.  

AND, a THREE day rally is probably going to be needed to pull in 
more traders.  We have had 2-day affairs but not longer - if the 
market went out firm on Friday and DIDN'T fall apart on Monday, 
we could even have a brief spot of "panic buying" - it happens on 
the upside too - the panic is "oh NO, I'm going to miss this 


A "shoot the messenger" take on Program Trading has been made by 
investors and traders that have been seeing the recent volatility 
in the market as owing all to a lot of big "buy and sell 

There is greater and greater volatility, so funds that have to 
reduce their holdings or perhaps "re-weight" their portfolios, 
turn increasing to simultaneous selling/buying the stocks 
involved so that the prices they get are in line with the S&P 

Small traders note the greater number of program style trades and 
the "wake" involved from these big block trades - and, they tend 
to complain about it as making it impossible to trade the market. 
I say, "Fuggetabotit! 

Yes, "program trades" have accounted for as much as 40% of total 
daily NYSE volume just lately - up from a more "typical" (for 
this stage of a bear market) 30%.  But this is more a function of 
individual investors staying away and reducing the volume. Who is 
left? - the funds that you and I invest in, and they have to 
respond to the market changes. 

An efficient (less costly) way for them to do that is by 
executing "blocks" of stock at the same time. By the way, we're 
not talking about that variety of program trading that is 
involved in stock index futures arbitrage with a basket of the 
stocks underlying the index involved. And, an article by the Wall 
Street Journal today quotes a Big Board (NYSE) "spokesperson" as 
stating that "Arbitrage" accounts for maybe 10% of the total. 

This is consistent of my knowledge of it in terms of volume 
levels - Index Arbitrage opportunities are far more limited in 
the ABSENSE of the bullish "sentiment" that frequently bids up 
the S&P futures premiums to well over "fair value". 

The definition noted for what is a "program trade" - the NYSE 
defines as: "any trade valued at a minimum of 1 million dollars 
and where more than 15 different stocks are bought or sold at 

A million actually is only small potatoes, as individual program 
trades can easily have a value of $100 million and more - such as 
a major rebalancing of a major pension fund - such resulting 
program trading could involve 2-3 Billion, with a "b". 

The funds believe or theorize that Program trading block 
transactions can help "steady" the market as it falls, spreading 
losses around a variety of stocks that might be in firm's 
portfolio. Well, that's one side of it!  

Leigh Stevens
Chief Market Strategist 

WINNER of Forbes Best of the Web Award 
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Note: Options involve risk. Risk disclosure: 


So Many Requests, So Little Time
by Mark Phillips

It seems that at least once a week lately, I'm forced to change
ships midstream because the pace of this market's decline is
surpassing even my most pessimistic assumptions from just a few
weeks ago.  Myriad factors are arrayed against the markets and
the scandal in the Financials (thanks to C and JPM being shown
to have really been in bed with Enron) that surfaced yesterday
is just the latest iceberg to hit the Titanic.  Needless to say,
that Chinese proverb/curse about living in interesting times has
been ratcheted up a few notches.

I had a completely different article all ready to go for today,
which I think many of you will find quite interesting, but it
will have to wait until next week.  It centers on the issue of
who stands behind the options/LEAPS that we buy if we really have
a substantial market decline (as if we aren't in the middle of
one already!).  Somebody sold those options that we bought, and
the question (How do we know there will be a market for that LEAP
when we want to sell it for a profit?) is one we should all ask
at some point in our option trading careers.  Suffice to say,
the answer is rather interesting, especially as it pertains to
index LEAPS, but as I said above, we have bigger fish to fry
here tonight.

Over the past few days, I've had several readers who have
requested some detailed information on index LEAPS and where we
might look for longer-term trades with the major indices having
fallen so far, so fast.  We've talked about it numerous times in
the LEAPS column, that the ideal time to purchase LEAP Calls is
when the VIX is at an extreme high.  Well, with the VIX closing
at an all-time high of 50.48 yesterday, it certainly seems like
there could be some truly attractive LEAP Call trades to take
when this crazy market stops falling.

Like all of you, I'd give my eye teeth to know at what level on
any major index this selling would come to an end, even if that
end is just temporary.  Unfortunately, my crystal ball is
currently non-functional, but the last reading I got said that a
DOW in the 7300-7400 area and the S&P 500 in the vicinity of
730-740 looked like a high-odds bet.  Unfortunately we seem to
have a ways to go before reaching those extreme levels.  But
trying to pick what those support levels that hold will be is
an exercise in futility so long as there are no sustained signs
of strength.

Rather than spend our time here trying to put together a LEAPS
play on the indices that may or may not set up for us, I thought
it would be instructive to review which indices have LEAPS
available, what their advantages and disadvantages are and how
we might best use them to our financial advantage.

S&P 500 - The granddaddy of the indices, the S&P 500 or SPX is
the index of choice for the professionals and as such is only
for those with deep financial pockets when considering a viable
LEAPS trade.  When buying a LEAP call, we want to purchase the
LEAP out of the money, but not so far that we have to have a
huge move before seeing our LEAP begin to appreciate.  I'm
writing this on Tuesday night, and the SPX closed just south of
800 for the first time in over 5 years.  But lets assume for the
sake of argument that this is the bottom and we want to buy a
LEAP call at current levels.  What strike would we pick and how
far out in time?

Even that question is a bit convoluted, as the expiration months
on index LEAPS are different than for individual equities.  While
equity LEAPS all have an expiration in January of the specified
year (2003, 2004 or 2005), index LEAPS adhere to the following

March 2003
June 2003
December 2003
June 2004

Obviously, the expiration month you choose will depend on the
timeframe over which you expect the rebound to take place.  Given
the fact that most pundits are now admitting the 2002 recovery is
DOA and some are calling into question the probability of a 2003
recovery, I would personally opt for as much time as possible and
go for the June 2004 LEAPS.  Another part of my rationale is that
I know from my experience with equity LEAPS, that the further out
in time I go, the less effect volatility has on the option
premium.  With volatility as measured by the VIX currently
sky-high, going as far out in time as possible helps to insulate
us from the volatility factor.

If we are looking for a shorter-term trade (say on the order of
2-5 months), then we'll want to pick a strike that is closer to
the money, perhaps the 900 strike.  On the other hand, if we're
expecting that this bottom will be THE bottom and want to hold
for the duration, then we might feel comfortable with a strike
further out of the money, maybe even the 1050 strike.

So let's look at some prices to see what the price of admission
is.  The JUN-04 900 Call is currently trading for a cool $6740,
while the JUN-04 1050 Call is being offered at a mere $2930.
While that latter option may seem like a downright bargain, note
that it would require a 125 point move in the SPX (ignoring the
effects of volatility and time decay) to give us a double on the
trade.  [I'm making this estimate based on the fact that the 925
strike is currently trading for $5930, roughly double the current
value of the 1050 strike.]  Making a similar assessment of the
900 LEAP Call shows that the same 125 point move in the index
would yield closer to a 90% return.  So if holding for the big
move over a long period of time (9 months or more), we might do
better by selecting the strike further out of the money.

However, if we are looking for a smaller move in the index, we
would do well to select the strike closer to the money, so we
don't have to wait for an extreme move before seeing our LEAP
begin to appreciate.  Those strikes that are FAR out of the
money will actually start to see a fair amount of premium decay
as volatility decays back nearer to its normal range, and this
can offset a large portion of the expected premium increase as
the index moves in our favor.

Here's an exercise that you can all do at home to evaluate the
risks and rewards of picking different strikes.  Go to the CBOE
site and pull up a complete option chain (including LEAPS) for
the SPX and look at the different prices for different strikes.
Then you can make assumptions for how far you expect the index
to move and then come up with a reasonable future estimate of
the price of that option after the move has occurred.

For instance, if the JUN-04 800 Call currently costs $11,300,
and the JUN-04 700 call currently costs $16,750, I can conclude
that an at the money JUN-04 LEAP will increase in value by
roughly $5400 with a 100-point upward move in the SPX.  By
going through the option chain, you can quickly zero in on
which combination of expiration month and strike price best
fits into your trading plan.

I hadn't intended to spend this whole article talking about
the SPX, but here I am, already running out of room.  Let's
see if I can cover the other majors in a more abbreviated

Dow Jones 30 - As most of you are probably aware, you can't
buy options on the DOW, but the DJX.X index is a capable proxy,
as it is 1/100 the size of the actual DOW.  When the DOW is at
9000 (I can dream, can't I?), then the DJX is at 90.  Expiration
months here are the same as for the SPX, with the notable
exception that the series currently ends with DEC-2003 since
the JUN-04 strikes have not been released.  I actually prefer
trading the LEAPS on the DJX to the SPX due to the fact that
the contracts are more reasonably priced.  A DEC-03 $80 strike
is currently priced at $840, which is notable since that is
practically an at the money option.

It isn't the absolute cost that I care about, but the ease with
which you can tailor your trade size.  Large traders with mid-6
figure accounts can quite easily pick up a dozen of the SPX
LEAPS without exceeding a prudent threshold of having no more
than 15% of their account at risk in a single trade.  For the
little guy, with a $50,000 account, one JUN-04 $925 Call is all
that can be purchased without exceeding that 15% threshold.
Playing in the SPX arena is too rich for this smaller trader,
in my opinion, as it denies him the flexibility of entering the
trade in stages, or taking partial profits as the trade works in
his favor.  On the other hand, this smaller trader could pick
up 5 contracts for $3000, then another 5 for $4000 after the
trade begins to work in his favor, for a total account
allocation of $7000 (or 14%) in the trade.  Then as the trade
becomes profitable, you can sell 2 contracts here or 3 contracts
there to lock in profits on the way up.  I love that flexibility!

NASDAQ-100 - LEAPS aren't really available on the NDX, but as
capable option traders, you all know that it isn't necessary,
when we have the NASDAQ-100 Trust (the first of the Merrill
Lynch HOLDRs), otherwise known as the QQQ.  Strikes are nice
and close together and we have strikes (that conform to the
expiration month pattern of normal equities) out to JAN-04
currently with JAN-05 scheduled to arrive soon.  For those that
like to trade the QQQ and have a feel for the way it moves (and
of course have a bullish outlook on Technology), this can be a
great way to go.  As a single data point, the JAN-04 $25 Call
on the QQQ is currently trading for just $350.  Going through
the estimation exercise I outlined in the SPX section above shows
that a move of about 6 points or 240 NDX points would yield a
double on that LEAP.

If you prefer to focus your trading in the Technology realm,
the QQQ LEAPS provide the same advantage as the DJX does, that
of flexible position sizing.

Other HOLDRs - While I don't have space to go into any details
here, there are LEAPS available on a few of the other Merrill
Lynch HOLDRs, namely the SMH (Semiconductor HOLDR), BBH (Biotech
HOLDR) and HHH (Internet HOLDR).  If you're looking for a way
to use LEAPS to trade the longer-term trend in any of these
sectors, then these instruments definitely merit a closer look.

While our discussion here tonight has been necessarily brief,
hopefully it has at least given you some food for thought and
some ideas where to look for LEAP trades on the major indices,
as well as enough knowledge to weigh the pros and cons of which
index to focus on.  I know there are likely many gaping holes in
this article, which will generate plenty of questions.  Send
them my way and we'll explore them together in this forum as
time permits on a week-by-week basis.  In the meantime, I'll see
if there isn't a way to squeeze a couple more of these indices
or HOLDRs into our weekend visits in the LEAPS column.

Have a great week!


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by Leigh Stevens

"What a difference a day makes, 24-little hours"  - I might have 
thought that I dreaming, not singing, when I looked at every one 
of the sectors I follow showing ONLY "green" - my Q-charts 
background when an item is up on the day. 

UP on Wednesday - 


DOWN on Wednesday - 

Only the Goldman Sachs precious metals index ($GPX.X) was down 
and it is more tied to the physical metal prices than the stocks. 
The Gold & Silver sector index (XAU) was up some 6% even.  


The criteria for an upside reversal is a move to new low, or 
under prior support, followed by a sharp rebound to above the 
prior close or, an even stronger "signal", to above the previous 
day's high. This pattern seen especially in:

The Bank Index (BTK), the Amex Composite (small cap), Biotech, 
the PC "Boxmakers" (BMX), the Cyclical sector (CYC), the (NYSE) 
Financial Index (NF), Defense (DFI), Forest & Paper Products 
(FPP), Healthcare (HMO), Oils (OIX), Drugs (DRG), Retail (RLX), 
the Russell 2000; small caps (RUT), Software (GSO), Broker-
Dealers (XBD), and the Dow Transports (TRAN). 








One of the more dramatic turnarounds today was the very oversold 
Bank sector - and a key sector it is, as it tends to be a 
bellwether for our economic health. The sector was lead by a 
rebounding JP Morgan (up 16%) and an embattled Citigroup (+10%). 

Bank Index ($BKX.X)


PRIOR COMMENTS: Noted the significant double top in place in 916-
918 area - such a significant top would typically lead to a very 
substantial decline. 

692 was the prior low made back in Sept - this is a key level for 
BKX to surpass if a rally is going to gain traction and lead to a 
substantial longer-term rally.  Odds favor another sell off 
later, as it seems doubtful that the Banks will not "build" a 
base and establish a series of lows over this year.  

That said, BKX could nevertheless rebound further, to resistance 
apparent in the 750 area, which is the current "best" upside I 
see currently, before another downswing. 

Leigh Stevens
Chief Market Strategist

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The Option Investor Newsletter                Wednesday 07-24-2002
Copyright 2002, All rights reserved.                        2 of 2
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JNJ - call
Adjust from $40 up to 46.50




AZO $67.19 +5.46 (-2.31) AZO followed the market rally up over $5 
today.  The OI stop loss of $64.00 was crossed and we have closed 
this position.  AZO’s candlestick chart now shows a bullish 
engulfing pattern, encompassing the movement of the last two 
days, and within 0.05 of a third.  Be careful about turning too 
bullish, AZO could still see significant resistance at the 200-
dma and the $70 level.

CTX $47.64 +2.13 (+1.89) Centex rallied on a big day for the 
market.  It crossed resistance at $45, and continued through our 
stop loss of $47.00, just above Monday’s high of $46.80. This 
rally may have have been the result of fellow homebuilder Ryland 
(RYL) reporting higher second quarter earnings than expected and 
raising its full year earnings estimate. Homebuilder Pulte (PHM) 
was also upgraded today by JMP Securities.  We have closed this 
position.  Bears might be waiting at overhead resistance of 
$49.00 and again at $50.00.

GS $70.85 +3.12 (-6.15) Goldman Sachs rallied today, following 
other financials Citigroup and J.P. Morgan, crossing our stop 
loss of $70.00. In spite of this issue’s triple bottom point and 
figure breakdown at $69.00, we have closed this position, as GS 
was able to cross back through resistance at $70.00. OI feels a 
move back below $69.00 could provide an a new entry point, and we 
will reassess this issue in the future.

LEH $53.20 +2.59 (-1.27) Lehman Bros. rode the market rally up 
through our stop loss of $52.25.  LEH followed the financial 
sector higher, led by Citigroup and J.P. Morgan, which rebounded 
from huge losses this week.  LEH also announced the indefinite 
postponement of the IPO of Cinemark Inc., one of the country’s 
largest movie theater chains, for which Lehman was lead 

OMC $50.96 +4.24 (+0.98) Omnicom rallied with the broader markets 
today, just crossing the OI stop loss of $50.00.  This stock has 
rolled over since its recent move from $36.50 took it to $54.20 
and back down again.  Although we closed this position, a move 
back down will lead to a reassessment and possible re-entry for 
bearish trades.

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MHK - Mohawk Industries Inc. $43.50 -1.48 (-2.40for the week)

Company Summary:
Mohawk is a leading supplier of flooring for both residential and 
commercial applications and a producer of woven and tufted 
broadloom carpet, rugs, ceramic tile, laminate, wood and an array 
of home product including pillows, throws, bedspreads and other 
textiles. The Company designs, manufactures and markets premier 
brand names, which include "Mohawk," "Mohawk ColorCenter," 
"Floorscapes," "Aladdin," "Bigelow," "Custom Weave," "Durkan," 
"Galaxy," "Helios," "Horizon," "Mohawk Commercial," "World," and 
"Wunda Weve," "Goodwin Weavers," "Karastan," "Mohawk Home," 
"Newmark" Dal-Tile, and American Olean

Why we like it:
Mohawk took quite a fall last week after warning that 3rd and 4th 
quarter earnings would be well below previous estimates.  The 
stock gapped and closed down $7.70 on July 16th.  It made a weak 
effort to close the gap, but was unsuccessful.  They had 
previously said they expected earnings growth in the 10-15 
percent range, and then guided lower to 2-5 percent.   That may 
be optimistic given that the company said that the uncertainty of 
economic conditions has never been greater.  Makers of furniture, 
home fixtures and appliances have all been hard hit as consumer 
demand and confidence has waned.

MHK fell sharply below its 200-dma, and after its failed attempt 
to rally, appears ready to break below its open on the gap day.  
On that day it opened at $43.50 and in the next three days 
managed a dead-cat bounce back to the $50 resistance level.  
Those gains have all been given back the next support level is 
the psychological round number of $40. However, we expect this to 
break and see MHK trade toward its next nearest support below 
that level, which appears between $37 and $38.  This is our 
initial target on this play.  Below that level, it could be a 
quick drop to support at $30.

As the homebuilders have taken a beating due concerns over a 
potential housing bubble, this maker of home products will surely 
see demand for its products continue to fall as consumer 
sentiment decreases.  A downgrade by Raymond James the day 
following its earnings release did nothing to help investor 
confidence in this issue.  OI will use a trigger point below 
$42.75 as an entry point, just below its intraday low on its gap 
down.  Until MHK trades under $42.75, we'll stand on the 
sidelines.  Once triggered, we will place our stop loss at $46.65 
above Monday's high.

Why This is our Play of The Day

Although the homebuilders got a lift today, and the Dow was up 
almost 500 points, this stock was still unable to get past 
Tuesday’s high. Our stop loss of $46.50 remains safe and we see a 
re-entry point on a pullback below $45.00.  

BUY PUT AUG-45*MHK-TI OI= 107 at $2.80 SL=1.80
BUY PUT SEP-45 MHK_UI OI= n/a at $3.70 SL=2.50, wait for volume 

Average Daily Volume = 848K


Relief Rally In Progress!
By Ray Cummins

U.S. stocks soared Wednesday after a week of precipitous declines
as traders shopped for bargains in the downtrodden equity markets.

The Dow Jones Industrial Average surged almost 500 points to post
its second largest point gain ever amid strength in its financial
components.  The blue-chip index enjoyed gains in all but one of
its member issues; only McDonald's closed lower.  The tech-laden
NASDAQ Composite Index climbed 60 points to 1,290 with computer
hardware and software shares leading the recovery.  The broader
Standard & Poor's 500-stock index posted its biggest percentage
gain since October 1987, up 45 points to 843.  Among the leading
broad-market sectors were utility, oil service and biotechnology
issues.  Trading volume was extreme at 2.81 billion on the NYSE
and 2.47 billion on the NASDAQ.  Market breadth was positive with
winners outpacing losers 3 to 2 on the Big Board and 4 to 3 on the
technology exchange.  Treasury issues finished with huge losses in
the wake of the equity advance.  The 10-year Treasury note tumbled
13/32 to yield 4.46% while the 30-year government bond declined 1
point to yield 5.34%.


Summary of Current Open Positions

(As of 07-23-02)

Naked Puts

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

CHBS     AUG    35   34.30  34.51   $0.21    1.69% ***
EBAY     AUG    45   44.15  53.16   $0.85    5.54%
LEN      AUG    50   49.05  48.21  ($0.84)   0.00% ***
EBAY     AUG    50   48.95  53.16   $1.05    7.56%
FRX      AUG    60   59.20  67.59   $0.80    5.03%
IDPH     AUG    30   29.40  37.59   $0.60    6.83%
QLGC     AUG    30   29.20  38.02   $0.80    8.67%

Christopher & Banks (NASDAQ:CHBS) has retreated in sympathy
with the broader market and traders who do not want to own
the stock should cover the sold (short) put or exit/adjust
the position.  As mentioned last week, Lennar's (NYSE:LEN)
move below support at $51-$52 may be sufficient cause for
an early exit of the position.

Naked Calls

Stock  Strike Strike Break Current  Gain  Potential
Symbol  Month  Price  Even  Price  (Loss) Mo. Yield

ABC      AUG    75    75.85  59.10   $0.85   4.99%
BRL      AUG    65    65.75  50.50   $0.75   5.51%
DGX      AUG    85    86.10  55.00   $1.10   5.35%
BZH      AUG    75    75.80  57.85   $0.80   6.20%
EXPE     AUG    70    71.00  48.41   $1.00   7.69%
SPW      AUG    115  116.45  92.83   $1.45   5.95%

Put-Credit Spreads

Stock                                              Gain
Symbol  Pick   Last  Month L/P S/P Credit   C/B   (Loss) Status

TKTX    40.15  38.08  AUG   30  35  0.75   34.25  $0.75   Open
TRMS    43.25  39.50  AUG   30  35  0.55   34.45  $0.55   Open

Transkaryotic Therapies (NASDAQ:TKTX) has retreated to a "key"
moment and should be monitored closely for further downside
activity.  A move below the recent trading-range top near $36
would be a potentially bearish signal, possibly warranting an
early exit in the position.

Call-Credit Spreads

Stock                                             Gain
Symbol  Pick   Last  Month L/C S/C Credit   C/B  (Loss) Status

AGN     58.30  51.72  AUG   70  65  0.60   65.60  $0.60  Open
CI      89.83  77.44  AUG  105 100  0.55  100.55  $0.55  Open
COF     51.41  30.99  AUG   65  60  0.65   60.65  $0.65  Open
UN      60.97  50.10  AUG   70  65  0.80   65.80  $0.80  Open
ABC     64.50  59.10  AUG   80  75  0.50   75.50  $0.50  Open
BRL     56.45  50.50  AUG   70  65  0.65   65.65  $0.65  Open
SLM     86.05  81.25  AUG  100  95  0.60   95.60  $0.60  Open

Credit Strangles:

Stock  Pick     Last    Position   Credit   G/L   Yield  Status

ERTS   63.00    54.00  AUG70C/50P   2.75    2.75   18%    Open

Synthetic Positions:

Stock  Pick     Last    Position   Credit   C/B    M/V   Status

FAST   40.37   33.15   AUG42C/37P   0.10   37.40   0.10  Closed

The bullish position in Fastenal (NASDAQ:FAST) was closed Friday
when the issue moved through recent technical support near $38.



One of our readers requested some new "premium-selling" plays on
leading technology stocks to profit from the potential recovery
in that group.  Traders with a bullish outlook on the underlying
issues, who plan to use the recent share-value slump to initiate
new positions, may find the risk-reward outlook in these plays
attractive.  All of these companies have relatively favorable
fundamentals but each stock must also be evaluated for portfolio
suitability and the recommended position should be reviewed with
regard to your personal investing criteria.
CTSH - Cognizant Technology  $55.90  *** New High!! ***

Cognizant Technology Solutions (NASDAQ:CTSH) delivers full life
cycle solutions to complex software development and maintenance
problems that companies face as they transition to e-business.
These information technology (IT) services are delivered through
the use of a seamless on-site and offshore consulting project
team.  The company's solutions include application development
and integration, application management and re-engineering
services.  The company's customers include ACNielsen Corporation,
ADP, Incorporated, Brinker International, Incorporated, Computer
Sciences Corporation, The Dun & Bradstreet Corporation, First
Data Corporation, IMS Health Incorporated, Metropolitan Life
Insurance Company, Nielsen Media Research, Incorporated, PNC Bank
and Royal & SunAlliance USA.

CTSH - Cognizant Technology  $55.90

PLAY (sell naked put):

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

SELL PUT  AUG 40   UPU TH      10     0.40    39.60       4.6% "TS"
SELL PUT  AUG 45   UPU TI     111     1.00    44.00      10.6% ***
SELL PUT  AUG 50   UPU TJ     370     2.05    47.95      14.6%

EBAY - eBay Inc.  $55.75  *** Still The Web-Auction Giant! ***

eBay (NASDAQ:EBAY) is a Web-based community in which buyers and
sellers are brought together to browse, buy and sell items such
as collectibles, automobiles, high-end or premium art items,
jewelry, consumer electronics and a host of practical and other
miscellaneous items.  The eBay trading platform is an automated,
topically arranged service that supports an auction format in
which sellers list items for sale and buyers bid on items of
interest, and a fixed-price format in which sellers and buyers
trade items at a fixed price established by sellers.  Through
its wholly owned and partially owned subsidiaries and affiliates,
the Company operated online trading platforms directed towards
the United States, Australia, Austria, Belgium, Canada, France,
Germany, Ireland, Italy, Japan, the Netherlands, New Zealand,
Singapore, South Korea, Spain, Sweden, Switzerland and also the
United Kingdom.

EBAY - eBay Inc.  $55.75

PLAY (sell naked put):

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

SELL PUT  AUG 40   QXB TH    1,516    0.40    40.40       4.6% "TS"
SELL PUT  AUG 45   QXB TI    3,074    0.80    45.80       8.7% ***
SELL PUT  AUG 50   QXB TJ    9,234    1.65    51.65      12.8%

ERTS - Electronic Arts  $57.18  *** Volatility = Premium! ***

Electronic Arts (NYSE:ERTS) operates in two principal business
segments globally: EA's Core business segment comprises the
creation, marketing and distribution of entertainment software,
while the EA.com business segment is composed of the creation,
marketing and distribution of entertainment software which can
be played or sold online, ongoing management of subscriptions
of online games and Website advertising.

ERTS - Electronic Arts  $57.18

PLAY (sell naked put):

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

SELL PUT  AUG 45   EZQ TI     610     1.10    43.90      11.6% ***
SELL PUT  AUG 50   EZQ TJ   3,959     2.00    48.00      14.9%
SELL PUT  AUG 55   EZQ TK   3,188     3.50    51.50      19.1%

IDPH - IDEC Pharmaceuticals  $39.99  *** On The Rebound! ***

IDEC Pharmaceuticals (NASDAQ:IDPH) is a biopharmaceutical company
engaged primarily in the research, development, manufacture and
commercialization of targeted therapies for the treatment of many
cancer and autoimmune and inflammatory diseases.  The company's
two primary commercial products, Rituxan and Zevalin (ibritumomab
tiuxetan), are for use in the treatment of B-cell non-Hodgkin's
lymphomas.  The company is also developing new products for the
treatment of cancer and various other autoimmune diseases such
as rheumatoid arthritis, psoriasis, allergic asthma and allergic
rhinitis.  Rituxan, the company's first product, and Zevalin, its
second product approved for marketing in the United States, as
well as its other primary products under development, address
immune system disorders such as lymphomas, autoimmune and many
inflammatory diseases.  In addition, the company has discovered
other product candidates through the application of its unique
technology platform.

IDPH - IDEC Pharmaceuticals  $39.99

PLAY (sell naked put):

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

SELL PUT  AUG 30   IDK TF   2,465     0.65    29.35       9.9% ***
SELL PUT  AUG 35   IDK TG   2,095     1.50    33.50      15.9%
SELL PUT  AUG 40   IDK TH   1,966     3.20    36.80      22.0%

QLGC - QLogic  $41.26  *** Bullish Industry Outlook! ***

QLogic Corporation (NASDAQ:QLGC) is a designer and supplier of
Storage Area Networking (SAN) infrastructure building blocks.
Its SAN infrastructure building blocks, comprised of various
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, Compaq, Fujitsu Microelectronics,
and Hitachi all use some 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 now delivers selected Fibre Channel building blocks
through leading distributors, systems integrators and resellers,
thereby expanding its reach and visibility to the information
technology community.

QLGC - QLogic  $41.26

PLAY (sell naked put):

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

SELL PUT  AUG 25   QLC TE   1,479     0.35    24.65       5.4% ***
SELL PUT  AUG 30   QLC TF   2,114     0.80    29.20      11.7%
SELL PUT  AUG 35   QLC TG   4,369     1.55    33.45      17.4%

SLAB - Silicon Laboratories  $28.64  *** New Trading Range? ***

Silicon Laboratories (NASDAQ:SLAB) designs, manufactures and sells
proprietary high-performance mixed-signal integrated circuits (ICs)
for the wireless, wireline and optical communications industries.
Mixed-signal ICs are electronic components that convert real-world
analog signals, such as sound and radio waves, into digital signals
that electronic products can process.  The company's mixed-signal
design engineers use normal complementary metal oxide semiconductor
(CMOS) technology to create ICs that can reduce the cost, size and
system power requirements of devices that the company's customers
sell to their end user customers.  SLAB's expertise in analog CMOS
and mixed-signal IC design allows the company to develop products
rapidly, which enables the company's customers to improve their
time-to-market with end products that respond to consumer demand
in the communications industry.

SLAB - Silicon Laboratories  $28.64

PLAY (sell naked put):

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

SELL PUT  AUG 20   QFJ TD      85     0.20    20.20       4.5% "TS"
SELL PUT  AUG 22.5 QFJ TX      75     0.70    21.80      14.4% ***
SELL PUT  AUG 25   QFJ TE     137     1.20    23.80      17.6%

UNH - UnitedHealth  $88.75  *** Technology Sector Alternative! ***

UnitedHealth Group (NYSE:UNH) forms and operates markets for the
exchange of health and well being services.  Through its family
of businesses, the company helps people achieve optimal health
and well being through all stages of life.  The company's revenues
are derived from premium revenues on insured (risk-based) products,
fees from management, administrative and consulting services and
investment and other income.  It conducts its business primarily
through operating divisions in the following business segments:
Uniprise; Healthcare Services, which includes UnitedHealthcare
and Ovations; Specialized Care Services, and Ingenix.

UNH - UnitedHealth  $88.75

PLAY (sell naked put):

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

SELL PUT  AUG 70   UHB TN     235     0.45    69.55       3.3% "TS"
SELL PUT  AUG 75   UHB TO     120     0.85    74.15       5.0% ***
SELL PUT  AUG 80   UHB TP   2,770     1.55    78.45       7.2%

WLP - WellPoint Health Networks  $75.76  *** Solid Earnings! ***

WellPoint Health Networks (NYSE:WLP) is a managed healthcare
company.  As a result of the recent completion of its merger with
RightCHOICE Managed Care, the company has over 12 million members.
The company offers a broad spectrum of network-based managed care
plans, including preferred provider organizations, and health
maintenance organizations, as well as point-of-service and other
hybrid plans and traditional indemnity plans.  In addition, the
company offers managed care services, including underwriting,
actuarial services, network access, medical cost management and
claims processing.  The company also provides a broad array of
specialty and other products, including pharmacy, dental, workers'
compensation managed care services, utilization management, life
insurance, preventive care, disability insurance, behavioral
health, COBRA and flexible benefits account administration.

WLP - WellPoint Health Networks  $75.76

PLAY (sell naked put):

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

SELL PUT  AUG 60   WLP TL     330     0.45  59.55       3.8% "TS"
SELL PUT  AUG 65   WLP TM   1,337     1.05  63.95       6.7% ***
SELL PUT  AUG 70   WLP TN   1,933     1.95  68.05       9.7%


BEARISH PLAYS - Naked Calls & Combinations

If the market enjoys a technical rebound in the coming sessions,
investors are unlikely to look to "safe-haven" sectors such as
aerospace stocks to find new positions for their portfolios.  At
the same time, the volatile activity in the market has driven
option prices to historical highs, providing a great opportunity
for traders who use "premium-selling" strategies.  Here are some
candidates for bearish positions, based on the underlying stock's
technical history and its recent trend.  In addition, each issue
has robust option premiums, a well defined resistance area above
the current price and a high probability of a remaining below the
sold strike in the suggested position.  News and market sentiment
will have an effect on these stocks so please review each play
individually and make your own decision about its future outcome.

GD - General Dynamics  $85.60  *** Back In A Comfort Zone! ***

General Dynamics (NYSE:GD) operates businesses that produce
information and communications technology, land and amphibious
combat systems, and also engage in naval, as well as commercial
shipbuilding, and business aviation.  These are high technology
firms that use design, manufacturing and program management
expertise together with advanced technology and the integration
of complex systems as part of their everyday operations.  The
company operates in four primary business groups: Information
Systems and Technology, Combat Systems, Marine Systems, and
Aerospace.  The company also owns other commercial operations.

GD - General Dynamics  $85.60

PLAY (aggressive - sell naked call):

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

SELL CALL AUG 100  GD HT    3,245   0.50   100.50       3.3% "TS"
SELL CALL AUG 95   GD HS    1,786   1.25    96.25       6.3% ***
SELL CALL AUG 90   GD HR    2,033   2.65    92.65      10.8%

LMT - Lockheed Martin  $58.00  *** Rally At An End? ***

Lockheed Martin (NYSE:LMT) is a customer-focused, worldwide
enterprise principally engaged in the research, development,
manufacture and integration of advanced technology systems,
products and services for government and commercial customers.
The corporation's core business areas are systems integration,
aeronautics, space and technology services.  Lockheed's Systems
Integration segment engages in the development, integration and
production of electronic systems for undersea, shipboard, land
and airborne applications.  Space Systems is engaged in the
design, development, engineering and production of commercial
and military space systems.  Aeronautics designs, researches
and develops, produces, and supports combat and air mobility
aircraft, surveillance and command, reconnaissance, platform
systems integration and advanced development programs.  The
Technology Services division provides information management,
engineering, scientific and logistic services.

LMT - Lockheed Martin  $58.00

PLAY (aggressive - sell naked call):

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

SELL CALL AUG 70   LMT HN   1,190   0.35    70.35       3.9% "TS"
SELL CALL AUG 65   LMT HM   6,608   1.05    66.05       8.0% ***
SELL CALL AUG 60   LMT HL   1,993   2.60    62.60      14.4%

NOC - Northrop Grumman  $105.63  *** Low Risk = Low Reward! ***

Northrop Grumman (NYSE:NOC) is a worldwide defense company that
provides unique, technologically advanced products, services and
solutions in defense and commercial electronics, information
technology, systems integration, and nuclear and non-nuclear
shipbuilding and systems.  Northrop Grumman has operations in 44
states and 25 countries, serving U.S. and international military,
government and commercial customers.  Northrop Grumman is divided
into six major business sectors: Electronic Systems, Information
Technology, Integrated Systems, Ship Systems, Newport News and
Component Technologies.

NOC - Northrop Grumman  $105.63

PLAY (aggressive - sell naked call):

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

SELL CALL AUG 120  NOC HD   1,962   1.10   121.10       5.0% ***
SELL CALL AUG 115  NOC HC   1,340   2.15   117.15       8.1%
SELL CALL AUG 110  NOC HB   4,936   4.30   114.30      13.5%

BA - The Boeing Company  $41.19  *** Trading Range? ***

The Boeing Company (NYSE:BA) together with its subsidiaries, is
an aerospace firm.  The company operates in principal areas that
include commercial airplanes, military aircraft, missile systems,
space and communications and customer and commercial financing.
The Commercial Airplanes segment is involved in development,
production and marketing of commercial jet aircraft; the Military
Aircraft and Missile Systems segment is involved in the research,
development, production, modification and support of military
aircraft; the Space and Communications segment is involved in the
research, development, production, modification and support of
space systems, missile defense systems, satellites and satellite
launching vehicles, rocket engines and information and battle
management systems, and the Customer and Commercial Financing
segment is primarily engaged in the financing of commercial and
private aircraft and commercial equipment.

The Boeing Company  $41.19

PLAY (conservative - bearish/credit spread):

BUY  CALL  AUG-47.50  BA-HW  OI=2761  A=$0.30
SELL CALL  AUG-45.00  BA-HI  OI=3952  B=$0.55

EASI - Engineered Support Systems  $42.90  *** Big Down Day! ***

Engineered Support Systems (NASDAQ:EASI) along with its various
subsidiaries, designs and manufactures military support equipment
and electronics for the United States armed forces.  The company
also engineers and manufactures air handling and heat transfer
equipment, material handling equipment and custom molded plastic
products for commercial and industrial users. Engineered Support
Systems' six wholly owned subsidiaries are Systems & Electronics
(SEI), Engineered Air Systems (Engineered Air), Keco Industries,
(Keco), Engineered Coil Company (d/b/a Marlo Coil), Engineered
Electric Company (d/b/a Fermont ) and Engineered Specialty

EASI - Engineered Support Systems  $42.90

PLAY (very conservative - bearish/credit spread):

BUY  CALL  AUG-55  UFE=HK  OI=195  A=$0.25
SELL CALL  AUG-50  UFE-HJ  OI=278  B=$0.65



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