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Daily Newsletter, Wednesday, 09/04/2002

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The Option Investor Newsletter                Wednesday 09-04-2002
Copyright 2002, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Is it For Real?
Index Trader Wrap: How High Does A Cat Bounce?
Weekly Fund Family Profile: Berger Funds
Options 101: Avoiding the Volatility Trap
Index Trader Game Plans: (See Note)

Updated on the site tonight:
Swing Trader Game Plan: -355 +117 = Down Trend

Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
09-04-2002                High    Low     Volume Advance/Decl
DJIA     8425.12 +117.07 8452.59  8280.40 1568 mln  1934/820
NASDAQ   1292.31 + 28.47 1294.65  1261.00 1478 mln  2037/1174
S&P 100   447.98 +  7.95  471.15  459.99   totals   3971/1994
S&P 500   893.40 + 15.38  896.08  875.73
RUS 2000  389.75 + 10.62  389.76  379.13
DJ TRANS 2315.22 + 62.82 2319.34  2238.41
VIX        39.94 -  3.92   43.44  39.45
VIXN       57.42 -  1.37   60.43  57.06
Put/Call Ratio 0.88
*******************************************************************

Is it For Real?
by Steven Price

The market experienced a bounce today after Tuesday's massive 
sell-off.  The Dow finished the day up 117.07, to close at      
8425.12. The Nasdaq also posted a gain of 28.47, to close at       
1292.31.

The morning started off with disappointing economic data, as 
construction spending in July remained unchanged after a 1.7% 
drop in June. Expectations were for a 0.5% increase.  Spending on 
single-family homes actually saw a small increase of 0.4%, and 
spending by governments increased 0.9%, but everything else 
remained unchanged or decreased.  Residential buildings saw a 
decrease of 0.7% and private non-residential buildings saw a 2.1% 
decrease, to the lowest level in six years.  Overall, 
construction spending is down 1.1% in the last year, in spite of 
government spending increasing 3.2%.  Private sector spending is 
down 20% in the last 12 months, while spending on industrial 
facilities is down 48%.  Suddenly, "unchanged" looks much worse 
when you look at what we're trying to come back from.

While the market was up today, it appears yesterday's drop put us 
into a new area of resistance.  A look at the 60-minute chart 
shows the significance of 8400 in the Dow and although resistance 
is just above it, around 8425, it appears we may now be looking 
up at that resistance for a while. There are several brackets of 
support and resistance just around 8400, and we could wind up 
bouncing between them, as well. 

Chart of the Dow 8400 level


 

Broken Trend

What may be even more significant is that during the Dow rally 
from its July low, we had seen a series of steadily rising lows 
on each pullback. We also saw decreasing correction amounts. For 
example, taking the intraday highs and lows, even the 702-point 
pullback from August 1-3 resulted in a higher low than the 
previous dip.  The same pattern was repeated from August 9-14, 
when the pullback of 443 points resulted in a decreasing 
correction amount and higher low.  The recent pullback from a 
high of 9077.01 on August 22 has broken this trend and does not 
look promising for a significant rebound.  Not only was the last 
pullback amount of 796.61 greater than the previous correction 
amount during August 9-14, it is also greater than the one from 
August 1-3.  In addition, it has broken the series of higher 
lows, dipping below the August 14 low of 8353, with yesterday's 
close of 8308 and this morning's low of 8280.

Chart of Dow Pullbacks


 

Chart of Dow Correction Amounts


 

Trucking On

While the morning started off with a mild gain, it grew as some 
good news trickled out as the day wore on.  Automakers reported 
significant sales increases across the board.  Ford reported that 
August sales rose 12 percent from last year, as attractive 
financing and discounts kept customers buying.  The Explorer and 
F-Series set records for the month of August. Sales of the high-
end makers Ford owns, Jaguar and Land Rover, rose over 60%. 
Unfortunately, concerns over the company's pension plan, which 
led to yesterday's downgrade, are still weighing on the stock, 
which was up only 0.11 on the day.   GM announced yesterday that 
it would extend zero-percent financing until the end of October; 
this practice has apparently helped sales to an 18% gain in the 
month of August. More than half of their sales were from the 
company's truck lines.  GM also finished the day only 
fractionally higher with a gain of 0.20.  Chrysler also saw 
August sales up, in their case a whopping 24%, on the strength of 
their Jeep brand and Ram trucks.  Chrysler jumped $1.65 to close 
at $41.52.

SOX Dips Again
While the Nasdaq rallied today, taking with it many of the 
smaller tech indices, such as Software (GSO.X), Hardware (GHA.X), 
Networking (NWX.X) and Semiconductors (SOX.X), the SOX did set a 
new 52-week low this morning. The index is still squarely within 
its descending channel, begun in March.  It was the failure at 
the 50-dma of this average in the middle of August that 
foreshadowed a turnaround in the broader markets, as it led the 
techs lower. This failure occurred even after the major indices 
were able to hold above their 50-dmas.  

Chart of the SOX


 

Intel will be giving its mid-quarter update tomorrow, which 
should shed some light on the accuracy of recent predictions by 
analysts that they will be lowering earnings estimates.  This 
morning Merrill Lynch and CSFB both cut 2002 and 2003 earnings 
estimates for the chipmaker.  They cited weaker than expected PC 
sales and the severity of September 1 price cuts.  CSFB cut its 
price target on the stock to $21 from $32, as well.  National 
Semiconductor (NSM) released earnings today, which met 
expectations, but issued cautious comments about the future.  
Chief Executive Brian Halla said, "Early indications of consumer 
demand for the holiday season are not strong at this point and 
although we have pockets of opportunity they may not be enough to 
offset weak end-user demand for this quarter."  While we saw the 
SOX up by the end of the day, it is hard to believe in an 
extended rebound with comments like this still coming out of the 
sector on a regular basis.

George Bush said today that he would be seeking approval from 
Congress for action against Iraq.  Calling Saddam Hussein a 
serious threat, it sounds like Bush is walking the fence between 
Colin Powell's suggestion that the U.S. seek more international 
support before launching an attack, and Dick Cheney, who has said 
he supports action sooner, rather than later.  Bush also said he 
would be consulting with other world leaders, including the 
presidents of China, Russia and France.  He will be addressing 
the U.N. General Assembly next week on the topic.

On Thursday we will be seeing retail sales results for the month 
of August. These numbers will reflect both the state of the 
economy, as measured by consumer spending, and foreshadow what we 
can expect from the holiday sales season.  Analysts are expecting 
weak numbers after many retailers have pointed to slow back to 
school sales in reducing sales estimates for the month.  Wal-Mart 
said last week that it expected same store sales to be in the low 
end of its projected 4 to 6 percent growth range.  After the 
close, American Eagle Outfitters released same store sales, which 
showed a 5% decrease.  This was worse than predictions of a 3.6% 
decrease and could be foreshadowing more of the same tomorrow.

Intel's comments tomorrow should have a pronounced affect on the 
Nasdaq tomorrow.  While the possibility of lowered estimates has 
already been figured into the market, the reality of the cuts, 
along with whatever comments accompany them, could still send the 
techs south. In another bearish sign, the Nasdaq-100, which has 
led the market in recent years, recently reversed its bullish 
percentage. After reaching a recent high of 58%, this index, 
which contains some of the biggest tech companies, is now reading 
42%, representing the number of companies in the sector that are 
currently giving point and figure buy signals.

Given the break in the series of higher highs and higher lows in 
the Dow and the Semiconductor Index reaching a new recent low, it 
is hard to believe in today's rally.  Look for a reversal back 
down as we approach 9/11 and the "bargain" shoppers finish their 
buying.  If the retail numbers are better than expected, 
reflecting an increase in consumer spending, it is possible the 
bounce will continue.  However, with President Bush talking tough 
on Iraq, tensions should only go up, and fears of an anniversary 
attack will be around until at least next week.  American 
Airlines said customer traffic was down 9% in August from a year 
ago and U.S. Air said they saw a 17.3% decline.  As September 11 
approaches I still see selling, especially when combined with bad 
news still streaming from the techs.  With only a week to go 
before that date, I'll be keeping a few extra puts around to 
protect any long position that looks too good to pass up. 


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

How High Does A Cat Bounce?
by Steven Price

The Nasdaq led a broad market rally today that saw most major 
averages making up about a third of yesterday's losses.  While 
this rebound is encouraging, it is not such a great bounce as to 
reverse the recent downtrend begun Aug 22-23.  The Dow, Nasdaq and 
NDX each plummeted yesterday below the recent lows of August 14.  
This reversed a recent trend of setting higher highs and higher 
lows in the recovery from July.  

Charts of Lower Lows in COMPX, Dow and NDX


 

Today's rally was surprising, given the recent downgrades of Intel 
and predictions that it would be lowering guidance in tomorrow's 
mid-quarter meeting.  While the rally was somewhat encouraging, it 
hasn't changed the look of the longer-term trend.

A look at the daily chart of the NDX actually shows a descending 
channel dating back to last December, which has encompassed the 
move from over 1700 in the NDX, all the way down to the August 5 
low of 856.   The recent rally rolls over at the top of the 
channel around August 22 and shows today's action, a 21.34 point 
jump back over 900 to 920.98, just a slight bump in the road down 
to 800.

Chart of the NDX


 

A look at the Nasdaq Composite shows a similar picture.  Today's 
rally of 28.47, to close at 1292.31 simply looks like sideways 
movement in the bigger picture.

Chart of The Nasdaq Composite (COMPX)


 

The advance/decline ratio actually looked bullish today, with a 
ratio of about 4:1 advancing shares to declining shares. However 
given yesterday's ratio of 10:1 to the the downside, the bounce 
looks like just that - a bounce. After such a large decline on 
Tuesday, a continued sell-off would have looked as though 
investors were simply running for the hills ahead of the September 
11 anniversary.  An orderly decline, however, if today's bounce 
turns out to be temporary, actually looks more bearish long-term.  
An orderly decline, which is based on fundamentals, with buyers 
halting the slide temporarily with each new leg down, is more 
sustainable, as it is based on real numbers, as opposed to panic 
ahead of a possible news event.  

The Semiconductor Sector Index (SOX.X) took out its recent 52-week 
low, before rebounding slightly with the rest of the Nasdaq-
related tech indices.  The SOX, however, could now be trapped back 
under 300 and with the expected bad news from Intel tomorrow, 
could begin its next leg down.

Chart of the SOX


 

I have talked to several floor traders who have shared with me the 
strategy most traders are planning as we head into next week's 
9/11 anniversary - they are getting long on the 10th.  Whether 
this means buying out of the money calls, in the money calls, 
buying stocks or futures, or selling puts, they are planning on a 
rebound after that date.  Which scares me!  When so many players 
are planning the same strategy, without any fundamental reason for 
it, other than some illusion of fear vanishing on a certain date, 
they are usually in line for a big disappointment.  Most likely 
what this strategy will result in is an overvalued market 
Volatility Index (VIX.X).  Most market makers will be bid on the 
out of the money calls, either as a strategy to get long, or 
prevent themselves from being short on a major rally.  At the same 
time, no one wants to be short too many puts in case there is an 
attack, so the premium level of the puts will remain high, as 
well.  the VIX dropped almost 4 points today, down to 39.45, but 
this is still relatively high for an index that spends most of its 
days under 30.  If the market rolls back over after today, the VIX 
will increase naturally as fear sets in for a re-test of July's 
low after the big drop on Tuesday reminded everyone of the 
potential downside.  If the market continues today's rally, don't 
expect the VIX to make it back under 30 before next Wednesday.  

The higher premium levels actually provide a good opportunity for 
traders who usually buy the at the money strikes to capture 
movement.  If a trader buys the at the money (or in the money) 
strike as part of a short or long play, he/she can sell the out of 
the money strikes, which will have an unnaturally high level of 
premium before next Wednesday, thus reducing their cost, and 
entering into a vertical spread.  While this limits the profit 
potential, these spreads should be available at better than usual 
prices, and can be used as percentage plays.  After 9/11, the 
premium in the out of the money options should drop significantly, 
allowing the sellers to either buy them back, or allow them to 
expire worthless.  If there is, in fact, a large rally, there are 
still profits to be reaped, just not as many.  Keep in mind that 
the option premiums on the at the money strikes are also high and 
after 9/11 will probably collapse as well.  If, however, you have 
collected some premium from the out of the money sale, the decline 
in the at the money option should be less painful.

Watch for today's rally to look more like a dead cat bounce after 
a rollover tomorrow.  However, wait any continued rally to roll 
before going short.  After such a big drop on Tuesday, the bulls 
may be able to squeeze out a few more upside points, but the 
fundamentals should eventually catch up.


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

Berger Funds

Denver-based Berger Financial Group LLC, advisor to the Berger 
Funds family, was founded in 1974 by Bill Berger, and today is 
owned by Stilwell Financial, Inc., the spin-out of Kansas City 
Southern Industries that owns Berger's cross-town rival, Janus 
Funds.

Stilwell currently owns around 92% of Janus Capital Management, 
about 90% of Berger Financial Group, about 81% of Nelson Money 
Managers plc, and roughly a third of DST Systems, Inc., and is 
traded on the NYSE under the symbol "SV."  Berger became a part 
of the Stilwell Financial Group in 1994 after producing strong, 
relative returns during a period that favored growth styles of 
investing.  

Indeed, Berger's asset management business was grounded on his 
fundamental, disciplined approach to growth investing.  Twenty 
years after its founding (1994), Berger was nearing retirement 
and recognized that his company needed to broaden its focus to 
remain competitive with other financial services organizations.  
He sold the company his investment management business in 1994 
and subsequently retired.

Following the acquisition, Stilwell Financial supported Berger 
Financial Group in its transition from a family of "pro-growth" 
style funds to a manager/distributor of a variety of investment 
products geared both to individual and institutional investors.  

One of the first things Berger did was add some value products.  
They started an investor share class of Berger Small Cap Value 
Fund (BSCVX) in 1997, and introduced Berger Mid Cap Value Fund 
(BEMVX) in 1998.  Both funds are subadvised by Bob Perkins, of 
Perkins, Wolf, McDonnell.  Perkins track record with the small 
cap value product dates back to 1985 (institutional class) and 
due to Perkin's strong performance, fund assets as of mid-year 
totaled $3.7 billion.  Because of its large asset base, Berger 
Small Cap Value Fund is currently closed to new investors.

Berger further diversified in 1998, forming a partnership with 
San Francisco-based Bay Isle Financial LLC, a money management 
firm specializing in large-cap value products.  In December of 
2001, Bay Isle officially became a member of Berger Financial 
Group and the Berger Large Cap Value Fund was launched.  Note 
that Bay Isle's co-founder and chief investment officer, Bill 
Schaff also manages Berger Information Technology Fund (BINVX), 
which debuted in 1997.  Schaff is a co-manager of Berger Small 
Cap Value Fund II (BVSIX) as well.

In 2002, Berger further expanded its reach by buying Enhanced 
Investment Technologies (INTECH), a quantitative money manager 
providing mathematically based large-cap investment strategies.  
INTECH's system attempts to capitalize on the random nature of 
stock price movements, rather than rely on estimates of future 
stock performance. 

As of mid-year 2002, Berger had $15 billion in combined assets 
under management.  Retail class shares of the Berger Funds are 
available on a no-load, no-transaction fee (NTF) basis through 
such leading fund networks as Charles Schwab, Fidelity, and TD 
Waterhouse.  The minimum initial investment is $2,500 (or $500 
for IRA accounts).

Investment Overview

Prior to its product expansion, Berger was recognized for its 
growth-oriented style of investing.  The firm's philosophy is 
rooted in the belief that investing in profitable, successful 
companies results in profitable, successful investments.  The 
Berger Financial Group concentrated their research and client 
portfolio holdings (including mutual funds) in companies with 
strong fundamentals necessary for long-term growth.  Berger's 
growth funds follow a bottom-up approach, building portfolios 
company by company and stock by stock (ala Janus Funds style).

Berger's small-cap value (closed) and mid-cap value products, 
managed by Bob Perkins of Perkins, Wolf & McDonnell, seek to 
identify stock bargains, those trading at or near their lows.  
According to Morningstar, Perkins from time to time will "load 
up" on sectors that are currently out of favor with investors, 
but he "rarely bets wrong."  When compared to other small-cap 
value and mid-cap value funds, Perkin's value-driven style of 
investing has produced strong performance with low volatility.  

Unfortunately, as stated earlier, the small-cap value product 
currently is closed to new investors; however, Berger Mid Cap 
Value Fund remains open.  It is Berger's second largest stock 
fund today, with $852 million in assets today per Morningstar.

Investors seeking a small-cap value or large-cap value Berger 
product have two funds sub-advised by Bill Schaff of Bay Isle 
Financial to consider.   Berger Large Cap Value Fund (BLCVX) 
invests primarily in large companies, whose stock prices are 
believed to be undervalued and trading at discounts relative 
intrinsic value.  The Berger Small Cap Value II Fund (BVSCX) 
invests primarily in the common stock of small-cap companies 
whose stock prices are believed to be undervalued at time of 
purchase.  Schaff/Bay Isle Financial uses fundamental analysis 
and proprietary valuation models to select stocks for the fund 
portfolios. 

The Berger Funds do not offer fixed income products other than 
their money market funds.  You can get some income from Berger 
Balanced Fund (BEBAX), but its large equity stake is likely to 
scare away most income-oriented investors.

Mutual Fund Performance

There was a time when Berger Funds rode high along with Janus 
Funds and other "pro-growth" managers.  Berger Growth Fund in 
1991 posted an 88.8% annual return for investors, followed by 
Berger Large Cap Growth Fund's 61% return.  Both growth funds 
rose in 1992 and returned more than 20% for investors in 1993.

Between 1994, when Bill Berger sold his investment company to 
Kansas City Southern Industries and 1999, Berger's pro-growth 
funds banged home runs left and right, including four product 
offerings with over 100% returns in 1999 at the height of the 
growth stock boom.

But like the Janus Funds, which rode the coattails of the tech 
and information boom in the 1990s, Berger's growth-style funds 
were particularly hard hit in the ensuing tech-led correction.  
Their aggressive growth style of investing, much like Janus's, 
fueled superior gains during the boom decade, but have fallen 
hard since 2000.

The Berger Growth, Berger Mid Cap Growth and Berger Small Cap 
Growth funds are rated only 1-star today by Morningstar based 
upon relative "risk-adjusted" return performance, compared to 
their respective category peers.  The Berger Large Cap Growth 
Fund sports a Morningstar 3-star (average) rating.  Though we 
haven't discussed them, Berger's foreign stock funds are also 
three-star rated by Morningstar in relation to similar funds.

Where Berger funds rate well today is on the value investment 
side of things - namely the two funds sub-advised by Perkins.  
Both Berger Small Cap Value Fund and Mid Cap Value Fund sport 
Morningstar's highest 5-star rating, a designation limited to 
only the top 10% of funds within a particular category (based 
upon Morningstar's proprietary rating system).  Though Berger 
Small Cap Value Fund is closed, the mid-cap value product has 
some room to grow before it may consider closing.




 


According to Morningstar, Berger Mid Cap Value Fund had an 
annualized total return of 13.4% through September 3, 2002, 
ranking it in the top 3% of the mid-cap value category and 
outperforming the S&P 500 large-cap index by a substantial 
margin.  During the same period, the popular S&P 500 index 
declined by an annual rate of 12.4%.

Compared to other mid-value funds, Berger's fund has above 
average volatility, per Morningstar, but has produced high 
returns for a 5-star overall rating.  Considering the fund 
currently resides in Morningstar's mid-cap blend style box, 
Perkins' management style may be called "aggressive value".

Conclusion

Morningstar ratings for the Berger Funds reflect its style 
biases.  Although Berger Growth Fund's struggles date back 
further, Berger Large Cap Growth and Berger Mid Cap Growth 
sported 4-stars and 5-stars, respectively, three years ago.  

Their "aggressive growth" style of investing produced huge 
returns in the 1990's, followed by large losses since 2000.  
While it's difficult to invest in funds that have performed 
poorly in recent periods, Berger's growth style funds have 
demonstrated in the past that they can run with the bulls.   
They're not as good in terms of preserving capital in down 
markets, however.    

If you believe, as I do, that we are near the bottom of the 
cycle, now may be a good time to look further at the Berger 
Funds' growth fund lineup.  With the growth cycle bottoming, 
value-driven funds may be in the late stages of their cycle.  
Berger Mid Cap Value Fund with its "aggressive value" style 
returned 21.6% in 1999 - so it may be capable of putting up 
strong numbers if/when the stock market resumes its advance.

For more information on Berger Funds family of funds, you can 
call 303-329-0200 or logon to www.bergerfunds.com.



Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com

       


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

Avoiding the Volatility Trap
by Mark Phillips
mphillips@OptionInvestor.com

Every time the VIX gets into extreme territory like we saw
yesterday, I get waves of email asking if now is the time to buy
calls in expectation of a strong rebound.  In almost equal
numbers, the questions fly in about whether to buy puts in
anticipation that this time the bottom will fall out of the
market.  Without sounding like I wise guy, let me humbly submit
that both of these questions are going in the wrong direction.
While price action trumps all other metrics that determine
option pricing, we can't afford to ignore the effect elevated
volatility has on the price of an option we are considering
for purchase.

Option sellers fully understand this conundrum and patiently wait
for days when volatility moves to extremes.  I personally know
traders that only sell options when volatility gets to an extreme.
Personally, selling naked options (whether calls or puts) has
never fit my risk profile.  Recall that as a buyer of an option,
you have limited downside (the premium paid), while upside is
theoretically unlimited.  Sure there is a practical limit, as
stocks can only go so high, or else go to zero.  But there are
numerous examples where an option can deliver 200%, 400% or even
greater profit, sometimes in the span of a few days.  

Put this relationship into the world of the option seller, and
you can see that reward is limited (the premium received), while
risk is theoretically unlimited.  Sell a SEP $70 Put on IBM at
the high of the day today and you could have taken in $2.00. 
That is the maximum return.  If IBM falls through the July lows
near $65 by September expiration, the option seller is looking
at a $5 loss, or more.  All of this can be mitigated through
prudent use of stop losses, but that doesn't protect us in the
event of a large gap down move.

But I'm getting off topic here, as I want to talk about how to
trade directionally in a volatile market environment, without
getting burned by overpaying for options due to sky-high
volatility.  Let's say your bias is bullish on a particular
stock and you are considering the purchase of calls.  If you
are right, as the price of the stock rises, the volatility will
likely be falling.  This means that you are making money from
the increase in the price of the underlying equity, but losing
money as the volatility component of the option premium drops
out of nose-bleed territory.  So the stock has to move far
enough (and fast enough) to overcome the premium drain of
collapsing volatility.  In fact, if volatility declines while
the stock gradually moves higher, you can end up losing money
due to the collapse of the volatility component of the option
premium.

Directional put purchasers can get into trouble too.  Let's say
you think the stock is going to drop further and you purchase
puts.  If you're right, then all is golden.  But if the stock
reverses on you, your position loses value twice as fast.  Price
action is going against you and declining volatility causes the
premium to decay even faster.  Has that ever happened to you? 
Or am I the only one?

Obviously the recent market volatility has provided ample
opportunity to make money on directional option purchases, if
only we can pick the right direction.  But the penalty for being
wrong in a high-volatility environment is more severe than normal
and can be a painful experience for the risk-averse trader.
That's what makes the appeal of spread trading so strong in
this sort of market.

For the uninitiated, a spread involves buying a call (or put)
and simultaneously selling a call (or put) on the same underlying
stock, but at a different strike price.  There is a seemingly
endless variety of spread strategies, both bullish and bearish,
simple and complex.  You've probably heard mention of bull call
spreads, bear put spreads, ratio spreads, back spreads,
butterfly spreads, and many others.  Each has their own
particular benefits and drawbacks, but the one thing they all
have in common is that they allow you to insulate yourself from
the effect of volatility.

You'll end up buying high volatility for the long portion of
the spread, but at the same time you are selling high volatility
with the short leg of the spread.  The net result is that your
spread position makes money if the price of the underlying moves
in your direction and lose money if the underlying moves against
you.  But changes in volatility will not materially affect the
outcome of the trade.

Let's look at a simple example of a Bull Call Spread and see how
it works.  Coming back to IBM, let's assume that we're bullish
on the stock and are looking for it to rise back above the $80
level by September expiration.  One way to play it would be to
buy the $75 call (IBM-IO) for $1.95 and sell the $80 call (IBM-IP)
for $0.45.  The net cost of the trade is $1.50, and the maximum
profit (difference between the strikes - net cost) is $3.50. 
That's better than a 2:1 reward to risk ratio, so that would fit
my risk profile.  I'm not recommending this as a trade, just
pointing out that it is a way to put on a bullish directional
trade, without subjecting ourselves to volatility risk.  No
matter which way volatility moves over the next two weeks, price
action will be the dominant determinant (nice alliteration, eh?)
of our profitability in the trade.

We could similarly put on a Bear Put spread on the expectation
that the price of IBM will fall over the next 2 weeks.  Buying
the $70 put (IBM-UN) for $1.35 and selling the $65 put (IBM-UM)
for $0.55 would cost a total of $0.80.  Maximum reward would be
$4.20, giving us a nice reward to risk ratio as well.  The key
point is that price action becomes our primary focus, rather
than stewing over a loss of volatility premium.  

With only 2 weeks until expiration, we might also choose to limit
our exposure to time decay in the trade by buying an ITM option
and selling an OTM option.  Applying this wrinkle to the Bear
Put spread would have us buying the $75 Put (IBM-UO) for $3.30
and selling the $70 Put (IBM-UN) for $1.35.  Net cost has risen
to $1.95, but even on a slight decline in price, the position
works in our favor.  The OTM option will expire worthless if IBM
remains above $70, while our long Put (IBM-UO) will retain
intrinsic value so long as it remains ITM.

We've talked about risk and reward in these trades, but the other
important issue when trading spreads is where is the breakeven
point on the trade.  For the Bull Call spread, the trade will be
profitable, so long as IBM is above $76.50 at expiration (the
level of the long call plus the cost of initiating the trade).
For the first version of the Bear Put spread, the trade is
profitable so long as IBM closes below $69.20 ($70 - $0.80).  And
for the OTM/ITM Bear Put spread, the trade is profitable at
expiration, so long as IBM remains below $73.05.

Spreads can be held until expiration or closed out early,
depending on price action and your risk profile.  Like I said
above, my intention with this article is not to advocate putting
on a specific spread trade.  Rather, I wanted to highlight the
advantage of utilizing this strategy in a high-volatility
environment.  It can allow us to place a directional trade,
without assuming the volatility risk inherent in a long put or
long call position.

I know this has been a rather brief introduction to the concept
of spread trading.  If you're an old hand at this type of
trading, then hopefully this serves as a reminder that this is
the sort of market in which this strategy shines.  If this is a
new concept, then hopefully I've given you something new to chew
on.  If you'd like more details about specific types of spreads,
let me engage in a bit of shameless self-promotion and point you
towards some of my past articles in the Trader's Corner archives.
Last year, I wrote a series of articles on different types of
trades (far from all-inclusive), where I talked about basic
spreads, back-spreads, ratio back-spreads and butterfly spreads.
If any of that sounds intriguing, then follow the links below.

More Details on Spread Strategies
To Spread or Backspread...That Is The Question
Call Ratio Backspreads - The Final Chapter
More Corrections and a Kickoff for Butterfly Spreads
The Long Butterfly Spread - Picking the Right Candidate
Spreads - The Final Installment (The Short Butterfly)

I should also point out that we have a prime resource at our
disposal for elucidating some of the finer points of using
spreads.  Our editor, Steve Price, in his prior life at the CBOE
paid a lot of attention to spread pricing and volatility.  I'm
willing to bet, he's got a few nuggets of wisdom on the topic to
share with all of us.  I'm more than happy to answer any and all
questions on the topic of spreads (within my limited knowledge
base), but if you've got an interesting question or suggestion
for a future article, we just might be able to twist Steve's arm
and learn even more.  Thanks in advance, Steve!  GRIN

Have a great week!

Mark


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

Due to Leigh Stevens being out of town, the Index Trader Game 
Plan, otherwise known as the Sector Beat, will not be updated for 
the remainder of this week.  Jeff Bailey will be updating the 
Sector Beat regularly starting September 9th.


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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.

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


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

-355 +117 = Down Trend

We should not complain about a move that rebounds to retrace only 
one third of the prior move. What we should be worried about is 
that it came at the end of the day and not at the beginning. This 
creates a serious question.


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


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

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Contact Support
The Option Investor Newsletter                Wednesday 09-04-2002
Copyright 2002, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.

In Section Two:
Stop Loss Updates: IBM
Dropped Calls: None
Dropped Puts: KBH, SYMC
Play of the Day: Put - CYMI
Big Cap Covered Calls & Naked Puts: Another Selling Opportunity?

Updated on the site tonight:
Market Watch
Market Posture

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


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

IBM - put
Adjust from $78 down to $75


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

None


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

KBH $47.81 +2.73 (-0.14 for the week) KBH rebounded strongly, 
along with the other homebuilders.  After releasing preliminary 
August numbers that showed increased sales, along with increased 
projections from Hovanian and Lennar, the stock is back up to 
$47.81, just 0.14 below where we went short.  Rather than fight a 
continued bounce in the sector, we will close the play where we 
entered it and look for better opportunities. 

SYMC $30.76 +3.09 (+0.22 for the week) SYMC rallied with other 
computer security firms after a report surfaced that the 
President Bush's advisers would recommend a large increase in 
spending on cyber-security.  SYMC derives 10-20% of its sales 
from the government. Positive analyst comments also contributed 
to the stock's rise. We will close the play now that it is back 
in the center of its long-term consolidation pattern, above 
previous support of $30.


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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 - PUT
*********************

CYMI - Cymer Inc. - $22.95 -1.24 (-1.24 for the week)

Company Summary:
Cymer, Inc. is the world's leading supplier of excimer laser 
illumination sources, the essential light source for deep 
ultraviolet (DUV) photolithography systems. DUV lithography is a 
key enabling technology, which has allowed the semiconductor 
industry to meet the exacting specifications and manufacturing 
requirements for volume production of today's advanced 
semiconductor chips. (source: company release)

Most Recent Write-Up
As the semiconductor stocks go, so goes Cymer.  While the company 
is not a chip manufacturer, its light source products are 
purchased by many semiconductor companies for use in 
manufacturing.  Today's downgrade of Intel put the Semiconductor 
Index (SOX.X) just above its recent low of 282.75 from August 5.  
Lehman lowered revenue forecasts for the chipmaker and said it 
expects Intel to lower profit guidance in Thursday's mid-quarter 
update.  This was just the latest in a long line of warnings and 
downgrades for this sector, which is one of Cymer's biggest 
clients.  While Cymer's products are also used elsewhere, the 
lack of demand for one of its major customer group's products has 
a large trickle down effect.  

The stock today closed below recent support levels from the 
beginning of August.  While it previously traded intraday below 
those levels, earning it a spot on the OI Watch List, today's 
close below $23 looks particularly bearish. the fact that the 
last 4 Septembers have seen the stock market significantly lower 
than where it began the month doesn't help, either.  A look at 
CYMI's PnF chart shows a significant technical breakdown for the 
stock.  While Cymer tested previous lows on the daily chart, it 
remained in PnF consolidation until today.  The trade of $23 
established a triple bottom breakdown, which is very bearish.  
According to professor Earl Davis of Purdue University, the 
formation is profitable 93.5% of the time for an average gain of 
23% over 3.4 months.  While we are looking at a shorter time 
frame, this probability only underscores what we are seeing on 
the daily chart.  The bearish vertical count is currently $14, 
however each $1 box below this level adds negatively to that 
number.  Our ultimate target on the play will be the September 
lows around $15.  However, $20 will most likely provide round 
number support on the way down, with technical support at $17 
below that. Place stops at $25.50, which is just above 
Wednesday's low and may signal a bounce from support.

Why This Is our play of The Day:
On a day when the Nasdaq rallied 28 points taking many of the 
tech dogs with it, CYMI finished down on the day.  With the 
Semiconductor Index (SOX.X) setting a new 52-week low intraday, 
and Intel most likely lowering earnings estimates tomorrow, the 
semiconductor-related stocks should experience a sell-off.  
National Semiconductor commented today that "Early indications of 
consumer demand for the holiday season are not strong at this 
point and although we have pockets of opportunity they may not be 
enough to offset weak end-user demand for this quarter."  This 
does not bode well for a company who considers the semis some of 
its best clients.

BUY PUT SEP-25 CQG-UE OI= 974 at $3.00 SL=1.50
BUY PUT OCT-25*CQG-VE OI= 208 at $4.10 SL=2.20

Average Daily Volume = 1.8 mil



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offers fast option executions

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*********************************************
SPREADS, COMBINATIONS & PREMIUM-SELLING PLAYS
*********************************************

Another Selling Opportunity?
By Ray Cummins

Today's session saw stocks rebound from Tuesday's precipitous
losses but the outlook for equities is far from bullish in light
of recent profit forecasts and the flagging economic recovery.

The major equity averages were buoyed by news that auto sales
surged to their highest level this year in August, as consumers
shrugged off fears about the economy and bought new vehicles at
a near-record pace.  Bullish auto sales were a favorable sign for
consumer spending as General Motors, Ford and Chrysler posted
double-digit gains for U.S. sales in August, giving investors
hope that the economy will avoid a double-dip recession.  The Dow
Jones industrials rebounded 117 points to 8,425 amid strength in
SBC Communications (NYSE:SBC), AT&T (NYSE:T) and Hewlett-Packard
(NYSE:HPQ).  Among technology issues, bargain-hunting investors
gathered shares of telecom-equipment makers and a late-session
rebound in semiconductor stocks helped lead the NASDAQ higher.
The composite index of hi-tech companies advanced 28 points to
1,292.  In the broader-market, biotechnology, retail, airline and
finance issues were biased to the upside after recent losses while
oil and gas, gold and silver, and utilities generally retreated.
The S&P 500 index recovered 15 points to 893.  Trading was active
with about 1.3 billion shares changing hands on the Big Board and
almost 1.5 billion traded on NASDAQ.  Advancers beat decliners by
a ratio of 22-9 on the NYSE and 21-12 on the technology exchange.
In the bond market, U.S. Treasuries absorbed early losses to drop
yields back to fresh 40-year lows.  On Tuesday, yields on 5-year
Treasury notes hit early 1960s closing lows at 3% and benchmark
10-year yields were at 3.97%.

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

SUMMARY OF CURRENT POSITIONS

***************
(As of 09-03-02)

Naked Puts

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

PLMD     SEP    22.5 21.85  24.39   $0.65    5.39%
AMGN     SEP    35   34.40  42.94   $0.60    4.26%
CCMP     SEP    25   24.45  39.50   $0.55    4.44%
AMGN     SEP    37.5 37.00  42.94   $0.50    4.11%
CCR      SEP    45   44.35  50.33   $0.65    4.15%
CEPH     SEP    35   34.05  41.20   $0.95    7.61%
CHIR     SEP    32.5 32.05  36.20   $0.45    4.03%
CVTX     SEP    20   19.65  19.62  ($0.03)   0.00%
IDPH     SEP    35   34.30  38.99   $0.70    5.84%
IVGN     SEP    30   29.40  34.82   $0.60    5.66%
AMGN     SEP    40   39.40  42.94   $0.60    5.88%
GDT      SEP    30   29.70  36.45   $0.30    4.41%
IDPH     SEP    35   34.35  38.99   $0.65    7.96%
INVN     SEP    25   24.75  32.39   $0.25    4.91%
IVGN     SEP    30   29.65  34.82   $0.35    5.28%

CV Therapeutics (NASDAQ:CVTX) is on the "early-exit"
watch-list.  Any further downside movement should be
considered a potential closing signal.
   
Previously closed: OSI Pharmaceuticals (NASDAQ:OSIP)


Naked Calls:

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

HIT      SEP    60   60.60  51.05   $0.60    4.63%
MUR      SEP    90   91.05  82.68   $1.05    5.13%
OMC      SEP    70   70.60  56.00   $0.60    5.74%
QLGC     SEP    40   40.45  32.36   $0.45    6.61%


Put-Credit Spreads

Stock                                              Gain
Symbol  Pick   Last  Month L/P S/P Credit   C/B   (Loss) Status
 
PII     67.90  69.95  SEP   50  55  0.60   54.40  $0.60   Open
BSC     65.44  60.35  SEP   55  60  0.55   59.45  $0.55   Open
CCMP    41.50  39.50  SEP   25  30  0.40   29.60  $0.40   Open
SCHL    44.00  42.15  SEP   35  40  0.50   39.50  $0.50   Open
CCR     52.47  50.33  SEP   45  50  0.65   49.35  $0.65   Open
EASI    52.40  53.79  SEP   45  50  0.90   49.10  $0.90   Open

Bear Stearns (NYSE:BSC) and Countrywide Credit (NYSE:CCR) are on
the daily "watch-list" for further downside activity.  Traders
should monitor the issues as they approach their respective sold
strike prices and if the bearish trend continues, use any upside
activity to exit the plays.


Call-Credit Spreads

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

AAP    45.95   50.20  SEP   60  55  0.70   55.70  $0.70  Open?
AIG    62.08   59.62  SEP   75  70  0.65   70.65  $0.65  Open
INTU   41.04   44.13  SEP   55  50  0.60   50.60  $0.60  Open
AVE    63.62   56.12  SEP   75  70  0.55   70.55  $0.55  Open
EASI   47.68   53.79  SEP   60  55  0.60   55.60  $0.60  Open?
HI     38.09   33.36  SEP   50  45  0.65   45.65  $0.65  Open
AET    41.89   40.77  SEP   50  45  0.45   45.45  $0.45  Open
COF    35.33   33.44  SEP   43  40  0.25   40.25  $0.25  Open
LEH    56.22   53.12  SEP   65  60  0.40   60.40  $0.40  Open


Synthetic Positions:

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

AXP    35.26   33.34   SEP40C/30P   0.10   29.90   0.20  Closed
CCR	 50.81   50.33   SEP55C/45P   0.20   44.80   1.20  Closed
INVN   27.25   32.39   SEP35C/20P   0.00   20.00   1.25  Closed
BLL    45.60   50.93   NOV55C/35P  (0.10)  35.10   1.40  Closed
GS     78.50   73.75   SEP85C/70P   0.10   69.90   1.00  Closed
IBM    74.92   72.35   SEP85C/60P   0.10   59.90   1.75  Closed

Ball Corporation (NYSE:BLL) was the most recent winner in the
group, offering up to a $1.50 closing credit in Tuesday's session.
Countrywide Credit (NYSE:CCR), InVision Technologies (NASDAQ:INVN)
and International Business Machines (NYSE:IBM) have achieved the
target exit points in our bullish plays.  Goldman Sachs (NYSE:GS)
has also yielded a favorable early-exit profit.  American Express
was closed to limit losses.

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 - Premium Selling

All of these issues have robust option premiums and relatively
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.

***************
AMGN - Amgen  $44.12  *** 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 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  $44.12

PLAY (sell naked put):

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

SELL PUT  SEP 40   AMQ UH   4,226     0.70    39.30       9.4%
SELL PUT  OCT 35   AMQ VG   3,742     0.85    34.15       6.1% ***
SELL PUT  OCT 37.5 AMQ VU   3,250     1.25    36.25       7.0%


***************
CHTT - Chattem  $37.94  *** Near All-Time Highs! ***

Chattem (NASDAQ:CHTT) is a leading marketer and manufacturer of
branded consumer products including health, beauty and skin care
products such as Gold Bond, Icy Hot, Sportscreme, Dexatrim, Selsun
Blue, pHisoderm and Garlique.  Chattem conducts a portion of its
global business through subsidiaries in the United Kingdom and
Canada.

CHTT - Chattem  $37.94

PLAY (sell naked put):

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

SELL PUT  SEP 35   HQT UG      93     0.55    34.45       8.2%
SELL PUT  OCT 30   HQT VF       0     0.45    29.55       3.9% "TS"
SELL PUT  OCT 35   HQT VG       0     1.55    33.45       7.8%


***************
CCMP - Cabot Microelectronics  $41.69  ** Pure Premium Selling! **

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.

CCMP - Cabot Microelectronics  $41.69

PLAY (sell naked put):

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

SELL PUT  SEP 35   UKR UG   2,453     0.60    34.40      10.8%
SELL PUT  OCT 30   UKR VF     747     1.10    28.90       8.1% ***
SELL PUT  OCT 35   UKR VG     703     2.20    32.80      12.5%


***************
INVN - InVision Technologies  $33.45  *** Bomb Detection ***

InVision Technologies (NASDAQ:INVN) is a provider of Federal
Aviation Administration certified explosives detection systems
used at airports for screening checked passenger baggage.  The
company's EDS products are based on complex computer tomography,
which is the only technology for explosives detection that has
met the FAA certification standards.  InVision was the first
manufacturer, and is one of only two manufacturers, whose EDS
products have been certified by the FAA for screening checked
baggage.

INVN - InVision Technologies  $33.45

PLAY (sell naked put):

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

SELL PUT  SEP 30   FQQ UF   1,113     0.40    29.60       7.3% ***
SELL PUT  OCT 25   FQQ VE     932     0.55    24.45       5.3%
SELL PUT  OCT 30   FQQ VF   1,134     1.45    28.55       8.8%


***************
IVGN - Invitrogen  $35.58  *** Basing Pattern ***

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  $35.58

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     0.35    29.65       7.4% ***
SELL PUT  SEP 32.5 IUV UZ     329     0.75    31.75      12.0%
SELL PUT  OCT 30   IUV VF      30     1.05    28.95       7.5%
SELL PUT  OCT 32.5 IUV VZ       0     1.70    30.80       9.1%


***************
MIK - Michaels Stores  $46.20  *** Retailers Rally! ***

Michaels Stores (NYSE:MIK) is the world's largest retailer of
arts, crafts, framing, floral, decorative wall decor and seasonal
merchandise for the hobbyist and do-it-yourself home decorator.
The vompany owns and operates 734 Michaels stores in 48 states
and Canada, 148 Aaron Brothers stores, located primarily on the
West Coast, and 1 wholesale operation located in Dallas, Texas.

MIK - Michaels Stores  $46.20

PLAY (sell naked put):

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

SELL PUT  SEP 40   MIK UH   1,534     0.40    39.60       6.0% ***
SELL PUT  SEP 35   MIK VH     141     1.25    33.75       8.2%
SELL PUT  SEP 40   MIK VI     138     2.45    37.55      11.5%


***************
UOPX - University of Phoenix Online  $30.00  ** Solid Earnings! **

University of Phoenix Online (NASDAQ:UOPX) is a provider of unique,
accessible, and accredited educational programs for working adults.
The firm began operations in 1989 by modifying courses developed by
University of Phoenix's physical campuses for delivery via modem to
students worldwide.  University of Phoenix Online now offers 11
accredited degree programs in business, education, information
technology and nursing.  Students can participate in their online
classes anytime via the Internet by using basic technology such as
a Pentium-class personal computer, a 28.8K modem and an Internet
service provider, thereby enhancing the accessibility of and the
potential market for its programs.

UOPX - University of Phoenix Online  $30.00
  
PLAY (sell naked put):

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

SELL PUT  SEP 25   UBY UE     134     0.25    24.75       6.6% ***
SELL PUT  SEP 26.2 JSX UY      32     0.45    25.80       9.8%
SELL PUT  OCT 25   UBY VE      10     0.70    24.30       6.3%


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

BULLISH PLAYS - Credit Spreads

The number of favorable issues in this category is limited and
the near-term outlook for stocks does not support a bullish bias.
However, traders who are optimistic about a continuation of the
recent recovery rally should consider these low-risk positions.

***************
EASI - Engineered Support  $55.00  *** Second Chance! ***

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  $55.00
 
PLAY (aggressive - bullish/credit spread):

BUY  PUT  SEP-45  UFE-UI  OI=77   A=$0.25
SELL PUT  SEP-50  UFE-UJ  OI=160  B=$0.75
INITIAL NET-CREDIT TARGET=$0.55-$0.60
POTENTIAL PROFIT(max)=11% B/E=$49.50


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

BULLISH PLAYS - Synthetic Positions

These stocks have excellent chart patterns with well established
technical support areas and favorable option premiums.  Traders
with a bullish outlook on the underlying issues 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.

***************
PDX - Pediatrix  $34.15  *** Momentum Play ***

Pediatrix (NYSE:PDX) was founded in 1979.  Its neonatal physicians
provide services at more than 190 neonatal intensive care units and
through Obstetrix its perinatal physicians provide services in many
markets where Pediatrix's neonatal physicians practice.  Combined,
Pediatrix and its affiliated professional corporations employ more
than 600 physicians in 29 states and Puerto Rico.

PDX - Pediatrix  $34.15

PLAY (speculative - bullish/synthetic position):

BUY  CALL  NOV-40  PDX-KH  OI=220  A=$1.15
SELL PUT   NOV-30  PDX-WF  OI=86   B=$1.40
INITIAL NET-CREDIT TARGET=$0.35-$0.40
TARGET PROFIT=$0.75-$1.25 B/E=$29.65

Note:  Using options, the position is similar to being long the
stock.  The initial collateral requirement for the sold (short)
put is approximately $1,100 per contract.


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

Neutral Plays - Credit Strangles

***************
INTU - Intuit  $45.53  *** Volatility = Premium ***

Intuit (NASDAQ:INTU)offers tax preparation and personal finance
software products and Web-based services that simplify complex
financial tasks for consumers, small businesses and accounting
professionals.  The company's principal products and services
include Quicken, QuickBooks, TurboTax, ProSeries, Lacerte and
Quicken Loans.  Intuit offers its products and services in five
principal business divisions, which include Small Business, Tax,
Personal Finance, Quicken Loans and Global Business.

INTU is an excellent candidate for premium-selling, based on the
underlying issue's technical background.  INTU has a relatively
stable trading range and no (expected) upcoming events that will
substantially change its fundamental or technical character prior
to the October expiration.  From a charting viewpoint, INTU is in
a lateral pattern with a near-term trading range from $40 to $50.
The recent indications suggest the current trend will continue,
however current news and market sentiment will have an effect on
the position, so review the position thoroughly and make your own
decision about its outcome.

INTU - Intuit  $45.53

PLAY (aggressive - neutral/credit strangle):

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

SELL PUT  OCT 40   IQU VH  2,548     1.40    38.60       6.9%
SELL CALL OCT 50   IQU JJ  3,137     1.50    51.50       6.8%


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

BEARISH PLAYS - Naked Calls

Based on analysis of option pricing and the underlying stock's
technical background, these positions meet our fundamental
criteria for bearish "premium-selling" strategies.  Each issue
has robust option premiums, a well-defined resistance area and
a high probability of remaining below the target 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.

***************
ERTS - Electronic Arts  $60.12  *** Trending Lower ***

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

ERTS - Electronic Arts  $60.12

PLAY (aggressive - sell naked call):

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

SELL CALL SEP 65   EZQ IM   5,966   0.55    65.55       5.3% ***
SELL CALL OCT 65   EZQ JM     955   1.85    66.85       6.1%
SELL CALL OCT 70   EZQ JN   1,209   0.80    70.80       3.7% "TS"


***************
MMM - 3M  $120.65  *** Triple Top Formation? ***

3M (NYSE:MMM) is a $16 billion diversified technology company
with leading positions in health care, safety, electronics,
telecommunications, industrial, consumer and office, and other
markets.  Headquartered in St. Paul, Minn., the company has
operations in more than 60 countries and serves customers in
nearly 200 countries.  3M businesses share many technologies,
manufacturing operations, brands, marketing channels and other
important resources.  3M, which marks its 100th anniversary this
year, is one of the 30 stocks that make up the Dow Industrial
Average and also is a component of Standard & Poor's 500 Index.

MMM - 3M  $120.65

PLAY (aggressive - sell naked call):

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

SELL CALL SEP 125  MMM IE   3,018   1.75    126.75       7.3% ***
SELL CALL OCT 125  MMM JE   1,806   4.40    129.40       6.3%
SELL CALL OCT 130  MMM JF   2,759   2.55    132.55       4.3% "TS"


***************
MUR - Murphy Oil  $83.71  *** Oil Sector Volatility ***

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.

MUR - Murphy Oil  $83.71

PLAY (aggressive - sell naked call):

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

SELL CALL SEP 85   MUR IQ    902    2.50    87.50      13.7%
SELL CALL SEP 90   MUR IR    613    1.00    91.00       6.7% ***
SELL CALL OCT 90   MUR JR  1,179    2.60    92.60       6.0%
SELL CALL OCT 95   MUR JS    149    1.40    96.40       4.1% "TS"


***************
QLGC - QLogic  $33.30  *** Downtrend Intact ***

QLogic Corporation (NASDAQ:QLGC) designs and supplies storage
network infrastructure components and software for server and
storage subsystem manufacturers.  The company's products are
based on SCSI, iSCSI, Fibre Channel and Infiniband standards.
The company is the only end-to-end supplier of Fibre Channel
network infrastructure components that aid in the transfer and
acquisition of data within the SAN.  Their products include its
SANblade HBAs, SANbox Fibre Channel Switches and SANsurfer Tool
Kit management software.  QLogic is the only HBA vendor that
supports SCSI, Internet Protocol, Virtual Interface and FICON
protocols with the same Fibre Channel HBA.  In addition, the
company designs and supplies controller chips used in a variety
of hard drives and tape drives as well as enclosure management
and baseboard management chip solutions that monitor the health
of the physical environment within a server or storage enclosure.

QLGC - QLogic  $33.30

PLAY (aggressive - sell naked call):

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

SELL CALL SEP 37.5  QLC IU   1,349   0.50    38.00       9.2%
SELL CALL OCT 37.5  QLC JU     235   1.95    39.45      11.5%
SELL CALL OCT 40    QLC JH   2,397   1.20    41.20       9.7% ***


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

BEARISH PLAYS - Credit Spreads

All of these positions are favorable candidates for "bear-call"
credit spreads, 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 positions may be higher
than other plays in the same strategy, due to disparities in
option pricing.  However, current news and market sentiment will
have an effect on these issues, so review each play individually
and make your own decision about its future outcome.

***************
ATH - Anthem  $60.41  *** Trading Range? ***

Anthem  (NYSE:ATH), formed as a wholly owned subsidiary of Anthem
Insurance, is a health benefits company.  The company offers a
diversified mix of managed care products, a wide range of unique
administrative and managed care services and partially insured
products for employer self-funded plans and several specialty
products such as group life, disability, prescription management,
workers compensation, dental and vision.  In July 2002, the firm
merged with Trigon Healthcare Inc., a managed healthcare company.
Anthem serves approximately eight million members primarily in
Indiana, Kentucky, Ohio, Connecticut, New Hampshire, Colorado,
Maine and Nevada.  The company owns the exclusive right to market
its products and services using the Blue Cross Blue Shield (BCBS)
names, and marks in all eight states under license agreements with
the Blue Cross Blue Shield Association (BCBSA), an association of
independent BCBS plans.

ATH - Anthem  $60.41

PLAY (moderately aggressive - bearish/credit spread):

BUY  CALL  SEP-70  ATH-IN  OI=2991  A=$0.25
SELL CALL  SEP-65  ATH-IM  OI=2412  B=$0.80
INITIAL NET-CREDIT TARGET=$0.60-$0.65
POTENTIAL PROFIT(max)=14% B/E=$65.60


***************
GSK - GlaxoSmithKline  $37.73  *** Sell The Bounce! ***

GlaxoSmithKline plc (NYSE:GSK) is a research-based pharmaceutical
and healthcare firm that is engaged in the creation and discovery,
development, manufacture and marketing of pharmaceutical products,
vaccines, over-the-counter medicines and health-related consumer
products.  GlaxoSmithKline is committed to making products aimed
at improving the quality of human life.  GlaxoSmithKline also is
active in four major therapeutic areas: anti-infectives, central
nervous system, respiratory and gastro-intestinal/metabolic.  In
addition, it has a growing portfolio of oncology products.

GSK - GlaxoSmithKline  $37.73

PLAY (moderately aggressive - bearish/credit spread):

BUY  CALL  SEP-42.50  GSK-IV  OI=379  A=$0.25
SELL CALL  SEP-40.00  GSK-IH  OI=649  B=$0.50
INITIAL NET-CREDIT TARGET=$0.30-$0.35
POTENTIAL PROFIT(max)=12% B/E=$40.30


***************
EBAY - ebay  $55.59   *** Range-bound? ***

eBay (NASDAQ:EBAY) is the world's online marketplace.  Founded in
1995, eBay created a powerful platform for the sale of goods and
services by a passionate community of individuals and businesses.
On any given day, there are millions of items across thousands of
categories for sale on eBay through auction or fixed price formats.
eBay enables trade on a local, national and international basis
with customized sites in markets around the world.

EBAY - ebay  $55.59

PLAY (moderately aggressive - bearish/credit spread):

BUY  CALL  SEP-65  QXB-IM  OI=6620  A=$0.10
SELL CALL  SEP-60  QXB-IL  OI=9009  B=$0.60
INITIAL NET-CREDIT TARGET=$0.55-$0.60
POTENTIAL PROFIT(max)=12% B/E=$60.55


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


SEE DISCLAIMER
***************


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