Option Investor

Daily Newsletter, Wednesday, 07/31/2002

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The Option Investor Newsletter                Wednesday 07-31-2002
Copyright 2002, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Tug of War
Index Trader Wrap: WHAT BEAR MARKET?   
Weekly Fund Family Profile: Papp Mutual Funds
Options 101: Where Does The Buck Stop?
Index Trader Game Plans: THE SECTOR BEAT - 7/31

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
07-31-2002               High    Low     Volume Advance/Decl
DJIA     8736.59 +56.56  8736.73 8537.10 2349 mln  1614/1505
NASDAQ   1328.26 -15.93 1335.79  1307.01 1613 mln  1371/1919
S&P 100   458.87 + 5.97  458.87  446.36   totals   2985/3424
S&P 500   911.62 + 8.84  911.64  889.88
RUS 2000  392.42 - 8.49  400.91  392.38
DJ TRANS 2370.05 -19.46  2390.29 2340.84
VIX        35.21 + 0.06    37.49   34.96
VIXN       57.86 + 1.40    60.15   56.92 
Put/Call Ratio 0.87

Tug of War

What resilience!  Several economic indicators were released this 
morning, and what appeared to be bad news simply can't seem to 
break the bulls.  GDP showed economic growth in the second 
quarter at only 1.1%, less than half of the expected 2.4%.   This 
was a decrease from first quarter growth of 5%, which was revised 
downward this morning from a previously reported level of 6.1%.  
This downward revision from the first quarter happens to be equal 
to total second quarter growth.

This morning's data release also altered perception of last year, 
showing that the economy did, in fact, slip into recession in 
2001.  The economy shrank in the first, second and third quarters 
last year, and emerged back into positive territory in the 
fourth.  The key to these revisions was the second quarter, which 
had previously been reported as positive.  The revision into 
negative territory put the economy into a solid recession with 
the required two straight quarters of economic contraction.  In 
this case there were three in a row, and demonstrated a deeper 
problem than previously thought.

The GDP report was followed by the Chicago PMI (Purchasing 
Mangers Index), which came in at 51.5% in July.  A reading above 
50% indicates expansion of activity in the manufacturing sector.  
This number was expected to come in at 56.8%, so it is considered 
a disappointment.  Keep in mind that it is also only 1.6% away 
from contraction.

The Dow started off poorly, down 143 points, but buyers shrugged 
off the economic data to rally the Dow 118 points from that 
level, before giving in after a Beige Book report that may have 
set a new record for use of the word "mixed" in an economic 
summary.  The report suggested that the economy expanded modestly 
in recent weeks, with uneven performance across sectors. 
Residential real estate and construction were strong, as were 
purchases for the home, but commercial real estate struggled.  
Banks reported strong demand for home mortgages, but continued 
weak demand for business loans. Agricultural conditions were 
mostly poor.  Labor markets were described as slack, but stable.  
Prices for most goods and services were steady.  Auto and retail 
sales were mixed.  Here is a link to the full text of this 


This lackluster report completed the trifecta of uninspiring 
data, driving the Dow back down over 100 points, however unable 
to force its way through support at 8500.  The average has come 
close to testing this level on several occasions the last few 
days, but has held firm. 

Chart of the Dow Jones


The S&P 500 has seen similar support at the 890 level.  This 
level in the S&P provided resistance on Tuesday morning, but ever 
since breaking through, has served as support for the index. 

Chart of the S&P 500


These levels will be important the next two days, as more key 
economic data is released.  Thursday we will get a look at auto 
and truck sales, initial jobless claims for last week and 
construction spending.  On Friday, we will see non-farm payrolls, 
unemployment rate for the month of July, and personal income and 
factory orders for the month of June.  After a rally of more than 
1200 points from last Wednesday's low, the bears will be looking 
for continued economic weakness.  Although the reports today 
couldn't break through these support levels, bad news over the 
next two days could combine with today's news to break the bulls' 

One theory on today's surge is that end of the month buyers 
stepped in and brought the Dow back into positive territory.  The 
end-of-month fund statements certainly look better with higher 
stock prices.  

Why the market continues to elevate, in spite of disappointing 
economic reports, seems a mystery.  However, valuation may be the 
name of this game.  Goldman Sachs released data showing that they 
have raised their global equity weighting to 65%, right at the 
top of their range.  The firm noted that global equities were 
cheap relative to bonds. Goldman reduced their bond holdings from 
23% to 20%, which was at the very bottom of their range, and 
reduced cash holdings from 5% to 7%.   "Switching out of bonds 
into equities at these valuation levels has proved a profitable 
tactic in the past," said Goldman's Neil Williams.

As the market has continued to hold its gains, there has been a 
noticeable reversal upward of bullish percent figures, which 
measure the number of stocks in an index that are currently 
giving buy signals.  The Nasdaq 100 bullish percent has reversed 
from a low of 8% at the beginning of the month to currently show 
30% of its stocks giving buy signals.  The S&P 500 bullish 
percent has doubled from a low of 12% to 24% and the Dow bullish 
percent has more than quintupled from 4% of these stocks giving 
buy signals to 22%.  An interesting note on these percents is 
that toward the beginning of the month, they were diverging, with 
the Nasdaq 100 on the way up, while the others continued 
downward.  At this point all three are not only on their way up, 
but remain in oversold territory.  The Dow and S&P are both in 
bull alert status, while the Nasdaq 100 has been bull confirmed.

General Electric certified its financial results ahead of the 
August 14th reporting period set by the SEC.  The company also 
announced that it would begin expensing employee stock options.  
This procedure will cost GE $30 million, or less than a penny a 
share, from its 2002 net income.  The cost will increase to about 
3 cents a share over the next 3 to 4 years, as the cost is phased 
in.  Investors rewarded GE for the announcement with a gain of  
$0.60, maintaining its rally of over $9 in the last week. The 
stock closed today at $32.20.  It remains to be seen how many 
companies expense these options, and whether investors will react 
positively to a more transparent accounting procedure, or whether 
the earnings per share cost leads to lower valuations.

We have been predicting for some time that companies would be 
releasing bad news ahead of the August 14 deadline for certifying 
financial results, and that this information could weigh heavily 
on the market.  While this is still a possibility, we may also 
see some investor confidence return as more companies begin to 
certify, therefore reducing anxiety among investors about which 
company will be next to announce accounting problems.  The SEC 
has made this information available on its website. 

One sector that did not get an end of day lift was the 
semiconductors.  After yesterday's close, NVDA warned that its 
earnings and revenue for the just completed quarter would fall 
well below expectations. They attributed this to weak demand for 
personal computers, which could spell bad news for many other 
companies in the sector.   The stock was pummeled today, and lost 
32% of its value, trading down $5.15 to $11.07.  The 
Semiconductor Index (SOX.X) dropped almost 5% after mounting a 
comeback the last two days from 52-week lows set just last week.  
The sector has been turned back from the index level of 350 
twice, after it served as support on the way down.  There is also 
a downward sloping trend line developing which looks bearish for 
the sector, when combined with the bad news that seems to come 
out of the sector every few days.  Last week, Taiwan 
Semiconductor (TSM) announced they were slashing their budget for 
the rest of the year.  Last night, KLA-Tencor (KLAC) reported 
earnings that fell 64%, citing languishing demand for 
semiconductor equipment. A Goldman Sachs upgrade of the 
semiconductor equipment makers last Friday provided a temporary 
boost, but the near-term prospects do not look good for this 

Chart of the SOX


This sentiment was reiterated by the Nasdaq Composite, which lost 
15.93 on the day to close at 1328.26.  

AOL/Time Warner confirmed today that the Justice Department has 
opened a probe into its accounting practices.  While the 
Washington Post first questioned AOL's accounting earlier this 
month, focusing on transactions that boosted advertising revenue 
through "unconventional transactions," there has been talk that 
the probe may now widen.  A Merrill Lynch research note by 
analyst Jessica Cohen stated "we are not 100% sure the 
investigation is contained purely at the AOL division."  As daily 
appearances before the Senate have become a regular occurrence, 
investors seem to be moving past these investigations and 
continuing to buy.  While the individual issues are getting 
beaten up, the overall market has been holding up on decent 
volume, which passed the 2 billion share level once again today.  
A month ago, news of any investigation sent the market rolling 
downhill.  Now it doesn't seem to register much more than a blip 
on the broad market.

Verizon said its losses widened in the second quarter and reduced 
its earnings and revenue outlook for the year.  Last week the 
company asked for help from the Federal Communications Commission 
in keeping its WorldCom related liabilities in check.  Verizon 
hasn't yet finished calculating what it is owed by WorldCom.

IBM announced its intention to purchase the consulting arm of 
Price Waterhouse for $3.5 billion after yesterday's close.  
Analysts have viewed this purchase as a strike at rivals 
Accenture, which is known as a top level IT consulting firm, and 
Hewlett-Packard, who will no longer have the option of 
reconsidering its previous decision not to purchase PwC.  Another 
firm that may suffer from this alliance is Electronic Data 
Systems (EDS), which said it was "frankly surprised it took IBM 
this long to realize the benefit of - and to begin taking steps 
to leverage - the combination of consulting, implementation and 
outsourcing."  It appears this move could be of great benefit to 
Big Blue, although the stock gave up $1.39 to finish the day at 

In an environment with very little to get excited about, it is 
quite surprising that the Dow and S&P have held up so well.  Keep 
an eye on tomorrow and Friday's data for signs of continued 
weakness throughout the economy.  If we get more bad news, and we 
fall through the aforementioned levels of support, it could lead 
to a re-test of July's lows.  If we manage to get through this 
data with continued support, we still need to get through 
congestion between 8700-8900 in the Dow.  If that happens, look 
for a move over 9000, as has happened the last two times the Dow 
tested the 7500 level in January 1998 and August 1998.  Respect 
your stops, there is pressure building in both directions, and 
eventually tug of wars end up with someone in the mud.  Stay 

Steven Price


by Leigh Stevens

I've been commenting on the tendency for the market to more or 
less "ignore" bearish news. If you think back to a month ago, 
what would news that  -  
- GDP that was HALF of the expected number for Q2
- there was a major suicide bombing in Israel
- there could be dire economic consequences of an Iraq invasion
have done to the market?  Bombs away! At that time any of those 
items alone could have generated a lot of selling.

My favorite NYSE floor broker and CNBC commentator, Art Cashin, 
was commenting today on how well "bid" the market has been on 
dips - with the speculation that there is continued short-
covering going on.  It is well known that NYSE Short Interest 
reached record levels coming into this month (July). 

One factor behind the shorting is the tremendous growth of "hedge 
funds" in the past two years.  As you probably know, the typical 
mutual fund is UNABLE to short stocks; or, buy puts normally, 
etc. Private hedge funds that attract money from wealthy 
investors, are not bound by these niceties - some would say, by 
these "antiquated" rules.  But that's the way it is.  

Meanwhile, a LOT of hedge fund managers are short up to their 
eyeballs and there is no way that they suddenly covered all there 
short positions on the rapid run up into today. It takes them 
time to unwind - not only that, but it is the CONTINUED firmness 
of the market that is convincing them that they need to buy the 
dips to cover and get less short.  

Then, of course, I didn't mention the Fed's Beige book report 
which shows only a tepid recovery still.  Hey, this is what a 
bull market is supposed to do - climb a "wall of worry". Do you 
suppose this is beginning of the end of the bear?  You will 
definitely NOT believe it if you still think that the stock 
market is a completely rational or logical mechanism that 
determines "fair value" for stocks on any given month - WRONG!  
The market has a "logic" of its own, which at times is quite hard 
to figure - until 6-8 months later, when we see what it (the 
market) was pointing to or "telling" us.    

There is a lot more media attention and focus on what the seeming 
single-minded intent of this administration to invade Iraq, would 
cost us big time - that's you and I, the taxpayers.  The bill 
from the Iraq war of 11 years ago was about $60 billion, of which 
80% was picked up by Japan, Saudi Arabia, Kuwait, etc.  However, 
in today's dollars, we can look forward to paying maybe $80 
billion by ourselves.  

If you recall the recession that followed the huge spike up in 
oil prices after the first Gulf war and the fragileness of this 
economy recovery - one question is: Are we being asked to play 
Russian roulette with the economic consequences of Gulf War II?  
Actually, I wish we were asked in a referendum or something - 
having grown tired of the long bear market, I was looking forward 
to a baby bull in the New Year!      

Still the same - possible objectives can be calculated to around  
9000 in the Dow, the 950 area in SPX, to 473 or higher in the OEX 
- (480 is the key Sept low that we could "retest"). 

In Nasdaq, using our most popular trading instrument - QQQ - 
26.50 is a possibility, maybe back to 27.00, at the Sept. low, 
but the Nasdaq is lagging the S&P of course.  The Composite 
(COMPX), Nasdaq 100 (NDX) and the QQQ tracking stocks, are all 
consolidating UNDER their "pivotal" 21-day moving average.  But, 
they are consolidating, not falling apart.  On the hourly charts, 
all started a strong rally in the final hour. Stay tuned! 

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


The hourly and especially the half hourly (30 min.) chart today 
looked like OEX had formed a possible Head & Shoulder's top, with 
a "neckline" drawn through upward through the lows - however, we 
never got the confirming "break" of that trendline, which is what 
a neckline is. This may be why you WAIT for the "confirming" 
break of the neckline before you toast your latest success being 
short and in puts. 

I continue to see the key upside target zone to be 465 - 470/472, 
which is the top of the hourly downtrend channel and the current 
intersection of the upper envelope lines, respectively.  The 
bears have got the bulls right where they want them - 
overconfident! - but who is losing money?  Stay tuned!!  

By the way, watch for when the daily stochastic is showing fully 
overbought - we haven't seen that in a while - not since the last 
big shoring opportunity.   

Support is 443-446 and 428 becomes my downside target if there is 
a break of 443.  

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


The bears are in danger of losing control here, with the S&P 500 
poised to break out above the hourly downtrend channel (at the 
red arrow) that the index has been trading in for weeks.  If so, 
we need focus on the prior rally peaks as possible next 
resistance points - that would be 919, then 934.  926 is the 
upper trading envelope line that I'm using currently - I don't 
consider SPX to be getting overly "extended" until it hits this 
upper band. 

I have no desire to try to "call" a top - we'll see it when we 
see it! Again, don't get too "logical" in trying to figure that 
this market "should not" be going up. 

Support is at 884 to 891 - below this zone, we're looking at 
support down in the gap area at 855. A long ways lower now!

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


No bust out above DJX resistance yet, but a small push tomorrow 
will put DJX above its key down trendline on the hourly chart.  
If so, 90-90.5 looks like an area that might be a next top - I 
would be a seller in this area to book profits and maybe take go 
into puts - especially as we get closer to overbought readings on 
the DAILY stochastic model.  

I have been guilty of trading while looking in a rear view mirror 
- don't do it by assuming that hourly overbought readings 
"signal" an end to the trend like it has before this most recent 
rally.  You have to know when an indicator stops "working" as an 
automatic given. 

Or, for that matter know when to throw out a "set" 
bullish/bearish point of view on the market. The top professional 
traders I've known always were only interested in trading on the 
side of a trend - caring little whether the trend direction "fit" 
their expected market view.

Support is at 85.3; then, if exceeded, at 82.8-82.5, the area of 
the upside chart gap.    

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


I'm still waiting for that big yellow circle of the upside chart 
gap to be "filled" by QQQ retreating into this area.  By the way, 
when a stock or index "resists" falling back into an upside gap, 
it is acting as support.  Another example of rigid thinking is to 
figure that a gap "has to" get filled. The market doesn't have to 
anything - except confound us at times!  

However, I think there is an even chance that the Q's get to the 
23 area, especially if they don't immediately climb back above 
near resistance at 24.00.  24.7-25 is "pivotal" resistance, such 
that a close over 25, suggests that QQQ could see 26.5-27.00 
before coming down again in a significant correction.  You'll 
note that the Q's are far from overbought by a look at the Daily 
stochastic.  However, price action is not overly strong, so I 
continue to think that the stock will come down first before a 
next significant rally.  Time will tell.  

No trading recommendation in the middle range.  For new 
positions, I'm a buyer at 22.50-23, a seller at 26.5-27 as I wait 
for a next "extreme" - trading new positions in the middle of a 
probable trading range is harmful for the health of my trading 

Leigh Stevens
Chief Market Strategist 

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Papp Mutual Funds

The Papp Mutual Funds is a family of five no-load equity mutual 
funds, which are characterized by low turnover and a pro-growth 
investment style.  Most growth-oriented funds are characterized 
by high turnover as growth managers shift assets to the sectors 
and securities with the best earnings growth prospects.  Papp's 
approach is more long-term natured, focusing on very consistent 
earnings, dividend and cash flow growth.

L. Roy Papp & Associates, LLP, based in Phoenix, Arizona serves 
as the investment adviser to the Papp Funds.  Like other mutual 
fund advisers, Papp & Associates provides continuous investment 
supervision and management to the Papp Funds under an agreement 
advisory agreement.  For these services, the adviser receives a 
management fee equal to 1.00% per year of assets from each fund.  

The prospectus states that Papp & Associates, LLP has agreed to 
reimburse each Papp fund to the extent its total annual expense 
(excluding taxes, interest and extraordinary litigation) during 
any fiscal year exceeds 1.25%.  That's good to know and adds to 
the appeal of the Papp funds in our opinion (that fund expenses 
are capped at the annual rate of 1.25% of average daily assets).

L. Roy Papp & Associates is also investment advisers to private 
clients, trusts, retirement plans, endowments, and foundations.  
As of March 31, 2002, the company had more than $780 million in 
total assets under management.

The Papp Mutual Funds require a $5,000 minimum initial purchase 
($1,000 for IRA accounts).  There's only one class of shares to 
consider and they come with no front-end and back-end load fees.  
The mutual funds have widespread brokerage availability and are 
available on a no-load no-transaction fee (NTF) basis through a 
number of leading NTF networks, such as Schwab Retail OneSource 
NTF, TD Waterhouse NTF, and Fidelity Retail Funds Network - NTF.

For more information or a fund prospectus, you can call the Papp 
Mutual Funds at 1-800-421-4004 or logon to www.roypapp.com.  

Additional Background

L. Roy Papp is a veteran of the money management field - having 
served in the investment industry since 1955 with the exception 
of two years when he was U.S. director of and ambassador to the 
Asian Development Bank, Manila, Philippines.  Roy Papp has been 
sole proprietor of or a partner of L. Roy Papp & Associates LLP 
and its predecessor since 1978.

Rosellen C. Papp, L. Roy's daughter-in-law, is a partner of the 
firm, and has been the Director of Research since 1981.  L. Roy 
Papp and Rosellen Papp have managed the portfolios of each Papp 
mutual fund since its inception.

L. Roy Papp, founder of the firm, holds an undergraduate degree 
in Economics from Brown University and an MBA degree in Finance 
and Banking from the Wharton School, University of Pennsylvania.  
He joined the investment advisory firm of Stein Roe and Farnham, 
Chicago, Illinois, in 1955.  

During his 20 years at Stein Roe, L. Roy Papp rose to the level 
of senior partner.  He was also on the firm's Investment Policy 
Committee.  Roy Papp served on a number of boards and trusts in 
the Chicago area when he was a resident there.  In 1969, he was 
appointed to the board of directors of Federal National Mortgage 
Association (FNMA).   

In 1975, Roy Papp accepted a presidential appointment as the U.S. 
Director and Ambassador to the Asian Development Bank in Manila, 
Philippines.  Following U.S. Senate confirmation, he served two 
years in Manila.  Returning to the U.S. in 1977, he established 
his investment advisory firm in Phoenix, Arizona, and served on 
the board of directors of four NYSE-listed companies. 

According to L. Roy Papp's biography, he has 41 years experience 
in the investment management field, and he provides the policy 
guidance for the firm's 9 additional professional staff members.

Rosellen C. Papp is a partner of L. Roy Papp & Associates, LLP, 
and has been associated with the firm since 1981.  She has over 
18 years experience in security and financial analysis and is a 
Certified Financial Analyst (CFA).  She is also a member of the 
International Society of Financial Analysts.

Rosellen Papp has a Master of Management degree in Finance from 
the esteemed Kellogg Graduate School of Management, Northwestern 
University to compliment her Bachelor of Business Administration 
degree from the University of Michigan.   

Investment Style/Strategy

As stated earlier, L. Roy Papp & Associates are equity-oriented 
investors.  When buying stock, they look for long-term and very 
consistent earnings, dividend and cash flow growth.  They focus 
on companies with low debt and uniquely strong market positions, 
paying an average price for these growth companies.  Some would 
call this a growth-at-a-reasonable (GARP) approach to investing.

The underlying rationale for Papp's investment approach is the 
belief that equities provide a greater long-term rate of return 
than fixed-income securities and that the return on stocks will 
exceed inflation; thus, maintaining the purchasing power of the 
assets available for investment.

L. Roy and Rosellen C. Papp don't attempt short-term judgements 
regarding the direction of the equity markets or interest rates.  
Rather, they look at long-term trends in the economy or markets, 
calling changes in their funds "evolutionary."  They don't make 
sudden shifts, suffice to say.

Their equity approach is based on the conclusion that enhanced 
portfolio value is obtained through ownership of above-average 
companies purchased at prices that don't reflect their superior 
long-term earnings growth which.  In most instances, they favor 
companies with at least 10 years of consistent earnings growth.

The fund co-managers also require a similar history of dividend 
increases, since dividends are the stockholder's current return 
they say.  Further, they look for companies expected to produce 
above-average profitability, as measured by return on equity or 
ROE with such profitability resulting from operating efficiency 
rather than financial leverage.  Cash flows too are examined to 
ascertain the sustainability of growth. 

Companies meeting these criteria are eligible for purchase only 
when their current price relative to the market as a whole does 
not fully reflect its perceived superiority.  Once bought, such 
shares are ordinarily retained as long as the fund co-managers 
believe that the prospects for capital appreciation continue to 
be favorable and that the securities are not greatly overvalued 
in the marketplace.
The website states that the Papp Mutual Funds don't utilize Wall 
Street research as the background for its buy and sell decisions.  
Instead, Papp managers independently pursue areas that have been 
overlooked by the Street or are currently out of favor.  Further, 
the site states that the fund managers do not typically purchase 
cyclical companies, because they are not willing to make guesses 
about the overall economy (which they feel increases the risk of 
error without a corresponding increase in prospective return).

While the portfolio's strategies vary, each Papp mutual fund is 
invested with the objective of long-term capital growth.  The 5 
mutual funds currently available are the L. Roy Papp Stock Fund 
(LRPSX), Papp America-Abroad Fund (PAAFX), Papp America-Pacific 
Rim Fund (PAPRX), Papp Small & Mid-Cap Growth Fund (PAPPX), and 
Papp Focus Fund (F000GV in Morningstar's system).  Papp's Focus 
Fund has only $2 million in net assets according to Morningstar.  

Our Favorite Funds

Our favorite funds are Papp Small & Mid-Cap Growth Fund (PAPPX) 
and Papp America-Pacific Rim Fund (PAPRX).  Both funds sport a 
Morningstar 5-star highest overall rating for fund performance, 
as adjusted for risk, in relation to their respective category.  

All of Papp's mutual funds are graded by Morningstar as having 
"below average" risk when compared to their category peers, so 
it's more a question of the strength of portfolio returns that 
has driven Morningstar's overall risk-adjusted return ratings.

Papp Small & Mid-Cap Growth Fund (PAPPX) has had high returns, 
with below average risk, relative to other midcap growth funds 
since inception on December 15, 1998, according to Morningstar.  
It seeks growth by normally investing at least 65% of assets in 
stocks and convertibles of small-cap and mid-cap companies (the 
stocks in the S&P Smallcap 600 index and S&P Midcap 400 Index).  
Here the fund managers may invest up to 20% of stock assets in 
foreign companies traded in the United States.

According to Morningstar, PAPPX has produced a 8.6% annualized 
total return over the trailing 3-year period through July 30th, 
ranking in the top 4% of the mid-cap growth category.  The S&P 
500 index lost an average of 11% a year during the same period, 
while the average mid-cap growth fund lost around 8% a year on 
average, to put Papp's performance into perspective.  With its 
expense ratio capped at 1.25%, the fund enjoys a small expense 
advantage versus other mid-cap growth offerings.

Since it invests in the extended market and limits holdings to 
around 40 securities, Papp Small & Mid-Cap Fund will likely be 
more volatile than the average diversified equity fund, but at 
the same time will likely be less volatile than the mid-growth 
fund.  It's suitable for investors looking to increase (or add) 
exposure to small-cap and mid-cap growth stocks.  In up-market 
cycles, this area of the market tends to do particularly well.

Papp America-Pacific Rim Fund (PAPRX) is another fund we favor, 
especially if you are looking to add exposure to Asian markets 
without committing 100% of assets.  It usually invests at least 
65% of assets in large-cap U.S. companies, 50% or more of whose 
earnings or sales can be attributed to (or corporate assets are 
situated in) Pacific Rim countries including the United States.

The fund managers may also invest assets so that 15% or more of 
such U.S. companies' earnings or sales can be attributed to, or 
assets are situated in, Pacific Rim countries outside the U.S.  
The fund may invest up to 30% of assets in the common stock of 
foreign-domiciled companies traded in the form of ADRs (American 
Depository Receipts).  Like other Papp mutual funds, this fund 
maintains a growth (GARP) style bias, which has produced below 
average volatility in comparison to its pure growth fund peers.

According to Morningstar, PAPRX has an average 5-year return of 
0.7% as of July 30, 2002, ranking it in the top quartile of the 
large-cap growth category.  Considering that the average large-
growth fund lost an average of 1.9% a year over the same 5-year 
period, Papp America-Pacific Fund outperformed its large-growth 
peers by a wide margin using Morningstar's numbers.  During the 
same period, the S&P 500 large-cap index rose by 0.4% a year on 

Because the bulk of fund investments are U.S. companies, PAPRX 
doesn't offer much diversification to U.S. investors, but those 
wanting to dip their toes in Pacific Rim waters have a suitable 
choice here.  


Papp America-Abroad Fund (PAAFX) is similar to the Papp America-
Pacific Fund in that they invest in multinational U.S. companies 
which derive portions of their earnings from foreign operations.  
This strategy allows investors to participate in foreign markets 
without having direct currency exposures (investments are traded 
in U.S. markets and denominated in U.S. currency).

Since the Papp Mutual Funds have very low turnover (10% or less), 
fund returns may be more volatile than other equity mutual funds.  
On the other hand, Papp does a good job of tempering some of the 
risk associated with growth investing by investing only in stock 
securities at an average price.  This GARP-like approach doesn't 
allow the fund managers to pay up too much for earnings growth.  
The result is below average risk growth portfolios, which have 
produced competitive total returns for shareholders.


Where Does The Buck Stop?
by Mark Phillips

Today's topic may seem a bit arcane to many of you, as it doesn't
deal with any specific trading strategy.  It is the outgrowth of
a discussion I had with a reader a couple weeks ago, where he was
basically asking who was on the other side of a given options
transaction.  That may seem like a really simplistic question to
you, just as it did to me, but I think the process of discovery I
went through is worth understanding for any serious options

The genesis of my reader's question (we'll call him Phil) had to
do with LEAPS (particularly LEAP Puts) on the major indices.  I
mistakenly assumed that he just wanted to know who was on the
other side of the trade to have some sort of assurance that if
he bought an index LEAP Put and rode it down to significant
gains, that he would be able to harvest those gains.  In other
words, how do we know that a market will continue to be available
for us to sell into in the future?  Well, let's just say I had
it partially correct.

I believe what got Phil started down this path was that he
actually took the time to read the myriad disclaimers in the
OCC booklet that we all got when we opened an options trading
account.  Granted there is a lot of legalese in those booklets,
but there are a lot of statements in that booklet about the
potential for a market to become (at least temporarily)
unavailable.  We all saw those effects last September, but I
digress.  Rather than rehashing my conversation with Phil, I
thought it would be instructive to take you through the process
of discovery, blow by blow.  Below you'll find my email
discussion with Phil, as it developed, with a few editorial
comments thrown in for clarity.

With your giving so much advice on LEAPS, you have never
explained who are writing LEAPS options?  It seems an especially
interesting question in the case of index options.  For example,
many recommend LEAPS puts/calls on market indexes, but no one
ever says who is the counterparty or what is its investment
strategy?  If I were to buy a LEAPS put on QQQ or OEX, I would
like to know who is (in theory, i.e., not the name, just the
status, etc. of the entity) writing the put I would be buying.

If you understand the way options can be written, you understand
how LEAPS can be written and who can write them.  It may be an
institution, market maker or another individual trader.  As to
the reason why they would be willing to write the option, the
answer varies from pure speculation to a hedge of an existing

While the knowledge about the intentions of the party on the
other end of the transaction may be interesting, that knowledge
is not available, and even if it was, I don't believe it would
have a material impact on our trading decisions.

It is the same with most transactions in the equity and
derivative markets.  For instance, when you see a surge of
buying in the S&P futures, you don't know if it is the opening
of a new long position, closing a short position, or part of a
hedged position.

As you are about to find out, I completely underestimated the
depth of Phil's understanding of these basics, but fortunately
he took the time to steer me back on course.

Now, I understand the role of the OCC, as to trading of options.
However, there is still the matter of the option contract being
traded.  If it is unknowable just who, or what entity, is writing
LEAPS puts, there should still be some trade organization or
agency, like the OCC, determining the qualifications or status of
the writer of LEAPS options?  With mendacity running rampant in
the world, as your newsletter loudly decries, would not the bona
fides of the option writer have a material impact on your trading

Maybe, a simpler case would bring this out:  what happens if the
writer of any naked put option cannot buy the underlying asset
when it is put at the end of the option term?  Surely, a broker
would not stand behind it.  If the answer is a law suit, then
should not the prospects for default by a large option writer,
especially of index options, scare the bejesus out of you?

I could imagine some industry standard practice such as the
requirement for an irrevocable letter of credit from a large
money center bank for all options the OCC handles.  Might the
answer lie in that area?

As you can see, Phil is making a very good point.  But I've
never been the brightest bulb in the chandelier, so it took me
a bit longer to really catch on.  By the way, for those of you
that are still wondering what OCC stands for, it is The Options
Clearing Corporation.  But more on that in a bit.  Back to our

Here is my rudimentary explanation of how it works.  I don't
know if you have ever written naked options, but from my
experience, people like you and I can't do it without
substantial cash in our account to cover the initial margin.
That is the broker's initial insurance.  If the position goes
against us to too great a degree (and we're too stupid to close
the position) we get a margin call, where we have the option
to liquidate the position or add cash to the account to keep
the position open.

It has always been my understanding (although I could be wrong)
that anyone that is writing options (market-maker, fund or
institution) that they are subject to similar rules.  All of
the floor traders I have ever talked with have indicated that
they strive to never have directional risk, hedging long
positions with short positions to control their risk.  But I'm
not sure that it is a requirement so much as an intelligent way
of doing business.

I continue to believe that the answer to the question should be
the same whether we are talking about indices or individual
equities, near-term options or LEAPS.  There again, I'll allow
that I could be in error.

Astute readers will note that I still haven't really answered
Phil's underlying question.  Sure I've provided some basics as
to the mechanisms by which the risks in the option market are
controlled, but I still haven't peeled away that last layer of
the onion.  Fortunately, I managed to figure out what Phil was
REALLY after without any further prompting, as you can see from
the final installment (below) of our discussion.

Phil, I found the answer!  As it turns out, the OCC is the
responsible party for all option transactions in the U.S.  They
effectively break the link between buyer and seller at the end
of each business day and take responsibility for all the risk
in all the trades.  The OCC is the one responsible for
maintaining all the pertinent margin rules of all the involved
parties.  According to the person I spoke to, the OCC makes
sure that all positions for which it is responsible are fully
hedged at the end of each day.  WOW!  Sounds like a lot of work
to me, but they must be doing something right, because S&P has
given them a AAA credit rating.  Sounds pretty good to me!

I know I took the long way around to give you this information,
but hopefully the journey has left you all with an understanding
both of the merits of the question Phil raised, as well as a
better understanding of who manages the non-trivial risks
inherent to the options market.

By the way, if you want to do some further digging yourself,
here's the phone number (1-800-678-4667) and website


for the OCC.  A good place to start is under the "About OCC" link
at the left of the page.  Put your mouse over that link and you'll
get a menu expansion.  Then select "Financial Guarantee".  That
should at least get you started in your exploration of this
important organization.  Then just let your imagination and
curiosity take you on your own process of discovery.

Hoping this has been useful!


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by Leigh Stevens

A lot more red ink today was seen today in the sectors than green 
- surprising given the way that the S&P and the Dow popped back 
up from their lows today. Well, sectors tend to reflect 
particular investment "themes" reflected over the long haul 
versus some of the shorter-term trading swings of the broad 

Banks continued to rebound, as did Heath Care, Oils - especially 
so given the war talk about Iraq as the Senate took up the topic 
in the Foreign Relations committee - Natural Gas, Drugs and 

The sectors down on the day were off more than the rebounding 
sectors were up on a percentage basis.  Conclusion: the bear 
trend in the market may appear to moderating, with a significant 
short-covering element, but no one is completely sure where to 
place bullish bets in terms of industries.  There is however, a 
tendency to buy the oversold groups that were doing well before 
the last big market down leg - gold, being an exception. 

The Biotech sector index (BTK) and the Biotech HOLDR's are 
holding up very well, with another small gain today.  Proving the 
point that "'limit' orders 'limit' your profits"! Well, that's 
what we used to say when I was a stockbroker.  

My conservative limit order under the market in the Biotech 
HOLDR's when they started rallying again strong recently, kept me 
out of what has been a decent trading bounce in biotech.  
However, the sector index is approaching the top end of its 
uptrend channel, which may offer tough resistance again. 

So, is the Pharmaceutical index (DRG) - approaching the top end 
of its downtrend channel that is.  I'll feature these two sectors 
soon in this column, as there may be a shorting opportunity 
coming up in the HOLDR's. 

UP on Wednesday - 

DOWN (the most) on Wednesday - 




Long SMH at 27.35 
(Semiconductor HOLDR's)
Stop at 24.50

Upside potential is back up to the prior recent rally high in the 
32 area in my estimation 



Leigh Stevens
Chief Market Strategist

”If you haven’t traded options online – you haven’t really traded 
options,” claims author Larry Spears in his new compact guide 

“7 Steps to Success – Trading Options Online”.

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



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Contact Support
The Option Investor Newsletter                Wednesday 07-31-2002
Copyright 2002, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.

In Section Two:
Stop Loss Updates: BBOX, BAX
Dropped Calls: None
Dropped Puts: CBE
Play of the Day: Call - BAX 
Big Cap Covered Calls & Naked Puts: Industrial Stocks Lead The 

Updated on the site tonight:
Market Watch
Market Posture

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BBOX - put
Adjust from $37.75 down to $36.50

BAX - call
Adjust from $35.00 up to $38.00




CBE $31.14 +1.76 (+3.19 for the week)  Cooper Industries has 
rebounded from its low of $27.14 and managed to break through the 
$30 resistance line.  The stock has made the list of companies 
that California will not do business with, as it is incorporated 
offshore.  The U.S. Senate also voted on Wednesday to deny 
defense contracts to such companies, as well.  In light of the 
stock's strength under such scrutiny, and its violation of our 
stop loss, we are closing this play.

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traded options,” claims author Larry Spears in his new compact 
guide book:  

“7 Steps to Success – Trading Options Online”.  

Order today and save 25% (only $15) by clicking on PreferredTrade 
and clicking on the link to the book on its home page.



BAX – Baxter International $35.89 +1.24 (+4.14 last week)

Company Info:
Baxter engages in the worldwide development, manufacture and
distribution of a diversified line of products, systems and
services used primarily in the healthcare field.  BAX's products
are used by hospitals, clinical and medical research laboratories,
blood and blood dialysis centers, rehabilitation centers, nursing
homes, doctor's offices and by patients at home, under physician
supervision.  The company manufactures products in over 28
countries and sells them in over 100 countries.

Most Recent Write-Up:
Relative strength is still the name of the game in this market,
and it is interesting to note that a few stocks actually bottomed
and began showing bullish signs before yesterday's amazing
recovery.  Dueling analysts provided plenty of volatility in
shares of BAX last Thursday after the company reported an
earnings shortfall.  Merrill Lynch downgraded the stock and it
quickly fell to the $30 level.  But UBS went against the grain,
upgrading to Strong Buy.  That seemed to be the catalyst necessary
for a near-term bottom and by Tuesday, BAX was starting to show
some bullish divergence from the overall market by posting a gain
for the day and dragging the daily Stochastics into a bullish
reversal.  Yesterday's morning dip hardly caused a ripple in the
stock and it then proceeded to rally strongly with the remainder
of the market, gaining nearly 10% on the day.  Flexing its
relative strength muscles again on Thursday, the stock opened at
its low and closed at its high, largely ignoring the broad market
instability enroute to tacking on more than a 3.5% gain.  Based
on the intraday action, a dip and bounce from the $34 level would
make for a solid entry into the play, as would trading a breakout
over the $36 level.  The first major obstacle is $38.75, the
bottom of the gap from last Thursday.  Should BAX reach that level
in the near-term, it would be advisable to harvest some near-term
gains, as a brief pullback will likely follow.  We are initially
setting our stop at $32, as a close below that level would
indicate that the fledgling rally had failed.

Why this is our Play of the Day:
Baxter defied the down and up jitters of today's overall market 
and has been on a slow steady climb all day.    Baxter has 
reached our initial target, and conservative traders may want to 
take profits here.  However, it broke the $40 resistance level, 
was turned back, and found legs again as it continues its series 
of higher highs and higher lows.  A trade of $40.50 looks like a 
point for additional long entries, as the stock now looks capable 
of achieving its 50-dma of  $44.63 on a breakout above $40. For 
new entries at the $40.50 level, we will use a stop loss of 
$39.00 to balance the risk reward at this higher level.  As we 
look for a new breakout above our target, we are also raising our 
stop on the initial play to $38.00, below today's low of $38.05.  

BUY CALL AUG-35*BAX-HG OI=5901 at $5.60 SL=3.00
BUY CALL AUG-40 BAX-HH OI=2636 at $2.10 SL=1.20
BUY CALL SEP-35 BAX-IG OI= 877 at $6.40 SL=3.20
BUY CALL SEP-40 BAX-IH OI= 481 at $3.30 SL=1.80

Average Daily Volume = 3.76 mln


Industrial Stocks Lead The Recovery!
By Ray Cummins

Blue-chip shares rallied late in the session today despite weaker
than expected GDP data and discouraging numbers from the Chicago
Purchasing Managers Index.

The Dow finished 56 points higher at 8,736 after an earlier slump
in response to gloomy evidence about the U.S. economic recovery.
Topping the list of bullish issues were shares of Alcoa (NYSE:AA),
American Express (NYSE:AXP), Johnson & Johnson (NYSE:JNJ), SBC
Communications (NYSE:SBC) and Coca-Cola (NYSE:KO).  A rebound in
technology stocks was limited due to losses in the chip sector
and Internet issues struggled as AOL Time Warner (NYSE:AOL) slid
lower on news of a government probe into its accounting practices.
The NASDAQ Composite closed 15 points lower at 1,328 after a 36
point deficit earlier in the day.  The broader Standard & Poor's
500-stock Index finished up 8 points at 911 on strength in drug,
oil, banking and consumer shares while brokerage, gold and retail
issues continued to slump.  Winners edged past losers 16 to 15 on
the New York Stock Exchange but declining stocks led advancers 4
to 3 on the NASDAQ.  Trading was active with 1.93 billion shares
exchanged on the Big Board and 1.62 billion shares trading hands
in the technology market.  Treasury issues reacted positively to
the economic news but bond investors also had to contend with a
large refunding package (the government will auction $22 billion
in five-year notes and $18 billion in 10-year notes next week).
The 10-year Treasury note jumped 1 point to yield 4.46% while the
30-year government bond gained 1 10/32 to yield 5.30%.


Summary of Current Open Positions

(As of 07-30-02)

Naked Puts

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

CBK      AUG    35   34.30  35.00   $0.70    5.63% ***
EBAY     AUG    45   44.15  58.30   $0.85    5.54%
LEN      AUG    50   49.05  52.51   $0.95    5.20% ***
EBAY     AUG    50   48.95  58.30   $1.05    7.56%
FRX      AUG    60   59.20  75.39   $0.80    5.03%
IDPH     AUG    30   29.40  44.00   $0.60    6.83%
QLGC     AUG    30   29.20  41.95   $0.80    8.67%
CTSH     AUG    45   44.00  59.64   $1.00   10.61%
EBAY     AUG    45   44.20  58.30   $0.80    8.71%
ERTS     AUG    45   43.90  61.56   $1.10   11.60%
IDPH     AUG    30   29.35  44.00   $0.65    9.94%
QLGC     AUG    25   24.65  41.95   $0.35    5.38%
SLAB     AUG    23   21.80  28.45   $0.70   14.40%
UNH      AUG    75   74.15  85.35   $0.85    4.97%
WLP      AUG    65   63.95  70.00   $1.05    6.74%

Although our positions in Christopher & Banks (NYSE:CBK)
and Lennar (NYSE:LEN) are positive, both plays have been
closed to limit losses and/or protect profits.

Naked Calls

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

ABC      AUG    75    75.85  69.55   $0.85   4.99%
BRL      AUG    65    65.75  59.45   $0.75   5.51%
DGX      AUG    85    86.10  56.83   $1.10   5.35%
BZH      AUG    75    75.80  65.44   $0.80   6.20%
EXPE     AUG    70    71.00  50.01   $1.00   7.69%
SPW      AUG    115  116.45 106.42   $1.45   5.95% ***
GD       AUG    95    93.75  82.85   $1.25   6.34%
LMT      AUG    65    66.05  63.17   $1.05   8.05% ***
NOC      AUG    120  121.10 107.42   $1.10   5.02%

Lockheed Martin (NYSE:LMT) and SPX Corp (NYSE:SPW) are on
the watch-list for potential (bullish) trend reversals.
A move through the sold strike in either position would
indicate an early exit or adjustment in their respective

Put-Credit Spreads

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

TKTX    40.15  38.90  AUG   30  35  0.75   34.25  $0.75   Open
TRMS    43.25  47.30  AUG   30  35  0.55   34.45  $0.55   Open

Transkaryotic Therapies (NASDAQ:TKTX) has recovered from recent
selling pressure but the issue should be monitored closely for
future downside activity.

Call-Credit Spreads

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

AGN     58.30  58.55  AUG   70  65  0.60   65.60  $0.60  Open
CI      89.83  85.88  AUG  105 100  0.55  100.55  $0.55  Open
COF     51.41  29.93  AUG   65  60  0.65   60.65  $0.65  Open
UN      60.97  53.50  AUG   70  65  0.80   65.80  $0.80  Open
ABC     64.50  69.55  AUG   80  75  0.50   75.50  $0.50  Open
BRL     56.45  59.45  AUG   70  65  0.65   65.65  $0.65  Open
SLM     86.05  90.01  AUG  100  95  0.60   95.60  $0.60  Open
BA      41.19  41.65  AUG   48  45  0.35   45.35  $0.35  Open
EASI    42.90  48.45  AUG   55  50  0.45   50.45  $0.45  Open ***

Engineered Support Systems (NASDAQ:EASI) has rebounded to a
recent trading range near $46-50 and any close above overhead
supply near $51 would signal a potential exit in the position.

Credit Strangles:

Stock  Pick     Last    Position   Credit   G/L   Yield  Status

ERTS   63.00    61.60  AUG70C/50P   2.75    2.75   18%    Open

Questions & comments on spreads/combos to Contact Support


We received some positive comments on last week's selection of
premium-selling candidates and with the market showing signs of
resilience, it may be a good time to speculate on a few bullish
issues.  All of these plays are based on the current price or
trading range of the underlying issue and its recent technical
history or trend.  The probability of profit in these plays may
also be higher than other positions in the same strategy, based
on small disparities in option pricing.  However, current news
and market sentiment will have an effect on these issues so
review each play individually and make your own decision about
its outcome.

CEPH - Cephalon  $48.00  *** On The Rebound! ***

Cephalon (NASDAQ:CEPH) is a worldwide biopharmaceutical company
dedicated to the discovery, development and marketing of products
to treat sleep disorders, neurological disorders, cancer and pain.
In addition to conducting a very active research and development
program, the company markets three products in the United States
and a number of products in various countries throughout Europe.
Cephalon's United States products are comprised of Provigil, for
the treatment of excessive daytime sleepiness associated with
narcolepsy, Actiq for cancer pain management, and Gabitril, for
the treatment of partial seizures associated with epilepsy.  The
company's quarterly earnings are due August 5.

CEPH - Cephalon  $48.00

PLAY (sell naked put):

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

SELL PUT  AUG 35   CQE TG     941     0.30    34.70      5.8% ***
SELL PUT  AUG 40   CQE TH   2,219     0.65    39.35     10.4%
SELL PUT  AUG 45   CQE TI   2,842     1.70    43.30     18.1%

FRX - Forest Laboratories  $77.47  *** Moving On Up! ***

Forest Laboratories (NYSE:FRX) develops, manufactures and sells
both branded and generic forms of ethical drug products that
require a physician's prescription, as well as non-prescription
pharmaceutical products sold over-the-counter.  The company's
most important U.S. products consist of branded ethical drug
specialties marketed directly, or "detailed," to physicians by
its Forest Pharmaceuticals, Therapeutics and Specialty sales
forces.  The company's many products include those developed by
Forest and those acquired from other pharmaceutical companies
and integrated into Forest's marketing and distribution systems.
Principal products include Celexa, an SSRI for the treatment of
depression; the respiratory products Aerobid and Aerochamber;
Tiazac, a once-daily diltiazem for the treatment of hypertension
and angina; and Infasurf, a lung surfactant for the treatment and
prevention of respiratory distress syndrome in premature infants.

FRX - Forest Laboratories  $77.47

PLAY (sell naked put):

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

SELL PUT  AUG 70   FRX TN   3,362     0.65    69.35      5.1% ***
SELL PUT  AUG 75   FRX TO   1,581     1.55    73.45      9.8%
SELL PUT  SEP 65   FRX UM      38     1.25    63.75      3.8% "TS"
SELL PUT  SEP 70   FRX UN      85     1.90    68.10      4.5%

IDPH - IDEC Pharmaceuticals  $44.59  *** Recovery In Progress! ***

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  $44.59

PLAY (sell naked put):

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

SELL PUT  AUG 35   IDK TG   1,865     0.30    34.70      6.2% ***
SELL PUT  AUG 40   IDK TH   2,369     0.75    39.25     10.2%
SELL PUT  SEP 35   IDK UG     238     1.10    33.90      6.5%

IVGN - Invitrogen  $34.85  *** A Profitable Quarter! ***

Invitrogen (NASDAQ:IVGN) develops, manufactures and markets more
than 10,000 products for the life sciences markets.  Invitrogen's
products are principally research tools in reagent and kit form,
biochemicals, sera, media, and other products and services, which
the company sells to corporate, academic and government entities.
The company focuses its core business on two principal segments,
Molecular Biology Products and Cell Culture Products.

IVGN - Invitrogen  $34.85

PLAY (sell naked put):

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

SELL PUT  AUG 30   IUV TF   1,336     0.30    29.70      6.1% ***
SELL PUT  AUG 32.5 IUV TZ     129     0.75    31.75     11.6%
SELL PUT  SEP 30   IUV UF      60     1.15    28.85      6.7%

PLMD - PolyMedica  $32.72  *** Bullish Revenue Outlook! ***

PolyMedica (NASDAQ:PLMD) is a provider of direct-to-user medical
products and services, conducting business through its Chronic
Care, Professional Products and Consumer Healthcare segments.
The company sells diabetes supplies and related products, and
provides services to Medicare-eligible seniors suffering from
diabetes and related chronic diseases through its Chronic Care
segment.  Through its Professional Products segment, it provides
direct-to-consumer prescription respiratory supplies and services
to Medicare-eligible seniors suffering from chronic obstructive
pulmonary disease.  It also sells, manufactures and distributes
a broad line of prescription urological and suppository products.
PolyMedica sells prescription oral medications not covered by
Medicare to its existing customers through its Professional
Products segment.

PLMD - PolyMedica  $32.72

PLAY (sell naked put):

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

SELL PUT  AUG 25   PM TE      322     0.20    24.80      5.6% ***
SELL PUT  AUG 30   PM TF       66     0.95    29.05     16.0%
SELL PUT  SEP 22.5 PM UX    2,850     0.65    21.85      5.4% ***
SELL PUT  SEP 25   PM UE      878     1.00    24.00      7.9%

TRMS - Trimeris  $46.73  *** Aids Drug Has Potential! ***

Trimeris (NASDAQ:TRMS) is engaged in the discovery and development
of fusion inhibitors, a new class of antiviral drug treatments.
Fusion inhibitors impair viral fusion, a complex process by which
viruses attach to and penetrate host cells.  If a virus cannot
enter a host cell, the virus cannot replicate.  By inhibiting the
fusion process of particular types of viruses, the company's drug
candidates under development offer a novel mechanism of action
with the potential to treat a variety of medically important viral
diseases.  Trimeris is a company in the development stages and has
invested a significant portion of its time and financial resources
in researching T-20, its lead drug candidate, thus is dependent on
that product for its overall success.

TRMS - Trimeris  $46.73

PLAY (sell naked put):

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

SELL PUT  AUG 40   RQM TH     157     0.55    39.45      8.4% ***
SELL PUT  SEP 35   RQM UG      59     1.00    34.00      5.8%
SELL PUT  SEP 40   RQM UH      24     1.65    38.35      7.2%

UNH - UnitedHealth  $87.66  *** Safe-Haven Sector! ***

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  $87.66

PLAY (sell naked put):

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

SELL PUT  AUG 75   UHB TO     452     0.55    74.45      4.6% ***
SELL PUT  AUG 80   UHB TP   2,429     1.10    78.90      7.3%
SELL PUT  SEP 70   UHB UN   1,962     1.05    68.95      3.4% "TS"
SELL PUT  SEP 75   UHB UO   3,411     1.75    73.25      4.3%

WLP - WellPoint Health Networks  $71.50  *** Entry Point! ***

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  $71.50

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     380     0.60    59.40      6.4% ***
SELL PUT  AUG 65   WLP TM   2,109     1.35    63.65     10.9%
SELL PUT  SEP 55   WLP UK      78     0.95    54.05      3.7% "TS"
SELL PUT  SEP 60   WLP UL     242     1.80    58.20      5.7%


BULLISH PLAYS - Credit Spreads

CTSH - Cognizant Technology  $58.52  *** Bullish Trend Intact! ***

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.

Despite today's small consolidation, the share price of Cognizant
Technology Solutions is firmly entrenched in a solid up-trend and
the activity should continue in the coming sessions.  The rally
began when CTSH announced in early July that strong demand for
its software services is expected to drive earnings and revenue
higher than forecast in the third quarter and for all of 2002.
Cognizant chairman and chief executive recently told investors
to expect revenue around $57 million, or about 7% higher than
forecasts for the current quarter of about $53.1 million.  The
executive also said the pipeline of contracts was prompting the
company to raise its full-year revenue guidance to $218 million
and its earnings outlook to $1.59 per share, considerably higher
than the previous existing consensus forecasts for $203 million
and $1.51 per share.  Analysts are optimistic about the future
outlook for Cognizant and based on the recent stock activity,
investors are as well.  Traders can speculate conservatively on
the near-term performance of CTSH with this position.

CTSH - Cognizant Technology  $58.52

PLAY (conservative - bullish/credit spread):

BUY  PUT  AUG-45  UPU-TI  OI=116  A=$0.55
SELL PUT  AUG-50  UPU-TJ  OI=410  B=$0.95


BULLISH PLAYS - Synthetic Positions

Stocks in the finance sector rallied today as analysts touted the
bullish outlook for the industry amid the lowest interest rates in
40 years.  Obviously, low borrowing costs generate loans, bringing
companies fees but the discounted rate environment has also made it
cheaper for financial companies themselves to acquire new funding,
thus improving their profit margins.  Here are two popular issues
in the banking and credit services group that have benefited from
recent buying pressure.  Traders who believe the bullish activity
will continue can speculate on that outcome with these positions.

AXP - American Express  $35.26  *** Analyst Upgrade! ***

American Express (NYSE:AXP) is engaged primarily in the business
of providing travel-related services, financial advisory services
and international banking services throughout the world.  American
Express provides charge and credit cards, travelers checks, travel
services, financial planning, investment products, insurance and
international banking.  American Express Travel Related Services
Company provides a global card network, issuing and processing
services, the American Express Card, the Optima Card, a number of
co-brand Cards, other consumer and corporate lending and banking
products, a network of automated teller machines, the American
Express Travelers Cheque, stored value products, business expense
management products and services, corporate and consumer travel
products and services, tax, accounting and business consulting
services, magazine publishing, merchant transaction processing
and point of sale and back office products and services.

AXP - American Express  $35.26

PLAY (speculative - bullish/synthetic position):

BUY  CALL  SEP-40  AXP-IH  OI=32   A=$0.50
SELL PUT   SEP-30  AXP-UF  OI=605  B=$0.50

Note:  Using options, the position is similar to being long the
stock.  The initial collateral requirement for the sold (short)
put is approximately $935 per contract.

CCR - Countrywide Credit  $50.81  *** Momentum Play! ***

Countrywide Credit Industries (NYSE:CCR) is a holding company that
originates, purchases, sells and services mortgage loans through
its principal subsidiary, Countrywide Home Loans.  The company's
mortgage loans are principally prime credit first-lien mortgage
loans secured by single family residences (prime credit first
mortgages).  Countrywide Credit also offers home equity loans and
sub-prime credit loans.  Countrywide, through its other wholly
owned subsidiaries, offers products and services that are largely
complementary to its mortgage banking business, including primary
underwriting of lender-placed mortgage insurance, insurance policy
brokerage, mortgage-backed securities brokerage and underwriting,
brokerage of bulk servicing transactions, loan processing and also
servicing in foreign countries, and retail banking.  The company
conducts its business through four segments: Insurance Segment,
Capital Markets Segment, Global Segment and Banking Segment.

CCR - Countrywide Credit  $50.81

PLAY (speculative - bullish/synthetic position):

BUY  CALL  SEP-55  CCR-IK  OI=100  A=$1.25
SELL PUT   SEP-45  CCR-UI  OI=134  B=$1.20

Note:  Using options, the position is similar to being long the
stock.  The collateral requirement for the sold (short) put is
approximately $1,575 per contract.


BEARISH PLAYS - Naked Calls & Combinations

AET - Aetna  $43.68  *** Earnings Play! ***

Aetna is a health benefits company whose business operations are
conducted in the Health Care, Group Insurance and Large Case
Pensions segments.  The Health Care segment consists of health
and dental benefit products including primary health maintenance
organization, point-of-service, preferred provider organization
and indemnity products, and group insurance products including
life, disability and long-term care insurance products.  The Group
Life Insurance segment consists mainly of renewable term coverage,
the amounts of which may be fixed or linked to individual employee
wage levels.  Large Case Pensions manages a variety of retirement
products, including pension and annuity products, that are offered
to qualified defined benefit and contribution plans.

Shares of health insurers moved higher today in conjunction with
optimistic results from some popular companies in the industry.
Humana, one of the biggest U.S. managed care companies, posted a
19% rise in second-quarter earnings earlier this week, boosted by
strong revenue from higher insurance premiums and increased HMO
membership.  Many of the major health maintenance organizations
have achieved double-digit profit growth for the current quarter
and traders are speculating on the results of Aetna's upcoming
report.  The increased interest has generated robust premiums in
the "out-of-the-money" call options and traders who believe the
bullish outlook is already "priced-in" to Aetna's share value can
profit from that limited upside activity in the issue with this

AET - Aetna  $43.68

PLAY (conservative - bearish/credit spread):

BUY  CALL  AUG-55  AET-HK  OI=447   A=$0.15
SELL CALL  AUG-50  AET-HJ  OI=1613  B=$0.60

JCI - Johnson Controls  $81.02  *** Technicals Only! ***

Johnson Controls (NYSE:JCI) is engaged in automotive systems and
facility management and control.  In the automotive market, the
company is a major supplier of seating and interior systems, and
batteries.  For non-residential facilities, Johnson Controls also
provides building control systems and services, energy management
and integrated facility management.  Johnson Controls conducts its
business in two operating segments: Controls Group and Automotive
Systems Group.  The Controls Group is a global supplier of control
systems, services and unique integrated facility management to the
non-residential buildings market.  The Automotive Systems Group
makes automotive interior systems for OEMs (original equipment
manufacturers) and automotive batteries for the replacement and
original equipment markets.

This position was discovered with one of our primary scan/sort
techniques; identifying primarily bearish trends on issues with
speculative (call) options activity.  In this case, the premiums
for the out-of-the-money call options are slightly inflated and
the potential for a successful (technical) recovery is affected
by the resistance at the sold strike price; a perfect condition
for a bearish credit spread.

JCI - Johnson Controls  $81.02

PLAY (conservative - bearish/credit spread):

BUY  CALL  AUG-90  JCI-HR  OI=19  A=$0.20
SELL CALL  AUG-85  JCI-HQ  OI=59  B=$0.65



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