Option Investor

Daily Newsletter, Sunday, 08/04/2002

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The Option Investor Newsletter                   Sunday 08-04-2002
Copyright 2002, All rights reserved.                        1 of 5
Redistribution in any form strictly prohibited.

Entire newsletter best viewed in COURIER 10 font for alignment

In Section One:

Wrap: It’s the Economy Stupid!  
Index Trader Wrap: DOUBLE DIPPING.
Editor’s Plays: Right on Schedule.
Market Sentiment: And Finally the Dam Broke.
Ask the Analyst: What Do the Charts Say?
Coming Events: Earnings, Splits and Economic Reports

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
        WE 8-02          WE 7-26          WE 7-19          WE 7-12 
DOW     8313.13 + 48.74  8264.39 +245.13  8019.26 -665.27  -694.97 
Nasdaq  1247.92 - 14.20  1262.12 - 57.03  1319.15 - 54.35  - 74.86 
S&P-100  434.05 +  7.12   426.93 +  3.83   423.10 - 35.81  - 33.75 
S&P-500  864.24 + 11.40   852.84 +  5.09   847.75 - 73.64  - 67.64 
W5000   8186.56 + 94.93  8091.63 +  8.63  8083.00 -628.50  -601.90 
RUT      376.45 -  5.81   382.26 -  3.94   386.20 - 27.08  - 27.64 
TRAN    2202.03 - 52.76  2254.79 - 77.39  2332.18 -147.96  -172.50 
VIX       45.39 +  4.95    40.44 -  3.01    43.45 +  5.12  +  8.12 
VXN       65.44 -  3.58    69.02 +  7.85    61.17 -  4.83  +  9.72 
TRIN       1.47             1.21             1.44             0.89 
Put/Call   0.93             0.70             1.14             0.64 

It’s the Economy Stupid!  
by Jim Brown

The Dow climbed back above 8300 at the close and managed to 
retain some of its gains for the week. The strength came in 
the techs at the close with the QQQ trading huge blocks as
bulls/bears battled over direction. The Dow may have finished
positive for the week but not without a black eye and bloody
nose. The trend changed as blow after economic blow rained 
down on the markets. 

Chart of the Dow

Chart of the Nasdaq

Two dips please and I am not talking chocolate. That is the 
growing consensus of opinion after the barrage of bad economics
reports this week. The Jobs Report was just another piece of
the puzzle and it appears that the picture is turning ugly.
The economy only created +6,000 jobs in July and that was 
far below estimates of 68,000-75,000 depending on who you
asked. This was just a squeak above losing jobs and as some
point out only a "revision" away from recessionary. Critical
indications of weakness included a drop in the manufacturing
work week, overtime hours and the average workweek. Without 
growth in these areas employers will not need to hire additional
workers and a continued drop will prompt more layoffs.

The unemployment rate remained at 5.9% as more unemployed 
workers dropped off the unemployment rolls after exhausting
benefits while others simply got tired of looking and stayed
home or retired early. The aggregate weekly hours, which is a 
proxy for GDP growth, declined by -0.6% with the largest decline
since October. Construction lost the most jobs with a -30,000
cut as construction spending fell as we saw earlier in the week.
Employers kept their checkbooks shut tight as worries about
slower orders kept a lid on hiring. With hours worked and 
take home wages dropping the consumer is not likely going
to be a big spender over the next quarter.

The Factory Orders dropped in June by -2.4% which was the 
worst drop in the last seven months. Last months numbers were
also revised down. With the economy apparently hitting a wall
in July the trend here is very troubling. With the consumer
going into hibernation it will require more business investment
to jump start new orders and without sales it will not happen.

Al this dire economic news has led to multiple projections of
a dramatic Fed move in our future. Goldman cut their estimates
of 2002 GDP to 2.0% from 2.5% and lowered 2003 as well. They
projected a Fed rate cut of another 75 basis points between
now and year end. This would be unprecedented in recent history
and would put the Fed funds rate at 1.00%. This would prompt
an entirely new round of refinancing and new home loans and 
make saving practically worthless. With money market accounts
earning interest below the inflation rate consumers would be
prodded to spend or invest the money instead of let is sit. 
The hope would be to stimulate another wave of consumers
withdrawing equity from real estate and seeing that money 
begin to circulate instead of being tied up in property. 
There is a real move in progress to drastically cut rates 
and increase government spending to avoid a Japanese style
deflation spiral.

In a report that was glossed over in the media, semiconductor
billings dropped for the first time in three months. The drop
was only -0.2% but in a time when orders are supposed to be
increasing the drop was troubling. Manufacturers have been
plagued with order cancellations and delays as a lack of
economic recovery delays plans to build inventory. Since
computers account for about half of all chips made the 
slowing PC sales will continue to impact the actual delivery
of current orders. You can order anything you want as long
as you don't have to take delivery until you are ready. This
puts a squeeze on manufacturers who want to use the slack 
time to build orders but not if those orders may be delayed
or cancelled indefinitely. The SOX.X broke to a new low under
300 intraday. 

Adding to the cautious comments from Disney with their earnings
on Thursday was the Four Seasons hotel chain. They said they
were seeing no pickup in U.S. business travel and no pickup
in global lodging. Hilton, Marriott and Starwood all posted 
lower lodging rates this week as well. There was some pre-Sept
9/11 anniversary worries. It appears nobody wants to be traveling
anywhere around the anniversary of the attack. Whether the risk
is real or imagined it could seriously hamper the fragile 
recovery if consumers and business travelers are already
blacking out their calendars for that period. The already
troubled travel/transportation industry took another hit when
UAL disclosed they had contracted a bankruptcy attorney and
would be in serious financial trouble if they could not get
a Federal loan guarantee for nearly $2 billion.

Stock news on Friday was basically a rehash of the weeks 
highlights. AOL disclosed on Friday that the SEC had broadened
their probe of their accounting problems and were now looking
at past dealings and acquisitions. AOL closed at $10.40 with
a loss of -.71. Cisco traded down another 50 cents near 11.50
after more disclosures were made about the future resignation
of the CFO. In an effort to blunt the selling the company said
the CEO/CFO were planning to certify the financials but not
with the current quarter. They would certify beginning in October.
This brought increased selling as investors feared they would
be flushing huge problems through this quarter to clean house.
They also expect CSCO to report weak sales and flat guidance
and possibly miss earnings. There is a fear that they will be
pushed into expensing stock options along with the building
tide to do so. Cisco currently has a PE of 23 based on 2003
estimated earnings but throwing options into the mix would 
push that forward PE to a whopping 39. Cisco announces earnings
on Tuesday after the close and will be a drag on the tech 
sector until they do. 

Somebody is not very confident in our rally potential. They
accumulated a 50,000 contract position in the Oct-80 DJX puts
at around $5 today. This is a huge $25 million bet that the 
Dow will be below 8000 by expiration in October. This bet
could just be that it will drop below 8000 sometime soon or
at anytime between now and October 18th. I could not find
any offsetting strikes so it does not appear to be a spread. 
Those contracts traded as high as $7 as recently as last week
when the Dow dropped to 7532. A drop to retest those lows 
would be very profitable and with the negative sentiment
from this week the odds are good we will see numbers lower
than that before October. There is also the possibility this
is a portfolio protection play where an institution/fund with
hundreds of millions in market exposure is hedging their long
bets. Probably Jeff Bailey expanding his trading horizons! (grin)

The buyer above is not the only one who expects the market to
drop. Morgan Stanley went on record as saying the economy was
"on the brink" of a double dip. This puts current high valuations
for stocks into question and suggests further market dips over
the next quarter. Lipper said the value of U.S, equity funds
dropped -9.3% in July and investor unrest was growing. AMG
Data and TrimTabs.com were strangely silent on Friday and 
neither released any numbers for the week. Both indicated that
the month of July accounted for something in the -$50 billion
net outflow category. This was the worst monthly outflow ever.
With the very negative economic news the odds of record 
withdrawals next week are good. 

There was a strong move to close the Dow over last Friday's
close. A positive result for the week would be less damaging
to investor sentiment and could convince some that the rebound
was still underway. They fought it hard with huge block orders
being triggered when the Dow dipped below the 8264 level. They
were successful and while the Dow finished -193 for the day it
was up +48 for the week. This fact will be highlighted in all
the weekly news recaps for weekend consumption. Will it be
successful in slowing the markets fall? We will not know until
this time next week. The big money could be funds trying to
stem withdrawals or defend portfolios already in danger of
further losses. The Nasdaq was the weakest member of the group
and despite block trades in million share lots in the QQQ they
could not push it back over 1250 and it closed the week with a
-14 point loss. 

The drop on Friday was on much lighter volume than the gains
earlier in the week. The NYSE only traded 1.5 billion shares
and the Nasdaq 1.4 billion. While this is small consolation to
those that lost money on Friday it does mean there was no real
conviction in the drop. That conviction could increase next week.
The VIX has rebounded from its low of 33.35 on Monday to a high
of 48.97 on Friday before falling back to close at 45.39. Many 
of the past VIX extremes were followed by repeats over the next
7-12 days. If this is going to repeat then next week could see
another reading in the 50+ range. This spike could be matched 
with another drop in the major averages back to the Dow 7500
range again. I am not predicting it just suggesting the road
map has been laid out in front of us with the various economic

We entered the week thinking that the recession had been very 
weak and lasting only one quarter and the recovery was well 
underway. It had been prompted in part by the 9/11 attacks. 
We exited the week knowing that the recession had lasted three 
quarters and was well under way before the attacks. We learned
that the economy hit a wall in July and the current 3Q was 
not looking any better and could be the start of the feared
double dip. Employment down, consumer spending down, business
spending at a standstill, travel down and expectations down.
This turn of events gave bullish investors a case of indigestion
but they continued to try and buy the dips. This is exactly
what prompted many analysts to predict lower lows ahead due
to the lack of capitulation that many had thought was at hand.
Buying in the face of bad news has long been seen as a prudent
investor strategy. Buy stocks when nobody else wants them. This
is not to be confused with the strategy of buying every bear
market rally until you are broke. 

The +1200 point bounce between last week's lows and this week's
highs was too good to be true. It was begging for some profit
taking regardless of the economic news. The -430 point loss
over the last two days equates to about one third of that bounce. 
The vigorous buying at Friday's close was due to shorts covering
and bulls anticipating a rebound after a 30% retracement. I
am amazed that anyone could buy anything except to cover on 
a Friday after the news week we had. Especially with the odds
of several financial certifications blowing up over the next
two weeks. Still, that is what makes a market. Bulls see the 
glass half full of a wine aged to perfection and bears see
the same glass half empty of sour grape juice. 

Next week could see a positive follow though on Monday as bulls
try to press their bets. They will be pinning their hopes on
the non-manufacturing ISM report on Monday in hopes that it
will show something entirely different than this weeks report.
With Cisco earnings on Tuesday any positive news on Monday will
be met with caution the next day. Wednesday has Wholesale 
Inventories, Thursday PPI and Friday Productivity. I would 
not be surprised to see that higher VIX number next week as
economic worries hit home and the consumer hibernation process
spreads to investments until the outlook is better. Even in
good years August and September are not kind to investors and
this year is not shaping up any better. The Dow just posted its
first consecutive four month loss in 20 years. The Nasdaq has
lost ground for 6 of the last 7 months. The yield on the two
year note fell below 2% on Friday for the first time ever. 
Are we having fun yet?

The "Guess the Dow" contest was won by Tom Million with a guess
of 8311.10. He wins a high end dual monitor video card to aid
in his trading. The average of all guesses, which ranged from 
9999 to 6750, was 8291. This was only 20 points away from where
the Dow closed! We could be on to something here! Maybe we can
predict the Dow and trade accordingly based on the consensus 
of several thousand readers. (joke) Let's see how this week
plays out. The contest has been reactivated and you can now 
enter your guess for the Dow close on Friday August 9th. We
we will give you a dual monitor video card if you are the winner.
Click here: 
Enter Very Passively, Exit Very Aggressively!

Jim Brown

Was this commentary helpful to you?


by Leigh Stevens


Focus in the last two days of last week, from employment data 
(only 6000 new jobs!), factory orders, GDP, purchasing managers, 
etc. now has the market abuzz with the idea the market - not the 
economists - has been "showing" us all along that the economy 
will be weaker in the second half. The market focuses on earnings 
 that is the lens it uses into the economy, and it saw noting to 
get bullish about.  

Art Cashin said it best on Friday: first investors found that 
they couldn't trust the CEO's and the company numbers, then it 
found that it couldn't trust the auditors and finally, last week 
it found that it couldn't trust the government numbers either! 

GDP for last year had a big downward revision - what's to say 
that that the anemic Q2 GDP is not going to end up as a negative 
number?!! Certainly, almost no big company is saying that they 
are getting new orders such that would it cause them to hire even 
one more new warm body. 

On Friday, talk from Goldman, was that the Fed may (be forced to) 
cut interest rates later this year to boost economic growth. 
Meanwhile the new "talking head" mantra was "double dip", as in 
double dip recession or more the consensus, a double dip slow 
down. This is not a double dip ice cream cone. Tired of the bear 
market?! - sorry, no rest for the weary. 

Market volatility shot up again at week's end - BIG TIME! 
I got a note from someone asking me whether the CBOE Volatility 
Index ($VIX.X) in the past has been well above 100 and wouldn't 
it take a reading of say 90, to suggest this market has bottomed? 

I went back and checked historical VIX peak levels - 
The highest VIX reading was during the week of the 1987 crash - 
on that Monday. I remember it well - I was at the CBOE that day 
and I will never forget the palpable fear & panic that was in the 
air. That day VIX shot up to a peak of 152; "black Monday". The 
next day, VIX briefly went higher, to 172. At the end of that 
October week the volatility index went out at 98; the following 
week VIX closed at 61. 

However, SINCE 1987, the highest VIX peaks have been in the 50-60 
range, not generally higher than about 55/57 (where we got to 
recently) - this was once in 89, once again in 1997 and 2-3 weeks 
in 1998; then, of course, in Sept. 2001 and again recently per 
the chart below. 
Mark Phillips sent me an interesting thought on this VIX peak in 
1987, versus what we've seen since then: 

"I was aware that the VIX had hit levels in excess of 100 back in 
’87, but I had assumed that those comparisons were invalid due to 
the fact that we now have the curbs/circuit breakers in place at 
the NYSE... Also, do you have any thoughts on the validity of the 
VIX calculation from ’87 vs. now due to the broader participation 
in the options markets? My gut feel is that it’s a bit like 
comparing apples to oranges....."
Of course, volatility is now controlled to some extent! - AFTER 
1987, when they put the NYSE program trading "circuit breakers" 
in effect and the VIX never hit levels above 100 again. Its peaks 
since then, as I noted earlier, have been in the 50-60 range. 

Do we now go back up the recent extremes in terms of volatility? 

Chart of the VIX (daily)

Well if these were stock or index charts, I would say of the top 
one that it had a strong reversal and rebound from the area of 
its up trendline, suggesting that it was still in an uptrend and 
could now well challenge its prior high in the 57 area.  

My crystal ball doesn't suggest whether there will be a break out 
to a NEW high. Based on the past pattern of the VIX - once it has 
peaked above 50-55, there has not usually been a higher high.   
The structure of the pattern also suggests that this may be the 
last spike up. VIX could make a "double top" or go a bit higher 
even, but it'll likely come down after that.   

The CBOE Nasdaq 100 volatility index (VXN) is an interesting 
technical study also.  It has rebounded to back above the uptrend 
it was in the week before last. It could challenge the highs made 
at its double top peak in the 71 area and maybe even register a 
bit higher.  Stay tuned.  

A double top is often a pretty good sign that the highs are in 
already. It appears to me looking a at the key Nasdaq big cap 
stocks, that the Nasdaq has reached an area of some stability.  

S&P 500 (SPX) Index - WEEKLY/Hourly charts:

Well we got a good rebound from the low end of the weekly 
downtrend channel two weeks ago, but that doesn't mean that SPX 
is headed right back to the upper end of it. SPX, with a weekly 
high at 885, couldn't even get back up to the last downswing low 
at 945. 

The index did fill it's upside hourly chart gap however at the 
low at 854.  If there is bullish potential now in this market, 
this is the area from which SPX should rally. Next week is one 
important week - maybe with the government on holiday, we can 
escape any more of their "help" and the market may stabilize.  
Maybe its time for me to go on vacation and let the market 
soldier on without me! 

Support levels are 835-836, then the 820 area. Key resistance is 
at 885.     

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

On a break of 443, my downside target was 427-428 and OEX got to 
428.4 on Friday and rallied a bit off that low.  Interestingly, 
the S&P 100 has not "filled in" its upside gap from last week, 
which would occur with a dip to 427 - it's not a big deal, but 
its little things like this that can be telling.  

Certainly, this market as we saw at the top, is not falling apart 
like it used to. The shorts are making out still, but they are 
having a wait a little longer to take smaller profits - and, if 
long puts, they are rewarded even less with the fat premiums with 
the VIX so high. 

Time will tell - OEX may yet retrace more of its last upswing, 
such as to 422, a 50% retracement and around the level of my 
lower envelope band. I suggest covering some shorts/long puts in 
this area, if reached.  However, I would like to see the daily 
stochastic get down to a more neutral reading or oversold again 
before I suggest its time to buy calls again. 

445-447 is overhead resistance - especially significant as the 
low end of a 2-day trading range. I highly doubt that we get 
through this area in the next 1-2 trading sessions. 

Dow Industrials (INDU)/Dow Index ($DJX.X) - WKLY/Hourly charts:

The Industrials reversed right at its weekly chart down 
trendline. While the action is disappointing to the "public" 
perception of this market in terms of not holding much of last 
week's rally, the Dow is WELL off its lows AND the DJIA managed 
to close plus on the week which gives us two weeks in a row. What 
is significant about this is that it reverses the pattern that has 
been going on for weeks of successively lower weekly closes. 

DJX got down to support around 82.30 at the top end of the last 
consolidation at the mid point of last week's rally and looked 
like it was trying to rally from there. This is maybe a faint 
encouragement to the bullish case. The market is starting to find 
areas where somebody is buying stocks - and/or not pressing the 
short side so much.    

DJX hasn't even retraced half of its last advance - this would 
occur at 81.30. If DJX gets into the 81-81.30 area I'm a buyer as 
long as it’s a "dip" not a falling "knife". 

Another scenario - DJX goes no lower than Friday, setting up a 
potential Head & Shoulder's bottom.  Stay tuned! 

Nasdaq 100 Index (NDX) WEEKLY/Hourly charts:

Someone wrote me about including a look at the actual index once 
in a while as the there is less distortion due to buying/selling 
as there is in QQQ tracking stock.  It is interesting to go to 
the "source" occasionally, so here it is -

The thing I'm always struck by when I review the weekly chart is 
the well-defined down trendline - some would say the RELENTLESS 
downtrend.  "Random walk" proponents would say that its just 
coincidence that this market turns down every time it "touches" 
its long-term down trendline. Some "coincidence"!

From a trading perspective, what is of some interest is the 
upturn in the final hour AFTER the NDX had trended sideways for 
the afternoon on Friday right in the area of its prior lows. 
I think its time to cover shorts and look to buy the Nasdaq 100 - 
Of course, the index call premiums get very pricey in this high 
volatility environment - the Q's aren't too bad. Good time to 
sell puts too. 

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

We certainly more than filled the upside chart gap last week - 
sailed right through there!  

I got a few mails Friday about whether I would be a buyer in the 
22 area. I was taking a wait and see attitude. Certainly, it 
looks like time to cover shorts and sell puts that you are long. 
However, am still a bit cautious with Intel and Cisco still 
looking so weak.  Also, there can be tendency for a lift on 
short-covering and then a retest of lows one or more times.  

Nevertheless, further downside risk doesn't look huge - buying in 
the 22 area could be done with stop protection under the prior 
intraday low, maybe giving that some "room" by setting stop/exit 
points at 21.30. 

Resistance is now 22.75 - 23.10 at last week's gap - what was 
support "becomes" resistance.  No Nasdaq bellwether, including 
Cisco, made a new closing low. The S&P may stabilize if there is 
no horrible news over the weekend and that will help Nasdaq too.

Leading the way may be ORCL, which is holding it's up trendline 
nicely.  I was looking to buy again at 9.00 - of course it got to 
9.05 and reversed. 9.00 was too "obvious" and you got to be 
smarter than that to catch these trading stocks at their lows.     

Leigh Stevens
Chief Market Strategist 

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Editor's Plays

Right on Schedule

I am not going to recap the entire editors play scenario
from the last two weeks again. Those of you who were in 
it know what happened and I will give a brief summary for
those who were just observing. 

On the QQQ calls from two weeks ago they hit $1.50 again
and our cost basis was $1.02. They did not do as well as
we would have hoped due to the Nasdaq's failure to follow
the Dow to stardom. The indexes made some major moves but
the QQQ only retraced its steps to $24.69 before rolling 
over. This was still a successful play with low risk.

The DJX play started off badly with a huge opening spike
on Monday. The call opened at $2.80 instead of the $2.15
estimated which would have required slightly more capital
on the insurance side. 

Chart of the DJX (30 minute interval)

However the Puts were also significantly cheaper beginning
at $1.75 instead of the $2.50 budgeted.

This is how you would have been filled on the puts:

qty 5 @ $83.00 (DOW 8300) $1.75 total invested $ 875 avg $1.75 
qty 5 @ $83.50 (DOW 8350) $1.75 total invested $1750 avg $1.75 
qty 5 @ $84.00 (DOW 8400) $1.75 total invested $2625 avg $1.75
qty 5 @ $84.50 (DOW 8450) $1.75 total invested $3475 avg $1.75
qty 5 @ $85.00 (DOW 8500) $1.50 total invested $4225 avg $1.69
qty 5 @ $85.50 (DOW 8550) $1.40 total invested $4925 avg $1.64
qty 10@ $86.00 (DOW 8600) $1.10 total invested $6025 avg $1.50

The spike open on Monday reduced the acquisition cost by -$950
over the estimates from last Sunday.

Cost of calls @ $2.80 = $5600 + puts @ $6025 = $11,625

The calls were worth $4.50 ($9,000) at the top and there was
plenty of time to sell them if that was your plan. That would
have reduced your total investment to $2,625 or $65 per contract.

The puts traded as high as $2.65 on Friday and closed at $2.00.
Had you sold at the close your net profit would have been $5,375.
(assuming you sold the calls when the market rolled over)

Assuming you kept the calls as insurance until they triggered
your stop loss at your entry price as suggested then they would
have closed for no gain/loss on Thursday afternoon.

You would be long 40 contracts of the Aug-82 puts at an average
cost of $1.50 and they closed at $2.00. 

You would have a good chance of a further Dow drop next week and
can set a stop loss on the position and get out at worst for
a breakeven and at best with $4.00 puts like they were the prior
week if the Dow retraces below 8000. 

$4.00 puts = $16,000 - $6025 cost or $9975 in profit.

(As always, I am not claiming that anybody made this exact trade
or could have achieved these exact fills. The prices quoted were
the average price for the period when the trigger point was hit.
This is an example of how it should have gone if the orders had
been entered prior to the open on Monday.)

I know many of you were caught off guard by the open and didn't
know what to do and actually ended up not buying the insurance and
simply bought the puts a cheaper prices than quoted above since
you waited for a couple hours to see if it would stick. One
person apologized for being late in the trade and bought most
of the puts beginning on Monday afternoon and Tuesday for as low
as $.75 cents. They sold them on Friday at 3:25 for $2.50. You
can do the math.

I wonder if they will be disappointed if they go to $5.00 next

New Play

I wish I had something sexy to write for you this weekend. 
Unfortunately I only have one market view and that is a possible
bounce at the open on Monday and then down again. 

The move up will not be dramatic enough (in my opinion) to
launch a complicated play. The move down could be serious but it 
could take all week instead of a single major move. (emphasize
could in both instances)

I don't see a big Dow spike on Monday since resistance is 
scattered liberally above us. My best game plan is to target
shoot some DJX puts on any bounce and ride them back down. It
is not fancy but has the best chance for profit.

Here is my best shot today.

We will stage into a 30 contract position of the AUG $80
DJX puts by using three trigger points.

Buy 10 @ DJX 83.50 est $1.40
Buy 10 @ DJX 82.25 est $1.60
Buy 10 @ DJX 81.00 est $2.00

Sell all 30 @ DJX $79.00 est $3.00 

Chart of the DJX (30 minute interval)

If we get a bounce the first set of contracts will be
cheap due to premium decay and the Dow going in our favor
at the time. 

The next set at 82.25 is just below the end of day support
on the Dow on Friday. If that level breaks then we could 
see free fall to 81.25. Those contracts will be fairly 

The third set at 81.00 are just icing on the cake. If we
get a break below 81.00 then the first support is in the 
78.75 range. This is where we could see an oversold bounce
and why I want to close the trade at 79.00. Since the last
set of contracts will go from OTM to ITM very quickly they
should gain value quickly. 

Since options premiums are highest at the money we want
to target our close very close to the money.

If I estimated correctly the average cost will be somewhere
in the $1.30-$1.50 range and the exit should be somewhere
around $3.00. That looks like a double in my book.

Of course as we have seen recently nothing ever goes according
to plan. If the Dow does not bounce on Monday to 83.50 then
your first order should be for 20 contracts at 82.25. Or, 
you can buy 10 a little higher, wherever you feel comfortable.


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

Good Luck

Jim Brown  

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And Finally the Dam Broke.
by Steven Price

The third day in a row of disappointing news seems to have 
finally broken the bulls.  The unemployment rate remained 
unchanged in July, adding 6,000 new jobs.  The expectation, 
however, was for between 60,000 and 68,000 new jobs to be added 
for the month. Factory orders were down 2.4%, versus expectations 
of a 1.7% decrease, which is the biggest drop in seven months.  
Total hours worked in the economy fell by 0.6%, reaching the 
lowest level in three years.  The average workweek was 34 hours, 
which I'm sure makes everyone a little jealous (those with jobs 
and those without).   A couple of less talked about statistics, 
which usually hold up in an improving economy, are overtime hours 
and temporary jobs, which both fell.

The good news is in the June statistics, which showed personal 
income up 0.6%, more than the expected 0.4%, and the biggest gain 
since July 2000.  Personal expenditures were up 0.5% and 
disposable personal income was also up, by 0.7%.  Consumer 
spending was up 0.5%, just under expectations of 0.6%.  Consumer 
spending, which accounts for two-thirds of the economy, may not 
be able to sustain growth, however, as hours worked go down and 
unemployment holds steady.

This combination of the third day in a row of disappointing 
economic numbers drove the Dow down over 300 points intraday, and 
through support levels of 8500 and 8400. An end of day rally 
brought the Dow back to finish at 8313.13, down 193.49.  After 
this week's earlier rally, investors appeared to be in a hurry to 
take profits, rather than wait to see if the Dow retests its 
recent lows in the 7500 range.  While this double dip may provide 
evidence of a real bottom, if we rebound again, no investor wants 
to be around for the ride down.  The interesting thing about the 
precipitous drops of the last two days are that, despite the 
feeling that the Dow has gone into the tank, we finished the week 
higher by 48.74.  While this week's rally did not hold, last 
week's is still safe.  At least until Monday morning.

In late 1997, from October through the following January, the 
market reached into the 7400s, before rebounding to a level over 
9000.  It then double dipped back into the 7500s the following 
August, before beginning its rise to 11,500.  So there is 
precedent for the double dip theory in this range.

The semiconductor sector continues to drop, this time after a 
warning from National Semiconductor (NSM) last night, stating 
that revenues will remain flat in the fourth quarter due to weak 
demand in the personal computer market.  NSM joined a host of 
other companies that supply the PC market and have lowered 
guidance due to weak demand.  The Semiconductor Index (SOX.X) 
reached its third 52-week low in the last three days.

This showed up in the Nasdaq Composite, which looks headed back 
to 1200.  The Nasdaq rolled down from its 21-dma of 1346 on 
Wednesday.  it traded as high as 1354.48, before giving up over 
100 points from that level, in two days, to finish the week at 
1247.92.  However, as noted earlier with the Dow, it finished 
very close to where it began the week, off just 15 points.

Disney reported a 7% decline in earnings and warned of worse 
conditions ahead. While the entertainment giant met earnings 
expectations, poor theme park attendance led to a corporate 
credit downgrade by Standard & Poor's.  Disney's 9% drop to 
$15.31 weighed on other travel and leisure stocks as well.

Next week may produce a "dead cat bounce" from Thursday's and 
Friday's sell-off.  However, it is hard to imagine a continued 
rebound in the overall markets after the amount of disappointing 
economic news this week. A shrinking economy is not good news for 
stocks, and although the bulls were able to forge ahead earlier 
in the week, eventually the bad news overwhelmed.  


Market Averages


52-week High: 10679
52-week Low :  7702
Current     :  8313

Moving Averages:

 10-dma: 8307
 50-dma: 9125
200-dma: 9769

S&P 500 ($SPX)

52-week High: 1226
52-week Low :  797
Current     :  864

Moving Averages:

 10-dma:  861
 50-dma:  967
200-dma: 1082

Nasdaq-100 ($NDX)

52-week High: 1766
52-week Low :  869
Current     :  892

Moving Averages:

 10-dma:  931
 50-dma: 1057
200-dma: 1366


The Semiconductor Index (SOX.X):  This section of the newsletter 
has been dominated lately by news of the semiconductor index. 
While there are many other sectors worth reporting on, there has 
been a steady stream of news emanating from these companies which 
weighs on the overall market.  As the tech sector led the bull 
market of the 90s, it has led the bear market of the last couple 
of years.  

National Semiconductor (NSM) issued a warning on Thursday, a 
month before its quarter ends, stating that it now expects sales 
to be flat for the quarter.  It had previously predicted sales 
would rise 6%-8%.  It blamed its lack of sales on weak order 
rates for personal computers, as other PC related chip companies 
have done in recent weeks.  This led the SOX to another 52-week 
low. The index broke its 300 level of support, trading as low as 
295.20, before rallying late to finish back over 300.  Until 
there is good news from someone in the sector, we can expect to 
see this index continue its steady decline.  If the tech sector 
continues to lead the overall market, this does not foreshadow a 
recovery anytime soon.

52-week High: 657
52-week Low : 301
Current     : 301

Moving Averages:

 10-dma: 331
 50-dma: 398
200-dma: 505


Market Volatility

The Market Volatility Index spiked back close to 50 intraday, 
reaching a high of 48.97.  The drop in the Dow and S&P once again 
triggered a surge in premium, however the end of day rally 
brought it down a few points.  There were also most likely 
sellers looking to capitalize on weekend time decay, selling 
options on Friday afternoon.  As premiums increase, time decay 
does as well, so the bet some traders make is that the movement 
of the market on Monday will not be so great as to overwhelm the 
premium decay they gain over three days on short options.

CBOE Market Volatility Index (VIX) = 45.39 +3.90
Nasdaq-100 Volatility Index  (VXN) = 65.44 +5.09


          Put/Call Ratio  Call Volume   Put Volume
Total          0.93        561,537       524,267
Equity Only    0.67        436,492       294,358
OEX            1.27         36,024        45,741
QQQ            0.44         53,626        23,703


Bullish Percent Data

           Current   Change   Status
NYSE          30      + 0     Bull Correction
NASDAQ-100    28      - 3     Bull Confirmed
DOW           20      - 3     Bull Alert
S&P 500       26      - 2     Bull Alert
S&P 100       25      - 2     Bull Alert

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

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


 5-Day Arms Index  1.21
10-Day Arms Index  1.22
21-Day Arms Index  1.27
55-Day Arms Index  1.36

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


Market Internals

        Advancers     Decliners
NYSE        839          2289
NASDAQ      911          2236

        New Highs      New Lows
NYSE         19             106
NASDAQ       61             218

        Volume (in millions)
NYSE     1,811
NASDAQ   1,405


Commitments Of Traders Report: 07/30/02

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

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

S&P 500

Commercials added significantly to their long positions.  While 
contracts were added on both sides, 25,000 were added to the 
longs, while only 11,000 were added to the short side.  Small 
Traders reduced both positions, however reduced long positions by 
an additional 6,000 contracts.

Commercials   Long      Short      Net     % Of OI 
07/09/02      396,321   456,164   (59,843)   (7.0%)
07/16/02      388,943   464,162   (75,219)   (8.8%)
07/23/02      405,969   471,704   (65,735)   (7.5%)
07/30/02      430,833   482,957   (52,124)   (5.7%)

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

Small Traders Long      Short      Net     % of OI
07/09/02      145,017    71,402    73,615     34.0%
07/16/02      157,370    67,247    90,123     40.1%
07/23/02      166,713    73,778    92,935     38.6%
07/30/02      153,858    67,451    86,407     39.0%

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

Commercials added 4,000 short contracts to their positions, while 
adding only 1,000 long contracts.  Small Traders reduced short 
positions by 2,000 contracts, while adding less than 500 to their 
long contracts, for a 2,000 long contract increase overall.

Commercials   Long      Short      Net     % of OI 
07/09/02       31,227     39,592    (8,725) (12.3%)
07/16/02       33,152     39,866    (6,714) ( 9.2%)
07/23/02       37,204     43,601    (6,397) ( 8.0%)
07/30/02       38,163     47,343    (9,180) (10.7%)

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

Small Traders  Long     Short      Net     % of OI
07/09/02       12,520     8,348     4,175     20.0%
07/16/02       12,816    10,774     2,042      8.7%
07/23/02       12,756    11,152     1,604      6.7%
07/30/02       13,159     9,237     3,922     17.5%

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


Commercials kept their long positions approximately the same, 
while reducing their short positions by almost 2,000 contracts.  
Small Traders reduced both long and short positions dramatically.  
They reduced their long position by 2400 contracts and short 
position by almost 4,000 contracts.

Commercials   Long      Short      Net     % of OI
07/09/02       20,761    14,122    6,639     19.0%
07/16/02       20,357    14,074    6,283     18.2%
07/23/02       22,369    14,745    7,624     20.5%
07/30/02       22,429    12,811    9,618     27.3%

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

Small Traders  Long      Short     Net     % of OI
07/09/02        6,831     6,623       208     1.50%
07/16/02        8,524    10,133    (1,609)   (8.62%)
07/23/02        9,101    12,604    (3,503)   (16.1%)
07/30/02        6,778     8,999    (2,221)   (14.1%)

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

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

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What Do the Charts Say?
By James

If you listen to the media these days, television, magazines, the 
Internet... all of them have been flooded with opinions regarding 
the future of the housing sector.  Many proclaim that real estate 
is the last great bastion of strength and wealth for the consumer 
and how Americans are turning to their homes instead of their 
portfolios for wealth creation.  Others cry out that this is a 
yet another bubble just waiting to burst upon unsuspecting 
investors who might be getting in at the top.  I bet a few of you 
are probably wondering who's right and who's wrong.

Unfortunately, the purpose of this article is not to argue the 
pro's and con's of the great housing bubble debate but I will 
touch on a few of the more popular thoughts on the subject.  
Investors who follow the industry already know that many of the 
widely followed companies posted very strong earnings and offer 
positive enthusiasm going forward.  That's a positive.  There 
aren't many companies now offering enthusiastic guidance going 
forward so score one for the bulls.  

However, this last week's construction spending report showed 
that residential spending had posted its third monthly decline, 
which might lead some investors to believe that America is slowly 
running out of its available cash to purchase that next new home.  
Let's not forget that the mortgage refinancing tide has started 
to ebb because most people who could refinance already have 
despite rates being at historic lows.  What do you think fueled 
the massive 4Q and 1Q GDP rebound?  It wasn't defense spending.  
Consider our current situation.  If the economy is poised on the 
brink of a double dip recession, the average worker is probably 
thinking about self and job preservation not buying a bigger and 
better house.  I'm not sure how many points to award for these 
ideas in this game but it looks like a score for the bears. 

Yet optimists will point to new speculation that the FOMC could 
lower rates again.  As of this Friday, some analysts are 
speculating that the Fed could lower interest rates by another 75 
basis points to 1%.  Could this spark yet another round of home 
refinancing and new home constructions?  If it comes to pass this 
could be another score for the bulls but let's hope consumer 
sentiment isn't destroyed with another quarter or two of massive 
layoffs, which could seriously put the brakes on consumer 

Here's another thought on investor psychology.  The average home-
construction stock is still up over 40% from its September 2001 
lows.  If the stock markets continue to fall, how many investors 
will decide to take that money off the table before evaporates 
due to broader market weakness?

I propose we see what the charts are telling us.  First, we're 
going to look at the DJUSHB (Dow Jones U.S. Home Construction 
Index) and then we're going to compare a couple of similar home 
building stocks.

The point-and-figure charts in this article
were created using www.stockcharts.com

For future articles
Please send your questions and suggestions to:

Contact Support


First we're going to look at a daily chart of the DJUSHB with
the 200-dma.  The housing sector had truly been an area of 
strength since the Dow Industrials topped out and began to slide 
in March of this year.  The DJUSHB didn't give in to the selling 
frenzy until July 8th or so when the drop in the Dow began to 
pick up speed.  The risk at this point definitely appears to be 
weighted towards the bulls with the construction index under both 
the 300 mark and the 50% retracement level.  Will the 250 area 
hold the sector from further selling?

Chart of the DJUSHB (daily with 200-dma)

Just for kicks I threw up a chart of the DJUSHB on a weekly time 
frame.  While the broader markets have been weak and the 
technology sector has been dying these last two years, the home 
construction sector has jumped from the 125 level to almost 400 
during the same period.  Again it looks like the 260 to 250 level 
might be the area to watch should the group continue to see 

Chart of the DJUSHB (weekly scale)

Whether you believe the home-builders are over-valued or under-
valued it's not a stretch to see that the sector could still see 
additional profit taking.  If you're bullish then you'll want to 
keep an eye for where the group builds support for its next leg 
up and if you're bearish you're probably looking for your next 
entry point.  Since you can't trade options on the DJUSHB I've 
arbitrarily picked two homebuilders near the top of the list as 
far as market cap.  They aren't the biggest but they both sport a 
market cap just over $1 billion, both enjoy a P/E close to 6.7 
and both have about 27 million shares outstanding.  I know 
technical traders don't care but those fundamental guys and gals 
might want to know.  Besides, if the group continues to slide, 
those P/E's will just keep looking better and better.

The two stocks are Ryland Group Inc (NYSE:RYL) and M D C Holdings 
(NYSE:MDC).  I chose these two because a quick glance would show 
that they trade in very similar patterns.  Which one, if any, 
would make a good trade for investors looking to capture a move 
in the sector?

Let's check out weekly charts for each to give us a long-term 

Shares of RYL have had an incredible run up from January of 2000 
lows near $7.75 up to almost the $60 level several weeks ago.  If 
you had bought the stock in 2000 or 2001, where would your stop 
loss be?

Chart of RYL (weekly interval)

The chart of MDC looks pretty similar to RYL's.  Shares have 
performed pretty well the last two years and longer-term 
shareholders might not want to suffer another dip similar to what 
occurred in the summer of 2001.

Chart of MDC (weekly interval)

Checking out the Daily charts for RYL and MDC also yield some 
interesting observations.  Both RYL and MDC had a very tradeable 
ascending channel, which lasted from last fall through May of 
this year.  When the channel broke, buyers stepped in to buy the 
dip but selling pressure by shorts or bulls not wanting to lose 
their profits from the ride up become to great.  Fortunately for 
chart readers, both stocks tended to trade between psychological 
round-numbers for support and resistance.

Check out the daily charts below for RYL and MDC.  Do you notice 
the big drop in July, which occurred while the broader markets 
were in free fall and the Dow was plummeting?  Did the 
fundamentals for RYL and MDC change during those three weeks?  
The answer is no.  Fear in the markets had these stocks falling 
fast and they produced an oversold bounce just like everyone 
else.  It is interesting to see that both have closed below what 
could have been potential support at the $40 mark and both are 
below their 200-dma.

Chart of RYL (daily interval) 

Chart of MDC (daily interval)

All right, we've looked at previous strength for both stocks and 
how they have traded closely together as their sector saw buyers.  
We've seen the breakdown, the oversold bounce at support and new 
weakness.  Will the weakness continue and how can we gauge risk?

To do this I've decided to apply a retracement tool to both 
charts just to see what has developed.  Using the lows from 
September to the average high in May on RYL's chart we see that 
the selling stopped or buyers defended the stock at the 61.8% 
retracement, which happens to coincide closely with the $35 area.  
The drop under $40 looks bad and traders are ignoring the 50% 
retracement level.  Aggressive traders could attempt bearish 
strategies now but they may encounter support again at the 61.8% 
level.  More conservative traders might want to wait for RYL to 
drop below the 61.8% level (or the current relative low) before 
attempting bearish strategies.  Using the retracement tool, one 
could attempt to target a move to the congestion under the $30 
mark but it may be smarter to just take profits as shares 
approach $30, which could develop as more psychological support.

Chart of RYL (retracement tool)

You'll probably notice a difference in MDC's chart now.  I've 
"fitted" the retracement tool - a trick that Jeff Bailey is known 
for.  Instead of using the absolute lows and highs for the range 
I'm attempting to analyze I've adjusted the retracement tool to 
align the most number of support and resistance points to give it 
more credence.  Now we see the 19.1% and 38.2% levels lining up 
but MDC has not yet hit its 61.8% retracement.  Even if I had 
used the lows from September the 61.8% level would be even lower 
than it is now, which might indicate some relative strength in 
shares of MDC.  With MDC now under $40 and the 50% level it looks 
like longs have risk to the 61.8% level, but remember the 
previous chart is still showing support (the current relative 
low) near $37.50.

Chart of MDC (retracement tool)

That's all fine and dandy but one thing we've learned is that the 
sector rotation caused by mutual funds shifting money from one 
group to another is a powerful event.  A lot of "smart money" use 
supply and demand charts or point-and-figure charts to gauge 
their risk.  Let's look at some PnF charts of RYL and MDC and 
maybe we can come up with a better picture that's not clouded by 
all the short-term support and resistance levels we see on the 
daily charts.

The RYL point-and-figure chart was showing a bearish vertical 
count of $29.00 in early July.  The same trend broke the bullish 
support line but the strong rebound produced a new buy signal 
killing the previous bear target.  Now the stock has reversed 
again and is currently pointing to a bearish target of $28 but 
this could grow worse as RYL is still in a column of O's.

Chart of RYL (point-and-figure)

Moving on to MDC's PnF chart we finally see some stronger 
differences between the two equities.  The supply and demand 
chart for MDC is showing that the stock was a long stronger up 
until July where the Dow Jones Industrials began their free fall.  
Chart readers already knew this since the MDC daily chart showed 
the rally back to its highs (the double top) while RYL was 
already experiencing profit taking.  Looking at the PnF chart for 
MDC it now appears that the relative strength we saw on the 
retracement chart above may not be what it seems.  RYL has a 
bearish target to $28 or 25% below current levels.  MDC is 
showing a bearish vertical count to $23 or 40% below current 
levels.  That would take it back towards its September lows.  
Obviously we don't expect MDC or RYL to trade straight to their 
bearish targets but it does give one a slightly better idea on 
which one might see more profit taking should the markets 
continue to fall.  

Chart of MDC (point-and-figure)

While we've done a lot of the homework traders might do before 
initiating a bearish trade we're not done.  If one was 
considering it, you should scan the news for any events that 
might influence the stock price.  Next one should check out the 
options for each stock.  Option volume for MDC is rather low and 
some traders might experience better fills or feel a bit more 
comfortable trading RYL due to the increased volume.

Now remember, before you send me any emails about how I'm wrong 
about the housing sector and that there is no housing bubble and 
this is just an entry point to go long, this whole exercise was 
compare two similar home-builders and see what the charts are 
telling us.  Believe me, I've already heard the argument that the 
selling in this group is just overdone and when the markets even 
out they'll shoot back to their former glory, etc.  We'll be more 
than happy to consider some bullish strategies if the market will 
give us some positive entry points to go long.

More often that not trading what you believe can be a lot more 
expensive than trading what you see.  The one maxim that can be 
hardest to accept is this - the market is always right.

Was this article beneficial to you?
Let us know: comments@OptionInvestor.com

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


Major Earnings This Week

Symbol  Company               Date           Comment      EPS Est

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

ATH    Anthem, Inc.           Mon, Aug 05  Before the Bell   0.98
AIV    Aptmt Invstmnt Mngmnt  Mon, Aug 05  -----N/A-----     1.27
CEPH   Cephalon               Mon, Aug 05  After the Bell    0.21
CHD    Church & Dwight        Mon, Aug 05  Before the Bell   0.36
CUZ    Cousins Properties     Mon, Aug 05  After the Bell    0.54
CHD    Church & Dwight        Mon, Aug 05  Before the Bell   0.36
CUZ    Cousins Properties     Mon, Aug 05  After the Bell    0.54
IN     Infonet                Mon, Aug 05  After the Bell   -0.01
MET    MetLife Inc.           Mon, Aug 05  After the Bell    0.64
OKE    Oneok                  Mon, Aug 05  After the Bell    0.22
PRE    PartnerRe              Mon, Aug 05  After the Bell    1.38
PPS    Post Properties        Mon, Aug 05  After the Bell    0.64
PG     Prctr & Gmble Company  Mon, Aug 05  -----N/A-----     0.74
STO    Statoil ASA            Mon, Aug 05  Before the Bell    N/A
TLTOB  Tele2 AB               Mon, Aug 05  Before the Bell    N/A
TP     TPG NV                 Mon, Aug 05  Before the Bell   0.29
TGH    Trigon Healthcare      Mon, Aug 05  Before the Bell   1.19

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

ASX    Adv. Semi. Eng.        Tue, Aug 06  -----N/A-----     0.01
ACF    AmeriCredit            Tue, Aug 06  After the Bell    1.05
AMH    AmerUs Group           Tue, Aug 06  After the Bell    0.89
BOX    BOC Group PLC          Tue, Aug 06  -----N/A-----      N/A
CAH    Cardinal Health        Tue, Aug 06  Before the Bell   0.73
CSCO   Cisco Systems          Tue, Aug 06  After the Bell    0.12
EIX    Edison International   Tue, Aug 06  Before the Bell   0.39
EDMC   Education Management   Tue, Aug 06  Before the Bell   0.16
ETM    Entercom Comm          Tue, Aug 06  Before the Bell   0.35
EXPD   Expeditors Intl WA     Tue, Aug 06  Before the Bell   0.22
HSIC   Henry Schein           Tue, Aug 06  Before the Bell   0.59
HTG    Hrtge Prprty Inv Trust Tue, Aug 06  After the Bell    0.64
HSP    Hispanic Bradcstng Co  Tue, Aug 06  Before the Bell   0.11
MXIM   Maxim Integrated Pro   Tue, Aug 06  After the Bell    0.21
MNY    MONY Group             Tue, Aug 06  Before the Bell   0.26
NVO    Novo-Nordisk           Tue, Aug 06  -----N/A-----      N/A
OMC    Omnicom Group          Tue, Aug 06  Before the Bell   1.00
PCO    Premcor U.S.A.         Tue, Aug 06  -----N/A-----    -0.28
PRU    Prudential Fncl, Inc.  Tue, Aug 06  After the Bell    0.52
RA     Reckson Ass Realty     Tue, Aug 06  After the Bell    0.61
RYAAY  Ryanair Holdings       Tue, Aug 06  Before the Bell   0.23
SHU    Shurgard Storage       Tue, Aug 06  After the Bell    0.76
IPG    The Interpublic Group  Tue, Aug 06  After the Bell    0.39
TMPW   TMP Worldwide          Tue, Aug 06  After the Bell    0.14
UNM    UnumProvident          Tue, Aug 06  After the Bell    0.63
HLTH   WebMD                  Tue, Aug 06  After the Bell    0.03

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

AOC    AON Corporation        Wed, Aug 07  Before the Bell   0.50
ARI    Arden Realty           Wed, Aug 07  -----N/A-----     0.70
AVT    Avnet                  Wed, Aug 07  After the Bell    0.00
BHP    BHP Billiton Ltd       Wed, Aug 07  -----N/A-----     0.02
EAT    Brinker International  Wed, Aug 07  Before the Bell   0.49
ETH    Ethan Allen Interiors  Wed, Aug 07  Before the Bell   0.60
FST    Forest Oil             Wed, Aug 07  After the Bell    0.17
HRC    Healthsouth            Wed, Aug 07  Before the Bell   0.28
HIW    Highwoods Properties   Wed, Aug 07  After the Bell    0.91
JS     Jefferson Smurfit Grp  Wed, Aug 07  Before the Bell   0.28
KCIN   KPMG Consulting        Wed, Aug 07  Before the Bell   0.15
LAMR   Lamar Advertising      Wed, Aug 07  After the Bell    0.00
MGA    Magna International    Wed, Aug 07  -----N/A-----     1.83
MME    Mid Atlantic Mdcl Serv Wed, Aug 07  After the Bell    0.39
NBG    Nat Bank of Greece     Wed, Aug 07  Before the Bell    N/A
NEM    Newmont Mining         Wed, Aug 07  -----N/A-----     0.14
PB     Pan American Beverages Wed, Aug 07  -----N/A-----     0.22
RL     Polo Ralph Lauren      Wed, Aug 07  Before the Bell   0.06
PFG    Principal Finl Grp     Wed, Aug 07  Before the Bell   0.53
PDLI   Protein Design         Wed, Aug 07  After the Bell   -0.01
REG    Regency Centers Corp   Wed, Aug 07  After the Bell    0.69
SYT    Syngenta AG            Wed, Aug 07  Before the Bell    N/A
UVN    Univision Comm         Wed, Aug 07  After the Bell    0.10
WPI    Watson Pharmaceutical  Wed, Aug 07  -----N/A-----     0.39
WFMI   Whole Foods Market     Wed, Aug 07  -----N/A-----     0.34

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

ABN    ABN Amro Holdings      Thu, Aug 08  -----N/A-----      N/A
AEG    AEGON N.V.             Thu, Aug 08  -----N/A-----     0.23
ATK    Alliant Techsystems    Thu, Aug 08  Before the Bell   0.70
ILA    Aquila, Inc            Thu, Aug 08  Before the Bell   0.18
ASN    Archstone-Smith Trust  Thu, Aug 08  Before the Bell   0.53
BF     BASF                   Thu, Aug 08  -----N/A-----      N/A
BIO    Bio-Rad Laboratories A Thu, Aug 08  -----N/A-----     0.64
CVC    Cablevision Systems    Thu, Aug 08  Before the Bell  -1.09
FUN    Cedar Fair LP          Thu, Aug 08  After the Bell    0.18
CNA    CNA Financial Corp     Thu, Aug 08  Before the Bell   0.50
CXR    Cox Radio              Thu, Aug 08  Before the Bell   0.16
DF     Dean Foods Company     Thu, Aug 08  Before the Bell   0.68
EP     El Paso Corp.          Thu, Aug 08  -----N/A-----     0.42
ENL    Elsevier NV ADS        Thu, Aug 08  -----N/A-----      N/A
ELX    Emulex                 Thu, Aug 08  -----N/A-----     0.16
EVC    Entravisions Comm Corp Thu, Aug 08  After the Bell    0.01
HCC    HCC Insurance Holdings Thu, Aug 08  After the Bell    0.42
HEW    Hewitt Associates Inc. Thu, Aug 08  Before the Bell   0.29
HB     Hillenbrand Industries Thu, Aug 08  Before the Bell   0.72
HEW    Hewitt Associates Inc. Thu, Aug 08  Before the Bell   0.29
HB     Hillenbrand Industries Thu, Aug 08  Before the Bell   0.72
NXL    New Pln Excl Rlty Trst Thu, Aug 08  -----N/A-----     0.47
PIXR   Pixar                  Thu, Aug 08  After the Bell    0.11
Q      Qwest Communications   Thu, Aug 08  -----N/A-----    -0.07
RUK    Reed Elsevier NV/Plc.  Thu, Aug 08  -----N/A-----      N/A
RSA    Ryl Sun Alnce Ins Grp  Thu, Aug 08  Before the Bell    N/A
NZT    Tele Corp New Zlnd Ltd Thu, Aug 08  After the Bell     N/A
PNX    The Phoenix Companies  Thu, Aug 08  Before the Bell  -0.08

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


Upcoming Stock Splits In The Next Two Weeks...

Symbol  Company Name              Ratio    Payable     Executable

FVB     First Virginia Banks      3:2      08/09       08/12
WSBK    Wilshire State Bank       2:1      08/15       08/16
SSD     Simpson Manufacturing     2:1      08/16       08/19

Economic Reports This Week

The U.S. economy has come to the front of all investor's minds.  
Keeping a close eye on economics is a must for all traders 
who wish to limit their exposure to possible potholes in the current 


Monday, 08/05/02
ISM Services (DM)       Jul  Forecast:   57.0  Previous:     57.2

Tuesday, 08/06/02

Wednesday, 08/07/02
Export Prices ex-ag.(BB)Jul  Forecast:    N/A  Previous:    -0.1%
Import Prices ex-oil(BB)Jul  Forecast:    N/A  Previous:     0.1%
Wholesale Invntories(DM)Jun  Forecast:   0.2%  Previous:     0.1%
Consumer Credit (AB)    Jun  Forecast:  $8.0B  Previous:    $9.5B

Thursday, 08/08/02
Initial Claims (BB)   08/03  Forecast:    N/A  Previous:     387K
PPI (BB)                Jul  Forecast:   0.1%  Previous:     0.1%
Core PPI (BB)           Jul  Forecast:   0.0%  Previous:     0.2%

Friday, 08/09/02
Productivity-Prel (BB)   Q2  Forecast:   2.3%  Previous:     8.4%

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

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Contact Support
The Option Investor Newsletter                   Sunday 08-04-2002
Sunday                                                      2 of 5

In Section Two:

Index Trader GamePlans: THE SECTOR BEAT - 08/04/02
Daily Results
Call Play of the Day: TXN - looking for a bounce
Put Play of the Day: BBOX - still falling
Dropped Calls: none
Dropped Puts: MMM

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option executions

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more; call 1-888-889-9178 or click for more information.



by Leigh Stevens

The sectors that were rallying into the middle of last week, 
retreated from that point, along with the market.  The Biotech 
Index (BTK) had been the standout performer, but also reached the 
top end of its downtrend channel of the past few months. This is 
suggesting an exit in the Biotech HOLDR's (BBH) - the charts are 
highlighted below. 

The Bank Index (BKX) fell sharply by week's end - this had been a 
standout sector on the market rebound, but is still up sharply 
from its low at 604 (weekly close: 716.8). 

Speaking of retreats, where are all the analysts that were 
"touting" the small cap indices as a market refuge, now that they 
are acting like everything else and heading south? I thought I 
would revisit the charts of the S&P 600 Small Cap and the Russell 
2000 iShares, also featured below. 

The Home Builder's Index (DJUSHB) has given back nearly all of 
its gains from the recent rally - indications of economic 
weakness and speculation about when the housing "bubble" is going 
to burst may be weighing on this group. The Forest Products 
sector (FPP) also fell sharply by week's end but has given back 
more like half of its rebound.  Of course the Western fires are 
busy burning up a lot of supply!  

Gold stocks (XAU) continue to rebound toward my recovery 
objective in the 65 area. In a switch, the Healthcare Index (HMO) 
has not held its recent gains as much as the Health Providers 
(RXH), but the later retreated all the way back to its March low, 
whereas the HMO group did not, reversing at support implied by 
its 200-day moving average.

Last but not least, the Semiconductor sector (SOX) continued to 
fall from midweek on, retreating further from its Sept. low at 
344, briefly falling under the psychologically important 300 
level (to 295), before rebounding to 301.4.  The Chip HOLDR's 
(SMH) have not fallen as far below their Sept. low, but far 
enough to stop out a long position I had suggested.  

Sometimes you be on the wrong horse - I was bullish on Biotech 
but didn't get filled on my price before the sector rebound, but 
got "stuck" in the Semiconductor HOLDR's for a loss.  Thank 
goodness for stops however. I would have lost my "shirt" had I 
stayed long in the Small Cap iShares, which I tried buying once 
well above where the S&P 600 small cap group is currently! 

UP on Friday - 

DOWN on Friday - 





Sold SMH at 24.50 sell stop, bought at 27.35  
(Semiconductor HOLDR's)


Biotechnology Index ($BTK.X)

Chart of the BTK.X (daily)

The BTK index has reached to top end of its multimonth downtrend 
channel, which will likely be a stopping or reversal point for 
its first leg up.  

At this juncture, shorting further BBH HOLDR's rallies up toward 
its upper channel line should have a good risk to reward. 

Stops can be placed just above the down trendline which 
intersects at 85 currently. Downside potential is to 300 in the 
Index and to 73 in the BBH 

S&P 600 Small Cap Index ($SML.X)

The sharp reversal at the first trendline resistance shows the 
weakness of the rebound so far.  A retest of the low may suggest 
buying, but not before.  Conversely, a close above 75.00 would 
suggest a minor bullish breakout for a move to 80-81 only.  
Small is definitely not beautiful in this market! - the bear 
savages all!!

Russell 2000 Index ($RUT.X)

A close above 82 is needed to suggest that the Russell 2000 
iShares was reversing its steep decline.  The RUT fell under its 
Sept. low before seeing an oversold rebound and will likely do so 

Semiconductor Sector Index ($SOX.X)

Chart of the SOX (daily)

How low do we go?! Perhaps to 290, the low end of the downtrend 
channel may be the worst we'll see for a while.  I may attempt 
buying the HOLDR's again if 290 was seen on the SOX, or in SMH to 
21-22, risking to 20, looking for a rally to 27 - a trade not a 

Leigh Stevens
Chief Market Strategist


For Best Alignment view in Courier Ten Font

CALLS              Mon    Tue    Wed    Thu   Week

BAX      38.24    2.32  -0.66   1.67  -1.73  0.26 Holding
ADP      36.20    1.40   0.22  -0.04  -0.98  0.35 Relative Strength
LTR      45.81    2.14   0.45  -0.23  -0.63  0.61 Premium Increase
MMM     119.87    5.81  -1.17   0.34  -3.70 -1.83 Drop, Market Casualty
MSFT     44.41    2.90  -0.15  -0.15  -2.28 -2.44 Scooped at end
TXN      19.97    0.15   0.45  -0.10  -1.89 -3.38  New, oversold


BBOX     33.26   -0.02  -2.19  -1.02   0.39 -3.94 Still going
JPM      23.85    1.77  -0.21   0.07   0.06 -0.52 Bad news
DD       39.09    1.85  -1.85  -0.14  -0.38 -0.53 Gave in
CCMP     38.21   -2.45  -1.34  -0.60  -2.48 -1.06 Rolling over
DHR      58.96    3.07  -0.06  -0.45  -1.93 -1.16 Room to Drop
KLAC     37.08    1.06   1.93   0.06  -2.11 -0.77 Short Circuit
BBBY     27.99    1.69  -0.03  -1.31  -1.92 -3.82  New, Red Sale

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Call Play of the Day:


See details in play list

Put Play of the Day:


See details in play list


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




MMM $119.87 -2.26 (-0.98 for the week) This stock found support 
above our stop of $118.50, rebounding after its intraday low of 
117.89, to close just under $120.  While our faith in the ability 
of the 200-dma of $118.57 to support this stock has been 
validated, our overall faith in the Dow is not as strong.  This 
stock is the most heavily weighted Dow component, and with the 
recent stream of bad economic reports the last few days, a dead 
cat bounce may be all the Dow has left in the short term.  
Although this stock reached as high as $127.55, the weight of the 
overall market may be too much to overcome for this conglomerate.  
We are closing  this play and will look for our next opportunity.  
Use a bounce in the overall market as an opportunity to exit open 
positions, however we will be closing it regardless of direction.


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

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

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

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

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

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

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Contact Support
The Option Investor Newsletter                   Sunday 08-04-2002
Sunday                                                      3 of 5

In Section Three:

New Calls: TXN
Current Calls: ADP, BAX, LTR, MSFT
New Puts: BBBY, SNE

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offers true direct access to each option exchange offers stop and 
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option executions

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TXN  $19.97 -1.14 (-2.37 for the week)

Company Summary:
Texas Instruments Incorporated provides innovative DSP and analog 
technologies to meet our customers' real world signal processing 
requirements. In addition to Semiconductor, the company's 
businesses include Sensors & Controls, and Educational & 
Productivity Solutions. TI is headquartered in Dallas, Texas, and 
has manufacturing, design or sales operations in more than 25 

Why We Like It:
Texas Instruments has been unfairly persecuted, as it falls into 
the family of semiconductor chip stocks. After the market's 
overreaching effort to throw the baby out with the bathwater, 
this baby should have the ability to crawl back out of the trash 
can when investors realize what its business is all about.  

The Semiconductor Index (SOX.X) has been beaten severely in the 
last few weeks. It reached successive 52-week lows the last three 
days, after a failed rebound on Monday and Tuesday.  The constant 
warnings about lack of PC demand, along with budget slashing by 
Taiwan Semiconductor (TSM), the world's largest chip foundry, 
have been like the smell of campground food to the bears in the 
tech sector. As a semiconductor stock, and part of the SOX, TXN 
was punished with the rest of the group. The difference for TXN 
is that their primary end users are not PCs.  This is a company 
with strong fundamentals, whose chips find their way into 
telephones, toasters, and automobiles.  Demand for PCs is not the 
same as  demand for video and medical imaging, or security card 

On July 22, the company released second quarter earnings, which 
doubled from the year before.  While other semis have had only 
bad news on earnings day, TXN's CFO said "We think TI has been 
growing faster than our markets.  We're gaining in DSP and 
analog, and we think we'll continue to do that." The company 
anticipates third quarter sales growth of 5%, driven by 
calculator sales during the back to school season.  Semiconductor 
sales rose 6% in the second quarter, on wireless sales that 
surged 62% from the year before.  This was mostly from sales of 
digital signal processors, which rose 41%.  A semiconductor 
company with rising sales?  Sounds too good to be true.  We 
aren't saying the overall market for semiconductors is raging, as 
it is not.  TXN, however, seems well positioned to watch its 
business grow, rather than shrink along with its brethren.  For 
this reason, we feel this stock is oversold and ready for a 
rebound.  Traders will want to be conscious of the September low 
of $20.10, through which this stock fell today.  This could 
provide some resistance, and  a trade above this level should be 
used as a trigger to go long.  We are placing our stop loss at 
$18.50, below today's low of $19.10, as a trade in the low $18 
range would be evidence of the bears' ability to maintain selling 
pressure. After all, we are concerned about making money in the 
short-term on this play, not being right in the end.

BUY CALL AUG-17.5 TXN-HS OI= 1040 at $3.00 SL=2.00
BUY CALL AUG-20.0 TXN-HD OI=  741 at $1.35 SL=0.75
BUY CALL SEP-17.5 TXN-IS OI=   95 at $3.70 SL=2.00
BUY CALL SEP-20.0 TXN-HC OI= 2193 at $2.25 SL=1.25

Average Daily Volume = 10.7 mln

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

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



ADP - Automatic Data Processing $36.20 (+0.49 last week)

Company Summary:
Through its many subsidiaries, ADP is a provider of computerized
transaction processing, data communication and information
services.  The company's operations are divided into Employer
Services, Brokerage Services, Dealer Services and Claims
Services.  Among the activities managed by the Employer
Services division are payroll, human resources, benefits
administration, tax filing and reporting and retirement plan

Why We Like It:
While the broad markets are continuing to oscillate in volatile
fashion, those pockets of relative strength are starting to
bubble to the surface.  ADP is one such pocket of strength, and
after a couple of days of profit taking, it began flexing its
muscles on Friday.  Sure it ended the day with an 11-cent loss,
but in light of the beating seen in the broad market, it was
truly impressive.  Another encouraging point is the fact that
the stock managed to end the week with a gain, albeit a
fractional one.  After topping out last week near the $38 level,
the bears used the 20-dma to pressure the stock lower, but then
the bulls stepped in to support ADP near the $35.75 level, also
the site of the 10-dma.  Actual support resides a bit lower,
near $35.25, and a rebound from that level would set us up for
another attractive entry into the play.  Remember that we have
our stop set at $35, so clearly a close below that level would
bring our play to an end.  ADP needs to clear the $38 level if
this rally is going to grow legs and challenge meaningful
resistance near $40.  Traders looking to enter on strength will
want to wait for a volume-backed move through the $38 level
before playing.  Use a move to the $40-41 level as an
opportunity to harvest gains.

*** August contracts expire in 2 weeks ***

BUY CALL AUG-35*ADP-HG OI=2263 at $2.20 SL=1.00
BUY CALL AUG-37 ADP-HU OI= 682 at $0.80 SL=0.25
BUY CALL SEP-35 ADP-IG OI= 144 at $3.30 SL=1.75
BUY CALL SEP-37 ADP-IU OI=1049 at $1.95 SL=1.00
BUY CALL SEP-40 ADP-IH OI=1227 at $1.10 SL=0.50

Average Daily Volume = 2.76 mln


BAX - Baxter International $38.24 (+1.66 last week)

Company Summary:
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.

Why We Like It:
Relative strength is still the name of the game and apparently
this attribute is returning to the Pharmaceutical index (DRG.X).
On Friday, the DRG index was one of the few sectors to end in the
green, which is impressive in light of another triple-digit loss
on the DOW.  Not only that, but the sector actually finished with
a 4.6% gain for the week.  Shares of BAX benefited from this
movement early in the week, briefly cresting the $40 level on
Wednesday, before succumbing to some profit taking.  While the
stock couldn't manage much of a rebound late in the week, it is
notable that it held the $38 support level and even managed a
slight gain on Friday.  If the broad market (and especially the
DRG index) can build on Friday's late-day rebound next week, then
new entries look attractive near current levels.  Risk is easy to
manage in the play, as we have our stop set at $38.  Traders
looking to enter on strength will want to see BAX clear the $40.25
level before initiating new positions.

*** August contracts expire in 2 weeks ***

BUY CALL AUG-35*BAX-HG OI=6985 at $4.20 SL=2.50
BUY CALL AUG-40 BAX-HH OI=2872 at $1.30 SL=0.75
BUY CALL SEP-35 BAX-IG OI= 901 at $5.10 SL=3.00
BUY CALL SEP-40 BAX-IH OI= 622 at $2.45 SL=1.25

Average Daily Volume = 3.91 mln


LTR - Loews Corp. $45.81 (+0.73 last week)

Company Summary:
Loews Corporation is a holding company with subsidiaries engaged
in property, casualty and life insurance (CNA Financial
Corporation); the production and sale of cigarettes (Lorillard,
Inc.); the operation of hotels (Loews Hotels Holding
Corporation); the operation of offshore oil and gas drilling
rigs (Diamond Offshore Drilling), and the distribution and sale
of watches and clocks (Bulova Corporation).

Why We Like It:
The persistent selling in the broad market finally took its toll
on our LTR play on Friday, pressuring the stock back under the
$46 intraday support level that had been holding over the past
few days.  Despite that technical victory for the bears, the
stock is holding onto the lion's share of its gains after
bottoming near $41.  With the broad market looking like it wanted
to bounce at the end of the day on Friday, we could be looking at
an attractive entry point near current levels.  It was
interesting to note that LTR really didn't sell off in the
afternoon with the rest of the market, indicating that there is
some internal strength that wants to make its presence known.  A
renewal of the bullish action we saw off the lows could easily
propel shares of LTR back up to near-term resistance at $48 and
then up toward more significant resistance at $50.  Use strength
in the broad market as an indication to initiate new positions
as LTR pushes back up through the $4 level.  Those looking for
some confirmation before playing may want to wait for a
volume-backed move through the $48 resistance level before
playing.  Remember, LTR is set to report its earnings on August
8th, and that could provide an additional catalyst over the next
week.  Keep stops in place at $45.

*** August contracts expire in 2 weeks ***

BUY CALL AUG-45*LTR-HI OI=153 at $1.95 SL=1.00
BUY CALL AUG-50 LTR-HJ OI=223 at $0.20 SL=0.00
BUY CALL SEP-45 LTR-II OI=  2 at $3.20 SL=1.50
BUY CALL SEP-50 LTR-IJ OI=256 at $1.05 SL=0.50

Average Daily Volume = 573 K


MSFT $44.41 -1.34 (-1.25 for the week)

Company Summary:
Founded in 1975, Microsoft is the worldwide leader in software, 
services and Internet technologies for personal and business 
computing. The company offers a wide range of products and 
services designed to empower people through great software -- any 
time, any place and on any device.

Why We Like It:
We lowered our stop on Microsoft last night to $44, where it 
showed amazing strength this afternoon.  As a Dow component, this 
stock fell with the rest of the market, but finally found some 
legs late in the day.  The bears attempted to force MSFT 
downward, but the stock formed an intraday double bottom, from 
which it bounced in the last hour of trading.  Expect any bounce 
in the Dow to be led by a company with good fundamentals, 
boatloads of cash, an expanding business, and unrivaled market 

While it has been a rough couple of days for Microsoft, this 
company still has a lot of upside.  It has dropped to within the 
middle of its flag formation from last week, the same point from 
which it exploded to almost $49.  This show of support has been 
impressive on a down day for both the stock and the market.  
While reports of weakness in the PC market have affected many of 
the semiconductor stocks, Microsoft's implementation of their new 
licensing agreement will help derive ongoing income from software 
users, regardless of new PC purchases.  Combined with their 
recent alliance with AT&T Wireless to provide wireless services 
to business customers, and expansion into the CRM field, the 
company continues to find new customers, rather than relying on 
previous business models.

We will target $49 on the upside, while maintaining our $44 stop 
loss.  The strength shown at this level should continue to act as 
a barometer for this play.  If the bulls that currently see value 
at this level eventually give in on a continued market drop, we 
will close the play and wait for another opportunity to play this 
stock.  While we believe in MSFT's future profit potential, we 
are concerned with the short-term trend.
BUY CALL AUG-42.50 MQF-HV OI= 5363 at $3.30 SL=1.75
BUY CALL AUG-45.00 MQF-HI OI=15105 at $1.85 SL=1.00
BUY CALL SEP-42.50 MQF-IV OI= 1170 at $4.80 SL=2.40
BUY CALL SEP-45.00 MQF-II OI= 8860 at $3.40 SL=1.75

Average Daily Volume = 41.7 mln


BBBY - Bed Bath & Beyond $27.92 (-3.33 last week)

Company Summary:
Bed Bath & Beyond is an operator of stores selling predominantly
better quality domestics merchandise and home furnishings
typically found in better department stores.  As of May, 2002,
the company had stores in 44 states.  Domestics merchandise
includes bed linens and related items, bath items and kitchen
textiles.  Home Furnishings include kitchen and tabletop items,
fine tabletop and giftware, basic housewares and general home

Why We Like It:
Despite an impressive start to the week, Retail stocks lost a
lot of their lustre as the week drew to a close.  After
rebounding as high as the $290 level in the middle of the week,
the Retail index (RLX.X) really fell apart, not only losing all
their intra-week gains, but also falling into negative territory
on Friday.  This is in contrast to the DOW, which actually
managed to end the week with a gain.  WMT is the poster child
for the Retail sector, and even it was unable to close the week
in the green.  So with that bearish picture to start with, we
are bringing shares of BBBY back onto the put list this weekend.
As badly as the RLX performed, BBBY actually did worse by giving
back even more ground and closing at its lowest level since early
November of last year.  One of the things that makes the play so
attractive, is that it still has plenty of room to fall before
testing its September lows down below $20.  The PnF chimes in
with its bearish voice after today's breakdown, as it puts the
stock back on a fresh sell signal.  Now we can focus on the
bearish price target ($18), which happens to be awfully close to
the September low at $18.70.  A rebound on Monday would present
a gift of an entry point into the play so long as that rebound
fails below the $30 level.  More realistically though, we'll be
contemplating entries as BBBY falls below $27.25 (just below
Friday's intraday low).  There is some support near $26, and
then BBBY looks to have downside to the $24 level before
finding meaningful support.  Place stops at $30.

*** August contracts expire in 2 weeks ***

BUY PUT AUG-30 BHQ-TF OI=2176 at $2.80 SL=1.50
BUY PUT AUG-27*BHQ-TY OI= 711 at $1.30 SL=0.75

Average Daily Volume = 3.88 mln


SNE - Sony Corporation $42.71 (-1.99 last week)

Company Summary:
If you like to be entertained, Sony has your fix.  Its
PlayStation home video game system alone accounts for about
11% of the electronics and entertainment giant's worldwide
sales.  As the #2 consumer electronics firm, SNE makes a host
of products including cameras, DVD players, MiniDisc and Walkman
stereo systems, computers, TVs, and VCRs.  Rounding out the
company's assets are Columbia TriStar and record labels Columbia
and Epic.

Why We Like It:
Consumer confidence was already starting to fray around the edges
before the abysmal economic reports last week that started
pointing the way to a double-dip recession.  The effects of
waning consumer confidence can be seen in the disappointing
sales numbers from major discount retailers like WalMart.  As if
that isn't bad enough, media companies have been under renewed
selling pressure recently, with Disney the latest to reveal that
consumers just aren't spending on entertainment.  That makes our
new put play on SNE the perfect combination of these bearish
factors.  Its Playstation2 game system (along with other consumer
electronics products) will see disappointing sales if the
consumer is less willing to spend and the increasingly
tight-fisted consumer will quite possibly shy away from
supporting the company's media businesses as well.  Investors
seem to have already figured this out, as the stock has been in
a persistent decline since late May.  The bulls spent the past
couple weeks defending the $44 support level, but that gave way
on Friday, with SNE slipping lower to the tune of more than 4%.
While there is some potential support near $42, there isn't
anything that can be called strong support until the $40 level.
And if the PnF chart is to be believed, SNE is headed down near
the $35-36 level (price target of $36).  A rally attempt early
next week will provide for the best entries, as it will likely
fail below the $45 level, which is now strong overhead
resistance.  Look to enter new positions as SNE rolls over in
the $44-45 area.  Otherwise, enter the play as SNE falls
under $42, pressured by more weakness in the broad market.
Stops are initially in place at $45.50.

*** August contracts expire in 2 weeks ***

BUY PUT AUG-45*SNE-TI OI=570 at $3.10 SL=1.50
BUY PUT AUG-40 SNE-TH OI= 80 at $0.80 SL=0.25

Average Daily Volume = 346 K

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The Option Investor Newsletter                   Sunday 08-04-2002
Sunday                                                      4 of 5

In Section Four:
Current Put Plays: BBOX, CCMP, DHR,  KLAC, JPM, DD
Leaps: Stop The Market, I'm Dizzy.
Traders Corner: Show Me The Money!

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BBOX - Black Box Corporation $33.20 (-3.72 last week)

Company Summary:
As a technical services company, Black Box Corp. designs, builds
and maintains network infrastructure systems.  The Black Box
team serves more than 150,000 clients in 132 countries,
providing technical services on the phone, on site and online.
Through its catalogs and Website, the company offers more than
90,000 infrastructure and networking products, and designs and
builds more than 650,000 custom products each year.

Why We Like It:
Renewed rumors about accounting problems at CSCO sent the
Networking sector (NWX.X) tumbling more than 2% again on Friday,
wiping out all the gains from earlier in the week.  That was
enough to derail the attempted bottom fishing in shares of BBOX,
sending the stock down to a fresh multi-year closing low just
above $33.  With the tight trading range in the stock over the
past few days, the logical course of action is to tighten the
noose to prevent giving back our gains.  Intraday resistance has
been building near the $34.75 level, so we are lowering our stop
to $35.  The markets may try to bounce on Monday, but a failed
rally below the $35 level can be used to initiate new positions
in anticipation of a continued decline down towards our $30
price target.  Alternatively, use a breakdown under the $33 level
to enter the play, so long as the NWX index continues to be the
playground for the bears.

*** August contracts expire in 2 weeks ***

BUY PUT AUG-35 QBX-TG OI=642 at $3.40 SL=1.75
BUY PUT SEP-35*QBX-UG OI=110 at $4.90 SL=3.00

Average Daily Volume = 485 K


CCMP - Cabot Microelectronics $38.22 (-0.54 this week)

Company Summary:
Cabot Microelectronics is a supplier of high performance
polishing slurries used in the manufacture of advanced
integrated circuit (IC) devices, within a process called
chemical mechanical planarization (CMP).  CMP is a polishing
process used by IC device manufacturers to flatten many of the
multiple layers of material that are built upon silicon wafers
and necessary in the production of advanced ICs.  CMP enables
IC device manufacturers to produce smaller, faster and more
complex IC devices with fewer defects.

Why We Like It:
The persistent weakness in the Semiconductor index (SOX.X) has
been the key point of weakness in the Technology sector in recent
weeks and Friday's plunge below the $300 level provided more
conviction for the bears in this arena.  While the SOX has now
reached a major level of support near $290-300, the continuing
deterioration in the fundamentals of this sector are showing no
signs of turning around.  Anticipation of continued sector
weakness led us to add CCMP to the put list last Thursday due to
our expectation that there should be some low hanging fruit to
pick, since the stock had substantial room to fall before testing
its recent lows.  With the SOX continuing to fall on Friday, CCMP
got moving in the right direction, shedding nearly 4%, and closing
back under its 20-dma ($38.69).  While we're looking for the stock
to continue declining, there exists the outside chance of a
rebound in the SOX next week, and we want to protect against that
possibility by lowering our stop to $40 this weekend.  A failed
bounce below that level can still be used to initiate new
positions, as can a solid drop under the $37.50 level (just below
Friday's intraday lows).  Consider harvesting gains on a dip near
the $36 support level and continue to monitor the SOX for
confirmation of strength/weakness.

*** August contracts expire in 2 weeks ***

BUY PUT AUG-40*UKR-TH OI= 746 at $3.70 SL=2.25
BUY PUT AUG-35 UKR-TG OI=1866 at $1.50 SL=0.75

Average Daily Volume = 1.44 mln


DHR - Danaher Corp. $58.96 (+0.01 last week)

Company Summary:
Danaher Corporation operates in two business areas: 
Process/Environmental Controls and Tools and Components.
The company's Tools and Components segment produces and
distributes general purpose mechanics' hand tools and automotive
specialty tools.  Among the household names they are responsible
for are Sears' Craftsman line, Allen wrenches, and NAPA hand
tools.  The Process Controls division, led by Veeder-Root, makes
leak detection systems for underground storage tanks, as well as
sensors, switches, measurement devices, and communications and
power protection products.

Why We Like It:
Under pressure from the continuing broad market decline, DHR got
moving in the right direction on Friday, giving up nearly 2%.
When we added the play on Thursday, this looked like the high
odds outcome given the fact that DHR had already pulled back to
close below its 20-dma, dragging the daily Stochastics oscillator
back into a bearish decline.  While this is a good start to the
play, we need to be careful here, as the stock managed to find
support near the $58.50-59.00 level, the site of some price
congestion from a week ago.  A rebound next week is entirely
possible and based on the strength of that rebound, we'll know
whether it is an attractive entry point into the play or a
warning that the decline is coming to an end.  Use a failed rally
near the $60 level or up near the $62 level to initiate new
positions.  Alternatively, a decline below the $58 support level
can be used to initiate momentum-based positions so long as the
broad market continues its decline.

*** August contracts expire in 2 weeks ***

BUY PUT AUG-60*DHR-TL OI=2057 at $2.70 SL=1.25
BUY PUT AUG-55 DHR-TK OI= 346 at $0.95 SL=0.50

Average Daily Volume = 1.08 mln


KLAC   $37.08 -0.20 (-0.21 for the week) 

Company Summary:
KLA-Tencor is the world leader in yield management and process 
control solutions for semiconductor manufacturing and related 
industries. Headquartered in San Jose, Calif., with operations 
around the world, KLA-Tencor ranked #6 on S&P's 2002 index of the 
top 500 companies in the U.S. KLA-Tencor is traded on the Nasdaq 
National Market under the symbol KLAC. (Source: company release)

Why We Like It:
KLAC-Tencor  drifted down today with the rest of the  
semiconductor-related stocks.  It finished down only $0.20, 
however traded as low as $36.21.  While KLAC does not produce the 
chips, the chip companies are their end users.  A warning after 
yesterday's close from National Semiconductor (NSM) regarding 
revenue being flat in the next quarter, due to low personal 
computer demand, underscored the ongoing problem for the sector.  
Low demand equals low revenue, which equals lower profits, which 
equals less money to spend with KLAC.

Taiwan Semiconductor, the world's largest semiconductor foundry, 
recently announced it was slashing its 2002 budget by $500 
million.  The ongoing warnings and disappointing revenues have 
driven the Semiconductor Index (SOX.X) below support at 300. 
While the index finished at 301.41, its intraday low was 295.20. 
At the risk of repeating ourselves with new data, the index set 
another 52-week low today.  KLAC continues its walk down the 
plank.  KLAC bottomed last October at $28.61.  It is one of the 
few companies connected to this sector not to have reached these 
lows.  While bulls will look at this as a sign of strength, we 
see it as having more room to fall.  If KLAC's customers are 
doing poorly enough to see their stocks fall below those levels, 
then KLAC has a good chance of reaching these lows as well.

This week's economic numbers, which show a slowing economy, do 
not figure to help the PC related industries.  There were far 
fewer new jobs created than expected, and customers need income 
with which to buy computers.  As noted in the original write-up 
on this play, KLAC is working on a bearish vertical count of $26 
in the point and figure chart.  Its recent four-box reversal up, 
ahead of earnings, cemented this count and the stock has reversed 
back down, a true sign of weakness.  We will maintain our 
original goal of $30 for this stock.

BUY PUT AUG-40 KCQ-TH OI=5214 at $4.10 SL=2.00
BUY PUT SEP-40*KCQ-UH OI=3741 at $5.60 SL=3.00

Average Daily Volume = 15.1 mil


JPM $23.85 -1.17 (+1.60 for the week)

Company Summary:
JP Morgan Chase & Co. is a global financial services firm with 
operations in over 60 countries. The Company's principal bank 
subsidiaries are The Chase Manhattan Bank, Morgan Guaranty Trust 
Company and Chase Manhattan Bank USA, National Association. Its 
principal non-bank subsidiaries are its investment bank 
subsidiaries, Chase Securities Inc. (CSI) and J.P. Morgan 
Securities Inc. (JPMSI). The bank and non-bank subsidiaries of JP 
Morgan Chase operate nationally, as well as through overseas 
branches and subsidiaries, representative offices and affiliated 

Why We Like It:
J.P. Morgan finally gave in along with the rest of the market.  
Its fall today was not only due to market weakness, however.  
Apparently, there may be more problems related to JPM's Enron 
involvement.   The Federal Energy Regulatory Commission (FERC) is 
now looking into loans obtained by two Enron pipeline 
subsidiaries totaling $1 billion, just prior to Enron's 
bankruptcy filing.  The banks that provided these loans were none 
other than J.P. Morgan and Citibank.  J.P. Morgan provided $450 
million to the pipelines.  The FERC order directed the companies 
to explain why the loans "were not imprudently incurred and 
therefore unrecoverable by the pipelines in any future rate 
proceedings before this commission."  FERC is suggesting the 
loans may have milked the federally regulated pipeline 
subsidiaries and shifted the cash illegally to the parent 
company.  In our last update, we suggested JPM may have more 
issues that the public has not yet been made aware of, and 
apparently this was true.  

In addition to the problems with Enron, and a weakening Dow, 
there is concern over JPM's derivatives portfolio.  JPM is by far 
the nation's largest holder of derivatives.  The company 
currently has about $51 billion in exposure to these instruments.  
JPM is a dominant player in the market for selling these 
products, which are used to hedge risk in currencies, commodities 
and interest rates.  At the end of 2001, JPM reported $170 
million in non-performing derivative contracts, compared to $37 
million in 2000.  At the end of last month, JPM reported $4.38 
billion in non-performing loans, investments and other assets, 
which was a 75% increase over the previous year. As a result, 
investors are nervous about JPM's ability to manage its risk, and 
the derivatives position seems like a potential time bomb.  While 
we certainly cannot tell in advance if these positions will cost 
the bank, this company seems to have established a pattern of 
making bad bets.

We are holding this position, and maintain our price target of 
$20.  We will leave our current stop at $25, as the Dow may 
experience a bounce on Monday and we do not want to be 
stopped out early.

*** August contracts expire in 2 weeks ***

BUY PUT AUG-25*JPM-TE OI=9126 at $2.30 SL=1.00
BUY PUT AUG-22 JPM-TX OI=7253 at $1.15 SL=0.50

Average Daily Volume = 10.5 mln


DD $39.09 -2.44 (-2.79 for the week)

Company Summary:
DuPont - the oldest industrial company listed on the Fortune 500  
was founded on July 19, 1802, by French immigrant Eleuthere 
Irenee du Pont as a small family operation which manufactured 
black powder for guns and blasting. Entering its third century 
today with 79,000 employees and operations in 70 nations, DuPont 
invented some of the world's best-known innovations and 
technologies. These include household names as nylon, Teflon® 
non-stick coating, Stainmaster® carpet, Lycra® brand elastane, 
Kevlar® fiber, Corian® solid surfaces, Tyvek® protective 
materials and Solae(TM) soy protein. (Source: company release)

Why We Like It:
DD's recent statements about the unsure outlook for the company 
for the rest of 2002 finally caught up with them on a day when 
the broader market took a dive.  As a Dow stock with exposure to 
many areas of the economy, this stock was down over $2, losing 
almost 6% on the day.  DD's products are found in sectors ranging 
from transportation and agriculture, to home furnishings and 
nutrition.  As the economy weakens, this stock will continue to 
weaken with it. This week's economic data got worse each day.  

On Wednesday we received bad news when GDP came in lower than 
expected, showing just a 1.1% gain in the economy this quarter, 
down significantly from the previous quarter. Thursday brought 
ISM numbers that were below expectations, along with high initial 
unemployment claims.  Friday revealed just 6,000 new jobs 
created, versus expectations of 68,000 and incomes rising at a 
slower rate than hoped.  The economy appears to be shrinking, and 
this is bad news for a company with its fingers in so many 
sectors of the economy.  The semiconductor index also sank to 
another new 52-week low, casting a longer shadow on DD's purchase 
of Chemfirst, which makes chemical products for that sector.

DD's role as a Dow component will also create some jitters among 
investors watching the index give back its recent gains.  If the 
market re-tests its lows in the 7500 range, this stock is sure to 
be riding shotgun.  We are lowering our stop loss from $44.00 to 
$42.00 in order to lock in a profit in the event of a rebound by 
the Dow.  We are maintaining our target price of $36.75, at the 
low end of its range on July 22, which coincides with the point 
and figure bearish vertical count of $36.

BUY PUT AUG-45 DD-TI OI=297 at $6.40 SL=3.20
BUY PUT SEP-45*DD-UI OI= 45 at $6.70 SL=3.50
Average Daily Volume = 3.02 mil

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Stop The Market, I'm Dizzy
By Mark Phillips

Remember the bumper sticker, "Stop the World, I Want to Get Off"?
With slight modifications, I think that is an apt description of
how I view the current market.  Does anyone else feel like
they've been on a roller coaster for the past 2 weeks?  Just to
recap, over the past 2 weeks, the DOW has plunged from 8100 to
7500, rocketed northward to the 8700 level and plunged back to
end at roughly 8300 on Friday.  Volatile markets like this
provide ample opportunity for high-adrenaline day traders to
either get rich or get broke.  And I think I can truthfully say
that I have never traded a market that was quite so volatile and

Speaking of volatility, the VIX has really been on a
roller-coaster ride.  Just two short weeks ago, the VIX was
sitting at 43 and since then it has risen to above 56, fallen
back to 33 and then launched back to 49, before settling in
around 45 Friday afternoon.  Are you dizzy yet?  Aren't you glad
we have a longer-term focus here in the world of LEAPS?

So let's see if we can clear away the near-term haze and try to
divine where things may be headed from here.  Jim mentioned in
the Market Monitor on Friday that when the VIX moves to panic
levels (above 50) it frequently creates a double-top formation,
as the initial decline off the highs needs to be confirmed.  That
would be analogous to the familiar double-bottom formation that
we would so desperately like to see in our poor bedraggled
markets.  While this double-top formation doesn't always make
its appearance, with the sharp market decline over the past few
weeks and the renewal of fear, it is looking increasingly likely
that it will come to pass this time, and soon.

As I see it, there are two possible outcomes for the current
market.  The first possibility is that we will continue downwards
until we near the recent lows, bounce again to confirm support and
then begin some healthy base-building before gradually beginning
the march back northwards.  The other possibility is that as we
continue towards the lows, some other negative event or
development rears its ugly head and really spooks investors,
driving the markets well below the recent lows.  That would start
this process of searching for a tradable bottom all over again.
Let me be the first to say that I really hope it is the first
scenario that plays out, because the latter is not a pleasant
prospect.  The problem is that there are so many possible
developments that could cause the latter one to develop.  A
surprise related to the August 14th CEO certification of
corporate financials, a new requirement to expense options, a
new corporate scandal, war with Iraq, failure of a major
financial institution; each of these have the potential to send
the markets spiraling lower.  I don't know what the likelihood
is of any of them, but they are risks and I think fear of these
myriad possibilities is a big part of the market weakness we are
still mired in.

Last weekend I got a bit hyperactive with new plays and to be
honest I think I may have acted a bit too soon.  Looking at the
market action, particularly in the latter part of the week, I
am hesitant to add a lot of new plays again this week, so we're
going to keep it pretty light until we see some more constructive
market action.  In fact, I'm not going to add a single play.  As
recently as the close on Wednesday, I had 7 different bullish
plays that I was seriously considering as new Watch List plays.
Every single one of them either took out major support or traded
poorly relative to the broad market.  And with the VIX hovering
near 45, the risk is too great to consider fresh long-term
bearish plays.  Prudence demands that I sit on my hands here until
we see how the next week plays out.  Trust me when I say I don't
like doing that, but I take my responsibility in this forum VERY
seriously.  And that responsibility is first to help you protect
your capital and then to help grow it.  I believe we are still
very much in the protection phase of that relationship right now.

Although we had some impressive price action early in the week
in several of our Watch List plays, we didn't initiate any new
positions this week for a variety of reasons, as detailed below.


BRCM - How very disappointing the action in the Semiconductor
index has been over the past couple weeks.  Contrary to its
behavior in past market bottoms, the SOX just continues to drift
lower with very little in the way of bullish interest.  Friday's
intraday violation of the $300 level was very disconcerting and
was likely a big part of the reason for BRCM's continued slide
towards support.  Our $16 stop is the line in the sand.  If it
holds as support, then that rebound can be used for initiating
new positions.  If not, then we'll jettison the play post-haste.

INTC - Same picture here.  INTC has been trying to get some
positive action going, but Friday's poor action in the SOX
finally dragged shares of the Pentium-producer back under the
$17 support level. That leaves very little room between INTC
and its stop.  A volume-backed bounce (not a gap) from above that
level can be used for new positions.  Otherwise we'll want to
steer clear.  The action in the overall SOX is critical here.
Until the bulls show some interest and start posting higher lows,
INTC is likely to be on the ropes.

GD - I really gave serious thought to dropping GD this weekend
to simply lock in the gain.  But rather than cut it off
prematurely (I still see the potential for a breakdown under
the $80 level), I'm just going to continue to ratchet our stop
lower.  Intraday resistance last week was just below $84, so
that becomes the new level of our stop.  A breakdown under the
$80 level will likely take us into the mid-$70s, and we want to
use that sort of move to lock in gains and exit the play.  Please
do not enter the play at current levels -- it does not present
a favorable risk to reward ratio.  And of course with a more
than 30% gain in the play right here, nervous investors may just
want to harvest that gain near current levels.

Watch List:

BA - Many would say that BA's recent price action is poor, and
I would agree.  But what I do like is that we appear to be
setting up for an attractive entry where risk is easier to
manage.  Breaking back below $40 on Friday, BA appears to be
headed back towards its recent lows, which are also the site of
solid support and the 62% retracement.  A rebound from the
vicinity of $37-38 looks like a very nice entry, as we can follow
it up with a tight stop at $36.50.  That's right, in this
bottoming formation (hopefully), a print below $37 will generate
a fresh PnF sell signal, even if only on an intraday basis.  That
will give me a clear signal that bottom-fishing in this arena was
a bad idea.  That's why I'd really prefer to see a print of $44
before taking a position on the next pullback.  But we'll take
what we can get.

WMT - While it didn't put in a gap move like so many of our other
plays last week, I stayed away from a fresh entry.  I really
detest taking long-term entries on strength, preferring to catch
them on a pullback.  Well that looks like what is shaping up for
shares of WMT.  We have a fresh Buy signal generated on the PnF
chart after last week's rally and now we're pulling back to
confirm support.  Look for new entries in the $45-46 area on a
rebound.  Just keep in mind that a trade below $44 will negate
the recent buy signal and put this retailer back into bear

GE - GE was definitely one of the stronger stocks in this market
last week, owing in part to the fact the company has stated it
will certify its financials AND begin expensing its options.
That propelled the stock as high as $32 last week, before the
bears let some air out of the balloon.  Look for support in the
vicinity of last week's gap, as it should provide support if
this rebound is for real.  If the bottom of the gap holds as
support, then we can consider new entries in the $28-29 area.

MSFT - That wasn't exactly what I had in mind, but I think it
was constructive nonetheless.  We were looking for a breakout
of the inside day to give us an entry into the MSFT play, and
Monday's wild ramp provided one heck of a breakout.  Fortunately,
it was a big euphoric gap, which was almost certain to get filled.
As I've pointed out numerous times before, we don't want to enter
new LEAPS positions on gap moves, due to their propensity to fill
in.  Use a rebound in the $42-44 area to initiate new positions.

QQQ - Another gap move here, that kept us out of the play last
week.  See how those gaps can keep us out of trouble.  Now that
the gap has filled, we could very well be looking at a decent
entry next week near the $22 level.  I think we'll need to see
the Semiconductor index (SOX.X) halt its decline before we'll
have a solid bottom under the QQQ, so keep an eye on that symbol
if contemplating an entry.

DJX - You know, we really couldn't ask for more.  Clearly that
euphoric move on Monday was not the time to enter new LEAPS
positions, but it was really encouraging to see support hold and
the DOW close back over the 8300 level on Friday.  We could
rebound from this level, but I still see the high odds entry as
a successful retest of the $80-81 level.  If the DOW falls back
under 8000 on a closing basis, then stay out.

The August 14th deadline really isn't a deadline, so much as a
starting line for CEOs to either profess the cleanliness of their
books or to reveal what problems actually exist.  Depending on
what skeletons are or are not revealed, it could either unleash
a huge bloodbath unlike anything we have seen over the past 2
years or it could cause the investing public to breath a
collective sigh of relief.  If I knew which way it was likely to
go, I'd certainly be positioned to profit from it.  But I don't
know, and I really don't think anyone does.  

Did you catch the news item from Goldman Sachs last week, where
they are expecting the Fed Funds rate to drop to 1.00% before the
end of the year?  That means a reduction of 75 basis points!
Given the lack of response to the previous interest rate cuts, I
really don't think an additional 75 basis points would have much
of an effect on the economy.  But I do believe it would have a
devastating effect on investors' confidence, as they would
wonder, "Oh my God, what is it that the Fed sees that we haven't
seen yet?"

Here is the dilemma as I see it.  We may be in the process of
putting in a solid bottom that could last for several months.
That is the picture that I am hoping for and I believe the
trading pattern in the major indices (DOW and S&Ps) and the fresh
spike in the VIX is pointing in that direction.  But we could be
on the cusp of a fresh wave of selling that takes the market to
fresh lows.  The August 14th date looms as the most likely
catalyst to usher in that less-than-favorable scenario.

So I am doing with my money, exactly what I suggest you do -- be
very careful.  That isn't to say that there aren't some winning
trades that we can take advantage of.  But until we start to see
some clarity, position sizes should be small (no greater than
1/2 positions) and stops should be kept tight.  If we do get a
successful test of support in the broad market, there will be
plenty of time to jump on the bullish bandwagon and build some
solid gains as we head into the end of the year.  But in order
to do that, we need to effectively protect our capital in this
uncertain market, so that we have a pile of cash available to
invest after the smoke begins to clear.

Tread Carefully!


LEAPS Portfolio

Current Open Plays


BRCM   07/10/02  '03 $ 20  RCQ-AD  $ 3.10  $ 3.00  - 3.22%  $16
                 '04 $ 20  LGJ-AD  $ 6.00  $ 5.80  - 3.33%  $16
INTC   07/26/02  '03 $ 20  NQ -AD  $ 2.00  $ 1.65  -17.50%  $15.50
                 '04 $ 20  LNL-AD  $ 4.10  $ 3.60  -12.20%  $15.50

GD     07/17/02  '03 $ 95  GD -MS  $11.70  $16.20  +38.46%  $84
                 '04 $ 90  KJD-MR  $13.50  $18.10  +34.07%  $84

LEAPS Watchlist

Current Possibles


WMT    03/31/02  $45-46        JAN-2003 $ 50  WMT-AJ
                            CC JAN-2003 $ 45  WMT-AI
                               JAN-2004 $ 50  LWT-AJ
                            CC JAN-2004 $ 45  LWT-AI
BA     06/30/02  $37-38        JAN-2003 $ 45  BA -AI
                            CC JAN-2003 $ 40  BA -AH
                               JAN-2004 $ 45  LBO-AI
                            CC JAN-2004 $ 40  LBO-AH
                               JAN-2005 $ 50  ZBO-AJ
                            CC JAN-2005 $ 40  ZBO-AH
GE     07/14/02  $28.50        JAN-2003 $ 30  VGE-AF
                            CC JAN-2003 $ 27  VGE-AY
                               JAN-2004 $ 30  LGR-AF
                            CC JAN-2004 $ 25  LGR-AE
DJX.X  07/28/02  $80-81        DEC-2002 $ 86  DJX-LH
                 $83        CC DEC-2002 $ 78  DJX-LZ
                               DEC-2003 $ 88  ZDJ-LJ
                            CC DEC-2003 $ 80  ZDJ-LB
MSFT   07/28/02  $42-44        JAN-2003 $ 45  MQF-AI
                            CC JAN-2003 $ 40  MQF-AH
                               JAN-2004 $ 50  LMF-AJ
                            CC JAN-2004 $ 45  LMF-AI
                               JAN-2005 $ 50  ZMF-AJ
                            CC JAN-2005 $ 40  ZMF-AH
QQQ   07/28/02   $22           JAN-2003 $ 25  OZC-AY
                            CC JAN-2003 $ 20  OZC-AS
                               JAN-2004 $ 25  LRI-AY
                            CC JAN-2004 $ 20  LRI-AE


New Portfolio Plays


New Watchlist Plays





Show Me The Money!!  

By Mike Parnos, Trading With Attitude

It’s said that, in the market, money isn’t made or lost, it just 
changes pockets.  In Jerry McGuire, Cuba Gooding shouted, "Show 
me the money!!!" Today I’m going to show you the money, but it’s 
going to take some work on your part to get it into your pocket.  
Are you ready for this?  We’ll find out soon enough.

Get ready for some mental exercise.  Physical exercise, as you 
must know by now, is out of the question for the Couch Potato 
Trading Institute student.  It’s not part of the curriculum.  
Every seven minutes of every day, someone in an aerobics class 
pulls a hamstring.  The risk-reward is simply unacceptable.
Remember mental exercise is fine as long as you have beer, a 
Quarter-Pounder with cheese and a bottle of Extra-Strength 
Tylenol within arm’s reach.

This may be a little complicated, but CPTI students, if nothing 
else, are well rested.  So, damn the torpedoes and full speed 
ahead.  Put down your remote and pay attention.  Pretend it’s 
Sunday morning, the stock market is closed, and there’s nothing 
on TV but The Brady Bunch and Reverend Ike.  We’re going to need 
your undivided attention. You're going to like this one.  

The In-The-Money Strangle

The Couch Potato Trading Institute’s "Strategy Du Jour" at was 
originally perfected by veteran option strategist Albert DeSalvo.  
He took minimal risk, knew his entry and exits, and kept a low 
profile as he executed many successful strangles in his 
illustrious career.

The ITM (In-The-Money) Strangle consists of the purchase of an 
in-the-money LEAP put and an in-the-money LEAP call with the same 

For example:
Micron Technology (MU) is trading at $20.65.  We know that, in 
two weeks MU, can trade at $15 or at $30, but it’s more likely to 
stay between $17.50 and $25.  These are the strikes we’ll use to 
establish the ITM Strangle position.  Let’s take it step by step.  
For our example we’ll use a 10-contract position.

Ideally, we would like to put on the ITM Strangle when volatility 
is low and there is an expected increase in volatility.  

1.  Buy 10 contracts of Jan 04 $25 puts @ $8.90 x 1K = $8,900
2.  Buy 10 contracts of Jan 04 $17.50 calls @ $8.20 x 1K = $8,200
3.  Total amount of money out of pocket $17.10 x 1K =	$17,100

Here’s the tricky part.  We just spent $17,100.  Sounds like a 
lot, doesn’t it?  However, our actual risk is substantially less.  
By buying this ITM Strangle, we’ve established a position that, 
regardless of where MU goes, there will be a minimum intrinsic 
value of $7.50 - the difference between the strike prices ($25 - 
$17.50 = $7.50).

Try it.  If, at expiration, MU is at $24, the $17.50 call is 
worth $6.50 and the $25 put is worth $1.00, totaling $7.50.  If
MU is at $15, the $25 put is worth $10 and the $17.50 call 
expires worthless.  But, it’s not likely we will hold this 
position to expiration.

So our actual risk in this position is the initial out of pocket 
($17,100) less the minimum intrinsic value ($7,500) -- $9,600.

Now, we have 18 months to make money.  Let’s get started.
1. Sell 10 cont. of the Sept 02 $25 calls @ $1.10 x 1K = $1,100
2. Sell 10 cont. of the Sept 02 $17.50 puts @ $1.35 x 1K = $1,350
We’ve just taken in a total of $2,450.  A 25% return on a risk of 
$9,600 for about six weeks.  Our risk is now only $7,150.

That was so much fun we may do it again for the next option 
expiration - and reduce our risk even further.  After we sell the 
fourth time, our risk is gone and it’s all gravy the rest of the 

Think about it.  If we can do that 12 times during the 18-month 
life of the position, we would take in $29,400 on our original 
risk of $9,600.  It doesn’t get any better than that.

OK, it’s time for a break.  That’s a lot to absorb in one 
sitting.  Make sure you are clear on this before we move on to 
the "What would happen if . . ." section.  Take a few deep 
breaths, a trip to the fridge, the bathroom, pet your dog, give 
your wife a good listening to (or listen to your dog and pet your 
wife), remind your husband to put the seat down, caress the TV 
Guide, and daydream about what you’re going to do with all the 
money you’re going to make if you can master this strategy.

What would happen if . . .

Since we don’t live in a perfect world, there will be 
complications - count on it.  Into each life some rain must fall.  
But if you have an umbrella, a little rain "ain’t no big deal." 
We never trade unless we have a plan, right? 

Q:  MU threatens to break upper resistance and is at $25 with two 
weeks to go before option expiration and the cost to buy it back 
is $1.25?

A:  You would do nothing.  (CPTI students love that answer) 
Remember, you are covered by the long Jan. 04 $17.50 call that is 
now $7.50 in the money.  That means you have a high delta that 
will continue to be higher than the delta of the short option up 
to the last few days prior to expiration. It makes no sense to 
buy back a short option (especially one that’s covered by a long 
position) while there is still time value.  Why pay $1.25 to buy 
back an option when it will cost you nothing to buy back that 
same option in two weeks?

The same logic applies if MU would go down to $15.  The long Jan. 
04 $25 put would be increasing in value faster than the short 
Sept. 02 $17.50 put.

Not to worry, it’s entirely possible the stock will retrace and 
return to the trading range.  Remember, the $25 and $17.50 
strikes were chosen because they represent approximate resistance 
and support levels.

If, at an expiration, MU has gone too far in a particular 
direction, you can always unwind the position and you should 
still show a profit.  The risk is minimal.

As you become more sophisticated option traders, there are ways 
you can play the bounces by repurchasing and reselling the short 
options at appropriate times to take in additional premium.  It’s 
not the CPTI way, but for you "players" out there, it’s a way to 
do some wheeling and dealing within the parameters of a basically 
conservative trade.  
We still need to be cautious in position selection.  That is true 
in many areas of life.  Although Albert DeSalvo never met a 
strangle he didn’t like, he eventually met his match.  He didn’t 
execute his last strangle properly and he paid the price.  It’s a 
lesson from which we can all learn.

The point is, take your time, evaluate everything before you put 
on a trade.  Remember, the early bird may get the worm, but it’s 
the second mouse that usually gets the cheese.

I showed you the money.  It’s there for the taking.  The money 
can be transferred into your pockets, but only if you take your 
hands out and learn to use them efficiently and productively.

Happy trading.  Make profits, not stress.  Wake me when it’s 

Mike Parnos

Your questions and comments are always welcome.  

P.S.  Here is an email that has been circulating.  Thought you 
might enjoy it.

Investment Counselors claim to always be looking out for their 
clients. They’ve done intensive research, consulted with 
countless analysts and have come to a conclusion.  They are now 
advocating the following strategy:

If you had bought $1000.00 worth of Nortel stock one year ago, it 
would now be worth $49.00.

Had you bought Enron, you would have $16.50 of your original 

With WorldCom, you would have less than $5.00 left.

However, if you had bought $1,000.00 worth of Budweiser (the 
beer, not the stock) one year ago, drank all the beer, then 
turned in the cans for the 10-cent deposit, you would have 

Based on the above, the current investment recommendation is to 
drink heavily and recycle.

Tired of waiting on trades to execute?
Does your broker offer Stop Losses on Options?

Trade instantly with Stop Losses at PreferredTrade Inc.
Stop Losses based on the option price or the stock price.
Move your trading into the next millennium with PreferredTrade.

Anything else is too slow!



Please read our disclaimer at:


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Contact Support
The Option Investor Newsletter                   Sunday 08-04-2002
Sunday                                                      5 of 5

In Section Five:

Covered Calls: Understanding The Buy-Write Order
Naked Puts: Investing 101: Buying "Valuable" Stocks
Spreads/Straddles/Combos: Stocks Retreat Amid Renewed Concerns

Updated In The Site Tonight:
Market Watch
Market Posture

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offers true direct access to each option exchange offers stop and 
stop loss online option orders offers contingent option 
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online spread order entry for net debit or credit offers fast 
option executions

PreferredTrade offers these online option trading features and 
more; call 1-888-889-9178 or click for more information.



Covered-Call Basics: Understanding The Buy-Write Order
By Mark Wnetrzak

One of our readers asked for an explanation of the "Buy-Write"
order, which is a common method of initiating a covered-call

In simple terms, a buy-write order involves buying a stock and
selling its option simultaneously.  When placing an order for a
buy-write, you are requesting to purchase the shares and sell the
(call) options for a specific "net" price, with both transactions
occurring at the same time.  Since the cost basis is established
prior to the trade, a buy-write order can be a useful method to
initiate a new covered-call position.  The exact phraseology is
not important but a specific "net-debit" must be given when the
trade instructions are delivered to the agent.  The floor broker
or clearing-house will fill the order if the specified net-debit
can be achieved through any combination of stock and call-option

One of the advantages of this technique is that it prevents the
possibility of "slippage" during the position entry process when
the premium in the call option declines.  This problem happens
frequently in the plays we list as many are opened in the first
hour of trading on the Monday after the newsletter is published.
If too many calls are sold without any buying pressure, the bid
premium drops quickly towards intrinsic value and the (ITM) play
becomes unfavorable.  Traders who attempt to "leg-in" to these
positions (buying the stock with plans to sell the call later)
are often surprised to see the previously overvalued premiums
disappear before they can write the options that complete the

The majority of covered-call positions we recommend in the OI
newsletter are "in-the-money" plays.  We favor this conservative
strategy as it provides new investors with a relatively stable,
annualized return even in a neutral market.  We try to construct
positions that utilize over-valued option premiums to provide a
reasonable profit potential with adequate downside protection.
Our extensive research exposes issues that have a higher than
average probability of finishing above the sold strike price at
expiration, and whose option premium provides a final cost-basis
near a recent technical support level or trading range bottom.
This conservative approach compliments the buy-write technique
because the risk/reward ratio in the covered-write position can
be positively established without the risk of transaction losses
during the opening trades.  The stock and options prices do not
have to be monitored during the day's activity, as the order will
be executed only when the appropriate net-debit is achieved.  In
addition, this type of trading works very well with low volume
issues and provides the market-maker with an opportunity to fill
the request based on other orders in the pits.  The buy-write can
also be used with unusually volatile stocks that novice investors
might otherwise avoid when choosing candidates for a conservative
covered-write position.

Trade Wisely!

Note:  Margin not used in calculations.

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

LVLT    5.75   6.98   AUG   5.00  1.20  *$  0.45  10.7%
ICOS   19.01  23.73   AUG  17.50  2.55  *$  1.04   9.2%
AMLN   10.00  11.95   AUG  10.00  0.90  *$  0.90   8.6%
CREE   13.98  14.11   AUG  12.50  2.30  *$  0.82   7.6%
WEBX   13.88  13.61   AUG  12.50  2.20  *$  0.82   7.6%
NPSP   17.11  20.26   AUG  12.50  5.60  *$  0.99   7.5%
SNDK   14.40  13.18   AUG  12.50  2.85  *$  0.95   7.1%
TRLY    6.31   5.86   AUG   5.00  1.60  *$  0.29   6.7%
SBL     8.58   9.20   AUG   7.50  1.50  *$  0.42   6.4%
FTI    17.40  17.38   AUG  15.00  3.00  *$  0.60   6.0%
HYSL   17.85  21.20   AUG  17.50  1.05  *$  0.70   6.0%
BRCD   18.50  16.68   AUG  15.00  4.40  *$  0.90   5.5%
NPSP   20.89  20.26   AUG  17.50  4.00  *$  0.61   5.2%
HGSI   14.98  16.02   AUG  12.50  2.90  *$  0.42   5.0%
IMDC   16.00  15.99   AUG  12.50  3.90  *$  0.40   4.8%
IVGN   30.88  35.13   AUG  25.00  6.90  *$  1.02   4.6%
IVGN   32.68  35.13   AUG  27.50  6.00  *$  0.82   4.5%
EXTR   10.67   9.40   AUG  10.00  1.70   $  0.43   4.2%
BRCM   20.39  16.85   AUG  17.50  3.90   $  0.36   1.9%
JNPR    8.90   7.23   AUG   7.50  1.75   $  0.08   1.2%
DRIV    9.19   6.95   AUG   7.50  2.25   $  0.01   0.1%

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


Here we go again - back on the Roller-Coaster!  Will the current
move down by the major averages end with a successful test of the
July low?  As always, time will tell.  The key is to have a plan
to protect your capital in case the test is unsuccessful.  I still
believe the best case scenario would for a lateral move and the 
creation of a Stage I base.  Stocks that are on the early exit
watch list for this week include:  Sandisk (NASDAQ:SNDK) - below
30-dma; FMC Technologies (NYSE:FTI) - monitor closely; Brocade 
Communications (NASDAQ:BRCD) and Broadcom (NASDAQ:BRCM) - both 
back to where they were last week; and Extreme Networks (NASDAQ:
EXTR) - at a key moment.  Juniper Networks (NASDAQ:JNPR) and 
Digital River (NASDAQ:DRIV) both appear headed lower and exiting
now may be prudent, depending on your outlook.

Positions Previously Closed: 

Zixit (NASDAQ:ZIXI) and Sprint PCS (NYSE:PCS). 


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

ALXN   13.73  AUG 12.50   XQN HV  1.55 62    12.18   14    5.7%
ENDP    8.58  AUG  7.50   IUK HU  1.45 26     7.13   14   11.3%
FDRY    7.50  AUG  7.50   OUJ HU  0.45 1878   7.05   14   13.9%
GCOR   10.16  AUG 10.00   UGO HB  0.70 155    9.46   14   12.4%
ISRG    7.52  AUG  7.50   AXQ HU  0.35 28     7.17   14   10.0%
OTEX   20.41  AUG 17.50   QFT HW  3.40 77    17.01   14    6.3%
ULGX    5.32  AUG  5.00   OZU HA  0.70 25     4.62   14   17.9%

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

ULGX    5.32  AUG  5.00   OZU HA  0.70 25     4.62   14   17.9%
FDRY    7.50  AUG  7.50   OUJ HU  0.45 1878   7.05   14   13.9%
GCOR   10.16  AUG 10.00   UGO HB  0.70 155    9.46   14   12.4%
ENDP    8.58  AUG  7.50   IUK HU  1.45 26     7.13   14   11.3%
ISRG    7.52  AUG  7.50   AXQ HU  0.35 28     7.17   14   10.0%
OTEX   20.41  AUG 17.50   QFT HW  3.40 77    17.01   14    6.3%
ALXN   13.73  AUG 12.50   XQN HV  1.55 62    12.18   14    5.7%

Company Descriptions

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

ALXN - Alexion  $13.73  *** Technical Speculation ***

Alexion Pharmaceuticals (NASDAQ:ALXN) develops pharmaceutical 
products for the treatment of heart disease, inflammation, cancer
and diseases of the immune system.  The company's two lead product
candidates are genetically altered antibodies that target specific
diseases that arise when the human immune system induces undesired 
1inflammation in the human body.  Alexion's product candidates are
designed to block components of the human immune system that cause
undesired inflammation while allowing beneficial components of the 
immune system to remain functional.  Not much news on Alexion but
this position is based on the formation of a short-term head-n-
shoulders bottom in the company's stock and signs of increased
accumulation.  Short-term speculation with a relatively low-risk
cost basis.

AUG 12.50 XQN HV LB=1.55 OI=62 CB=12.18 DE=14 TY=5.7%

ENDP - Endo Pharmaceuticals  $8.58  *** Bottom Fishing! ***

Endo Pharmaceuticals (NASDAQ:ENDP) is a specialty pharmaceutical
company specializing in pain management.  The company is engaged
in the research, development, sale and marketing of branded and 
generic prescription pharmaceuticals used primarily to treat and
manage pain.  The company's primary area of focus is analgesics,
with a portfolio of branded products that includes Percocet, 
Lidoderm, Percodan and Zydone.  Endo's generic portfolio is 
comprised of products that cover a broad range of indications,
most of which are focused in pain management.  Endo had a bad 
June after reporting disappointing clinical trial results.  More
recently, Endo reported a strong second quarter on continued 
growth of its lead products and even raised guidance for the rest
of 2002.  This week, Endo received tentative approval from the
FDA for an abbreviated new drug application for Oxycodone.  Endo 
believes that once final FDA approval is granted, it will have 
180 days of marketing exclusivity of the tablets.  The current 
technical outlook is recovering and our position offers good
profit potential at the risk of owning Endo at a favorable cost

AUG 7.50 IUK HU LB=1.45 OI=26 CB=7.13 DE=14 TY=11.3%

FDRY - Foundry Networks  $7.50 *** Earnings Rally ***

Foundry Networks (NASDAQ:FDRY) is a provider of next-generation
networking products.  The company provides high-performance, end-
to-end switching and routing devices for enterprises and service
providers. Foundry designs, develops, manufactures and markets 
solutions to meet the needs of high-performance network infra-
structures for Layer 2-7 switching and routing and for LANs,
Metropolitan Area Networks (MAN), Wide Area Networks (WAN) and
the Web.  Foundry offers global end-to-end solutions within and 
throughout a customer's networking infrastructure.  Last week,
Foundry Networks reported better-than-expected second-quarter 
results.  Several analysts were impressed with the company's new
products and have raised their revenue and earnings estimates on
the issue.  We simply favor the bullish technical indications and
our conservative position offers a method to participate in the
future movement of the stock with relatively low risk.

AUG 7.50 OUJ HU LB=0.45 OI=1878 CB=7.05 DE=14 TY=13.9%

GCOR - Genencor  $10.16 *** On The Rebound *** 

Genencor (NASDAQ:GCOR) is a diversified biotechnology company that
develops and delivers products and/or services to the industrial, 
consumer, agri-processing and healthcare markets.  The company
develops products that deliver sustainable solutions to the 
problems of everyday life.  Genencor groups its existing products
into three general functional categories: enzymes that break down
protein, enzymes that break down starch; and enzymes that break 
down cellulose.  Industrial and consumer market applications 
include fabric care, cleaning and textile processing, as well as
the emerging market of personal care.  The agri-processing market
applications include classes of enzymes utilized in the grain 
processing, animal feed and specialties areas.  Genencor reported
earnings on Thursday and said its second-quarter profit rose, 
partly as a result of more revenue from its acquisition of Enzyme
BioSystems.  More importantly, the company expects to report 2002
results between break-even and a 7 cent loss per diluted share.
Previous guidance was for a loss between 11 cents and 18 cents.
We favor the bullish move above the mid-July high on heavy volume,
which suggests further upside potential.  Favorable short-term
speculation on a rebounding stock.

AUG 10.00 UGO HB LB=0.70 OI=155 CB=9.46 DE=14 TY=12.4%

ISRG - Intuitive Surgical  $7.52 *** Morning Star Pattern ***

Intuitive Surgical (NASDAQ:ISRG) designs and manufactures the 
da Vinci Surgical System.  The da Vinci System consists of a 
surgeon's console, a patient-side cart, a high performance 
vision system and its proprietary instruments.  Intuitive's 
da Vinci Surgical System is a commercially available technology
that can provide the surgeon with the intuitive control, range 
of motion, fine tissue manipulation capability and 3-D visual-
ization characteristic of open surgery, while simultaneously 
allowing the surgeon to work through the small ports of minimally
invasive surgery.  This week, Intuitive Surgical reported sales
of $19.4 million in the second quarter, up 52%, driven by higher
da Vinci(TM) Surgical System placements and continued growth of
recurring revenue.  We noticed the "Morning Star" formation on a
two-year chart, which suggests a bullish change-of-character for
the stock.  Traders who agree with our assessment can speculate
on the near-term performance of the issue with this conservative

AUG 7.50 AXQ HU LB=0.35 OI=28 CB=7.17 DE=14 TY=10.0%

OTEX - Open Text  $20.41  *** Earnings Beat Expectations! ***

Open Text (NASDAQ:OTEX) develops, markets, licenses and supports
collaborative knowledge management application software for use 
on intranets, extranets and the Internet, enabling users to find
electronically stored information, work together in creative and 
collaborative processes, do group calendaring and scheduling and 
distribute or make available to users the resulting work product
and other information.  The company's principal product line,
Livelink, is a scaleable collaborative network application that 
integrates several modular engines including, but not limited to,
search, collaboration, workflow, group calendaring and scheduling,
and document management.  Open Text reported better than expected
fourth-quarter profit this week on higher sales of license and 
networking products.  The company reported net income of $7.26 
million on record revenues of $41.2 million.  Open Text said it
was comfortable in meeting its guidance for next year and expects
to record stronger sales going forward.  Our outlook is also 
bullish, due to the recent technical strength and this position 
offers a low risk cost basis in the issue.

AUG 17.50 QFT HW LB=3.40 OI=77 CB=17.01 DE=14 TY=6.3%

ULGX - Urologix  $5.32  *** Takeover-Target Speculation ***

Urologix (NASDAQ:ULGX) has developed and offers non-surgical, 
catheter-based therapies that use a proprietary cooled microwave
technology for the treatment of benign prostatic hyperplasia 
(BPH), a disease that affects more than 23 million men worldwide 
by causing adverse changes in urinary voiding patterns.  Urologix
markets its products under the Targis and Prostatron names.  Both
systems utilize Cooled ThermoTherapy, a targeted microwave energy
combined with a cooling mechanism that protects healthy tissue and
enhances patient comfort while providing safe, effective, lasting 
relief from the symptoms of BPH.  Urologix crashed in early July
after the company said quarterly sales were hurt by lower-than-
expected sales of its systems for treating enlargement of the 
prostate.  This week, shares of Urologix spiked on rumors that
the company could be a takeover target.  Of course, the company
refused to comment.  The tape suggests that somebody is interested
in this stock.  Earnings are due in the coming week.

AUG 5.00 OZU HA LB=0.70 OI=25 CB=4.62 DE=14 TY=17.9%



The following group of issues is a list of additional candidates
to supplement your search for profitable trading positions.  As
with any investment, you must decide if the selections meet your
criteria for potential plays.  Only you can know what strategies
and positions are suitable for your experience level, risk-reward
tolerance and portfolio outlook.  They will not be included in
the weekly portfolio summary. 

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

EXEL    5.30  AUG  5.00   XQT HA  0.75 79     4.55   14   21.5%
CRGN    5.56  AUG  5.00   CQX HA  0.90 74     4.66   14   15.9%
NBTY   15.31  AUG 15.00   NBQ HC  0.85 1395  14.46   14    8.1%
CSTR   30.36  AUG 30.00   QLR HF  1.30 63    29.06   14    7.0%
INCY    5.85  AUG  5.00   IPQ HA  1.00 192    4.85   14    6.7%
MLNM   11.52  SEP 10.00   QMN IB  2.40 1580   9.12   49    6.0%
ENZN   21.18  AUG 17.50   QYZ HW  4.10 370   17.08   14    5.3%
TKLC    8.48  SEP  7.50    KQ IU  1.55 40     6.93   49    5.1%
CVTX   23.01  SEP 20.00   UXC ID  4.50 15    18.51   49    5.0%


Investing 101: Buying "Valuable" Stocks
By Ray Cummins

One of our new readers asked for help in choosing fundamentally
sound stocks for naked-put candidates.  While our selection
process focuses primarily on technical analysis, a value-based
approach is certainly appropriate in the current market.

Attn: Naked Puts Editor
Subject: Fundamental analysis of naked put candidates

Hi Ray,

I just became a subscriber to the Option Investor Newsletter and
I have been reading some of the older articles on covered calls
and naked puts.  I plan to use the naked put strategy to purchase
stocks at a discount" but since they are going to be in my long
term portfolio, I think it is important to choose companies with
good fundamentals.  I know you concentrate on charting to find
your weekly plays but can you suggest some guidelines for picking
stocks with better than average value.  Thanks in advance for any


Hello DT,

Indeed, there has been lots of discussion recently about stock
valuation and the need for fundamental analysis in investing.
Warren Buffett of Berkshire Hathaway explains the concept best:
Evaluating securities and businesses for investment purposes
has always involved a mixture of qualitative and quantitative
factors.  At one extreme, the analyst exclusively oriented to
qualitative factors would say, "Buy the right company (with the
right prospects, inherent industry conditions, management, etc.)
and the price will take care of itself".  On the other hand, the
quantitative spokesman would say, "Buy at the right price, and
the company (and stock) will take care of itself".  In the world
of the stock market, money can be made with either approach and
a combination of both may offer the best balance in a long-term

The first step in examining the fundamental factors in a company
(net asset value, working capital, price-to-earnings ration, debt
to equity ratio etc..) is to identify the minimum criteria that
determines a favorable characteristic in each specific category.
A well-known expert on fundamental analysis, Benjamin Graham, made
the following list of attributes of an undervalued stock.  In his
list, criteria 1 through 5 measure risk; while 6 and 7 establish
financial soundness; and 8 through 10 show a history of stable
earnings.  Any company that meets 7 out of the 10 criteria is
considered undervalued with regard to its fundamental condition.
Keep in mind, some of the valuation criteria in Benjamin Graham's
list are more important to certain types of investors than others.
Depending on a person's risk/reward outlook and investing goals;
income, safety, or growth, he or she can focus on those elements
that best achieve future objectives and give heavier weighting to
the valuation attributes that fit their personal investing style.

1.  An earnings-to-price yield (reverse of P/E ratio) double the
    current AAA bond yield.  If the AAA bond yield is 6%, the
    earnings yield should be 12%.

2.  A price-to-earnings ratio that is 40% of the highest average
    P/E ratio achieved by the shares in the most recent 5 years.

3.  A dividend yield of 2/3 the AAA bond yield.  Stocks that lack
    either a dividend or current profits are eliminated here.

4.  A stock price that is 2/3 the tangible book value per share.

5.  A stock price that is 2/3 the net current asset value or the
    net quick liquidation value.

6.  Total debt that is lower than the tangible book value.

7.  A current ratio of 2 or more. This is a measure of liquidity,
    or a company's ability to pay its debts from income.

8.  Total debt of no more than the net quick liquidation value.

9.  Earnings that have doubled in the most recent 10 years.

10. Earnings that have declined no more than 5% in 2 of the past
    10 years.

For definitions of any terms above, refer to:


Every investor knows that fundamental factors play a major role in
determining a company's share value however, if you form your price
expectations based on those factors, it is important to also study
the issue's price history or you may end up owning an undervalued
stock that remains undervalued for a long time.

Good Luck! 

                        *** WARNING!!! ***

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


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

NXTL    6.64   5.31   AUG   5.00  0.25  *$  0.25  17.2%
SNDK   15.08  13.18   AUG  12.50  0.55  *$  0.55  14.9%
DCTM   14.86  13.73   AUG  12.50  0.40  *$  0.40  14.6%
PDLI   13.02  13.32   AUG  10.00  0.25  *$  0.25  12.7%
MCDTA   9.70  10.30   AUG   7.50  0.25  *$  0.25  12.4%
ISSX   15.45  15.45   AUG  12.50  0.30  *$  0.30  12.3%
DCTM   12.90  13.73   AUG  10.00  0.30  *$  0.30  11.3%
BCGI    8.90   9.46   AUG   7.50  0.25  *$  0.25  11.3%
CHKP   15.69  16.01   AUG  12.50  0.25  *$  0.25  10.7%
BRCM   19.86  16.85   AUG  15.00  0.40  *$  0.40   9.9%
FCN    40.00  39.05   AUG  35.00  0.80  *$  0.80   9.8%
MU     23.39  18.18   AUG  17.50  0.45  *$  0.45   7.6%
OSIP   26.79  29.01   AUG  22.50  0.35  *$  0.35   7.5%
PDLI   10.95  13.32   AUG   7.50  0.20  *$  0.20   7.3%
RIMM   13.82  10.45   AUG  10.00  0.25  *$  0.25   7.2%
DT     12.00  10.89   AUG  10.00  0.25  *$  0.25   7.1%
QCOM   28.11  25.55   AUG  20.00  0.40  *$  0.40   5.8%
QLGC   40.69  37.39   AUG  25.00  0.45  *$  0.45   5.7%
SANG   23.35  18.90   AUG  20.00  0.35   $ -0.75   0.0%

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


Just when you thought it might be safe to get back into stocks,
the market tumbles amid a slew of bearish economic data.  Based
on this week's employment and manufacturing reports, the outlook
remains uncertain and some analysts believe we may be in for a
"double-dip" recession.  That kind of speculation will certainly
have a negative affect equity values in the near-term, so keep
your stops tight and your attitude cautiously optimistic until a
solid bottom is established.  The continued declines in Applied
Materials (NASDAQ:AMAT) and Cisco Systems (NASDAQ:CSCO) were no
surprise and as mentioned last week, both positions were closed
to limit losses.  However, unexpected news was the culprit in
our Sangstat (NASDAQ:SANG) play and the bearish activity forced
an early exit in the Aug-$20 Put.  Other issues on the watch-list
include: Broadcom (NASDAQ:BRCM), Sandisk (NASDAQ:SNDK), Deutsche
Telecom (NYSE:DT), Micron Technology (NYSE:MU), and Research In

Positions Previously Closed: Royal Gold (NASDAQ:RGLD), Motorola 


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

AMGN   43.51  AUG 37.50   AMQ TU  0.30 1318  37.20   14    5.6%
ICOS   23.73  AUG 20.00   IIQ TD  0.45 266   19.55   14   15.7%
IVGN   35.13  AUG 30.00   IUV TF  0.30 1336  29.70   14    7.1%
LNCR   31.50  AUG 30.00   LQN TF  0.50 3228  29.50   14    9.4%
NBIX   36.24  AUG 30.00   UOT TF  0.25 189   29.75   14    6.4%
PLMD   29.95  AUG 25.00    PM TE  0.40 322   24.60   14   11.7%
SYY    27.20  AUG 25.00   SYY TE  0.30 2042  24.70   14    7.3%
TRMS   46.62  AUG 40.00   RQM TH  0.60 159   39.40   14   10.3%
VMSI   22.35  AUG 20.00   QMP TD  0.25 10    19.75   14    7.9%

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

ICOS   23.73  AUG 20.00   IIQ TD  0.45 266   19.55   14   15.7%
PLMD   29.95  AUG 25.00    PM TE  0.40 322   24.60   14   11.7%
TRMS   46.62  AUG 40.00   RQM TH  0.60 159   39.40   14   10.3%
LNCR   31.50  AUG 30.00   LQN TF  0.50 3228  29.50   14    9.4%
VMSI   22.35  AUG 20.00   QMP TD  0.25 10    19.75   14    7.9%
SYY    27.20  AUG 25.00   SYY TE  0.30 2042  24.70   14    7.3%
IVGN   35.13  AUG 30.00   IUV TF  0.30 1336  29.70   14    7.1%
NBIX   36.24  AUG 30.00   UOT TF  0.25 189   29.75   14    6.4%
AMGN   43.51  AUG 37.50   AMQ TU  0.30 1318  37.20   14    5.6%

Company Descriptions

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

AMGN - Amgen  $43.51  *** Entry Point! ***

Amgen (NASDAQ:AMGN) is a biotechnology company that discovers,
develops, manufactures and markets human therapeutics based on
advances in cellular and molecular biology.  Amgen manufactures
and sells human therapeutic products including Epogen, Neupogen,
Aranesp, Neulasta and Kineret.  Amgen focuses its research and
development efforts on therapeutics delivered in the form of
proteins, monoclonal antibodies and small molecules in the areas
of nephrology, cancer, inflammation and neurology and metabolism.
The company has research facilities in the United States and has
clinical development staff in the United States, the European
Union, Canada, Australia and Japan.  Amgen has acquired Immunex,
a biopharmaceutical firm dedicated to developing immune system
science to protect human health.  Immunex has developed two
major products, Enbrel and Leukine, and has two other products,
Novantrone and Thioplex, which can be used in treating multiple
indications.  Amgen's shares rebounded this week in conjunction
with the biotechnology sector and investors who want a low risk
cost basis in the issue should consider this position.

AUG 37.50 AMQ TU LB=0.30 OI=1318 CB=37.20 DE=14 TY=5.6%

ICOS - ICOS Corporation  $23.73  *** New Drug Developments! ***

ICOS Corporation (NASDAQ:ICOS) develops pharmaceutical products
with significant commercial potential by combining its unique
capabilities in molecular, cellular and structural biology,
high-throughput drug screening, medicinal chemistry and gene
expression profiling.  ICOS applies its integrated approach to
erectile dysfunction and urologic disorders, sepsis, pulmonary
arterial hypertension and other cardiovascular diseases, as well
as inflammatory diseases.  ICOS has established collaborations
with pharmaceutical and biotechnology companies to enhance its
internal development capabilities and to offset a substantial
portion of the financial risk of developing its drug candidates.
Biotechnology stocks have performed well recently with shares of
Icos in the news after a positive announcement on the company's
anti-impotence drug.  Icos and pharmaceutical partner Eli Lilly
said their anti-impotence drug, Cialis, had received a favorable
review from European regulators.  The companies hope to receive
final European clearance later this year and win U.S. approval
in the second half of next year.  Traders who want to speculate
on the company's new drug developments can do in a conservative
manner with this position.

AUG 20.00 IIQ TD LB=0.45 OI=266 CB=19.55 DE=14 TY=15.7%

IVGN - Invitrogen  $35.13  *** 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.  Invitrogen
recently announced it achieved a second-quarter profit as sales
of its tool kits for genetic research rose and it ceased writing
off costs of a merger.  Invitrogen posted a net profit of $8.1
million, or $0.15 a share, compared with a loss of $35.1 million,
or $0.67, a year ago.  The company also announced Thursday that
its board authorized the repurchase of up to $300 million of the
company's common stock over the next three years.  IVGN enjoys a
well established trading range near $30-$35 and this play allows
investors to speculate on the company near-term share value with
relatively low risk.

AUG 30.00 IUV TF LB=0.30 OI=1336 CB=29.70 DE=14 TY=7.1%

LNCR - Lincare Holdings  $31.50  *** Health Services Sector! ***

Lincare Holdings (NASDAQ:LNCR) is a provider of oxygen and other
respiratory therapy services to patients in the home.  Lincare
also provides a variety of home infusion therapies in certain
geographic markets.  The company's customers typically suffer
from chronic obstructive pulmonary disease, such as emphysema,
chronic bronchitis or asthma, and require supplemental oxygen or
respiratory therapy services in order to alleviate the symptoms
and discomfort of respiratory dysfunction.  Lincare currently
serves over 320,000 customers in 44 states through 564 operating
centers.  Lincare Holdings recently joined the NASDAQ 100 Index
and the company is very popular among analysts who follow the
specialized health services industry.  Consistent growth as well
as solid finances are often listed as factors that should boost
Lincare's share value (the company has achieved long-term growth
of more than 20% per year) and their stock price will benefit as
baby boomers head into their golden years needing home health
care.  Investors who favor health services stocks can establish
a conservative entry point in the issue with this position.

AUG 30.00 LQN TF LB=0.50 OI=3228 CB=29.50 DE=14 TY=9.4%

NBIX - Neurocrine Biosciences  $36.24  *** On The Rebound! ***

Neurocrine Biosciences (NASDAQ:NBIX) develops and intends to
commercialize drugs for the treatment of neurologic and endocrine
system-related diseases and disorders.  The company's product
candidates address many worldwide pharmaceutical markets such as
insomnia, anxiety, depression, cancer, diabetes and multiple
sclerosis.  The company has almost 20 programs in various stages
of research and development, including seven programs in clinical
development.  The company's lead clinical development program is a
drug for the treatment of insomnia that is being evaluated in Phase
III clinical trials.  Last week, Neurocrine Biosciences posted a
narrower second quarter loss than analysts projected.  The company
also reported revenue growth of 27%, which came mainly from revenue
received from GlaxoSmithKline.  A large part of the losses were due
to increased spending on pivotal-stage trials of its experimental
insomnia drug Indiplon but the company said it is on track and on
schedule to meet its goal of filing U.S. FDA applications for the
drug at the end of 2003.  A recent technical support area exists
near the cost basis in this play, providing favorable speculation
for traders who wouldn't mind owning the issue.

AUG 30.00 UOT TF LB=0.25 OI=189 CB=29.75 DE=14 TY=6.4%

PLMD - PolyMedica  $29.95  *** 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.  PolyMedica recently estimated that fiscal-year
revenue would increase by at least 20%, boosted by the growing
number of Americans developing diabetes.  The company also posted
a 7% revenue increase in first-quarter profit and said the fiscal
second quarter, ending in September, would see another rise with
projected revenue between $84 million and $85 million.  Investors
were happy with the news but PLMD's stock price went too far, too
fast, and now it is in the midst of a necessary consolidation.  A
conservative cost basis can be achieved with this position.

AUG 25.00 PM TE LB=0.40 OI=322 CB=24.60 DE=14 TY=11.7%

SYY - Sysco Corporation  $27.20  *** Record Earnings! ***

Sysco (NASDAQ:SYY) is a North American distributor of food and
food related products to the foodservice or food prepared away
from home industry.  The company provides products and services
to restaurants, healthcare and educational facilities, lodging
establishments and other foodservice customers.  Sysco provides
food and other products through its 124 operating companies.
Each of Sysco's many operating companies represents a separate
operating segment.  The company has aggregated its operating
companies into five segments, of which only Broadline and Sygma
are reportable segments.  Broadline operating companies offer a
full line of food products and a variety of non-food products to
both the Company's traditional and chain restaurant customers.
Sygma operating companies distribute a line of food products and
a variety of non-food products to some of the company's chain
restaurant customer locations.  Sysco recently announced record
results for its fourth quarter of fiscal year 2002, its 105th
consecutive quarter of sales and earnings increases, and the
event also marked the 26th year in a row that the company has
achieved sales and earnings increases.  Fourth quarter EPS rose
19% on stronger real sales growth and the company also announced
a 20-million-share repurchase program.  Investors showed their
appreciation by boosting the company's share value over 20% in
one week and this position offers a conservative way to profit
from continued upside activity.

AUG 25.00 SYY TE LB=0.30 OI=2042 CB=24.70 DE=14 TY=7.3%

TRMS - Trimeris  $46.62  *** 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.  Trimeris has recently been
in the news as investors learn about its revolutionary product,
T-20, the first in a novel class known as fusion inhibitors that
work in a unique way, by preventing HIV virus from entering cells.
Patient groups and AIDS activists have been clamoring for access to
the new drug, which will be sold under the brand name Fuzeon, as an
alternative treatment for thousands of people who are resistant to
existing medicines.  T-20 is now undergoing a fast-track review at
the U.S. Food and Drug Administration, and there is an increased
likelihood of a speedy approval in Europe as well.  Investors who
wouldn't mind owning this speculative issue can establish a cost
basis near $40 with this position.

AUG 40.00 RQM TH LB=0.60 OI=159 CB=39.40 DE=14 TY=10.3%

VMSI - Ventana Medical Systems  $22.35  *** Trading Range! ***

Ventana Medical Systems (NASDAQ:VMSI) develops, manufactures and
markets instruments and consumables that are used to automate
diagnostic and drug discovery procedures in clinical histology
laboratories and drug discovery laboratories worldwide.  Ventana's
product offerings comprise Tissue Processors and Staining Systems
and Associated Reagents.  Its products are used in many centers
for cancer research and treatment including Johns Hopkins Hospital,
the Mayo Clinic and Memorial Sloan-Kettering Cancer Center.  The
company reported in mid July that profits and sales rose during
the second quarter and Ventana also raised its earnings forecast
for 2003, saying that sales of products used to automate tissue
preparation improved.   The company expects to see sales growth of
about 20% from 2001 and net income at around 5% to 7% percent of
sales.  Investors who like the outlook for the company can use the
solid technical support near $19 to justify this speculative play.

AUG 20.00 QMP TD LB=0.25 OI=10 CB=19.75 DE=14 TY=7.9%



The following group of issues is a list of additional candidates
to supplement your search for profitable trading positions.  As
with any investment, you must decide if the selections meet your
criteria for potential plays.  Only you can know what strategies
and positions are suitable for your experience level, risk-reward
tolerance and portfolio outlook.  They will not be included in
the weekly portfolio summary. 

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

NPSP   20.26  AUG 17.50   QKK TW  0.70 123   16.80   14   25.2%
MLNM   11.52  AUG 10.00   QMN TB  0.30 1596   9.70   14   19.2%
CVTX   23.01  AUG 20.00   UXC TD  0.40 761   19.60   14   13.2%
ABI    17.98  AUG 15.00   ABI TC  0.25 95    14.75   14   12.2%
IDPH   41.75  AUG 35.00   IDK TG  0.45 1530  34.55   14    9.4%
ABT    40.12  AUG 37.50   ABT TU  0.55 1397  36.95   14    8.5%
BLL    42.70  AUG 37.50   BLL TU  0.45 476   37.05   14    7.9%
VAR    40.08  AUG 37.50   VAR TU  0.50 20    37.00   14    7.8%
CHIR   33.62  AUG 30.00   CIQ TF  0.30 325   29.70   14    6.4%


Stocks Retreat Amid Renewed Economic Concerns
By Ray Cummins

                         - MARKET RECAP -
August 2, 2002

The onslaught of gloomy news continued Friday with the employment
report providing further evidence of a stalled recovery in the
U.S. economy.

A dour outlook from Walt Disney (NYSE:DIS) weighed heavily on the
Dow, which plummeted 193 points to 8,313 in a second consecutive
session of triple-digit losses.  Bankruptcy concerns for United
Airlines' (NYSE:UAL) parent UAL also affected blue-chip shares
after the nation's second-largest airline announced it had hired
bankruptcy lawyers following the 9/11 terrorist attacks and may
yet file for Chapter 11 protection if it doesn't receive a $1.8
billion federal loan.  Shares of the world's largest airline fell
to historic lows near $4.  Technology stocks fared no better after
a warning from National Semiconductor (NYSE:NSM) of tepid sales
sent semiconductor stocks into a downward spiral.  The composite
index of high-tech shares retreated 32 points to 1,247.  In the
broader market, almost every sector endured selling pressure and
the Standard & Poor's 500-stock index finished down 20 points at
864.  Market breadth was ragged on the NYSE, where 2,369 stocks
fell and only 884 rose on trading volume of 1.54 billion shares.
On the NASDAQ, 2,294 shares declined and 1,018 advanced with 1.42
billion shares changing hands.  The treasury market soared in the
wake of falling equity values with the 10-year note adding 27/32
while its yield fell to 4.29%.  The 30-year bond was up 1 1/8 to
yield 5.21%.

Last week's new plays (positions/opening prices/strategy):
Dupont     (NYSE:DD)   JAN45C/AUG45C  $1.90  debit   calendar
Kraft      (NYSE:K)    JAN35C/AUG35C  $1.80  debit   calendar
Pharmacia  (NYSE:PHA)  JAN45C/AUG45C  $2.50  debit   calendar
Stericycle (NSDQ:SRCL) AUG40C/AUG27P  $1.00  credit  strangle
Deutsche   (NYSE:DB)   AUG70C/AUG65C  $0.60  credit  bear-call
Intl. Game (NYSE:IGT)  AUG65C/AUG60C  $0.50  credit  bear-call
Cognizant  (NSDQ:CTSH) AUG45P/AUG50P  $0.50  credit  bull-put

Despite the initial bullish trend early in the week, there was
little favorable activity in our new time selling plays.  The
only standout was the Pharmacia position, which yielded a small,
short-term profit as the stock rallied to $44.75 on Wednesday.
A favorable entry opportunity was available in the Stericycle
credit strangle and the target premiums were achieved in both
bearish spreads.  Traders in the Cognizant position had to wait
until Thursday for an acceptable entry credit.

Portfolio Activity:

The market enjoyed a brisk recovery with Monday's rally but the
optimism soon faded as investors came to grips with the reality
of a potential "double-dip" recession in our economy.  Despite
signs of a technical bottom, the selling pressure returned with
a vengeance Thursday after news of a drop in construction spending
and a weak reading of national business activity.  Friday's report
of weaker than expected factory orders offered little consolation
and disappointing employment data helped bearish traders achieve
firm control of the primary trend.  Analysts commented about the
broken support levels on two of the major equity averages (NASDAQ
and S&P 500) and most experts are convinced the market will test
its recent lows.  That outlook bodes well for a number of spreads
in our portfolio, however it is not the direction favored by most

Among the bullish positions, Amphenol (NYSE:APH) and International
Business Machines (NYSE:IBM), are candidates for early exit on any
further downward movement.  United Parcel Service (NYSE:UPS) and
eBay (NASDAQ:EBAY) are on the watch-list as well, although their
respective support areas should limit any downside activity in the
near term.  The neutral credit-strangle in Symantec (NASDAQ:SYMC)
is holding up nicely, in spite of the recent technology sell-off
and speculative plays in Oracle (NASDAQ:ORCL) and Protein Design
Labs (NASDAQ:PDLI) have yielded small gains.  Ciena (NASDAQ:CIEN)
and Sepracor (NASDAQ:SEPR) have retreated sharply after showing
brief signs of life, but both of these positions are long-term
with plenty of time to recover.  The most active issue in our
calendar spread section continues to be Nextel Communications
(NASDAQ:NXTL) and although the stock has experienced some extreme
volatility, Friday's close at $5.70 offered another viable exit
or adjustment opportunity.  Traders who believe the issue will
consolidate in the $5-$6 range can wait for a significant change
in character before taking profits or transitioning to a future
expiration date in the short option.

Questions & comments on spreads/combos to Contact Support
                           - NEW PLAYS -
MXIM - Maxim Integrated Products  $29.96  *** Multi-Year Low! ***

Maxim Integrated Products (NASDAQ:MXIM) designs, develops, makes
and markets a broad range of linear and mixed-signal integrated
circuits, commonly referred to as analog circuits.  Maxim also
provides a range of high-frequency design processes and unique
capabilities that can be used in custom design.  The analog IC
market is highly fragmented and characterized by many diverse
applications, a great number of product variations and, as to
many circuit types, relatively long product life cycles.  The
company's objective is to develop and market both proprietary
and industry-standard analog integrated circuits that meet the
increasingly stringent quality standards demanded by customers.

Last week's time-selling plays generated a worthy suggestion
from one of our long-time readers.  He recommended that we
offer some bearish calendar spreads, to take advantage of the
downside potential in technology companies that have yet to
announce quarterly earnings.  Maxim Integrated Products fits
that request perfectly as the company is expected to report
earnings next week and its share value is at a multi-year low.
Traders who want to speculate on the outcome of the report in
a conservative manner should consider this position.

PLAY (speculative - bearish/calendar spread):

BUY  PUT  SEP-25  XIQ-UE  OI=511   A=$1.85
SELL PUT  AUG-25  XIQ-TE  OI=1336  B=$0.65

SPW - SPX Corporation  $98.50  *** Disparity Play! ***

SPX Corporation (NYSE:SPW) is a worldwide provider of technical
products and systems, industrial products and services, flow
technology and service solutions.  SPX offers networking and
switching products, fire detection and building life-safety
products, television and radio broadcast antennas and towers,
life science products and services, transformers, compaction
equipment, high-integrity castings, dock products and systems,
cooling towers, air filtration products, valves, back-flow
protection and fluid handling devices, and metering and mixing
solutions.  The company's products and services also include
specialty service tools, diagnostic systems, service equipment
and technical information services.  The company's products are
used by a broad array of customers in many industries including
chemical processing, pharmaceuticals, infrastructure, mineral
processing, petrochemical, telecom, transportation, financial
services and power generation.

SPW Corporation is not really a technology issue, but the stock
emerged near the top of the list in a scan/sort for potentially
bearish issues with large premium disparities in the front-month
options.  In addition, the automotive parts segment (which the
stock is grouped in) has struggled recently and future declines
in the sector will likely affect SPX's share value.  Traders who
employ speculative, time-selling plays can use the disparities
in the August options to establish a bearish position with low
risk and potentially high reward.  Target a lower overall debit
in the position as the bid/ask spreads are inflated and plan to
exit the play prior to the September expiration.

PLAY (very speculative - bearish/calendar spread):

BUY  PUT  SEP-80  SPW-UP  OI=183  A=$2.80
SELL PUT  AUG-80  SPW-TP  OI=62   B=$0.85

AMLN - Amylin Pharmaceuticals  $11.95  *** A Bullish Play! ***

Amylin (NASDAQ:AMLN) is a biopharmaceutical company engaged in the
discovery, development and commercialization of drug candidates
for the treatment of diabetes and other metabolic disorders.  The
company has exclusive rights to two drug candidates that are in
late-stage development for the treatment of diabetes, SYMLIN and
AC2993.  The company has a third drug candidate, AC3056, in early
stage clinical trials, and maintains a very focused research and
development program to discover and in-license additional drug
candidates for metabolic diseases.

Amylin shares have been in a bullish trend since mid-June, when
the company presented favorable SYMLIN and AC2993 results at the
annual scientific sessions of the American Diabetes Association.
Amylin's CEO has also commented that the company is currently in
discussions with a potential partner for AC2993 development and
the upcoming earnings report has simply added to the volatility.
From a technical viewpoint, the issue traded at a 52-week high
on Friday but it has significant long-term resistance above the
current price and will likely consolidate near $14.  Traders who
want to speculate on the near-term share value of this unique
biopharmaceutical company should consider this position.

PLAY (very speculative - bullish/calendar spread):

BUY  CALL  OCT-12.50  AQM-JV  OI=770  A=$1.40
SELL CALL  AUG-12.50  AQM-HV  OI=134  B=$0.45

MYL - Mylan Laboratories  $32.45  *** Rising Profits! ***

Mylan Laboratories (NYSE:MYL) is engaged in developing, licensing,
manufacturing, marketing and distributing generic and brand name
pharmaceutical products.  The company conducts business through a
generic pharmaceutical segment and a brand pharmaceutical segment.
The company markets its generic products directly to wholesalers,
distributors, retail pharmacy chains, mail order pharmacies and
group purchasing organizations within the United States.  Mylan
also markets its many generic products indirectly to independent
pharmacies, managed care organizations, hospitals, nursing homes
and pharmacy benefit management companies.  Indirect customers
purchase Mylan's products mainly through its wholesale customers.

Last week, the Pittsburgh-based drug-maker posted solid quarterly
profits, boosted by sales of drugs that have recently lost patent
protection and the company's generic version of anxiety medicine
BuSpar.  Mylan reported earnings of $61.8 million, or $0.49 per
share, compared with $50.6 million, or $0.40 per share last year,
with revenues of $275 million versus $237 million in the previous
period.  Sales of Mylan's emerging branded drugs were outstanding
with a 42% increase to $39.8 million.  The company has recently
capitalized on patent expirations for hypertension drugs Prinivil
and Zestril, painkiller Ultram and ulcer treatment Axid by making
copycat versions of the drugs.

Investors appear to be pleased with the company's results and
traders who expect additional upside activity from Mylan's stock
in the near-term can profit from that outcome with this position.

PLAY (speculative - bullish/synthetic position):

BUY  CALL  SEP-35  MYL-IG  OI=194  A=$0.95
SELL PUT   SEP-30  MYL-UF  OI=33   B=$0.95

Note:  Using options, the position is similar to being long the
stock.  The initial collateral requirement for the sold (short)
put is approximately $1,150 per contract.

SNE - Sony Corporation  $42.71  *** Next Leg Down? ***

Sony Corporation (NYSE:SNE) and its consolidated subsidiaries
develop, design, manufacture and market electronic equipment,
instruments and devices for consumer and industrial segments.
It also develops, produces, manufactures and markets home-use
game consoles and software, and develops, produces, makes and
distributes recorded music in a variety of commercial formats
and musical genres.  It is also engaged in the development,
production, manufacture, marketing, distribution as well as
broadcasting of image-based software, including film, video
and television, and in various financial service businesses,
including insurance operations through insurance subsidiaries,
banking operations through a Japanese Internet-based banking
subsidiary and leasing and credit financing operations in the
Far East.  Sony also has Internet-related businesses, as well
as an advertising agency business in Japan and location-based
entertainment businesses in Japan and the United States.

Shares of Sony tumbled to a 5-month low Friday in conjunction
with a slump in Asian stock markets as the latest economic data
from the United States jolted investors' waning confidence in
the condition of the world's biggest economy.  Companies like
Sony, which generate a significant part of their revenues in
the U.S. market, were pummeled as a result of renewed weakness
in the dollar, which fueled selling among Japanese exporters.
Traders who believe there is additional downside potential in
the issue can profit from that outcome with this position.

PLAY (speculative - bearish/synthetic position):

BUY  PUT   AUG-40  SNE-TH  OI=80  A=$0.80
SELL CALL  AUG-45  SNE-HI  OI=26  B=$0.65

Note:  Using options, the position is similar to being short the
stock.  The initial collateral requirement for the sold (short)
call is approximately $1,550 per contract.

                      - TECHNICALS ONLY -

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

BZH - Beazer Homes  $57.14  *** Construction Sector Slump! ***

Beazer Homes (NYSE:BZH) designs, builds and sells single family
homes in various locations within the United States: Florida,
Georgia, North Carolina, South Carolina, Tennessee, Arizona,
California, Colorado, Nevada, Texas, Maryland, Pennsylvania,
New Jersey and Virginia.  The company designs its homes to appeal
primarily to entry-level and first time move-up homebuyers.  The
company's objective is to provide its customers with homes that
incorporate quality and value while seeking to maximize its gain
on invested capital.  The company's homebuilding and marketing
activities are conducted under the name of Beazer Homes in each
of its markets except in Colorado (Sanford Homes) and Tennessee
(Phillips Builders).

PLAY (conservative - bearish/credit spread):

BUY  CALL  AUG-70  BZH-HN  OI=718  A=$0.20
SELL CALL  AUG-65  BZH-HM  OI=375  B=$0.75

SNPS - Synopsys  $40.24  *** 10-month Low! ***

Synopsys (NASDAQ:SNPS) is a global supplier of electronic design
automation software to the electronics industry.  The company's
many products are used by designers of integrated circuits (ICs),
including system-on-a-chip ICs, and the electronic products such
as computers, cellular phones and Internet routers that use ICs
to automate significant portions of their chip design process.
ICs are distinguished by the speed at which they run, their area,
the amount of power they consume and the cost of production.  The
company's products offer its customers the opportunity to design
ICs that are optimized for speed, area, power consumption and
production cost, while reducing overall design time.  Synopsys
also provides consulting services to assist customers with their
IC designs, as well as training and support services.

PLAY (conservative - bearish/credit spread):

BUY  CALL  AUG-50  YPQ-HJ  OI=552   A=$0.10
SELL CALL  AUG-45  YPQ-HI  OI=2380  B=$0.60

                   - STRADDLES AND STRANGLES -
MUR - Murphy Oil  $77.64  *** Premium Selling! ***

Murphy Oil Corporation (NYSE:MUR) is a worldwide oil and gas
exploration and production company with refining and marketing
operations in the United States and the United Kingdom.  The
company's operations are classified into two primary businesses:
Exploration and Production; and Refining and Marketing.  The
company's principal exploration and production activities are
conducted in the United States, Ecuador and Malaysia by wholly
owned Murphy Exploration & Production and its subsidiaries; in
western Canada and offshore eastern Canada by Murphy Oil Ltd.
and its subsidiaries; and in the U.K. North Sea/Atlantic Margin
by wholly owned Murphy Petroleum Limited.  Murphy Oil USA, a
wholly owned subsidiary, owns and operates two refineries in
the United States.  MOUSA markets refined products through a
network of retail gasoline stations and branded and unbranded
wholesale customers in a 23-state area of the southern and
Midwestern United States.

Murphy's recent earnings report was less than stellar but last
week, the company made a significant offshore oil discovery on
the Kikeh prospect near Malaysia and investors flocked to the
stock on the news.  The bullish activity suggests a technical
change in character may be underway and the extreme volatility
has produced some robust premiums in its options.  In addition,
MUR spent much of 2002 in a well-defined trading range between
$70 and $85 and the stock will likely remain in that area for
the next few weeks.  Traders with a neutral outlook for the
issue can profit from that type of activity with this position.

PLAY (conservative - neutral/credit strangle):

SELL CALL  AUG-85  MUR-HQ  OI=243  B=$0.70
SELL PUT   AUG-70  MUR-TN  OI=40   B=$0.55
UPSIDE B/E=$86.25 DOWNSIDE B/E=$68.75

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The shorts are still working with two more triggered Friday.  
We’re trying it again with this Nasdaq favorite.

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


More movement to report from Friday’s session.  Unfortunately, 
most of it was to the downside.

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


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