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Daily Newsletter, Wednesday, 08/14/2002

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The Option Investor Newsletter                Wednesday 08-14-2002
Copyright 2002, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Allocate This
Index Trader Wrap: Holy Cow!
Weekly Fund Family Profile: Prudential Mutual Funds
Options 101: LEAPing Forward
Index Trader Game Plans: THE SECTOR BEAT - 8/14

Updated on the site tonight:
Swing Trader Game Plan: Bad News Ignored!

Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
08-14-2002               High    Low     Volume Advance/Decl
DJIA     8743.31 +260.92 8748.29  8353.07 1722 mln  2017/730
NASDAQ   1334.30 + 61.22 1334.31  1265.19 1053 mln  2193/1065
S&P 100   464.44 + 19.14  465.05  441.42   totals   4210/1795
S&P 500   919.62 + 35.41  920.21  876.20
RUS 2000  389.41 + 11.65  389.41  374.03
DJ TRANS 2306.12 + 41.89 2309.25  2212.39
VIX        40.46 + 1.10    42.90  39.98
VIXN       56.29 - 2.41    59.13  56.09 
Put/Call Ratio 0.82
*******************************************************************

Allocate This
by Steven Price

D-Day has arrived for the remainder of the 695 companies that 
must certify their financial results by today at 5:30 p.m.  We 
have been inundated with reports of who has reported so far.  The 
SEC has stated that it will be at least a week before they can 
tell for sure who has fully complied with the deadline and who 
has not.  We expected a few revelations and were not 
disappointed.  

Household International (HI), which certified results today, also 
announced it was restating earnings since 1994.  Earnings were 
revised downward by a total of $386 million, including 2002 
earnings, which will be lowered by 0.01 for the 2nd quarter and 
0.06 for the first half of the year.  HI blamed this restatement 
on collapsing accounting firm Arthur Andersen, stating that new 
accounting partner KPMG determined that the company should have 
been expensing certain costs over several months to a year, 
rather than amortizing them over several years.  

Nicor (GAS) said they will restate first quarter 2002 financial 
results, and that its CEO and CFO could not certify its 2002 
interim financial results due to uncertainties pertaining to its 
gas distribution unit's results.  Apparently the SEC is looking 
into improprieties at the company's gas supply program and 
accounting at a joint venture between Nicor and Dynegy.

Dynegy (DYN) also announced that its officers will not be able to 
certify results, due to a pending restatement of its 2001 
financial results and a 3-year re-audit of its books.

AOL certified its results, but included a caveat. It said it is 
re-examining 3 deals conducted over 6 quarters by its America 
Online Internet Unit.  The deals may have been improperly 
assessed as advertising and commerce revenue. The total of all 
three deals amounts to $49 million.  The company said it 
discovered the possible violations within the last 10 days.  This 
sounds about as believable as Worldcom's recent "discovery" of an 
additional $3.3 billion in overstated earnings.  It is amazing 
how a deadline can jog the memory, especially when it involves 
prison time.

Applied Materials (AMAT) issued a negative outlook after 
yesterday's bell, predicting a 5-15% decline in orders for the 
current quarter.  The company was downgraded by UBS Warburg, 
which cut estimates to below the company's own guidance.  In 
spite of the bad news, AMAT finished up 0.96 on the day.

I find it interesting that with today's action, which involved a 
395-point swing in the Dow, the VIX dropped well below 40. The 
Dow bottomed out at 8353.07 this morning, before staging a 
comeback to finish at 8743.31, after reaching a high of 8748.29. 
On most up-days this pattern would seem normal, and with the Dow 
up 260.92 , one would expect to see a drop in the VIX.  Today, 
however, has shown a struggle between the bears and bulls, with 
the two tug of war teams pulling the center flag to the brink of 
victory, only to see it pulled back the other way. The final 
surge did not result from fundamental news about the economy, or 
positive news from any particular bell-weather stock.  
Apparently, investors have been lulled into a false sense of 
security by all of the CEO and CFO filings.  I don't see how a 
CEO stating that his company's accounting statements are accurate 
can leave an investor bullish.  These leaders are already 
supposed to stand behind their companies' reports.  Signing off 
on the numbers does little to change an economic environment even 
the Federal Reserve sees as risky.

On the other hand, companies that do not comply certainly will be 
raising gigantic red flags.  The SEC does not have specific 
penalties in place for a CEO who does not certify, but a false 
certification can lead to a $5 million fine and up to 20 years in 
prison.   Therefore, a CEO who has some doubts, has nothing to 
lose in terms of personal penalties from a delay, but an awful 
lot to lose by signing on the dotted line.  Bulls may see these 
delinquent filers as cautious; bears will pile on without mercy.  

This may be part of the explanation for today's rally, as the 
certification reports flowed in.  The other explanation may be 
asset-allocation programs, which were triggered as bonds reached 
new lows.  The bottoming in the 5-year yield, and 10-year yield 
appear to have triggered a switch from low yielding bonds into 
stocks.  A look at the 5-minute charts of the 5-year and 10-year 
Treasury Notes shows allocation kicking in at 10:15, 12:00, and 
1:30.  Note that the yield drops with an increase in bond price, 
so a selling of bonds creates an increase in the yield, resulting 
from a lower bond price.  The graph below represents the yield.

Chart of the 5 year Treasury Note


 

Chart of the 10-year Treasury Note


 

A look at the Dow Industrials shows the index finding a bottom at 
each of these allocation points, and experiencing a rebound.  The 
simultaneous time at which these trades occurred, in all three 
markets, lends credence to the theory that the primary reason for 
today's rally  was that asset allocation programs pulled money 
out of bonds and into stocks.

Chart of The Dow


 

A look at the Point and Figure charts of the Dow and S&P 500 
shows today's rally creating something we haven't seen in a 
while.  The S&P chart established a new buy signal using a 10-
point box.  The Dow, on the other hand, continued its downward 
sell signal.  A closer look, however, shows that the Dow is 
actually a mere 56.69 points away from also creating a new buy 
signal on a triple top breakout, using a 50-point box.  
Concurrent buy signals on both charts may be enough to convince 
some bears to come out of hibernation and strap on the horns.

Chart of the S&P 500 Point and Figure


 

Chart of Dow Point and Figure


 

The stars seem to be aligning for a break to the upside, yet the 
fundamentals have seen no real change.  If the Federal Reserve 
still sees danger to the economy, then is jumping in long the 
right move at this point?  With September 11th looming, it would 
seem hasty at this point to jump on the train.  After all, how 
many investors will want to hold long positions heading into this 
date, knowing there is a possibility of an anniversary attack.  
Even in the absence of such an event, the fear alone may cause a 
severe anticipatory drop.

The airline industry is certainly showing signs of continued 
failure one year later.  United Airlines (UAL) today confirmed 
that they are preparing for a possible bankruptcy filing this 
fall.  They are still hoping for a $1.8 billion federal loan 
guarantee.  Chief Executive Jack Creighton stated ,  "The changes 
we need to make are urgent, significant and immediate... 
Simultaneously, we are preparing for the potential of a Chapter 
11 bankruptcy filing this fall, due to our fourth-quarter debt 
payments.  Unless we lower our costs dramatically, filing for 
bankruptcy protection will be the only way we can ensure the 
company's future and the continued operation of our airline."  
The NYSE has also permanently suspended trading in shares of U.S. 
Airways, which filed for bankruptcy on Sunday.

After the bell, Brocade reported earnings that met expectations 
and also added that the third quarter showed double-digit gains 
from a year ago in sales and profits.  Net income was up 31% from 
the previous quarter and 52% from last year.  Total revenue of 
$151 million beat estimates by $3 million.  Sales were up 12% 
from last quarter and 30% from last year.  The stock was last 
trading $16.34 after hours, following a close of $15.05.

ImClone also announced earnings, losing 0.59 versus expectations 
of a loss of 0.41.  The company blamed the loss on increased 
research costs. ImClone also announced it was suing former CEO 
Sam Waksal for return of his $7 million severance package.

With the summer earnings season just about completed, 468 of the 
S&P 500 companies have reported.  61% of these companies have 
beat estimates, 24% have matched and 15% have missed forecasts.  
This would seem bullish, although most of these earnings 
estimates had been previously lowered so much that a snake could 
crawl over them.  Tomorrow we will get a look at results from 
NVidia and Dell.

After what has been a wild ride the last few days, look for 8800 
as the next significant level in the Dow, as this would confirm 
the S&P 500 buy signal noted above.  A trip back over 1000 would 
look bullish for the Nasdaq, as well.  I still see a lack of 
fundamental strength, compounded by the September 11 anniversary 
around the corner.  The Fed's easing bias may be sinking in and 
the market may be taking off on new euphoria over a possible 
surprise rate cut between now and the September 24th FOMC 
meeting. My guess is that it will not come until after September 
11th.  If the market continues to rise, it may not come at all.  
A trend is a trend and fighting it only leads to lost 
opportunity.  A breakout above 8800 may convince this skeptic to 
go along for the ride.


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

HOLY COW!
By Leigh Stevens

TRADING ACTIVITY AND OUTLOOK - 
 
In the words of the great Phil Rizutto, the great NY Yankee who 
must have been thinking about the NY Market (OR a great line 
drive) - Holy cow! - what a rally. This was like the bear market 
of past weeks when the market would DROP big time anytime that it 
was registering overbought on the hourly stochastics - today a 
minor oversold conditions "signaled" a melt UP.  

Certification day brought one heck of a rally - the rally was 
triggered more by other factors but of course the talking heads 
were in overdrive talking about what CEO's have signed and which 
ones have not.  

However, you'll recall the sizable rally that occurred in the 
bond market yesterday - there was follow through to the upside 
today as bond rallied again on the open.  To rally in PRICE means 
to FALL in yield.  Yields on 5 & 10 year notes had now fallen to 
multiyear lows and declined to under the low point of the post 
9/11 bottom of early-November last year. 

Now of course a lot of money has flowed OUT of the stock market 
into fixed income. At some point today, a significant asset 
allocation shift started, probably based somewhat on decisions 
made yesterday, to buy stocks and sell bonds - which had produced 
a very good gain already.  And stocks were on a dip.  

Technical traders noted that the S&P held its up trendline and 
the Dow was "masking" the fact that the market correction was not 
deep. These type traders started buying the S&P futures.  With 
S&P Sept. futures fair value at only +50 points over the SPX, buy 
programs were profitable to do when futures ran up to around 180 
points over "cash". Technical buying jacked up the premium, the 
premiums attracted index-arbitrage buy programs, which brought in 
asset allocation type "buy programs" and the thing snowballed. 

And, money managers were nibbling at some of the key tech stocks, 
like Cisco, Microsoft and even Intel.  Tech stocks don't have to 
rally for the S&P to explode on the upside, just hold steady, 
maybe rally a little and continue to move gradually off their 
recent bottoms. So it goes on the Street of Dreams.   
 
S&P 100 Index (OEX) - Daily/Hourly charts: 


 

Now that the 460 resistance area has been pierced, my next upside 
target in the S&P 100 is to 476-480. A move to 480 would fulfill 
the potential of the "bull flag" formation on the daily chart. I 
suggest exiting long positions in the 480-485 area if reached and 
buying September OEX puts. 

I've thought for a while that there was going to be a "squeeze" 
up into the August expiration, than the market would come down 
from there.  Not severely, but there should be a retest of the 
"line" of prior highs (458-462-460) as support - at a minimum.

So, near support: 460 area; then, at 450, the low end of the 
recent hourly trading range on the last consolidation. 

The rising support trendline and today's low in the 440 area, are 
areas to watch as well for potential support on a next pullback - 
but I think we get follow though to the upside from today's rally 
first, before contending with today's low again.    

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


 

I thought we could get back to the prior low in the 855 area 
today - WRONG! I didn't draw the same trendline that I had on the 
OEX chart and, as you'll note, the low not only held the same 
trendline ("anchored" from the 776 low) in the SPX in a picture 
perfect fashion, but the subsequent hourly lows "walked up" this 
line for a time. Buy programs did the rest. 

I got to believe that the rally was initially catalyzed by the 
fact that SPX held technical support - and, the shorts ran for 
cover after 3-4 hours of this!  Hey, if they can't take em down, 
they'll take em up. This market has a bad case of nerves and 
traders will likely be jumpy for some time yet. Meanwhile the 
vast majority of potential "public" investors are only interested 
in how much their house is appreciating. They trust the market 
like a pet rattlesnake. 

Where do we go from here? I don't think its up, up and away. I 
see resistance coming into play at 943-945, at the top of my 
upper envelope line and also at the September low at 945 - a 
prior significant low like this is likely to "become" resistance. 

A portion of investors who bought the sharp price break after 
9/11 may take the opportunity to bail out on a return to the 
September low, at or close to "breakeven" for those purchases, 
figuring they'll take a second look at the market again once 
we're past THIS September.    

DJ Industrial Index (1/100 of INDU) - $DJX - Daily/Hourly charts: 


 

In a switch, the Dow is lagging the S&P and unlike that index, 
the average did not go to a new high today for the current move.  
On the downside today, DJX held its up trendline and we now have 
3 points to better define the trendline on the low end of an 
emerging uptrend channel. 

I continue to estimate the best near-term upside potential as 
being to the Dow 9000 area - 90.0 in DJX.  I would take profits 
on long positions in this area and look to probe the short side 
by doing some put buying, anticipating a pullback to 86, which is 
near support.  

Nasdaq Composite ($COMPX) Index Hourly/Daily charts:


 
 

"Would you please tell me how do you see the COMPX in the long 
and short-term support and resistance?" 

My longer-term outlook: I think the Nasdaq Composite ($COMPX) is 
bottoming - it could be called a "rolling bottom". This process 
could go on for some weeks more, even into Oct. Meaning - up & 
down price swings in a sideway direction and within a trading 
range between 1387 area (Sept low) maybe as high as 1425, on the 
upside and perhaps back to the 1200 area on the downside.
 
My short-term outlook: Resistance is 1300, then in the 1320-1325 
area - closes above this zone suggests that the 1350-1355 area 
may be retested. 1354 is a pivotal point - a close above this 
prior peak suggests that COMPX is back into an uptrend, which 
activates longer-term objectives up toward the upper end of the 
trading range I mention as part of my longer-term outlook.

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


 

I was looking to short QQQ in the 24.7 area at the prior price 
peak. I also figured that we had no "confirmed" up trend until 
this level was cleared. 

After falling to 22.5, not quite reaching support in the 22 area, 
QQQ rebounded to all the way back up to the up trendline 
intersecting the prior recent hourly highs, suggesting that the 
Q's are now at minor technical resistance.  However, I still 
anticipate that the 24.7 prior high will be retested. 

My trading strategy is to short the stock/buy QQQ puts in the 
24.7 to 25.25 area, looking for a pullback - I am mildly bullish 
on the Nasdaq, but also estimate that there are going to be back 
and forth trading swings and upside potential to be limited. As 
noted before, there is a tendency for a second test of any summer 
low, in the Sept-Oct period.   

Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com    


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**************************
WEEKLY FUND FAMILY PROFILE
**************************

Prudential Mutual Funds

The Prudential Mutual Funds, part of Prudential Financial, is a 
diverse family of mutual funds that offers access to some of the 
world's leading money managers.  Prudential funds are subadvised 
by what they consider to be the best available asset manager for 
each fund's specific objective, asset class and investment style. 

Prudential Funds uses an in-depth research process to select and 
monitor manager activity and performance.  A team of 20 analysts 
is responsible for researching each manager, following what they 
describe to be a rigorous and consistent process.  Prudential's 
website states that this manager-of-managers philosophy enables 
them to hire specialists, what they believe to be "an advisable 
practice in today’s fast-moving, global markets."

Per the P&I 2002 Money Managers Directory, Prudential Financial 
had institutional tax-exempt assets under management, including 
assets passed to subadvisers, of $127.6 billion at December 31, 
2001, ranking them in the top 10 managers of U.S. institutional 
tax-exempt assets.  Prudential Financial also ranks 12th on the 
list of top 250 firms ranked by worldwide assets with some $388 
billion in total assets at year-end 2001.

This week, our focus is on the Prudential Mutual Funds that are 
advised by Prudential Investment Fund Management and subadvised 
by leading asset managers.  Prudential also offers another fund 
series known as Strategic Partners Mutual Funds, in addition to 
PruChoice, a program that allows you to consolidate your mutual 
fund investments.  Pru's other programs are beyond the scope of 
this report. 

Prudential Financial believes that choosing the right fund (and 
correct combination of funds) is key as a person constructs and 
manages their investment portfolio.  Mutual funds and annuities 
are marketed and sold through a nationwide network of financial 
professionals that help individuals reach their goals by having 
them identify their goals, and make advised decisions right for 
them.

Pru's mutual funds are available in Class A, B, C and Z shares, 
which differ in fee structure.  Class A shares have a 5% front-
end sales load, while Class B shares have a contingent deferred 
sales charge (5%, 4%, 3%, 2%, 1% and 1% over a six-year period). 
After seven years, the Class B shares convert to Class A shares.  
Class C shares have a 1% front-end sales charge and an 18-month 
contingent deferred sales charge of 1%.  Class Z shares are only 
offered to a limited group of investors.  Class A, B, C and Z 
shares have a common portfolio.

Additional Background

Per the company website, Prudential Financial companies serve 
individual and institutional clients worldwide and include The 
Prudential Insurance Company of America, one of the oldest and 
largest life insurance companies in the U.S.  These companies 
offer a the full range of products and services including life 
insurance, property and casualty insurance, mutual funds and 
annuities, pension and retirement plan administration, asset 
management, securities brokerage, banking and trust services, 
real estate brokerage franchises, and even relocation services.

A recent news release indicates Prudential Financial companies 
had approximately $557 billion in total assets under management 
and administration as of June 30, 2002.  

Investment Styles and Strategies

The Prudential Mutual Funds are divided into four basic groups: 
stocks funds, bond funds, balanced funds and money market funds.  
Their stock funds cover a range of investment styles from large 
cap to small cap, and from value to growth.  The bond funds are 
designed to offer flexibility and range from current high yield 
funds to highest quality government bond funds.  Their balanced 
fund combines a range of investments in one place.  Their money 
market funds offer competitive short-term yields, combined with 
liquidation and preservation of principal.

Pru's stock fund lineup is well diversified, with at least five 
distinct offerings in each stock fund category.   The large-cap 
stock funds invest primarily in the stocks of large established 
companies according to various investment styles or disciplines 
such as value, growth, tax-efficient or quantitative.  Pru also 
employs a variety of investment styles/strategies to the midcap 
and smallcap domains.  Their sector funds invest principally in 
companies within or related to a certain sector of the economy, 
such as technology or financial services.  Lastly, their global 
funds invest in companies all over the world including the U.S. 
while their international funds invest in companies outside the 
U.S. market.

Pru's bond funds are categorized into three types: taxable bond, 
global/international bond, and municipal (tax-free) bond.  Their 
general bond funds invest in bonds of U.S. corporations, or U.S. 
government entities, to provide a source of income with limited 
potential of capital appreciation.  Some funds specialize in a 
particular type of bond, such as government, corporate or high-
yield bonds.  The global bond fund invests in bonds of foreign 
governments, corporations, multinational enterprises, and their 
agencies and instrumentalities.

Prudential Active Balanced Fund seeks to provide a balance of 
income and long-term growth of capital by investing in stocks, 
bonds, and money market instruments.  It's actively managed to 
capitalize on securities believed to be undervalued at time of 
purchase.  Prudential MoneyMart Assets invests in money market 
instruments issued by government entities (and their agencies), 
corporate issuers and banks to provide current income.

Top-Rated Prudential Funds

Below is a summary of the Prudential mutual funds that are top 
rated by funds tracker Morningstar (4 stars or better).  These 
funds have generated above average to high returns as adjusted 
for risk when compared to their category peers.  Collectively, 
they represent a good starting place for your search, although 
you may find other Prudential funds better serve your specific 
goals.
 
 Stock Funds:  
 Prudential 20/20 Focus (Cat: Large-Blend) 4 Stars
 Prudential Jennison Equity (Cat: Mid-Value) 4 Stars
 Prudential Health Science (Cat: Health) 4 Stars
 Prudential Natural Resources (Cat: Natural Resources) 4 Stars
 Prudential Technology (Cat: Technology) 4 Stars
 Prudential International (Cat: Foreign Stock) 4 Stars

 Taxable Bond Funds:
 Prudential Government Income (Cat: Interm. Gov't) 4 Stars
 Prudential Total Return (Cat: Multi-sector Bond) 4 Stars

You might want to add to this list the Prudential Global Total 
Return Fund, which is 3-star rated overall by Morningstar, and 
has produced average return, with below average risk, compared 
with other international bond funds per Morningstar's analysis.

In some cases a fund has split ratings with the Class Z shares 
rated 4 stars and the other classes rated 3 stars.  The reason 
the Z shares are better rated generally speaking is because of 
their lower expense ratios, since they have a common portfolio.

The two U.S. equity funds we like are the 20/20 Focus Fund and 
the Jennison Equity Fund.  Prudential 20/20 Focus Fund Class Z 
(PTWZX) has an above average reward-risk profile and is unique 
because it divides assets between a value and a growth manager.
The fund seeks long-term appreciation by normally investing at 
least 80% of assets in up to 40 stocks of U.S. companies.  One 
manager selects roughly 20 stocks based on value screens while 
the other manager selects 20 or so stocks using growth screens.
Both managers focus investment in large and mid-size companies. 




 


According to Morningstar, the Prudential 20/20 Focus Fund had a 
trailing 3-year annualized return of negative 6.8 percent as of 
August 13, 2002.  Although negative, that was still 4.7% better 
than the S&P 500's 11.5% annual-equivalent loss and good enough 
to rank the Z shares in the large-blend category's top quintile.
The fund returned more than 32% in 1999 and did a good job both 
in 2000 and 2001 of preserving capital, hence the above average 
rating for trailing period (risk-adjusted) relative performance 
from Morningstar.

Long-term investors seeking a more diversified equity portfolio 
may wish to consider Prudential Jennison Equity Opportunities Z 
Class (PJGZX).  It has approximately 70 stock holdings, per the 
latest Morningstar report, and invests in equities of companies 
based on value qualities.  The fund seeks long-term growth with 
current income a secondary consideration by investing primarily 
in common stocks issued by companies with growth prospects that 
the Jennison judges to be undervalued.  It may invest up to 30% 
of assets in debt securities and may invest up to 20% of assets 
in foreign securities.  

Bradley Goldberg, co-manager of the Prudential 20/20 Focus Fund 
since November, 2000, has run the Jennison Equity Opportunities 
portfolio since its November 7, 1996 inception.  Two additional 
Jennison portfolio managers joined Goldberg in May 2000.  Since 
Goldberg runs half of the 20/20 Focus Fund portfolio, you might 
not want to invest in both funds, or you will have some overlap.

Compared to other mid-cap value fund managers, Goldberg has had 
above average returns over the last five years and overall with 
an average level of risk overall.  The fund's risk level in the 
last three years has been above average compared to other value 
funds investing in mid-cap stocks.  Using Morningstar's numbers 
as of Aug. 13, 2002, the Jennison Equity Opportunities Fund had 
an annualized total return of 8.9% over the last five years, in 
comparison to the 0.5% average gain by the S&P 500 index.  That 
performance was strong enough to rank it in the 12th percentile 
of the mid-cap value category per Morningstar.

Like the 20/20 Focus Fund, year-to-date 2002 performance is off 
somewhat relative to category, but the fund still sports a good 
long-term record.

Prudential International Value Fund Z (PISZX) is subadvised by 
the Bank of Ireland, and has a large-cap value style that, over 
the years, has resulted in below average risk compared to other 
foreign stock funds.  The fund's portfolio recently pushed into 
the large-cap blend style box, but traditionally the fund has a 
value bias.  Its trailing 5-year annualized loss through August 
13, 2002 of 1.4%, outperforming the MSCI EAFE index by 1.1% per 
year on average and ranking in the top 30% of the foreign stock 
fund category per Morningstar.

In the bond fund group, we like the two 4-star rated Pru funds 
and feel they are worthy of consideration for income investors.  
Prudential Government Income Fund Z (PGVZX) has "above average" 
risk relative to other intermediate-term government bond funds 
per Morningstar, but historical total returns have been "above 
average" as well.  Over the last 5 years, the fund has a total 
return of 7.6% (annualized), for a 16th percentile rank in the 
intermediate-government bond fund category.  Investors seeking 
income and appreciation potential across all multi sectors may 
wish to consider Prudential Total Return Fund Z (PDBZX).  It's 
multi-sector bond strategy has generated above average returns 
with below average risk compared with other multi-sector funds 
per Morningstar.        

Summary

If you can get into the Class Z shares that would be your best 
option in my opinion because of their lower relative expenses, 
which in time translates into more long-term growth of capital 
potential.  However, the Class Z shares are geared to employee 
benefit plans and other qualified investors.  You should speak 
with a Prudential financial representative to discuss the fund 
class share options.  

For more information on the Prudential mutual funds, log on to 
www.prudential.com, and follow the Products and Services links 
to the Prudential Mutual Funds.


Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


***********
OPTIONS 101
***********

LEAPing Forward
By Mark Phillips
mphillips@OptionInvestor.com

With August expiration looming on Friday, it is time to revisit
the issue of the new LEAPS (2005 expiration) that have been issued
in recent months and those that are waning in usefulness, those
that expire in January (the 2003s).  Normally I would defer this
discussion to our weekend LEAPS column, but with today's dramatic
reversal in the broad markets, I foresee that we'll have plenty
discuss aside from this peripheral issue.

For those of you that have questions about the actual process by
which the new LEAPS are issued and the symbols change for the
front-year (2003) LEAPS, let me refer you to the article I wrote
in late May.

Out With The Old, In With The New

LEAPS traders typically take positions in order to profit from
longer-term moves in the equity market, as LEAPS provide us with
the attractive leverage benefits of options, while insulating us
from the detrimental effects of time decay attendant with
short-term options.  Simply put, LEAPS give us staying power for
a directional move without forcing us to constantly fret about
the loss of time value in our option holdings.

The catch is that when LEAPS draw within 5-6 months of expiration,
time decay starts have a much more pronounced effect on those
front-year LEAPS premiums.  In order to insulate ourselves from
this increasing time decay effect each year, we start rolling out
of the front-year LEAPS at the end of August, focusing more
intently on the out-year LEAPS, 2004 and 2005 in this case.
Certainly, there is greater leverage available from the
shorter-dated LEAPS, but with only 5 months left until the 2003
LEAPS expire, any significant pause in the fledgling rally will
have a much more pronounced negative impact on these near-term
LEAPS.

Let's take a quick look at an example from the current LEAPS
Portfolio, as I think it will really drive the point home.  We've
been trying to game the bottom in the Technology sector via LEAPS
on MSFT.  I think we've managed to grab a solid entry point into
the play, and the positive action in both the stock and the
broader market today would seem to bear that out.  But looking at
the charts below, you can see how there have been much wider
swings in the price of the 2003 LEAP, relative to the 2004 and
2005 LEAPS, although this is partially due to the fact that the
2003 LEAP is a lower strike.

Daily Chart of MSFT JAN-2003 $45 Call


 


Daily Charts of MSFT JAN-2004 and 2005 $50 Calls


 


So let's do some quick math.  The lows that I've used for our
measurement are those that occurred on August 2 and 5, with MSFT
putting in an apparent bottom near the $44 level, while the highs
I'm using are those levels that have been consistently tested
over the past week.  It's not so much the price range that
catches my attention, as it is the percentage moves in the LEAP
prices.  Here's how the math works out:

LEAP       Price Change    % Change
2003       $3.10             +53.4%
2004       $2.60             +30.2%
2005       $3.30             +28.2%

It doesn't take a rocket scientist to see that the better return
on capital invested over the past 8 trading days would have come
from the shorter-dated LEAP, with a more than 50% return.  But we
need to remember that leverage works in both directions.  What I'm
more concerned with in managing a trade is the control of risk,
rather than just the eternal question of "How much can I make?"
Note that the current stop on this play in the LEAPS column is set
at $43, just below the $44 low that I referenced above.  So what
that means is that if we are playing with the 2003 LEAP and
protecting ourselves with that $43 stop, we need to be prepared
for a far more substantial decline (in percentage terms) than if
we were using the 2004 or 2005 LEAPS.  Put another way, it is
easier to control risk with the longer-dated LEAPS, because time
value is a larger portion of the premium.

Remember that we aren't talking about which option to pick for a
short-term trade, as we want to hold our LEAP for an extended
move, where we can stomach the volatile swings in the price of
the underlying, without watching the value of our position swing
up and down by 50% or more in a period of only a few days.  And
then there's the issue of staying power.  What if MSFT were to
cease its ascent near current levels and meander sideways for the
next couple months?  Guaranteed the 2003 LEAP would lose
significant value, but the longer-dated LEAPS wouldn't suffer
this premium erosion due to the amount of time remaining until
expiration.

This discussion is just the long way of showing why we are going
to be phasing out the 2003 LEAPS from those plays that we cover
in the LEAPS column, placing our emphasis on those LEAPS that
will not be subject to significant time decay in the months
ahead.  Obviously we can't just make this transition overnight,
especially with several open Portfolio plays.  We'll continue to
track all of the listed LEAPS for the duration of each of these
open positions.  But all future Watch List candidates will be
listed with only the 2004 and 2005 LEAPS.  Additionally, for
those of you looking to initiate new positions in any of the
featured Portfolio plays, I would recommend not using the 2003
LEAPS from this point forward.

Hopefully this process doesn't leave anyone confused.  If you
do have any questions on the topic, feel free to send me an email
at mphillips@OptionInvestor.com and I'll endeavor to clear up any
gaps or inconsistencies in the process and the reason for our
transition.  Addressing this issue during the week leaves us free
to focus on the markets and our actual plays in the weekend
edition.  And from where I sit, it looks like we'll have plenty
to talk about this weekend!

Have a great week!

Mark


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


***********************
INDEX TRADER GAME PLANS
***********************

THE SECTOR BEAT - 8/14
by Leigh Stevens

Up, down, up, down - I feel like a yo-yo in sector land.  The one 
fortunate bit of luck I had was to look to short the Biotech 
HOLDR's on a breakdown below 83.00 and NOT to sell them on a 
rally, as they held their up trendline and I would rather own 
them today, then be short - tomorrow, next week, whatever - is a 
different story.  

I am very cautious about taking ANY positions in the sectors 
absent a retest of the bottom and until we get past Sept/Oct.  
Its hard to "trade" the sectors back and forth like the index 
options/index futures.  We need to be able to anticipate if not 
count on more sustained moves to make it worthwhile to go into 
the HOLDR's and iShares and the like. 

The Airline index (XAL) - most beaten down of all the sectors - 
fell another 10% today. Lets all start flying again and help em 
out!   

The Bank index (BKX), Brokers (XBD), and the financially 
sensitive Utilities (UTIL) sector are back on a bullish track and 
looked headed higher.  As the financial type stocks go, so goes 
the market - usually anyway.

The Boxmaker index (BMX) had a minor breakout today - what is 
happening here - they're even buying the PC makers. Well, it's 
DELL mostly. A similar move was recorded in the Computer 
Technology index (XCI). 

The Defense sector (DFI) index held its up trendline, but didn't 
have much of a rally - jury is still out on this one, as it is on 
former favorites, Forest products (FPP) and Home Builder's 
(DJUSHB) which have been struggling.  

The play of former "hot" sectors struggling and former "dogs" 
coming to life is typical and reflects the tendency for money 
managers to play certain sectors until they get overvalued and 
then move on to other "undervalued" groups - any similarity 
between this behavior and a herd of locusts is strictly 
coincidental. 

They ain't quite so in love with the Healthcare sectors either 
(HMO & RXH) as they are having trouble sustaining rallies. 

The Retail sector (RLX) popped again today and broke out above 
some near technical resistance.  The Oil Index (OIX) has climbed 
above a line of resistance at 283.5 (close: 285.3), as the API 
inventory numbers were down and bullish for near-term oil prices. 

The Gold & Silver index (XAU) continues to not be able to close 
above its 200-day moving average.  If XAU gets up to the 70-71 
area I suggest put plays. 

Even the No. American Telecom sector (XTC) popped today above 
near resistance and is managing a minor "dead cat" rebound off 
from the low end of its downtrend channel.  
  
UP on Wednesday -


 


DOWN on Wednesday - 


 


SECTOR TRADE RECOMMENDATIONS -

NEW/OPEN TRADE RECOMMENDATIONS -

Short BBH on break of 83.00
(Biotech HOLDR's)
Stop: 84.70

 
TRADE LIQUIDATIONS -

NONE


SECTOR HIGHLIGHT(S) -

NONE 

Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com


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***********************
SWING TRADER GAME PLANS
***********************

Bad News Ignored!

Call it planet alignment, asset allocation, irrational exuberance, 
Plunge Protection Team at work or simply an unexpected rally but 
the +400 point rally off the day's lows was cheered by one and 
all.

To read the rest of the Swing Trader Game Plan Click here:
http://www.OptionInvestor.com/itrader/indexes/swing.asp


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The Option Investor Newsletter                Wednesday 08-14-2002
Copyright 2002, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:
Stop Loss Updates: None
Dropped Calls: None
Dropped Puts: DIA
Play of the Day: Call - JNJ
Big Cap Covered Calls & Naked Puts: Stocks Rally As Investor 
Optimism Surges Over Corporate Honesty

Updated on the site tonight:
Market Watch: Atmospheric Pressure
Market Posture: Breakthrough In Sight

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*****************
STOP-LOSS UPDATES
*****************

None


*************
DROPPED CALLS
*************

None

************
DROPPED PUTS
************

DIA $87.47 +2.52 (-0.13 for the week) The Dow rallied 395 points 
from its low on the day, eventually closing up 260.92. After 
yesterday's drop, following the FOMC announcement that rates were 
not being cut,  this rally may have been due to asset allocation 
programs taking money out of bonds and putting it into equities, 
as yields reached 40 year lows.   Today's deadline for accounting 
certifications may have also figured into the equation.  OI 
lowered our stop loss on this play to 86.50, locking in a profit 
from the original entry of 87.60.  Our stop was violated as the 
Dow closed at 8743.31, and we are closing the play.


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traded options,” claims author Larry Spears in his new compact 
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and clicking on the link to the book on its home page.

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


**********************
PLAY OF THE DAY - CALL
**********************

JNJ - Johnson & Johnson $55.50 +2.13 (+0.99 for the week)

Company Summary:

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

Most Recent Write-Up:

JNJ has continued to test new support above $53 the last few 
days.  It has rebounded each time from approximately the same 
area, around $53.40.  The stock's sideways movement is further 
evidence of consolidation at a higher level than the last.  There 
is currently support at the 10-dma of $52.73 and 50-dma of 
$52.82, just below the aforementioned $53.  On a day the market 
plummeted as a result of disappointment in the FOMC's reluctance 
to lower interest rates, JNJ held up well.  This stock has had 
quite a run, and today's drop shook out many stocks that had 
risen on air.  JNJ, however, held its ground.  The pipeline of 
new products, several of which are scheduled to be reviewed 
before the FDA in the next couple of months, has kept the sellers 
at bay, as the prospects look promising for JNJ.  JNJ remains on 
a PnF buy signal with a bullish price objective of $65. We are 
maintaining our long position with a target of $60.

Comments

JNJ continued its impressive run today.  After meeting resistance 
at $55 the last 4 days, it finally broke through this level.  $55 
could have also provided psychological resistance, but that is no 
longer a problem.  JNJ had met resistance on one occasion at 
$55.30, back on June 25. However JNJ's close of $55.50, on its 
high of the day, not only took out that level, but looks bullish 
as the buyers were still piling on at the close.  All healthcare 
related indices also finished the day in the green, most on their 
highs of the day.  JNJ continues to look solid after breaking from 
recent consolidation between $53 and $55.  A trade of $56 would 
indicate a break of bearish resistance on the PnF chart, another 
bullish sign for the stock. The break above $55 provides added 
incentive for new entries at this level.  We will maintain our 
initial price target of $60, however, the last time we played JNJ 
long for a profit, we had room to spare.


BUY CALL AUG-50 JNJ-HJ OI=13744 at $5.70 SL=3.00
BUY CALL AUG-55 JNJ-HK OI= 8014 at $0.95 SL=0.00
BUY CALL SEP-50*JNJ-IJ OI= 5735 at $6.50 SL=3.50
BUY CALL SEP-55 JNJ-IK OI=10983 at $2.70 SL=1.50

Average Daily Volume = 10.8 mil



************************************************
BIG-CAP COVERED CALLS, NAKED PUTS & COMBINATIONS
************************************************

Stocks Rally As Investor Optimism Surges Over Corporate Honesty
By Ray Cummins

The major equity averages soared Wednesday as company executives
came out in droves to certify their financials with the SEC.

Investors were impressed by the glut of corporate chiefs who swore
in the face of possible jail time that their balance sheets were
true.  Renewed confidence was seen in every area of the market and
technology stocks were particularly upbeat with the NASDAQ up 65
points to 1,334 on strength in all major hi-tech groups.  The Dow
jumped 260 points to 8,743 amid bullish performances by Wal-Mart
(NYSE:WMT), Home Depot (NYSE:HD), and Citigroup, (NYSE:C) as well
as tech stalwarts such as Intel (NASDAQ:INTC), Hewlett-Packard
(NYSE:HPQ) and Microsoft (NASDAQ:MSFT).  In the broader market,
retail, biotechnology, oil and financial issues led the recovery
while airline, paper and gold shares generally retreated.  On the
Big Board, where 1.51 billion shares traded, 2,344 stocks rose and
895 fell.  On the NASDAQ, where 1.43 billion shares changed hands,
2,235 stocks advanced and 1,106 declined.  Bonds were mixed again
as the 10-year Treasury note lost 1/4, with its yield up to 4.11%,
while the 30-year bond rose 5/8 point to yield 4.93%.

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

SUMMARY OF CURRENT OPEN POSITIONS

***************
(As of 08-13-02)

Naked Puts

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

EBAY     AUG    45   44.15  56.05   $0.85    5.54%
EBAY     AUG    50   48.95  56.05   $1.05    7.56%
FRX      AUG    60   59.20  69.10   $0.80    5.03%
IDPH     AUG    30   29.40  43.89   $0.60    6.83%
QLGC     AUG    30   29.20  32.14   $0.80    8.67%
CTSH     AUG    45   44.00  53.65   $1.00   10.61%
EBAY     AUG    45   44.20  56.05   $0.80    8.71%
ERTS     AUG    45   43.90  59.28   $1.10   11.60%
IDPH     AUG    30   29.35  43.89   $0.65    9.94%
QLGC     AUG    25   24.65  32.14   $0.35    5.38%
SLAB     AUG    23   21.80  23.00   $0.70   14.40%
UNH      AUG    75   74.15  86.81   $0.85    4.97%
WLP      AUG    65   63.95  71.98   $1.05    6.74%
CEPH     AUG    35   34.70  44.37   $0.30    5.76%
FRX      AUG    70   69.35  69.10  ($0.25)   0.00%
IDPH     AUG    35   34.70  43.89   $0.30    6.19%
IVGN     AUG    30   29.70  35.31   $0.30    6.07%
PLMD     AUG    25   24.80  25.55   $0.20    5.64%
PLMD     SEP    23   21.85  25.55   $0.65    5.39%
TRMS     AUG    40   39.45  48.49   $0.55    8.36%
UNH      AUG    75   75.45  86.81   $0.55    4.56%
WLP      AUG    60   59.40  71.98   $0.60    6.44%
AMGN     SEP    35   34.40  45.64   $0.60    4.26%
ATK      AUG    60   59.60  64.26   $0.40    6.49%
CCMP     SEP    25   24.45  39.44   $0.55    4.44%
CEPH     AUG    35   34.80  44.37   $0.20    7.40%
GDT      AUG    30   29.75  34.87   $0.25    9.08%
IDPH     AUG    35   34.75  43.89   $0.25    8.73%
OSIP     SEP    23   21.65  30.76   $0.85    8.74%
TRMS     AUG    40   39.70  48.49   $0.30    8.18%

Positions previously closed: Christopher & Banks (NYSE:CBK)
and Lennar (NYSE:LEN).


Naked Calls

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

ABC      AUG    75    75.85  67.50   $0.85   4.99%
BRL      AUG    65    65.75  62.86   $0.75   5.51%
DGX      AUG    85    86.10  56.82   $1.10   5.35%
BZH      AUG    75    75.80  59.79   $0.80   6.20%
EXPE     AUG    70    71.00  47.34   $1.00   7.69%
SPW      AUG    115  116.45  97.48   $1.45   5.95%
GD       AUG    95    93.75  79.00   $1.25   6.34%
LMT      AUG    65    66.05  63.18   $1.05   8.05%
NOC      AUG    120  121.10  111.56  $1.10   5.02%


Put-Credit Spreads

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

TKTX    40.15  37.86  AUG   30  35  0.75   34.25  $0.75   Open
TRMS    43.25  48.49  AUG   30  35  0.55   34.45  $0.55   Open
CTSH    58.52  53.65  AUG   45  50  0.55   49.45  $0.55   Open
PII     67.90  66.90  SEP   50  55  0.60   54.40  $0.60   Open


Call-Credit Spreads

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

AGN    58.30  57.84   AUG   70  65  0.60   65.60  $0.60  Open
CI     89.83  80.16   AUG  105 100  0.55  100.55  $0.55  Open
COF    51.41  29.20   AUG   65  60  0.65   60.65  $0.65  Open
UN     60.97  59.35   AUG   70  65  0.80   65.80  $0.80  Open
ABC    64.50  67.50   AUG   80  75  0.50   75.50  $0.50  Open
BRL    56.45  62.86   AUG   70  65  0.65   65.65  $0.65  Open
SLM    86.05  92.56   AUG  100  95  0.60   95.60  $0.60  Open
BA     41.19  37.23   AUG   48  45  0.35   45.35  $0.35  Open
EASI   42.90  48.21   AUG   55  50  0.45   50.45  $0.45  Open
AET    43.68  42.39   AUG   55  50  0.50   50.50  $0.50  Open
JCI    81.02  79.51   AUG   90  85  0.50   85.50  $0.50  Open
AAP    45.95  50.01   SEP   60  55  0.70   55.70  $0.70  Open
AIG    62.08  62.31   SEP   75  70  0.65   70.65  $0.65  Open
INTU   41.04  39.60   SEP   55  50  0.60   50.60  $0.60  Open

Advance Auto Parts (NYSE:AAP) rallied with stocks in the Auto
Parts Stores group and any close above near-term resistance at
$52 would signal a potential exit in the position.


Synthetic Positions:

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

AXP    35.26   34.83   SEP40C/30P   0.10   29.90   0.20   Open
CCR	 50.81   52.10   SEP55C/45P   0.20   44.80   1.20   Open?
INVN   27.25   28.78   SEP35C/20P   0.00   20.00   0.90   Open
BLL    45.60   46.66   NOV55C/35P  (0.10)  35.10   0.30   Open

Countrywide Credit (NYSE:CCR) has achieved the target exit point
in our bullish position and conservative traders should consider
taking profits in the play.  InVision Technologies (NASDAQ:INVN)
has also yield a favorable "early-exit" profit in only one week.


Credit Strangles:

Stock  Pick     Last    Position   Credit   G/L   Yield  Status

ERTS   63.00    59.28  AUG70C/50P   2.75    2.75   18%    Open


Questions & comments on spreads/combos to Contact Support
***************

NEW POSITIONS

This following group of plays is simply a list of 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
are suitable for your skill level, risk-reward tolerance and
portfolio outlook.  In addition, we recommend that you avoid any
strategy or technique in which you are not completely comfortable
with the potential loss, the necessary adjustments and the common
entry-exit strategies.  (I monitor the positions marked with ***).

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

BULLISH PLAYS - Naked Put Extravaganza!

With today's bullish activity and the upward bias in the major
equity averages, we have decided to continue offering a larger
than normal selection of naked put candidates.  All of these
issues have robust option premiums and favorable technical
indications.  However, current news and market sentiment will
have an effect on these stocks, so review each play thoroughly
and make your own decision about its future outcome.  Traders
should target higher premiums initially, to allow for a brief
consolidation after today's sizeable gains.

***************
AMGN - Amgen  $47.52  *** Isis Collaboration Making Progress! ***

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 as well
as clinical development staff in the United States, the European
Union, Canada, Australia and Japan.  The company recently bought
Immunex, a biopharmaceutical company dedicated to developing new
immune system sciences to protect human health.  Immunex had
successfully developed two products, Enbrel and Leukine, and was
marketing four products treating multiple indications, Enbrel,
Leukine, Novantrone and Thioplex.

AMGN - Amgen  $47.52

PLAY (sell naked put):

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

SELL PUT  SEP 37.5 AMQ UU   4,136     0.50    37.00       4.1% ***
SELL PUT  SEP 40   AMQ UH   3,493     0.80    39.20       5.4%
SELL PUT  SEP 42.5 AMQ UV     985     1.20    41.30       6.5%


***************
CCR - Countrywide Credit  $54.60  *** Finance Sector Rally! ***

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

CCR - Countrywide Credit  $54.60

PLAY (sell naked put):

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

SELL PUT  SEP 45   CCR UI     559     0.65    44.35       4.1% ***
SELL PUT  SEP 50   CCR UJ     663     1.40    48.60       6.2%
SELL PUT  SEP 55   CCR UK     304     3.00    52.00       9.8%


***************
CEPH - Cephalon  $46.57  *** Recovery Underway! ***

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

CEPH - Cephalon  $46.57

PLAY (sell naked put):

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

SELL PUT  SEP 35   CQE UG   1,496     0.95    34.05       7.6% ***
SELL PUT  SEP 40   CQE UH   4,344     1.75    38.25      10.4%
SELL PUT  SEP 45   CQE UI   1,196     3.10    41.90      12.6%


***************
CHIR - Chiron Corporation  $39.61  *** Rally In Progress! ***

Chiron Corporation (NASDAQ:CHIR) is a global pharmaceutical firm
that is focused on developing products for cancer and infectious
disease.  Chiron continues to build upon its cancer franchise,
which has three dimensions, including immune system modulators,
monoclonal antibodies and novel anti-cancer agents.  In the area
of infectious diseases, the company has a range of products.  The
company commercializes its products through three business units,
which include biopharmaceuticals, vaccines and blood testing.
Chiron Biopharmaceuticals discovers, develops, manufactures and
markets a range of therapeutic products.  Chiron Vaccines offers
more than 30 vaccines for adults and children.  Chiron Blood
Testing provides products used by the blood banking industry.

CHIR - Chiron Corporation  $39.61

PLAY (sell naked put):

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

SELL PUT  SEP 32.5 CIQ UZ      38     0.45    32.05       4.0% ***
SELL PUT  SEP 35   CIQ UG     217     0.85    34.15       5.8%
SELL PUT  SEP 37.5 CIQ UU      19     1.60    35.90       8.6%


***************
CVTX - CV Therapeutics  $27.80  *** New Heart Drugs ***

CV Therapeutics (NASDAQ:CVTX) is a biopharmaceutical firm focused
on applying molecular cardiology to the discovery, development and
commercialization of novel, small molecule drugs for the treatment
of cardiovascular diseases.  The company has four new compounds in
clinical trials including Ranolazine, the first in a new class of
compounds known as partial fatty acid oxidation inhibitors, which
is being developed for the potential treatment of chronic angina.
CVT-510 (tecadenoson), an A1 adenosine receptor agonist, is being
developed for the potential reduction of rapid heart rate during
atrial arrhythmias.  CVT-3146, an A2A adenosine receptor agonist,
is being developed for the potential use as a pharmacologic agent
in cardiac perfusion imaging studies.  Adentri, an A1 adenosine
receptor antagonist, is being developed by the company's partner
Biogen (NASDAQ:BGEN) for the potential treatment of acute and
chronic congestive heart failure.

CVTX - CV Therapeutics  $27.80

PLAY (sell naked put):

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

SELL PUT  SEP 20   UXC UD      52     0.35    19.65       4.9% ***
SELL PUT  SEP 22.5 UXC UX     131     0.75    21.75       9.4%
SELL PUT  SEP 25   UXC UE      37     1.50    23.50      12.6%


***************
IDPH - IDEC Pharmaceuticals  $45.76  *** Analyst Upgrade! ***

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

IDPH - IDEC Pharmaceuticals  $45.76

PLAY (sell naked put):

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

SELL PUT  SEP 35   IDK UG     895     0.70    34.30       5.8% ***
SELL PUT  SEP 40   IDK UH   1,268     1.55    38.45       9.0%
SELL PUT  SEP 45   IDK UI     180     2.85    42.15      11.5%


***************
IVGN - Invitrogen  $36.49  *** Solid Technical Support! ***

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

IVGN - Invitrogen  $36.49

PLAY (sell naked put):

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

SELL PUT  SEP 30   IUV UF      90     0.60    29.40       5.7% ***
SELL PUT  SEP 35   IUV UZ     335     1.15    33.85       6.6%
SELL PUT  SEP 40   IUV UG      30     1.90    38.10       7.8%


***************
OSIP - OSI Pharmaceuticals  $32.70  *** Rally Continues! ***

OSI Pharmaceuticals (NASDAQ:OSIP) is a biopharmaceutical company
focused on the discovery, development and commercialization of
products for the treatment of cancer.  The company has built a
pipeline of programs and drug candidates addressing major, unmet
needs in cancer and selected opportunities arising from OSI's
new drug discovery research programs that represent commercial
opportunities outside of cancer.  The company has three primary
candidates in clinical trials and seven projects with candidates
in late stage pre-clinical development.  OSI's most advanced drug
candidate is Tarceva, which has demonstrated various indications
of anti-cancer activity.  The company expects to focus its future
efforts primarily in the areas of diabetes.

OSIP - OSI Pharmaceuticals  $32.70

PLAY (sell naked put):

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

SELL PUT  SEP 20   GHU UD      20     0.45    19.55       5.3% ***
SELL PUT  SEP 22.5 GHU UX   1,253     0.65    21.85       7.4%
SELL PUT  SEP 25   GHU UE   2,928     0.95    24.05      10.4%


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

BULLISH PLAYS - Credit Spreads

***************
BSC - Bear Stearns Companies  $65.44  *** Hot Sector! ***

The Bear Stearns Companies (NYSE:BSC) is a holding company, which,
through its subsidiaries, principally Bear, Stearns & Co. Inc.,
Bear, Stearns Securities, Bear, Stearns International Limited and
Bear Stearns Bank PLC, is an investment banking, securities and
derivatives trading, clearance and brokerage firm.  The company
serves corporations, governments, institutional and individual
investors worldwide.  BSC provides professional and correspondent
clearing services, in addition to clearing and settling customer
transactions and certain proprietary transactions of the company.
The firm is primarily engaged in business as a securities broker
and dealer operating in three principal segments: Capital Markets,
Global Clearing Services and Wealth Management.

Stocks in the financial services segment have rallied in recent
sessions and Bear Stearns has been one of the best performers, up
over 10% in the last week.  Analysts say the primary reason for
the bullish activity is that most financial issues are cheap on a
valuation basis and the earnings outlook is favorable with 2003
seen as the year the banks and brokers will start posting robust
profit numbers.  Traders who agree with an optimistic assessment
for Bear Stearns can speculate on its near-term share value with
this position.

BSC - Bear Stearns Companies  $65.44

PLAY (conservative - bullish/credit spread):

BUY  PUT  SEP-55  BSC-UK  OI=303  A=$0.60
SELL PUT  SEP-60  BSC-UL  OI=553  B=$1.10
INITIAL NET CREDIT TARGET=$0.55-$0.60  PROFIT(max)=12%


***************
CCMP - Cabot Microelectronics  $41.50  *** Building A Base? ***

Cabot Microelectronics is a supplier of high performance polishing
slurries used in the manufacture of advanced integrated circuit
devices, within a process called chemical mechanical planarization.
CMP is a polishing process used by integrated circuit (IC) device
manufacturers to planarize or flatten many of the multiple layers
of material that are built upon silicon wafers and necessary in
the production of advanced ICs.  Planarization is the polishing
process that levels and smooths, and removes the excess material
from the surfaces of these layers.  CMP slurries are unique liquid
formulations that facilitate and enhance this polishing process
and usually contain engineered abrasives and proprietary chemicals.
CMP enables IC device manufacturers to produce smaller, faster and
more complex IC devices with fewer defects.

Cabot Microelectronics has established a relatively stable base in
its recent trading range (near $40) and the technical indications
suggest a bullish resolution may occur in the near future.  From a
fundamental viewpoint, the outlook is also favorable as the company
is expected to earn $2.20 per share next year, 34% higher than its
estimated 2002 results, and the issue currently trades at only 18
times this forecast.  Traders who believe the stock has reached a
bottom with regard to its share value should consider this position.

CCMP - Cabot Microelectronics  $41.50

PLAY (conservative - bullish/credit spread):

BUY  PUT  SEP-25  UKR-UE  OI=2633  A=$0.30
SELL PUT  SEP-30  UKR-UF  OI=110   B=$0.85
INITIAL NET CREDIT TARGET=$0.60-$0.70  PROFIT(max)=14%


***************
SCHL - Scholastic Corporation  $44.00  *** On The Rebound! ***

Scholastic Corporation (NASDAQ:SCHL) is a worldwide children's
publishing and media company.  The company's businesses are
categorized into four operating segments: Children's Book
Publishing and Distribution; Educational Publishing; Media,
Licensing and Advertising (which collectively represent the
company's domestic operations); and International.  The firm's
operations in Canada, the United Kingdom, Australia and New
Zealand generally mirror the company's United States business
model.  Each of these international operations has original
trade and educational publishing programs, distributes a wide
range of children's books, software and other materials through
school-based book clubs, school-based book fairs and trade
channels, distributes magazines and offers on-line services.

Goldman Sachs announced last week that it began research coverage
of Scholastic, and placed the stock on its "recommended list."
Goldman analyst Peter Appert said the stock has the potential to
appreciate 25-30%, based on the company's consistent revenue
growth, improving cash flow dynamics and potential upside from
the Harry Potter book series it publishes.  Investors apparently
agree with the positive outlook as they have pushed the issue up
almost 20% in the month of August and the technical indications
suggest the bullish trend will continue in the near-term.  This
position offers a conservative way to profit from future upside
activity with limited downside risk.  

Note: Due to the low Open Interest, traders who participate in
the play should use a "net credit" order to initiate the spread.
 
SCHL - Scholastic Corporation  $44.00

PLAY (conservative - bullish/credit spread):

BUY  PUT  SEP-35  USC-UG  OI=3  A=$0.25
SELL PUT  SEP-40  USC-UH  OI=0  B=$0.70
INITIAL NET CREDIT TARGET=$0.50-$0.55  PROFIT(max)=11%


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

BULLISH PLAYS - Synthetic Positions

One of our subscribers suggested that we offer some speculative
synthetic positions, to take advantage of the current upside
potential in the market.  Both of these stocks have excellent
chart patterns with well-established technical support areas and
favorable option premiums.  Traders who have a bullish outlook on
these stocks may find the risk-reward outlook in these positions
attractive, however they should also be evaluated for portfolio
suitability and reviewed with regard to your personal investing
criteria.

***************
GS - Goldman Sachs  $78.50  *** On The Move! ***

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

GS - Goldman Sachs  $78.50

PLAY (speculative - bullish/synthetic position):

BUY  CALL  SEP-85  GS-IQ  OI=801   A=$0.95
SELL PUT   SEP-70  GS-UN  OI=3024  B=$0.95
INITIAL NET CREDIT TARGET=$0.10-$0.25  TARGET PROFIT=$0.75-$1.25

Note:  Using options, the position is similar to being long the
stock.  The initial collateral requirement for the sold (short)
put is approximately $2,375 per contract.


***************
IBM - International Business Machines  $74.92  *** Big Blue! ***

International Business Machines Corporation (NYSE:IBM) makes and
sells computer services, hardware and software.  The company also
provides financing services in support of its computer business.
The company's major operations comprise a Global Services segment;
three hardware product segments (Enterprise Systems, Personal and
Printing Systems, and Technology); a Software segment; a Global
Financing segment; and an Enterprise Investments segment.  IBM
offers its products through its global sales and distribution
organizations.  The company operates in more than 150 countries
worldwide and derives more than half of its revenues from sales
outside the United States.

IBM - International Business Machines  $74.92

PLAY (very speculative - bullish/synthetic position):

BUY  CALL  AUG-85  IBM-IQ  OI=2642  A=$0.40
SELL PUT   AUG-60  IBM-UL  OI=4501  B=$0.40
INITIAL NET CREDIT TARGET=$0.10-$0.15  TARGET PROFIT=$0.50-$0.75

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


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

BEARISH PLAYS - Credit Spreads

There are plenty of candidates in the "premium-selling" category
of options trading but with the potential for a market-wide rally,
we are going to continue with a limited-risk through the use of
combination plays.  Based on analysis of option pricing and the
underlying stock's technical background, these positions meet our
fundamental criteria for profitable "bear-call" credit spreads.
Each issue has robust option premiums, a well-defined resistance
area and a high probability of remaining below the sold strike
prices.  As with any recommendations, these positions should be
carefully evaluated for portfolio suitability and reviewed with
regard to your strategic approach and personal trading style.

***************
AVE - Aventis  $63.62  *** Resistance Near $70 ***

Aventis (NYSE:AVE) is engaged in the discovery and development
of pharmaceutical products.  Aventis offers a range of patented
prescription drugs to treat patients with serious diseases in a
number of therapeutic areas, including respiratory and allergy,
cardiology and thrombosis, oncology and diabetes.  The company
also is engaged in the areas of human vaccines and therapeutic
proteins.  Aventis' businesses include Aventis Pharma, Aventis
Pasteur, Aventis Behring, Aventis CropScience and Aventis Animal
Nutrition.

AVE - Aventis  $63.62

PLAY (conservative - bearish/credit spread):

BUY  CALL  SEP-75  AVE-IO  OI=20   A=$0.50
SELL CALL  SEP-70  AVE-IN  OI=283  B=$1.00
INITIAL NET CREDIT TARGET=$0.55-$0.60  PROFIT(max)=12%


***************
EASI - Engineered Support Systems  $47.68  *** Trading Range? ***

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

EASI - Engineered Support Systems  $47.68

PLAY (very conservative - bearish/credit spread):

BUY  CALL  SEP-60  UFE-IL  OI=20   A=$0.35
SELL CALL  SEP-55  UFE-IK  OI=170  B=$0.95
INITIAL NET CREDIT TARGET=$0.65-$0.70  PROFIT(max)=15%


***************
HI - Household International  $38.09  *** Restating Earnings! ***

Household International (NYSE:HI) is principally a non-operating
holding company engaged in three reportable segments: Consumer,
Credit Card Services and International.  The Consumer segment
includes consumer lending, mortgage services, retail services
and auto finance businesses.  The Credit Card Services segment
includes domestic MasterCard and Visa credit card business.  The
International segment includes foreign operations in the United
Kingdom and Canada.  Household's subsidiaries primarily provide
middle-market consumers with several types of loan products in
the United States, the United Kingdom and Canada.  Household and
its subsidiaries, including the operations of Beneficial Corp.,
offer real estate secured loans, auto finance loans, MasterCard
and Visa credit cards, private label credit cards, tax refund
anticipation loans, retail installment sales finance loans and
other types of unsecured loans, as well as credit and specialty
insurance products.

HI - Household International  $38.09

PLAY (conservative - bearish/credit spread):

BUY  CALL  SEP-50  HI-IJ  OI=1368  A=$0.25
SELL CALL  SEP-45  HI-II  OI=3256  B=$0.85
INITIAL NET CREDIT TARGET=$0.65-$0.70  PROFIT(max)=15%


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


SEE DISCLAIMER
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