Option Investor

Daily Newsletter, Sunday, 09/08/2002

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The Option Investor Newsletter                   Sunday 09-08-2002
Copyright 2002, All rights reserved.                        1 of 5
Redistribution in any form strictly prohibited.

Entire newsletter best viewed in COURIER 10 font for alignment

In Section One:

Wrap: Thank You Intel, Maybe.
Index Trader Wrap: Catalyst
Editor’s Plays: Great Plays If You Have Faith
Market Sentiment: Devil's Advocate
Ask the Analyst: Highly Volatile 
Coming Events: Earnings, Splits, Economic Events

Updated on the site tonight:
Swing Trade Game Plan: Two Days To Go

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
        WE 9-06          WE 8-30          WE 8-23          WE 8-16
DOW     8437.20 -236.30  8663.50 -209.46  8872.96 + 94.90  + 32.61
Nasdaq  1295.30 - 19.76  1315.06 - 65.51  1380.57 + 19.56  + 54.89
S&P-100  446.67 - 14.13   460.80 - 13.70   474.50 +  6.06  +  9.62
S&P-500  893.92 - 22.16   916.08 - 24.78   940.86 + 12.09  + 20.13
W5000   8481.20 -172.84  8654.04 -222.85  8876.89 +106.61  +198.41
RUT      391.57 +   .61   390.96 -  9.17   400.13 +  4.16  +  7.52
TRAN    2257.07 -  8.56  2265.63 -128.69  2394.32 + 54.92  +  7.52
VIX       40.04 +  4.24    35.80 +  2.99    32.81 -  0.01  -  6.54
VXN       56.54 +  1.56    54.98 +  7.36    47.62 -  3.03  -  8.05
TRIN       0.93             1.20             2.87             1.52
Put/Call   0.79             0.84             0.80             0.51

Thank You Intel, Maybe.  
by Jim Brown

The markets rallied on the better than expected Intel warning and 
the better than expected Jobs Report. Unfortunately both announcements
may not have been what investors first thought. When the euphoria
wears off on Monday we may be left with something that smells worse
than week old Chinese take out. 

Dow Chart


Nasdaq Chart


The Intel news was better than expected and investors fearing the 
worst raced to cover at the open but after the initial spike and 
drop the markets failed to reach the days highs again until 3:15
and then only for a brief period. Still they ended the day solidly
in the green but end the week in the red. Resistance held and there
was no monster short covering rally like we saw with Cisco and Intel
last quarter. In short the down trend is still intact.

The Intel news is questionable since they have not told the absolute
truth about their financials in over four years. There is a constant
shell game about productions rates, inventory levels, product mix, 
lack of visibility, etc. Analysts asking questions of the president 
on the conference call probably felt like they were interrogating
Greenspan on monetary policy. 

There were no straight answers and words were chosen carefully.
Intel admits their quarter is very heavily loaded to the back end. 
Orders for the holidays come in September and Intel admits they may
not come this year. In their highly technical analysis of their
prospects they said any possibility of a 4Q seasonal sales increase 
was far from a sure bet. That is far from comforting. Numerous 
analysts cut their ratings on Intel and warned the stock could 
drop as low as $12 before becoming fairly valued. With earnings
estimated to increase only +15% next year analysts claim it is 
still very overvalued. Some think Intel could drop to as low as $7.

Cypress Semi was rumored to have commented at the SG Cowen tech
conference on Friday that the back to school sales that everyone 
has said were weak were actually nonexistent. They said it simply
did not happen and that calls into question the coming holiday 
sales as well. If retail sales are so bad for low ticket items
due to tight budgets then how bad are they going to be for big
ticket items? I suggest that consumers are probably going to
keep that Pentium-III around a little longer especially since 
prices on components are nearly free. You can upgrade memory
for little more than the cost of a dinner at McDonalds for four.
You can upgrade your hard drive to 40GB for the price of a dinner
for two with drinks at Red lobster. Why spend $1,000 for a new
box when less than $100 will do wonders? Do you need 1.2GHZ when
600 MHZ does fine?

The Jobs Report was also more smoke and mirrors. The headline number
showed 39,000 new jobs being created in August. What the headline
number did not show was that 22,000 were hired as airport security
personnel and 34,000 were teachers going back to work. Neither of
these events are going to be repeatable next month. Also there was
a huge number of temporary jobs added that will be phased out over
the next couple months. 41,000 jobs were government related. 69,000
jobs were cut in the manufacturing sector alone. A key point remained
that 53.3% of companies cut workers during August. If the government
hires workers it may have created job but it does nothing to add
to the GDP. Nothing gets manufactured or sold and no equity is
built by hiring a clerk or airport screener. Yes, we need these
government posts but it will not keep us out of a recession. These
facts were beginning to make the rounds by Friday afternoon and
likely contributed to the lack of enough volume to hold the rally
at its highs. 

It was announced that over 100 US and British aircraft took part
in the largest bombing raid in four year over Iraq. It was also
the second one this week. While President Bush is claiming he
will get permission from Congress and develop an allied coalition
he is going out of his way to soften up defenses under the guise
of policing the no-fly zones. The area they bombed today was the
area where scud missiles could be fired at Israel. With reports
coming in from the region of massive build ups of men, vehicles
and supplies it appears to be a foregone conclusion that we are
going to attack them. The reason we should be concerned is the
continuing rumor that Saddam has issued the orders for a preemptive
strike. This means his time is running short and anticipation is
building. It was also revealed that he is supporting a large
group of senior Al Queda in northern Iraq. There is also fear 
that he will use 9/11 as an attack date to attempt to gain favor 
from other Muslims who hail Osama as a hero. 

In that same context German police arrested two people with Al
Queda ties that were planning a 9/11 attack on an American base
in Germany. They recovered 267 lbs of explosives and a large 
quantity of chemical weapons (type undisclosed). This should
be a huge red flag. There is some strong sentiment that by 
attacking on 9/11 terrorists will build support among cells
that have gone into hiding and put their plans on hold. By
going on the offensive again, even if it is only a series of
small attacks, they show that they have not gone away and can
not be stopped. I doubt they will manage to mount any credible
attacks but that cloud will loom over us until next Thursday. 

Just in case you thought everything was better after that jobs 
report let me bring you back to earth. AMR announced after the
bell that they would have to cut substantially more than the 
7,000 already planned. CAT announced they would be laying off 
470 workers and terminating 250 more due to slower truck sales. 
GE said it was sending out another 500 pink slips Friday and
would cut more employees by year end. SUNW was rumored to be
announcing another round of layoffs on Monday. TLAB cut 800
jobs yesterday. Nortel said it was cutting 7,000 more jobs
and Lucent could be announcing another 5,000 cuts next week. 
I could go on but you get the picture. 

Bill Gross made the news today with a Dow 5000 prediction of
sorts. The entire article can be read at www.pimco.com but the
bottom line was that stocks were still nearly twice as high 
historically as he thinks they should be. He is not the lone
voice in the overvalued, still have farther to drop crowd but
he is very well respected. He manages the biggest bond fund
in the world. Critics say he had a vested interest in trashing
stocks but his rationale was very interesting reading. Of course
with bonds facing a multi year bear market ahead he is probably
worried about withdrawals just like equity fund managers over
the last two years. 

Volume was very anemic on Friday with only 2.8 billion shares
trading on all the markets. Up volume was better than 3:1 over
down volume but was not strong enough to push the markets over
the same resistance that has held all week. Since Tuesday's huge
drop the markets have seen three days of triple digit swings
but remained no higher than the intraday high on Tuesday. There
may be a bid under the market but there is heavy supply above
it. The averages are stuck between the 50% and 38% retracement
levels and I would be surprised to see them break either until
next Wednesday. Especially after the two people in Germany were
arrested for plotting a 9/11 attack. The possibilities are just
too strong that something major will happen and nobody wants to
be caught holding if it does. 

Contrary to all the bad news above I strongly believe we will 
see a monster relief rally on 9/12 assuming nothing happens. 
High priced stocks, weak economy and war fears will all be 
forgotten temporarily and I think we could easily see Dow 
9000 again. The Commitment of Traders Report showed that the
Commercials were very close to the most bullish position since 
Oct-2001. The $64,000 question is will it stick. Once overbought 
again those same economic fears will return along with earnings
warnings in volume. Investors who bought the relief rally will
be tested for conviction and there is still a large contingent
that believe we will see new lows in October. One thing for
sure, this wall of worry is approaching World Trade Center

Enter Very Passively, Exit Very Aggressively!

Jim Brown


By John Seckinger

With the Dow, Nasdaq, QQQ’s, OEX, SPX, and NDX gathering the 
majority of traders’ attention, wouldn’t it be nice to find an 
Index that could help in forecasting direction?  Fortunately, 
there are two that has recently gotten my attention.

Blue-chip investors certainly felt resistance on Friday at the 50% 
retracement level (8471) during trading on Friday.  Moreover, an 
aggressive bearish trend line beginning on August 27th bisected 
Friday’s high as well and should give bears confidence heading 
into next week.  Entering into the picture and giving bullish 
traders hope is the possible double bottom near 8215 and a trend 
line drawn from the 7532 low through 8217.  Since we are not 100% 
sure which trend lines will be adhered, it certainly seems to make 
sense to keep them on the radar screen until confirmation.  

Chart of the Dow Jones Industrial Average Index, Daily  


Now it is time to look for the catalyst.  If you have followed me 
on the Market Monitor, you know that I put a lot of weight in the 
Dollar, Bonds, Utilities, Oil, and the yield curve.  However, only 
one of the aforementioned sectors has gotten my attention at this 
time:  Bonds.  The other is Gold and Silver (which should trade 
inversely with Dollar).  Before I start with Gold and Silver, here 
is my opinion on the other indices:

Dollar:  Bearish (Weekly), Neutral (daily)

Bonds:  Bearish (Weekly), Bullish (daily)

Utilities:  Bearish (weekly and daily)

Oil:  Bearish (weekly), Neutral (daily)

Yield Curve:  Bearish (weekly), Neutral (daily) 

Note:  All indices trade in the same direction as the Dow; 
hopefully leading equity prices and giving a trader an edge.  

As mentioned, both gold and bonds (30-year) have garnered my 
attention during the last few trading sessions.  Why?  Looking at 
a weekly chart of Gold shows the Index rising above a well-defined 
channel, certainly getting the attention of both institutional and 
retail traders.  Historically, Gold has traded inversely to the 
Dollar and higher Gold prices usually mean lower equity valuations.
Will the pattern hold true?  Most likely it will, especially as 
thoughts of deflation rear its ugly head.  Moreover, concerns over 
a credit crunch, in theory, will scare investors out of equities 
and into more “safe” commodities (read: Gold).  

Chart of the Gold And Silver Index, Weekly


Another possible catalyst going forward could be the 30-year bond 
(TYX.X), especially following the mass exodus out of the “safe-
haven” index and into stocks after the non-farm report.  Remember:  
I said “catalyst”, not “bearish catalyst” or “bullish catalyst”.  
A weekly chart of the 30-year bond does show HIGHER YIELDS (which 
is bearish for stocks) for seven consecutive weeks.  Nevertheless, 
the daily action on Friday certainly will have traders wondering 
if the trend is beginning to change.  As we all realize, a switch 
out of bonds and into stocks could be explosive.  

As the chart notes, the MACD indicator has still yet to break its 
long downward trend.  However, a break above should have market 
pundits further looking to bonds as the catalyst leading stock 
prices higher.  

Chart of the 30-year Treasury Bond Index, Daily


In a marketplace where asset allocation is explosive and dynamic, 
finding the catalyst becomes a constant challenge.  Therefore, when 
using Q-charts, I place this quote sheet in the upper right side of 
my trading monitor:  


The Dow is at the top because I give that Index that most weight.  
Then I look at the other major equity indices for confirmation and 
solid trading strategies.  Following equities is the cash bond, 
commodities index, the dollar, gold, and bond futures.  Once 
an index trades in-step with normal Intermarket relationships, 
confidence grows and executing option orders become easier to 
perform with conviction.

Discussing specific trade ideas, I am comfortable with Jim’s 
short trade on the OEX from 448.  His current stop loss is at 
OEX 451, SPX 901, and DJX 85.10.  For Jim’s Swing Trade Game 
Plan, please go to the following page:


Quoting Jim, “The plan for Monday will be to try and stay short 
until we see pre-9/11 buying begin and then reverse positions. If 
we get a major drop on Monday we will try to exit at the 50% 
retracement level for the OEX of 436 and look for a bounce.”

If perfect trading conditions exist, Gold will rise on Monday and 
help our short trade; then, bonds will begin to drastically sell-
off and pre-9/11 buying will begin to kick in.  Wouldn’t that be 

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Editor's Plays

Great Plays If You Have Faith

The DJX laddered put play from two weeks ago hit the target
of 83.00 on the DJX on Thursday. If you had the faith to see 
it through then those 50 Sept $85 put contracts with an average
cost of $1.40 as I diagrammed last week could have been sold
on Thursday for $3.60-$4.00. That would have netted you $11,000
profit for a $7,000 investment. I doubt anyone followed it to 
conclusion with the market making triple digit swings daily but 
the concept was sound and profitable. 

The QQQ play from last week has not yet reached the bottom 
target of 21.50 but did hit five of the seven entry points. 

Using the October $24 call - QAV-JX

Got 10 calls at 1.25 when QQQ touched 23.00 (est price $1.25)
Got 10 calls at 1.15 when QQQ touched 22.75 (est price $1.15)
Got 15 calls at 1.05 when QQQ touched 22.50 (est price $1.00)
Got 20 calls at 0.95 when QQQ touched 22.25 (est price $0.75)
Got 25 calls at 0.80 when QQQ touched 22.00 (est price $0.60)

Buy 30 calls at market if QQQ touches 21.75 (est price $0.50)
Buy 40 calls at market if QQQ touches 21.50 (est price $0.35)

The average cost for the 80 contracts is now .98 cents and our
post 9/11 target is something in the $2.50 range. 

The last two fills were higher than estimated due to the triple
digit swings each day. The bounce on Wednesday put some fear
into the market makers and the premiums did not come back 
down on Thursday when the QQQ hit $22. 

The insurance put was higher than expected on Tuesday with
the huge gap down. The cost for the first 15 min of trading
was between 1.50-1.60. Using an average of 1.55 your cost to
buy 50 contracts of the insurance would have been $7750.

The puts traded as high as $2.30 on the Thursday dip ($11,500)
but have slipped back to $1.50 at Friday's close. 

If you remember the plan it was to hold the puts until the QQQ
hit $21.50 and then sell them to offset 75% of the cost of the
calls. Or hold them until after 9/11 to protect against a 
complete disaster. 

If you are in this play now this would be my recommendation.

I would maintain the current orders for the 21.75 and 21.50 
entry points. 

If it appears on Monday that the QQQ is not going to sell off
to that level I would then raise my entry points to 22.50 and
22.25 or higher. It is imperative that you fill the last two
positions at the lowest number possible but do not let the QQQ 
run away from you. I would be looking to add to your current 
position on any dip regardless of where any dip stops. The 
difference in the call price from 22.50 to 22.00 is not going 
to be material. 

The QQQ has a very good chance of hitting 26.00 post 9/11. 
That is the point of the entire play. 

For insurance I would maintain the puts until 21.50 or
until the close on 9/11 or any apparent end of day rally on 
9/11. Your profit will come from the QQQ not from the insurance.



CTSH - Cognizant 

This is a purely directional momentum play. It appears CTSH
is wedging up to the $60 level and could breakout any day.
A positive post 9/11 rally could be the spark to provide a
significant boost. 

I would try to ladder into the play by buying half a position
on a pullback to $59 and the other half on a pullback to $58.
A breakout over $61 would trigger a full position if no pullback
or the remaining half position if only $59 was reached. 

Set a stop loss at $56 to close the play if it goes against us. 



PVN - $5.71

For those who have read this section for sometime I would 
note that PVN has recovered from its bout of depression and 
is looking like it might be ready to breakout. A trade over 
6.25 would be my signal to go long again. Apparently the 
government watchdogs are going to be unsuccessful in putting
restrictions on the high risk lenders and PVN is recovering 


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

Good Luck

Jim Brown  


Devil's Advocate
by Steven Price

Do you believe?  I'm still not sure about this rally, however, 
there is no sense fighting the rising tide.  The Dow actually 
finished by giving up some of its gains today toward the end of 
the session after looking strong throughout the afternoon.  The 
catalyst was Intel, whose revenue guidance was lower, but not as 
bad as expected. This leaves us in a very precarious position. 
When the catalyst for a rally is simply bad news that isn't as 
bad as expected, the rally screams "oversold bounce."  In this 
case that would be accurate, as shorts pounded the semiconductors 
to new 52 week lows the last couple of days.  The question is, 
however, just how oversold were we?  

The Semiconductor Index (SOX.X) experienced a rebound today, but 
it wasn't a terribly convincing one. After taking out lows and 
closing at 275.36, the index rebounded to 288.47.  The rebound, 
however, met serious resistance just over 290, where it flat-
lined for most of the day. If the tech rebound was for real, I 
would have expected it to have at least an upward sloping 5 min. 
graph, as opposed to a horizontal line after the open.  There is 
still quite a bit of selling pressure above, which leads me to 
believe we will see a sell-off ahead of 9/11 when we open on 

In spite of today's rally, the Dow finished the week down 236.30.  
The Nasdaq finished the week down 19.55.  The rally today was 
certainly a feel good event, but the big picture still carries 
quite a bit of bad news.  This week we saw a decrease in both 
manufacturing and non-manufacturing reports, a decrease of 68,000 
jobs in the manufacturing sector, employment data that swung both 
ways (a lower unemployment rate, but evidence of layoffs 
increasing their pace once again), and a lowering of estimates by 
the world's largest chipmaker.

With the anniversary of 9/11 next Wednesday, it is hard to 
imagine investors wanting to remain long, especially with a 
couple arrested today in Germany for planning an anniversary 
attack on a U.S. base there.  The question remains, what else is 
out there?  While there will most likely be a rally if that date 
passes without any major event, what happens between now and then 
is anyone's guess.  That lack of predictability, combined with 
little to cheer about in the business world, should lead most 
bulls to the sidelines before next Wednesday.

Supporting this theory is the low volume today, in spite of 
increased volatility over the last few days. The Market 
Volatility Index  (VIX.X) has closed over 40 on 3 of the last 4 
days, dipping to 39 on Wednesday.  These high readings usually 
suggest quite a bit of activity, however, today was an anomaly.  
Usually rallies lead to lower volatility readings, as investors 
gain confidence.  Volatility generally decreases on up moves and 
increases on down moves, because drops tend to happen at a much 
faster rate than increases.  While we saw increased volatility to 
the upside during the boom-boom days of the internet stock surge, 
that was an exception to the rule.  Today and Wednesday we saw 
volatility remain high in spite of triple digit Dow gains. We 
will most likely see a VIX reading over 40 for the next few days 
as we approach 9/11.  After all, no one wants to sell puts too 
cheaply in this environment, and calls must contain the same 
amount of premium (excepting interest and dividend 
considerations) as the puts.  

Look for a drop on Monday and possibly Tuesday as well.  The 
market fundamentals have not changed much, so any rally after 
9/11 will need some supporting evidence to maintain itself.  If 
you feel the need to go bargain hunting ahead of that date, just 
make sure you keep a few puts in your pocket for protection.


Market Averages


52-week High: 10679
52-week Low :  7702
Current     :  8427

Moving Averages:

 10-dma: 8608
 50-dma: 8652
200-dma: 9671

S&P 500 ($SPX)

52-week High: 1226
52-week Low :  797
Current     :  893

Moving Averages:

 10-dma:  911
 50-dma:  909
200-dma: 1059

Nasdaq-100 ($NDX)

52-week High: 1782
52-week Low :  892
Current     :  922

Moving Averages:

 10-dma:  947
 50-dma:  967
200-dma: 1306


The Semiconductor Index (SOX.X): The bulls got what they were 
hoping for from Intel yesterday, which was news that wasn't as 
bad as expected.  The SOX, which opened up strongly, looked as 
though it would test resistance at 300, as the sector had been 
shorted heavily the last few days ahead of the Intel 
announcement.  Instead, the group came to a dead stop just over 
290, and the shorts kept a lid on them for the rest of the day.  
Given the new recent 52-week low and today's resistance, it 
appears that the problems facing the chipmakers are for real and 
even an oversold bounce had very little spring to it.

52-week High: 657
52-week Low : 275
Current     : 288

Moving Averages:

 10-dma: 309
 50-dma: 339
200-dma: 486


Market Volatility

The VIX has closed over 40 on 3 of the last 4 days, despite 
triple digit Dow gains on Wednesday and Friday.  The 9/11 premium 
is built into these options as no one wants to take on too much 
risk by selling puts too cheaply in case of a sell-off, or calls 
too cheaply in case of a post 9/11 rally.  A VIX reading over 40 
heading into a weekend, when time decay is significant, shows 
that fear is still a factor, despite today's rally.  Expect this 
number to remain high until Wednesday passes.  If there is no 
event, we should see a significant drop in option premiums.  If 
there is an event, 40 will look awfully low in retrospect.

CBOE Market Volatility Index (VIX) = 40.04 –2.19
Nasdaq-100 Volatility Index  (VXN) = 56.54 –4.18


          Put/Call Ratio  Call Volume   Put Volume

Total          0.79        419,346       331,026
Equity Only    0.62        321,047       199,208
OEX            1.17         16,524        19,251
QQQ            0.59         35,412        20,717


Bullish Percent Data

           Current   Change   Status
NYSE          43      + 1     Bull Confirmed
NASDAQ-100    36      - 1     Bull Correction
DOW           50      - 3     Bull Correction
S&P 500       51      - 1     Bear Confirmed
S&P 100       45      - 1     Bear Confirmed

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

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


 5-Day Arms Index  1.57
10-Day Arms Index  1.68
21-Day Arms Index  1.31
55-Day Arms Index  1.35

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


Market Internals

        Advancers     Decliners
NYSE       2004           736
NASDAQ     2230           984

        New Highs      New Lows
NYSE         34              44
NASDAQ       24              97

        Volume (in millions)
NYSE     1,392
NASDAQ   1,310


Commitments Of Traders Report: 09/03/02

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

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

S&P 500

Commercials added 6,000 contracts to the long side, while 
reducing shorts by only 500, in what appears to be a stockpiling 
in anticipation of extreme movement next week. Small traders 
increased both long contracts and short, adding 5,000 to the long 
side and 8,000 to the short side.

Commercials   Long      Short      Net     % Of OI 
08/13/02      427,618   475,536   (47,918)   (5.3%)
08/20/02      422,100   469,556   (47,456)   (5.3%)
08/27/02      425,982   469,087   (43,105)   (4.8%)
09/03/02      431,755   468,529   (36,774)   (4.1%)

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

Small Traders Long      Short      Net     % of OI
08/13/02      155,040    66,546    88,494     39.9%
08/20/02      156,974    69,071    87,903     38.9%
08/27/02      153,152    72,408    80,744     35.8%
09/03/02      158,262    80,130    78,132     32.8%

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

Commercials added 2600 short contracts and only 1400 longs, while 
small traders got longer, adding 1,000 longs and reducing short 
positions by 300.

Commercials   Long      Short      Net     % of OI 
08/13/02       42,303     50,354    (8,051) ( 8.7%)
08/20/02       41,876     49,461    (7,585) ( 8.3%)
08/27/02       45,354     50,634    (5,280) ( 5.5%)
09/03/02       46,712     53,287    (6,575) ( 6.6%)

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

Small Traders  Long     Short      Net     % of OI
08/13/02       12,797     8,933     3,864    17.8%
08/20/02       11,321     7,980     3,341    17.3%
08/27/02       10,156     8,040     2,116    11.6%
09/03/02       11,150     7,720     3,430    18.2%

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


Commercials reduced short positions slightly, reducing risk 
heading into next week, while small traders reduced both sides by 
about 500 contracts. 

Commercials   Long      Short      Net     % of OI
08/13/02       22,837    13,833    9,004      24.6%
08/20/02       21,160    15,349    5,811      15.9%
08/27/02       21,023    14,328    6,695      18.9%
09/03/02       21,161    13,792    7,369      21.1%

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

Small Traders  Long      Short     Net     % of OI
08/13/02        5,050     8,349    (3,299)   (24.6%)
08/20/02        6,216     8,163    (1,947)   (13.5%)
08/27/02        6,825     8,438    (1,613)   (10.6%)
09/03/02        6,395     7,966    (1,571)   (10.9%)

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


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

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



Highly Volatile

Of the many requests I got for individual stock analysis this 
weekend, I found Forest Labs (FRX) an interesting example of a 
stock that would allow for a strategy that works pretty well in 
the current market conditions.  This specific request was for 
analysis of FRX as a short candidate.  However, the market has 
been whipsawing many stocks recently. Volatility is at an 
extremely high level and thus we will see certain stocks trade in 
a wide range.  A look at FRX's graph shows it in the middle of a 
range that has seen swings as wide as $12.  

A straddle is a trade in which the trader buys both a call and a 
put at the same strike.  In FRX we will use the $70 strike, which 
is the strike closest to the center of its current trading range.  
If a trader bought both the 70 call and the 70 put he/she could 
make money if the stock moved in either direction.  Of course one 
of the options would lose money when the stock moved in the 
opposite direction.  However, with time on our side in an option 
purchase, we have the luxury of trading stock against the 
position and paying for the cost of both options and making a 
nice profit, as well.  

I have outlined several different buy and sell points on the 
chart, at which stock can be traded after the position is 
initiated.  The red lines are the widest buy and sell levels, 
however occur with the least amount of opportunities.  The orange 
lines represent a narrower trading band, but provide more 
opportunities. The blue lines represent the narrowest range, but 
provide the most opportunities.  

Each time the stock dips and touches the bottom portion of the 
trading band, the trader can purchase 100 shares of stock per 
long option that has gone his/her way.  For instance, look at the 
purple line pointing to the low of $69.10 on June 5.  A holder of 
the $70 straddle could have purchased 100 shares of stock at this 
point, knowing that if the stock continued downward, the trader 
could have exercised the 70 put and sold the stock a dollar 
higher.  The cost of a straddle on a $70 stock with high 
volatility will be far more than a dollar, so if the stock just 
kept going one direction, the trade would be a loser overall.  
But with a stock that trades like this one does (see IBM as 
well), in a wide but defined range, there was an opportunity to 
sell the stock three dollars higher just 5 days later (second 
purple arrow).  Because the straddle owner would now have no 
stock position after selling the 100 shares, but still hold a 
long call, the trader can actually sell an additional 100 shares 
at this level (total of 200 shares) leaving him/her short 100 
shares of stock, but protected by the long 70 call if the stock 
continues to rise.  If the stock keeps going up, the trader 
simply exercises the call and buys the short stock back at $70.  

If the trader had not bought stock prior to June 10 (second 
purple arrow), he/she can simply initiate the trading strategy by 
shorting 100 shares at that level and then buying them back when 
the stock goes back down, along with an additional 100 shares 
against the long put.  This is simply the same strategy I 
discussed in relation to initiating the play with the purchase of 
stock on the June 5, only starting on the sell side instead. 
Remember that the opening trade for 2 options is always 100 
shares and then 200 shares after that.  More options allow for 
trading of more shares, but always in the same ratio.

Each time the stock touches a trading band, there is an 
opportunity to "flip" the stock for a profit.

If a trader had employed this strategy using the blue trading 
bands, there would have been 14 separate opportunities (so far) 
during the time period on this graph in which to trade the stock 
back and forth for a $300 gain each time, holding onto just 2 
options - 1 put and 1 call, the whole time.  The orange bands 
would have provided about half the amount of opportunities, but 
at twice the trading range (and profit) on each buy/sell 
opportunity.  The same principle applies to the red trading 
bands, which provided only 3 opportunities, but for an $11 gain 
each time.  

While I have highlighted certain trading ranges, any combination 
of these can be used.  If a stock shows a technical breakout to 
the upside, a trader may want to let it run a little before 
selling.  The same applies to the downside.

The key is to trade back and forth on either side of the strike, 
when one of the options is in the money.

Professional option traders use this strategy all the time when 
holding long option positions, referring to it as "scalping."  
When there is a stock that is hard to pick a direction on, such 
as FRX, however its highly volatile range is easier to see, 
trading straddles can be very profitable.  Remember that the more 
volatile a stock, the higher the cost of the straddle, so this is 
not a free money strategy, as you must cover the cost of the 
initial purchase.  The farther out you purchase a straddle, the 
more scalping opportunities you will have and the more the 
straddle will cost.

More conservative traders will probably want to stick to a 
narrower trading range (blue lines), as the scalping 
opportunities are more plentiful and he/she can reduce the risk 
of the stock not reaching the outer bands.  The downside to this, 
of course, is higher commissions for more stock trades.  A trader 
also needs to make sure to either pay attention to the stock, or 
place limit orders after each stock trade is completed.  

I received many good requests this week for the column and I will 
attempt to address many of them on the Market Monitor if I see an 
opportunity in the particular stocks.  In the future I will also 
be discussing more individual directional plays in "Ask the 
Analyst," however given the current volatility in the market, I 
thought this was a good opportunity to highlight the long 
straddle strategy. 

Chart of Forest Labs (FRX)



Market Watch for the week of September 9th

Major Earnings This Week

Symbol  Company               Date           Comment      EPS Est

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

SASOY  Sasol Limited         Mon, Sep 09  -----N/A-----       N/A

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

AAUK   Anglo American PLC    Tue, Sep 10  -----N/A-----        N/A
CMVT   Comverse Technology   Tue, Sep 10  After the Bell     -0.12
HNZ    Heinz                 Tue, Sep 10  Before the Bell     0.53

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


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

ADBE   Adobe Systems          Thu, Sep 12  After the Bell    0.19
BNG    Benetton Group         Thu, Sep 12  -----N/A-----      N/A
CBRL   CBRL Group             Thu, Sep 12  -----N/A-----     0.54
EN     Enel S.p.A.            Thu, Sep 12  -----N/A-----      N/A

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


Upcoming Stock Splits In The Next Two Weeks...

Symbol  Company Name              Ratio    Payable     Executable

NBY     NBC Capital               4:3      09/09       09/10
BLUD    Immucor Inc.              3:2      09/13       09/16
DORL    Doral Financial           3:2      09/14       09/16

Economic Reports This Week

This market watch could be the barometer that helps investors 
to forecast the market weather ahead.  


Monday, 09/09/02
Wholesale Invntories(DM)Jul  Forecast:   0.2%  Previous:     0.3%
Consumer Credit (AB)    Jul  Forecast:  $9.2B  Previous:    $8.4B

Tuesday, 09/10/02

Wednesday, 09/11/02
Fed’s Beige Book (DM)

Thursday, 09/12/02
Initial Claims (BB)   09/07  Forecast:   400K  Previous:     403K
Export Prices ex-ag(BB) Aug  Forecast:    N/A  Previous:     0.2%
Import Prices ex-oil(BB)Aug  Forecast:    N/A  Previous:     0.0%
Current Account (BB)     Q2  Forecast:-$125.0B Previous: -$112.5B

Friday, 09/13/02
Retail Sales (BB)       Aug  Forecast:   0.4%  Previous:     1.2%
Retail Sales ex-auto(BB)Aug  Forecast:   0.2%  Previous:     0.2%
PPI (BB)                Aug  Forecast:   0.2%  Previous:    -0.2%
Core PPI (BB)           Aug  Forecast:   0.1%  Previous:    -0.3%
Mich Sentiment-Prel.(DM)Sep  Forecast:   87.9  Previous:     87.6

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

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Anything else is too slow!



Two Days To Go

The Intel news and the better than expected Jobs Report gave 
shorts, including us, a case of indigestion. However, the gains 
slowed to a halt at recent resistance and leads me to believe 
Monday may not be a bullish event.

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The Option Investor Newsletter                   Sunday 09-08-2002
Sunday                                                      2 of 5

In Section Two:

Index Trader GamePlans: (See Note)
Daily Results
Call Play of the Day: LLL
Put Play of the Day: IBM
Dropped Calls: BRL
Dropped Puts: UTX

If you trade options online, then you need an online broker that:
offers true direct access to each option exchange offers stop and 
stop loss online option orders offers contingent option 
orders based on the price of the option or stock offers 
online spread order entry for net debit or credit offers fast 
option executions

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



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.


For Best Alignment view in Courier Ten Font

CALLS              Mon    Tue    Wed   Thu   Week

BRL      68.35    0.00  -3.23   0.38 –1.09  -2.11  Drop, sideways
BYD      17.71    0.00  -0.45   1.20  0.36   1.46  New, altitude
LLL      52.84    0.00  -1.44   0.55  1.13   2.45  New,clear sky
MSFT     47.82    0.00  -1.50   0.65 –1.59  -0.70  New, leader
OMC      60.00    0.00  -3.10   1.32  1.15   0.90  New, to $65
SYK      57.70    0.00  -0.80   0.80  1.03   1.58  roll a strike
TRMS     45.30    0.00  -2.18   1.29 –1.40  -0.48  New, demand


AA       22.59    0.00  -0.93   0.23 –0.99  -1.86 weak effort  
AIG      59.45    0.00  -3.18   0.43 –1.93  -3.10 ceiling at $60
EXC      44.40    0.00  -1.49   0.60 –0.65  -1.45 weighed down
IBM      73.20    0.00  -3.03   1.38 –1.55  -1.00 back in range
UTX      58.67    0.00  -2.71   0.61 –1.11  -0.23 Drop, sideways
WY       51.00    0.00  -2.05   0.05 –2.25  -3.35 lower low 

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

“7 Steps to Success – Trading Options Online”.

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



Call Play of the Day:

LLL - L-3 Communications Holdings $52.84 (+1.95 last week)

See details in play list

Put Play of the Day:

IBM – Int’l Business Machines - $73.20 +1.02 (-2.18 for the week)

See details in play list


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


BRL $68.35 (-2.36) Friday's tight trading range in shares of BRL
points to a loss of bullish enthusiasm, particularly in light of
another strong upward move in the broad market.  The stock is
likely coiling for a strong move, but with the oscillators
waffling between overbought and oversold, it is just too hard to
make a case either way.  Rather than risk an adverse move next
week, we're pulling the plug this weekend.  Hopes for a bullish
breakout appear to be waning and there are better bullish
candidates to consider.


UTX $58.67 (-0.72) Following the broad market higher on Friday,
UTX broke out of its inside day setup to the upside on its way
to posting a more than 3% advance.  Despite concerns about the
9/11 anniversary, there is still a bid in the market and UTX's
rebound has us thinking that this leg of the decline has run its
course.  Rather than wait for our $59 stop to be taken out on a
resumption of the broad-market rebound next week, we're dropping
the play this weekend.  Individual traders will have to decide
whether to close open positions at the open on Monday, on a move
through the $59 stop or wait for another intraday dip in order
to exit at a better level.


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

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

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

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

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

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

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Contact Support
The Option Investor Newsletter                   Sunday 09-08-2002
Sunday                                                      3 of 5

In Section Three:

Current Calls: SYK
New Puts: None

If you trade options online, then you need an online broker that:
offers true direct access to each option exchange offers stop and 
stop loss online option orders offers contingent option 
orders based on the price of the option or stock offers 
online spread order entry for net debit or credit offers fast 
option executions

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



TRMS - Trimeris - $45.30 +1.95 (-0.20 for the week)

Company Summary:
Trimeris is a development stage, biopharmaceutical company 
engaged in the discovery and development of novel therapeutic 
agents that block viral infection by inhibiting viral fusion with 
host cells. Trimeris' lead product candidate, Fuzeon(TM), which 
inhibits fusion of the human immunodeficiency virus (HIV) with 
host cells, is currently in Phase III clinical trials and has 
received fast track designation from the FDA. Trimeris' second 
fusion inhibitor product candidate, T-1249, has also received 
fast track designation from the FDA and is in Phase I/II clinical 

Why We Like It:
Trimeris has broken onto the biotech scene on the strength of its 
HIV drug, T-20, which will be marketed in 2003 as Fuzeon.  T-20 
is the most advanced of a new class of HIV drugs called fusion 
inhibitors.  There have been so many requests for the drug that 
Trimeris, who is partnering with Roche in the marketing of T-20 
will likely be unable to produce enough of the drug to meet 
supply.  When demand outstrips supply, basic economics says that 
prices go up. Right now, T-20 is expected to cost $15,000 
annually and the plant set up to produce the drug was originally 
made to produce enough dosages for 25,000 patients by the end of 
2003 and 40,000 by the end of 2004.  The demand now looks to be 
much greater.  The initial revenue estimates of $300-600 million 
in annual revenues could now approach $1 billion if the company 
can produce enough supply.  The drug was developed in conjunction 
with the National Institutes of Health, therefore keeping some of 
the development costs in check. In addition to T-20, Trimeris 
also has another drug in the pipeline, designated T-1249, which 
may hold even more promise than T-20.

Demand for T-20 stems from two separate factors.  First, many of 
the 850,000 - 950,000 Americans infected with HIV have become 
resistant to current drugs used in the HIV "cocktail."  The 
cocktail consists of three different classes of drugs, of which 
drugs from at least two classes are used.  Because T-20 
represents an entirely new class, patients who have developed 
resistance to the current classes should see better results from 
T-20 than they are currently experiencing.  Secondly, previous 
classes of HIV drugs have focused on preventing HIV from 
replicating once it enters cells and then preventing it from 
exiting cells to infect others.  T-20 instead focuses on 
preventing the disease from entering cells altogether.  While it 
is currently meant for use in infected patients who have 
developed resistance to other drugs, the implications could be 
much greater worldwide as a preventative product for high-risk 
populations.  While T-20 could eventually result in HIV 
developing resistance to it as well, that will not happen for 
some time after the drug is introduced and this play will most 
likely be closed long before then.

TRMS made our Watch List as it flirted with $50, but was unable 
to break the barrier.  It instead pulled back to support at $43, 
which was its bullish support line on the point and figure chart, 
found its legs and has turned up for another run.  While we would 
like to see it break $50, we will be satisfied with a $5 move up 
to that level, which will be our target on the play. More 
conservative investors can look for a pullback and re-test of 
support at $43 to initiate new long positions.  OI, however, 
views the current level as sufficient to initiate long entry.  
Place stops at $42.50, just below recent support.

BUY CALL SEP-40 RQM-IH OI=    35 at $6.30 SL=3.50
BUY CALL SEP-45*RQM-II OI=   171 at $2.25 SL=1.10
BUY CALL OCT-40 RQM-JH OI=   337 at $7.60 SL=4.00
BUY CALL OCT-45 RQM-JI OI=   195 at $4.00 SL=2.00

Average Daily Volume = 556 K


MSFT - Microsoft - $47.81 +1.90 (-1.31 for the week)

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

Why We Like It:
Microsoft rallied today with the rest of the tech sector after 
last night's news from Intel turned out to be far less 
disappointing than expected.  The stock finished the day up 
$1.90, or 4.13%.  MSFT's recent high of $53.45 on August 22 was 
turned back, along with the rest of the broader markets.  The 
stock looks very oversold, as evidenced by its stochastic 
oscillator having just reversed upward from oversold territory.  
On the last three occasions the stochastic has reached this 
point, its upturn has been quick and signaled an oversold rally.  

While many of the other tech giants are complaining about a lack 
of IT spending and lowering estimates on a regular basis, 
Microsoft has been in a much better position to whether the 
storm.  The company will begin charging user fees each year for 
its software, rather than a one-time charge, therefore increasing 
revenue, even as PC sales slow.  On September 4, MSFT announced 
that more than 60 companies are building digital media products 
and services on its next-generation digital media platform, 
Windows Media 9 Series.  The companies encompass consumer 
electronics, media and entertainment, service providers and 
software and hardware manufacturing. In fact, Microsoft's sales 
are currently so strong that software vendor CDW recently raised 
earnings guidance, citing strong sales of Microsoft products.

A look at the point and figure chart shows Microsoft having 
reversed up exactly at its bullish support line of $46. Although 
still in a column of "O"s, the stock has followed this ascending 
support line during its last 3 pullbacks, and the next level of 
support on the chart is $47.  We will use a stop loss of $45.50, 
just below recent support.  Our target on the play will be the 
recent high of $53.45, although if we experience a post 9/11 
rally, this may be a conservative view. Of all the tech stocks, 
Microsoft appears to demonstrate the greatest financial health 
and should lead the rally.  The current bullish vertical count is 
$72, and although this may be an overly optimistic view, we'll be 
happy with a move even 1/3 of that amount.  

BUY CALL SEP-45    MQF-II OI= 12377 at $3.90 SL=2.00
BUY CALL SEP-47.50 MQF-IW OI= 14598 at $2.15 SL=1.10
BUY CALL OCT-45    MQF-JI OI=  5732 at $5.30 SL=2.75
BUY CALL SEP-47.50 MQF-JW OI=  5777 at $3.80 SL=2.00

Average Daily Volume = 45.8 mil


BYD - Boyd Gaming Corporation $17.71 (+1.41 last week)

Company Summary:
Boyd Gaming Corporation is a multi-jurisdictional gaming company
that owns and/or operates 12 casino entertainment facilities in
eight distinct markets in five states.  The company's
entertainment properties are located in Nevada, Mississippi,
Illinois, Indiana and Louisiana.  BYD is also developing The
Borgata, a $1 billion casino resort in Atlantic City, through
a joint venture with MGM Mirage.

Why We Like It:
Consumers may be slowing their rate of expenditures on items
other than new vehicles, but judging by the action in some of the
gaming stocks, they still have a healthy appetite for
entertainment.  Clearly leading the pack has been our new call
play, BYD.  The stock bottomed near the $11.50 level back in
mid-June and since then has been working higher, posting a series
of hither lows along the way.  About 2 weeks ago, the stock moved
to a new multi-year high when it briefly traded above $17, but
the broad market weakness dragged BYD back for a retest of
support.  The successful rebound from the $15.75 level gave the
bulls renewed confidence and BYD has seen strong buying pressure
over the past few days, resulting in a breakout to new highs on
Friday.  Note that the push through the $16 level generated a
fresh Buy signal on the PnF chart, and the current vertical count
is pointing to the $25 level as an eventual price target.  The
$17.50 level is significant, as it is the site of the stock's IPO
price (1994) and the relative highs in 1996.  For this reason, we
expect to have a bit of consolidation before the stock can
continue to power higher.  Look for one more dip near the $16
level to give us an attractive entry into the play before the
bulls take a renewed run at the all-time highs near $18.75.  We
are initially placing our stop at $15.50, just below last week's
intraday lows.  If looking to trade a breakout, wait for BYD to
push to new all-time highs (above $18.65) on continued strong

*** September contracts expire in 2 weeks ***

BUY CALL SEP-15 BYD-IC OI=214 at $2.90 SL=1.50
BUY CALL SEP-17 BYD-IW OI=529 at $0.80 SL=0.25
BUY CALL OCT-15 BYD-JC OI=  0 at $3.10 SL=1.50
BUY CALL OCT-17*BYD-JW OI=130 at $1.30 SL=0.75

Average Daily Volume = 338 K


LLL - L-3 Communications Holdings $52.84 (+1.95 last week)

Company Summary:
As a leading supplier of sophisticated secure communication
systems and specialized communication products, LLL provides
critical elements of virtually all major communication, command
and control, intelligence gathering and space systems.  The
company's high data rate communication, avionics, telemetry and
instrumentation systems and components are used to connect a
variety of airborne, space, ground-based and sea-based
communication systems.

Why We Like It:
With the war drums beating louder than ever, the prospects of a
renewed war with Iraq are moving out of the 'if' category to the
'when' department.  While war normally causes an initial
depression in the equity markets due to increased uncertainty,
Defense and Security stocks are one area that benefits from that
military action.  Apparently investors are starting to factor
that war premium back into stocks in the sector, as the Defense
index (DFI.X) appears to be moving out of its month-long
consolidation.  It is important to note that the DFI index broke
above its 50-dma ($561) on Friday, for the first time since late
June.  Resistance is looming just overhead at $574 (also the site
of the 38% retracement of the decline from the May highs), but a
breakout above that level will likely open the door for a rally
up to the next level of resistance near $595-600.  Note that the
50% retracement is also at $595.  That brings us to our new play
on LLL, which appears to be leading the way higher for the DFI
index.  LLL broke out above its own 50-dma 3 weeks ago (a sign
of relative strength) and has been consolidating between $48-52
since then.  But Friday's bullish move in the DFI index was
enough to push LLL through the top of its recent range, as well
as the 200-dma ($52.42).  With uncertainty ahead of the 9/11
anniversary, it is likely that today's breakout will be tested
next week with a drop back to support near the $50-51 area, but
that dip should be supported by the rising 20-dma ($49.53).  We
want to take advantage of a dip and bounce near that level to
initiate new positions.  Given the likelihood of a brief pullback
and resistance just overhead at $54-55, we don't want to get
aggressive with entries on breakouts right here.  Either wait for
the pullback and bounce, or a decisive breakout over the $55 level
accompanied by the DFI index pushing through the $574 level.  Our
stop is initially set at $49.

*** September contracts expire in 2 weeks ***

BUY CALL SEP-50 LLL-IJ OI=1907 at $3.80 SL=2.25
BUY CALL SEP-55 LLL-IK OI=1302 at $0.75 SL=0.25
BUY CALL OCT-52*LLL-JX OI= 883 at $3.70 SL=2.00
BUY CALL OCT-55 LLL-JK OI=1813 at $2.40 SL=1.25

Average Daily Volume = 2.03 mln


OMC – Omnicom Group $60.00 (-0.50 last week)

Company Summary:
Omnicom Group is a marketing and corporate communications company.
The company has grown its strategic holdings to over 1500
subsidiary agencies operating in more than 100 countries.  OMC's
wholly and partially owned businesses provide communications
services to clients on a global, pan-regional and national basis.
The company's agencies provide an extensive range of marketing
and corporate communications services, including advertising,
brand consultancy, crisis communications, custom publishing,
database management, digital and interactive marketing,
business-to-business advertising, employee communications and
environmental design.  OMC also provides field marketing,
healthcare communications, marketing research, promotional
marketing and sports and event marketing.

Why We Like It:
It seems hard to believe, but the August 14th SEC certification
deadline that seemed to cap off the Crisis of Confidence in
corporate accounting was only 3 short weeks ago.  Since that
time, many stocks that were under severe selling pressure due to
accounting concerns have made an impressive recovery.  A perfect
example is our new play on OMC.  Recall that we played the stock
to the downside when those concerns pushed the stock over the
cliff up near the $85 level.  The selling climaxed near the $40
level and since then OMC has been working steadily higher, posting
a series of higher highs and higher lows.  Following its most
recent peak near $65, the stock pulled back to the $56 level,
right near the level of the two prior highs, confirming that prior
resistance level as support.  OMC is a big player in the marketing
and advertising markets and it looks like that area is starting to
firm up a little, which should continue to support the stock.  The
broad markets could continue to be nervous over the next few days,
ahead of the 9/11 anniversary, and we are looking for that to
translate into one more dip to support in the $57-58 area.  That
would provide us with an attractive entry into the play, allowing
us to better manage our risk.  Since it held as support last week,
we are setting our stop at $56.  A violation of that level on a
closing basis would tell us we are on the wrong side of the trade.
Momentum traders need to be very careful with buying breakouts
due to the solid overhead resistance between $62-65.  Those
looking to buy a breakout will want to wait for a decisive
breakout above the top of that range before entering.

*** September contracts expire in 2 weeks ***

BUY CALL SEP-60*OMC-IL OI=4095 at $3.40 SL=1.75
BUY CALL SEP-65 OMC-IM OI=1651 at $1.30 SL=0.75
BUY CALL OCT-60 OMC-JL OI=2110 at $5.90 SL=4.00
BUY CALL OCT-65 OMC-JM OI=2886 at $3.50 SL=1.75

Average Daily Volume = 4.46 mln

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SYK – Stryker Corporation $57.70 (+1.33 last week)

Company Summary:
Stryker Corporation and its subsidiaries develop, manufacture
and market specialty surgical and medical products, including
orthopaedic reconstructive implants. the company operates in two
reportable segments.  Orthopaedic Implants sells orthopaedic
reconstructive, trauma and spinal implants, bone cement and the
bone growth factor osteogenic protein-1.  The Medsurg Equipment
segment sells powered surgical instruments, endoscopic systems,
medical video imaging equipment, craniomaxillofacial implants,
image-guided surgical systems and hospital beds and stretchers.

Why We Like It:
In a reversal of roles on Friday, the broad market advanced
smartly on the heels of a better than expected employment data
and shares of SYK took a pause from their winning ways.  After
Thursday's breakout above the $57 level, we expected to see
some hesitation at the $58 level and despite posting another
gain, the stock fell back from its best level of the session.
This has the look of some orderly profit taking, especially since
it came on below average volume, in contrast to the strong volume
that accompanied the breakout.  With the possibility of some
broad market weakness ahead of the 9/11 anniversary, we're still
looking for a pullback near $56 support to provide for better
entries.  A dip and bounce from that level would confirm that
prior resistance is now acting as support.  Trader's looking to
enter on further strength will need to see a volume-backed move
through $58.25 (just above Friday's high) accompanied by broad
market strength to give them an acceptable entry into the play.
Since our preference is to look for entries on a pullback, we
still have our stop set at $54.50.  Traders that take entries on
a breakout will likely want to place a tighter stop, possibly
near the $56 level.

*** September contracts expire in 2 weeks ***

BUY CALL SEP-55 SYK-IK OI=1677 at $3.60 SL=1.75
BUY CALL SEP-60 SYK-IL OI=1135 at $0.65 SL=0.25
BUY CALL OCT-55*SYK-JK OI=   9 at $4.70 SL=2.75
BUY CALL OCT-60 SYK-JL OI= 268 at $1.80 SL=1.00

Average Daily Volume = 723 K



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The Option Investor Newsletter                   Sunday 09-08-2002
Sunday                                                      4 of 5

In Section Four:
Current Put Plays: AA, AIG, IBM, EXC, WY
Leaps: Creeping Closer
Traders Corner: Taking Advantage of The Unwinding

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AA - Alcoa - $22.59 +0.44 (-2.50 for the week)

Company Summary:
Alcoa is the world's leading producer of primary aluminum, 
fabricated aluminum and alumina, and is active in all major 
aspects of the industry. Alcoa serves the aerospace, automotive, 
packaging, building and construction, commercial transportation 
and industrial markets, bringing design, engineering, production 
and other capabilities of Alcoa's businesses to customers. In 
addition to aluminum products and components, Alcoa also markets 
consumer brands including Reynolds Wrap® foils and plastic wraps, 
Alcoa® wheels, and Baco® household wraps. Among its other 
businesses are vinyl siding, closures, precision castings, and 
electrical distribution systems for cars and trucks. The company 
has 129,000 employees in 38 countries

Why We Like It:
Alcoa's problems were like a weight on its shoulders today.  The 
stock was a textbook example of poor relative strength.  On a day 
when the Dow traded up as high as 190 points intraday AA made it 
up a grand total of 0.70 at its high point.  It closed up 0.44 to 
$22.59.  In spite of today's Dow rebound, the average was still 
down almost 3% for the week.  AA, on the other hand, lost 10%. 
Even today's rally could not lift the stock over either 
Thursday's high, or more importantly, its July low of $22.75.  In 
fact, its high of the day reached that July low and was promptly 
turned back.  A look at the 5-minute chart actually shows plenty 
of supply at that level, as the stock struggled to get through it 
on repeated attempts for an hour late in the day, only to be 
turned back each time.  A look at the stochastics shows the stock 
having just entered oversold territory.  However, the last three 
times it reached this territory, it stayed there for two to three 
weeks each time, as the stock continued its declines. This time 
around, the stock has been there for 3-6 days, depending on 
whether you look at the slow or fast line.  In either case, it 
still has some time left.  The other bearish indicator we see is 
that volume has been much heavier on the recent decline than it 
was on today's mild rebound.    As referred to in Thursday's 
write-up, this company is seeing plenty of demand/supply ratio 
problems, and pricing pressures have dropped the price of 
aluminum by 15% over the last year.  They have been forced to 
permanently close capacity at two plants and reduce capacity at a 
third.  We maintain our negative outlook for the company and will 
hold our short position with a target of $17.  Look for a 
rollover in the Dow before initiating new positions, in order to 
avoid getting short ahead of a possible 9/11 rally beginning 
earlier than expected.  As a Dow stock, AA could participate in 
such a rally in spite of fundamental weakness.

BUY PUT OCT-22.50 *AA-VX OI= 747 at $1.60 SL=0.80
BUY PUT OCT-25     AA-VE OI=2228 at $3.10 SL=1.60

Average Daily Volume = 4.26 MIL


AIG - American International Group - $59.45 +1.13 (-3.35 for the 

Company Summary:
AIG is the world's leading U.S.-based international insurance and 
financial services organization, the largest underwriter of 
commercial and industrial insurance in the United States, and 
among the top-ranked U.S. life insurers. Its member companies 
write a wide range of general insurance and life insurance 
products for commercial, institutional and individual customers 
through a variety of distribution channels in approximately 130 
countries and jurisdictions throughout the world. AIG's global 
businesses also include financial services, retirement savings 
and asset management. (source: company release)

Why We Like It:
AIG showed a bounce of just less than 2% today, as the Dow 
rallied almost 150 points, after having been up 190 intraday. In 
spite of this rally, AIG was stopped dead in its tracks at $60.  
A look at the 5-minute chart shows the stock made numerous 
attempts between 11:25 and 2:30 to crack this barrier and was 
turned back each time.  This activity mirrored that of the 
insurance index, which struggled similarly at 260, and managed 
only a 1% gain on the day.  As we head into next week, the 9/11 
anniversary looms ahead on Wednesday.  Not many investors will 
want to remain long insurance stocks ahead of this date, after 
seeing what happened to the group last year.  If there is an 
attack, the group could revisit the July lows and just the 
possibility of this drop should be enough to bring out the bears 
to begin the week.  AIG had found support at $60 and the 
Insurance Index (IUX.X) had found support at 260, before breaking 
through two days ago, and the struggles with these levels to the 
upside shows that resistance now looks firmly in place.  Our 
current stop loss of $61.00 would indicate a decisive break in 
that resistance and would convince us that fear of another attack 
is behind us.  The fact that there is now supply at a level of 
former support, however, demonstrates just the opposite.  The 
current PnF bearish vertical count is $47, which works fine for 
our target on the play of $50.  Look for a rollover below 
Friday's low of $58.57 to initiate new short entries on this 

BUY PUT SEP-60 AIG-UL OI=12681 at $3.00 SL=1.50
BUY PUT OCT-60 AIG-VL OI= 1743 at $4.10 SL=2.00
Average Daily Volume = 7.39 mln


IBM - International Business Machines - $73.20 +1.02 (-2.18 for 
the week)

Company Summary:
IBM is the world's largest information technology company, with 
80 years of leadership in helping businesses to innovate. IBM is 
a leading provider of e-business solutions and is dedicated to 
helping customers, IBM Business Partners, and developers leverage 
the potential of the Internet and network computing across a wide 
range of businesses and industries. The company offers a host of 
cross-industry and industry specific solutions designed to meet 
the needs of growing companies. (source: company press release)

Why We Like It:
IBM has reinforced our belief over the last three days that it is 
now trapped back within its old rectangle pattern, which formed 
over seven weeks, between the middle of June and beginning of 
August.  As the third most heavily weighted Dow component, if 
there were any real bullish sentiment behind the buying in IBM, 
it would have performed better, as the Dow experienced triple 
digit gains in two of the last three days.  On top of the Dow 
action, the tech sector rallied strongly on Intel's news and 
should have also provided this stock with a big boost. Instead, 
it was stopped dead in its tracks at the top of the previous 
formation.  This formation kept the stock between $66 and $74.  
The high of the day on both Wednesday and Friday was $73.99, 
showing the shorts are back in place and giving Big Blue more 
than it can handle. The weakness in the Dow toward the end of the 
day may be foreshadowing a sell-off on Monday ahead of 9/11. 
Since IBM as already tested and failed resistance, a pullback may 
give it another chance at support.  Right now the next level of 
support is $70.  Below $70, IBM should re-test the $66-67 range, 
which is our target on the play.  With the best news in the tech 
sector being Intel lowering revenue less than expected, things 
still look bleak on the IT spending front.  As the biggest of the 
big, IBM has seen its business shrink considerably in the server 
market, and predictions of slow PC sales for the holiday season 
will not help, either.  We will continue to hold our short 
position in IBM heading into next week.  Our current stop of $74 
will remain in place as the action of the last three days has 
only reinforced this level as a pivotal point for the stock.  
Look for a rollover in the Dow to initiate new short positions, 
as this component can still participate in a continued rally if 
the rising tide is strong enough.

BUY PUT SEP-75*IBM-U0 OI= 13370 at $3.40 SL=1.70
BUY PUT OCT-75 IBM-VO OI= 25031 at $5.30 SL=2.75

Average Daily Volume = 9.16 mil


EXC – Exelon Corporation $44.40 (-2.42 last week)

Company Summary:
Exelon Corp. is the parent corporation for each of Commonwealth
Edison Company (ComEd) and PECO Energy Company (PECO), which are
electric utilities.  Exelon, through its subsidiaries, operates
in three business segments: Energy Delivery, Generation and
Enterprises.  The Energy Delivery segment consists of the retail
electricity distribution and transmission businesses of ComEd in
northern Illinois and PECO in southeastern Pennsylvania and the
natural gas distribution of PECO in the Pennsylvania counties
surrounding the city of Philadelphia.  Generation is made up of
the electric generating facilities, energy marketing operations
and equity interests in Sithe Energies, Inc. and AmerGen Energy
Company, LLC.  Enterprises consists of competitive retail energy
sales, energy and infrastructure services, communications and
other investments weighted towards the communications, energy
services and retail services industries.

Why We Like It:
Vigilant and aggressive traders got a great entry point into our
EXC play on Friday.  The strong open in the broad market spooked
some shorts, and the stock gapped up to the $45.40 level at the
open before falling back just as quickly.  The initial spike
could have been influenced by the Goldman Sachs upgrade, but the
fact that EXC fell back near the $44 level so quickly showed that
there wasn't any conviction to the buying.  By the end of the day
EXC had managed to hang onto a fractional gain, but the trend is
still down.  Friday's volatility points out that the shorts may
be nervous, but are still very quick to pounce on apparent
weakness.  EXC continues to be under pressure due to the recent
negative FERC (Federal Energy Regulatory Commission) ruling,
which the company says will have an adverse impact on its
financial results.  The stock has had quite a decline in the
past 5 trading days, and the daily Stochastics is now fully
oversold, so we need to be careful about initiating new
momentum-based entries, but failed rallies are still fertile
ground for initiating new bearish positions.  Note that the stock
has been unable to move into the gap left on Tuesday, and that
makes it a strong resistance level.  Look to initiate new
positions on any failed rally below the $46 level and keep stops
in place at $46.25, just above the bottom of Tuesday's gap.

*** September contracts expire in 2 weeks ***

BUY PUT SEP-45*EXC-UI OI= 67 at $1.90 SL=1.00
BUY PUT SEP-40 EXC-UH OI= 80 at $0.45 SL=0.00
BUY PUT OCT-40 EXC-VH OI=391 at $1.10 SL=0.50

Average Daily Volume = 1.25 mln


WY – Weyerhaeuser Company $51.00 (-3.51 last week)

Company Summary:
Weyerhaeuser is principally engaged in the growing and harvesting
of timber and the manufacture, distribution and sale of forest
products, real estate development and construction.  The company's
business segments are timberlands; wood products; pulp, paper and
packaging, and real estate and related assets.  WY is engaged in
the management of 5.9 million acres of company-owned and 0.5
million acres of leased commercial forestland in North America.
The company's wood products businesses produce and sell softwood
lumber, plywood and veneer, oriented strand board, composite and
other panels, hardwood lumber and treated products.  The firm's
pulp, paper and packaging businesses include pulp, paper,
containerboard packaging, paperboard and recycling.

Why We Like It:
We wanted an oversold rebound in shares of WY to give us a better
entry, and in an amazing display of cooperation, the market looks
like it is giving it to us.  With the broad market in rally mode
on Friday, WY went along for the ride, trading right up to just
below Thursday's high near $51.60 before pulling back in the final
hour.  This relieved the near-term oversold condition and with
intraday oscillators rolling over from overbought territory.
Aggressive investors could have taken advantage of the late-day
rollover to initiate new positions, but we're thinking we could
get an even better opportunity next week if the broad market tries
to extend Friday's rally.  Keep in mind, that fundamental
pressures seem to be weighing on shares of WY, with lumber
prices falling and demand for housing-related wood and paper
products likely to fall as we leave the peak construction season.
That was the key point of Morgan Stanley's downgrade of most of
the stocks in the paper sector on Thursday.  While WY traded in
a fairly narrow range on Friday, the PnF chart gives us some
bearish confirmation.  WY traded down to $50 in the morning,
adding to the current column of O's, confirming the recent triple
bottom breakdown with another double-bottom sell.  Use failed
rallies in the $52-53 area to initiate new positions or else wait
for a breakdown under $50.  Our stop remains at $53.50.

*** September contracts expire in 2 weeks ***

BUY PUT SEP-50 WY-UJ OI= 551 at $1.95 SL=1.00
BUY PUT OCT-50*WY-VJ OI=1037 at $3.20 SL=1.50

Average Daily Volume = 1.12 mln

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Creeping Closer
By Mark Phillips

It's like the classic horror movie scene.  You know the one I'm
talking about.  The monster is lurking downstairs in the dark and
the foolish heroine walks down the stairs - in the dark - to see
what made the noise she just heard.  Never mind the fact that half
the town has already suffered a mysterious and violent demise.
She's sure she can handle it.  And we, as the audience, sit in our
seats in various levels of suspense - depending on our individual
susceptibility to the premise of the movie - wondering if the
heroine will be saved in time.

It's the same in our markets right now.  Most sectors have been
thoroughly slaughtered, earnings warnings are soon to be here,
next week holds the promise/spectre of revisiting the worst
tragedy ever to occur on U.S. soil, and we are in the dreaded
September/October period, the worst part of the year for stocks.
Add to that the comments from Bill Gross on Friday, calling 5000
the fair value for the DOW, and 650 the fair value for the S&P
500.  Let me complete the analogy:  The market is the dark house,
the heroine is the collective group of investors who have bravely
started to go long following INTC's earnings warning and ahead of
the 9/11 anniversary.  That anniversary is the primary monster in
the movie, and if it turns out to be just a phantom and nothing
more, we are likely to see bright lights (at least temporarily)
illuminate the house and show us that the heroine will be safe
for now.  That will likely give the investing public (retail as
well as institutional) the intestinal fortitude to venture back
into the market.

Did I forget to mention that a hurricane is bearing down on the
house?  We don't know when it will arrive, but its analogical
equivalent is the pending attack on Iraq to oust Saddam Hussein.
When that heats up (and it already appears that is the case with
Friday's large-scale air attack) expect the lights in the house
to be quickly extinguished and then the heroine will have to deal
with all the other monsters in the house; earnings warnings,
historically weak part of the year, the fact that it's still a
bear market, and of course the weak economy.  At that point, look
for the audience (that's us and the rest of the market
participants) to pull back in shock/fear/panic and wait to see
if the heroine will survive her next foray into the dark and
foreboding downstairs.

So let's recap real quickly.  I expect the markets to be weak
(but not excessively so) early next week and then once 9/11 passes
uneventfully, we could have a downright impressive rally.  Look
for the VIX to remain above 40 until after the anniversary, and
then I would look for it to quickly plunge to 30 or possibly even
lower.  Along the way, we could see the DOW back above 9000, the
SPX in the 980-1000 area and the NASDAQ-100 could actually push
up as high as 1100.  But that's about as good as it gets, as I
expect that rally to fail just like every other one over the past
2 1/2 years.  Why?  It's a bear market!  Before the year is out,
I expect to see the July lows tested, and I am hoping that it will
be a successful test.  I would look at a successful test of those
lows as a high odds LEAP Call entry point, as it would likely
stimulate and nourish the belief that we have seen the bottom of
the bear market.  That could be the catalyst to allow us to have
another glorious rally attempt, that could last all the way into
the April/May earnings season.  Then I expect the bears will once
again come out of hibernation to have their way with the markets.
But I'm getting ahead of myself in my long-term prognostication.

Coming back to the here and now, we want to use a dip early next
week to initiate new bullish positions and ride them up, possibly
into the end of September.  When that rally comes to an end,
we'll want to quickly shift gears and get on the bears' side as
there is little evidence of growth in the economy and that means
any substantial rally is likely to be transitory.


It is really sad to see the Portfolio so empty and lonely.  But
take heart!  I expect we'll see it filling up again over the next
few weeks as our entry triggers are hit.  Additionally, once the
uncertainty of 9/11 passes, we can gain more confidence about
adding new plays into the Watch List, which should naturally move
to the Portfolio.  Each of the Portfolio plays that were there a
short 2 weeks ago have been closed out in a disciplined manner
and now we're in the process of getting things built back up.
Remember, you don't always need to be in a trade!

Watch List:

MO - Now, aren't you glad you didn't jump into a position
prematurely?  I know I am!  It appears that increased advertising
and marketing costs (in an effort to fight off the low-cost
competition) is going to be cutting into the profits of Big
Tobacco.  Look for this to be forgotten fairly quickly, and don't
forget how much of MO's business comes from the food and beverage
arena.  This is a short-term blip that is giving us a more
attractive entry into the play.  Unfortunately, with the weekly
Stochastics now in full bearish roll, we're going to need to be
more conservative about taking an entry into the play.  Lower the
entry target to $43-44, as that is the site of strong support.
While we could see a drop as low as $40-42, I don't think that is
likely at all.  And if we did get a drop that low, I would
consider it an even better entry point.  Keep in mind my central
premise in the play is that investors are going to be more and
more focused on non economically-sensitive stocks that pay
healthy dividends.  It is hard to find a stock that fits that
model better than MO.

BA - Still waiting for that breakdown, although last week we
actually saw a dip near the $35 level.  It looks like we're going
to need to wait for the next leg down in the broader market
before we get our entry at $32.  Patience is the key.

BBH - Along with the rest of the market, the BBH gapped lower on
Tuesday and then spent the rest of the week vacillating between
$78-82.  I'm expecting that behavior to continue into next week
and then I expect to see a Biotech rally.  We'll want to use that
rally to initiate new positions, hopefully with the BBH reaching
to the top of our entry zone at $88 before the bulls lose their

SMH - With the SOX hitting fresh multi-year lows on Wednesday and
Thursday, it is clear that this is not the area to be looking for
bullish plays.  Let's hope for a relief rally in the group on the
back of a market-wide rally following an uneventful 9/11
anniversary.  Based on the abysmal fundamental condition in the
Semiconductor arena, any rally is an opportunity to initiate new
bearish positions.  While I would consider a move up to the $26
level to be an ideal entry, I can't rule out the possibility that
the bulls will completely lose their senses (even if just
temporarily).  That could give us a rally as high as the $28-29
level and I would take advantage of a move that high as a gift
of an entry point, although I would recommend shifting to the
$25 strikes.

The Portfolio is empty and the Watch List is pretty meager, but
I think that is the prudent way to be positioned.  The QQQ play
is the only one that I expect should be entered ahead of the 9/11
anniversary and should only be considered by more aggressive
traders.  Following an uneventful anniversary, we can start to add
a few more plays into the Watch List, as we get a better read on
broad market direction.  In the meantime, keep the position sizes
small and the stops in place.  It's likely to be a bumpy week!

See you next week.


LEAPS Portfolio

Current Open Plays




LEAPS Watchlist

Current Possibles


BA     06/30/02  $32           JAN-2004 $ 45  LBO-AI
                            CC JAN-2004 $ 40  LBO-AH
                               JAN-2005 $ 50  ZBO-AJ
                            CC JAN-2005 $ 40  ZBO-AH
MO     08/25/02  $43-44        JAN-2004 $ 50  LMO-AJ
                            CC JAN-2004 $ 45  LMO-AI
                               JAN-2005 $ 50  ZMO-AJ
                            CC JAN-2005 $ 40  ZMO-AH
QQQ    09/08/02  $22-22.50     JAN-2003 $ 24  QAV-AX
                               JAN-2004 $ 24  KLF-AX

BBH    08/30/02  $86-88        JAN-2004 $ 80  EVK-MP
                               JAN-2005 $ 80  EIL-MP
SMH    09/01/02  $25.50-26.00  JAN-2004 $ 20  KBS-MD
                               JAN-2005 $ 20  ZTO-MD

New Portfolio Plays


New Watchlist Plays

QQQ - NASDAQ-100 Trust $22.85  **Call Play**

Borrowing from the Boss.  We've taken a couple of runs at playing
upside moves in the QQQ in recent months, one a loss and the
other a slight gain.  Along the lines of Jim's play in the QQQ
that he has highlighted over the past week, I want to take one
more shot at a bullish play here with the idea that the third
time will be the charm.  As I mentioned above, I am expecting
that we could see a strong rally following an uneventful 9/11
anniversary.  Given the fact that it is so close to major support,
the QQQ is a perfect way to play the upside.  The LEAPS are cheap
(minimum capital at risk) and will give us a nice return on even
a fairly small move.  Like Jim, I want to target the $24 calls on
any dip next week.  Anything at or below $22.50 looks attractive
to me.  Don't get too stingy on entries here -- if we get the dip
and it only goes to $22.50, don't hold out for $22.25 or lower.
The idea is that we need to be in the play prior to the open on
9/11.  My expectation is that so long as there is not an event
during the day, we should start to see more and more bullish
action as the day progresses.  Waiting until the end of the day
(for confirmation of safety) may mean missing the play
altogether.  Make no mistake, this is a higher-risk play, because
we are betting that fear of a possible event will give way to
euphoria when the event passes peacefully.  Not only are we being
more aggressive with our entry, we are also going to be more
aggressive with our exit.  We'll initiate the play with a fairly
wide stop at $21 (just below the August 5th lows), but once above
$24, we will start tightening the stop fairly aggressively as the
rally progresses.  This is a much shorter-term play than we
normally focus on here in the LEAPS column, and for that reason,
we're going to play it only with the shorter-term contracts.  Note
that we've moved to strictly the '04 and '05 LEAPS for the rest of
our plays, but here I want to step back and use the '03 and '04.
My expectation is that this play will last less than 3 weeks, so
my personal preference would be to use the '03 LEAPS.  Time decay
will be a factor, but we'll get much better return on capital
invested.  I'm expecting that the upside in the play is likely
limited to the $25-26 area, and we'll start tightening our stop
as we approach that level.  I may even advocate taking partial
gains off the table if the $25 level is reached.  Due to the
shorter time-span on the play and the aggressive nature of the
play, I'll use the Market Monitor to post pertinent updates to
the play over the next few weeks.  While I think the likelihood
of an actual anniversary terrorist event is low, if we do have an
event, we should use that as our cue to close the play as soon
as possible.



DJX $83.08 $%#&*!!  That pretty much sums up my feelings about
this play.  A great entry, a well-managed play with an
intelligently placed stop, and then Tuesday's decline arrived.
I hope you let the $86 stop take you out of the play for a gain.
Due to the way we've been tracking plays (using end-of-day
closing prices for entries and exits), our Portfolio actually
shows a loss on the play.  But make no mistake, this was a
successful play and if given the chance, I'd take it again.  It
provides the perfect case study of how the difference between
disciplined and undisciplined entry/exit makes the difference
between a profit and a loss.

WMT $51.87 The bulls stubbornly held their ground above our
$52.50 stop, but last Tuesday's slide in the DOW was too much
for our WMT play and it slid below our stop at the close.  It's
just as well, as the stock then proceeded to trade as low as
$50.02 on Thursday before staging an impressive rebound with the
rest of the broad market.  I think the stock has seen about all
the upside we can expect for this upward cycle and with weekly
Stochastics just beginning to tip over from overbought territory,
I'm happy to be out of the play with a gain.


Taking Advantage of The Unwinding
By Mike Parnos, Investing With Attitude

Today’s column is extra credit for CPTI students.  For those who 
wish to put forth effort above and beyond the call of duty, I’ll 
show you how we’re going to get a little revenge on those market 
makers who have had their hands in our pockets for much too long.

Warning:  Your pizza will probably get cold.  Your soda will 
probably get warm.  The same can probably be said about your wife 
and your libido, but we all have to make sacrifices from time to 
time.  This is one of those times and, believe me, you’ll think 
it’s worth it.

We’ll be using the strange occurrences that take place during the 
“unwinding” to our advantage.  The unwinding refers to the days 
prior to expiration Friday when traders have to make decisions 
and adjustments to their positions.  Let’s get started with a 
little quiz.

Expiration Week Quiz:
1.  Have you noticed that, the day or two before a monthly option 
expiration, an unusual number of stock prices start methodically 
working their way towards a specific strike price?
2.  Do you think it’s a coincidence that this particular strike 
price has the highest open interest of that month’s strikes?
3.  Have you noticed how the premiums of the options for that 
same strike price seem to go up just prior to expiration?
4.  Have you noticed how the premiums for the next month of that 
same strike price seem to go down just prior to expiration?
5.  Who determines the amount of volatility that is put into the 
option formula that determines the premiums?
6.  Aren’t these market makers, who determine the option 
premiums, the very same people who love to take our money and put 
it into their pockets?
7.  Do you suppose there’s a method to their madness?

The answers to the above questions should be: yes, no, yes, yes, 
market makers, yes, yes.  Seven correct out of seven is superior.  
Five correct out of seven is average. Those who got only three 
correct, well, take the quiz again.  If you don’t improve, you 
have my permission to return to the couch, take two Ginkgo Biloba 
tablets (orally), and think about this.  There are three kinds of 
people in the world -- those who can count and those who can’t.

The question is:  Can we beat the market makers? 
We’re going to try.  When something is predictable, we can 
construct a strategy of our own and have a fighting chance to 
beat them at their own game. 

The market makers are counting on the fear of the trading public.
1.  Covered callers who are short the option, and don’t want to 
lose their stock, have to roll out to the following month.
2.  Traders, who are short the option as a part of a spread, will 
also want to roll their position.
3.  Traders in the buff, who are naked a short position, will 
have to buy back their short option (at an inflated price) and 
roll out to the same strike price (at a deflated price) for the 
next month.
The market maker benefits by: 
a) the profit of the spread from two additional transactions; and 
b) the difference between the inflated price of the current $20 
call less the deflated price of the next month $20 call.

It may not seem like a huge pot at the end of the rainbow, but 
those dimes add up, especially when they’re multiplied by tens of 
thousands of contracts – month after month after month.   Keep in 
mind, these are YOUR dimes that are paying for the market maker’s 
Mercedes. Let’s see what we can do to put some of those dimes 
back into your pocket.

The scenario at expiration:
XYZ stock is trading at $18.50 Thursday morning before 
September’s Friday expiration.  The September $20 call may be 
worth $.15.  XYZ starts moving up. By the time it gets to $19.25, 
the market maker manipulates the premium of the September $20 
call to $.60 so the thousands of option rollers will have to 
overpay to buy back the short $20 call as part of their rolling 

At the same time, the market makers are taking the volatility out 
of the premium for the October $20 call.  Normally, when XYZ is 
at $19.25 with a day or two before September’s expiration, the 
October call should be about $1.75.  But, once the market makers 
are finished with their magic, it may be only $1.25.  

The rollers have now purchased the September $20 calls back for 
an overpriced $.60 and sold the October $20 calls for $1.25 – a 
credit of only $.65.

Well, what are we going to do?  Here’s the plan.
1.  We’ll keep a watch list of five or six stocks that are 
hovering within a point or two of a strike price that has a large 
open interest a few days prior to September expiration.  Maybe 
they’re poised to move back up from a support level, or just ripe 
for an oversold bounce.  You’re going to have to do some 
2.  Watch for the stocks to start their move higher.  Monitor the 
September option for an uncharacteristic spike in value.  
3.  Once you’ve seen the spike in value of the current month, 
check to see if the value of the same strike in October is 
unusually low.
4.  If all the planets are aligned, (based on the example above) 
you want to buy the October $20 call for $1.25 and sell the 
September $20 for $.60.  The net cost to you will be $.65.  
That’s your entire risk.

This strategy is not for the meek.  It requires a great deal of 
focus and shouldn’t be tried at home without adult supervision 
(preferably female) and a bottle of Jack Daniels (optional).  
Seriously though, you should have access to streaming quotes for 
stocks on your watch list.  Plus, instant access to real time 
option chains for those same stocks.  Warning:  Trading, without 
real time access, can be hazardous to your financial health.

What will happen if . . .

a)  In the best of all worlds, the September $20 call will expire 
worthless and you now own an undervalued long $20 October call.  
Even if XYZ stock does not move, in a few days, the market makers 
will readjust the volatility figure and the long call will, once 
again, be worth about $1.75.  

If you sell for $1.75, you’ve just pocketed a profit of $1.10 
($1.75 - $.65) in only three or four trading days.  That’s a 169% 
return.  Or, if you believe XYZ has upside potential, you could 
hold the Oct. $20 call and take your chances.

b)  If XYZ finishes over $20 at the September expiration, you 
will have to deliver shares of XYZ at $20 within three days.  
Then, you can simply exercise the October $20 call to satisfy 
your share obligation.  The most you can lose is the original 
$.65 risk.

c)  If XYZ falls, the September $20 call will expire worthless.  
The October $20 call would have also lost value, but it’s likely 
to retain at least the $.65 necessary to recoup your initial 

It can be a very profitable trade (percentage wise), with a very 
small risk factor.  When you’re observant and notice patterns, 
you can recognize opportunities.

This is another one of those columns that you’ll want to print 
out because you’ll want to read it again and maybe again.  As Dr. 
Phil says, “You either get it, or you don’t.”  If you don’t, go 
over it again – and again.  

Now you can reheat your pizza, get your cold soda and enjoy the 
rest of your Sunday.  I chose to write about this strategy this 
week, so you’d have a few weeks to digest the information, 
regurgitate your questions (but not the pizza), and be ready for 
option expiration.

Iron Condor Update:  BBH is at $80.60.  On Tuesday, BBH dropped 
below $80 and we shorted 1,000 shares at $80 to protect our short 
$80 put (see Thursday update).  Today (Friday) we covered our 
short 1,000 shares at $80.10 at the open.  We may get bounced 
around a bit near this support level, but we’ll stay on top of 
it.  Sooner or later, BBH will pick a direction, and, if we stay 
alert, it really doesn’t matter which way it goes.

We originally put on this hypothetical BBH Iron Condor trade a 
few weeks ago with BBH.  We established an Oct. $80/$75 bull put 
spread and an Oct. $110/$115 bear call spread for a credit of 
$1.10.  The objective is for BBH to close inside the 30-point 

Happy trading!  The CPTI credo:  May our remote batteries and 
self-discipline last forever, but mierde happens.  Be prepared!  
In trading, as in life, it’s not the cards we’re dealt.  It’s how 
we play them. 

Your questions and comments are always welcome.  

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Stop Losses based on the option price or the stock price.
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The Option Investor Newsletter                   Sunday 09-08-2002
Sunday                                                      5 of 5

In Section Five:

Covered Calls: Trading Basics: Why Use Options Anyway?
Naked Puts: Options 101: Q&A With The Editor
Spreads/Straddles/Combos: Stocks Rally To End The Week...But Don't
Go Long Just Yet!

Updated In The Site Tonight:
Market Watch
Market Posture

If you trade options online, then you need an online broker that:
offers true direct access to each option exchange offers stop and 
stop loss online option orders offers contingent option 
orders based on the price of the option or stock offers 
online spread order entry for net debit or credit offers fast 
option executions

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



Trading Basics: Why Use Options Anyway?
By Mark Wnetrzak

A new reader wants to know why people trade options and how they
can be used to profit from stock movement.

Attn: Questions@OptionInvestor.com
Subject: Option Trading Basics

Hello OIN,

I am a new reader, through your free trial, and I am interested
in learning about option trading.  The first question I have is,
"Why do people trade options instead of stocks?"  I know that
options expire at some point and they can become worthless, so
what's the reason for using them, especially if you just want to
invest for the long-term?  Also, I have heard that some people
buy calls (or puts?) instead of a stock because they can make
more money if the stock goes up.  That just doesn't make sense.
Anyway, it seems like you have an informative website and I look
forward to any help you can give me as a new trader.




Why do people buy options?  Two reasons: limited risk and leverage.
When you buy an option your risk is limited to the price you pay
for the option.  From a standpoint of leverage, that means you can
control an expensive asset for a fraction of what it would cost you
to purchase the asset outright.  So, if you think that the price of
a stock will increase, you can buy a call option instead of buying
the stock, or if you feel the price will decrease, you can purchase
a put option instead of selling the stock short.  Those are but two
of the myriad of strategies available with options and that's why
the options market brings together traders and investors with such
a variety of expectations and goals.  Some enter the market with an
opinion on which direction prices will move.  Others intend to use
options to protect existing positions against adverse price movement.
Some hope to take advantage of price discrepancies between similar
to related products.  Some act as a middleman, buying and selling as
an accommodation to other market participants and hoping to profit
from the difference between the bid and the ask price.  All of these
techniques can be used to generate conservative, long-term profits
and at the OIN, our goal is to provide you with the knowledge and
ability to accomplish that task.

You have probably heard that option trading is a "risky" business,
and you may even know people who have lost money in the market.  It
is also possible that you know people who regularly make money by
trading options.  What do these traders have that others don't?  The
answer is very simple.  As a group, successful option traders have
two things in common.  First, they have adopted sound and sensible
methods for trading options.  Second, they have acquired the proper
tools for undertaking accurate analysis in support of their personal
strategies.  It is really not that difficult when you understand the
rules and trading fundamentals and regardless of background or level
of experience, anyone can be successful in this unique endeavor.  To
begin, we will help you define your goals and determine your risk
profile.  We want you to protect against known risks, gain financial
security and a comfortable standard of living, and create financial
independence for retirement.  Whatever your goals or abilities, the
tools and resources provided by the newsletter staff can enable the
implementation of strategies tailored to your risk-reward tolerance.

About Calls and Puts

A call is an option contract, which gives an investor the right, but
not the obligation, to purchase the underlying security at a specific
price within a specific time period.  Theoretically, the potential
profit is unlimited, while the risk is limited to the amount paid for
the option.  The main attraction is they provide the call buyer with
a great deal of leverage -- one can realize a large percentage gain
with only a modest rise in the underlying stock price.  The risk is
material however, because in order to realize a profit, one normally
needs the share value of the underlying stock to increase not only to
a specific price, but also in a timely manner.  With option-buying
strategies, learning the proper times to enter a trade is invaluable
and knowing when an option is priced "fairly" can be paramount to
long-term success.  Understanding the components involved in option
valuation, such as expected volatility, is also essential because
buying calls ahead of important events (such as an earnings report)
can often improve one's overall position as the price of the option
may increase with the change in volatility.  Options offer a great
deal of flexibility from a risk-reward standpoint, simply through the
selection of different strike prices.  Out-of-the-money options offer
the greatest reward potential, at minimal cost, if the stock moves
considerably, while in-the-money options, which cost more money, will
perform better if the underlying issue only moves moderately.  The
probability of the option expiring worthless is also much lower with
in-the-money positions, so they are usually the choice of experienced

Buying puts offers similar advantages, but for stocks that are in a
downtrend.  The profit potential is limited to the cost of the put,
whereas the short sale of a stock has unlimited risk.  Traders also
sell puts against portfolio collateral (such as stocks) to collect
income.  There are two basic methods used to profit from the sale of
cash-secured or "naked" puts.  The first technique involves selling
at-the-money options to take advantage of a bullish movement in the
underlying stock for large, short-term profits.  The less aggressive
approach involves writing out-of-the-money puts, hoping that the sold
position will expire worthless.  Either technique can be used to take
a position in a specific stock however, in most cases, a conservative
approach to naked-put writing is applied as a deep-out-of-the-money
strategy in which a trader uses the collateral value of his portfolio
to return a consistent, limited profit in neutral to bullish markets.

Look for more information on the OIN website in "Traders Corner" and
"Options 101" and don't hesitate to send us your questions in the

Trade Wisely,

Mark W.

Note:  Margin not used in calculations.

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

ALKS    7.70   8.87   SEP   7.50  1.25  *$  1.05  11.8%
IMCL    8.30   7.95   SEP   7.50  1.30  *$  0.50  10.9%
NXTL    5.49   7.98   SEP   5.00  1.10  *$  0.61  10.1%
JDEC   13.05  13.25   SEP  12.50  1.30  *$  0.75   9.7%
MDR     6.00   6.95   SEP   5.00  1.50  *$  0.50   8.0%
OSTE    9.34   9.45   SEP   7.50  2.20  *$  0.36   7.7%
TDY    17.80  17.50   SEP  17.50  1.05   $  0.75   6.8%
MNS    11.20  10.88   SEP  10.00  1.75  *$  0.55   6.3%
NWRE   16.94  17.10   SEP  15.00  2.65  *$  0.71   5.4%
V      12.96  12.99   SEP  10.00  3.30  *$  0.34   5.4%
XOMA    5.66   5.26   SEP   5.00  0.95  *$  0.29   5.4%
NWRE   17.82  17.10   SEP  15.00  3.30  *$  0.48   5.0%
ICST   20.74  17.42   SEP  17.50  4.20   $  0.88   4.6%
AFFX   18.51  18.05   SEP  15.00  4.40  *$  0.89   4.6%
MRCY   24.79  24.79   SEP  22.50  3.60  *$  1.31   4.5%
NET    14.56  12.98   SEP  12.50  2.55  *$  0.49   4.4%
IDTI   15.20  13.13   SEP  12.50  3.30  *$  0.60   4.4%
WEBX   15.02  14.12   SEP  15.00  1.40   $  0.50   4.0%
VMSI   22.30  21.26   SEP  20.00  2.80  *$  0.50   3.9%
ISIS   11.25   9.45   SEP  10.00  2.05   $  0.25   2.4%
ORCL   10.79   9.63   SEP  10.00  1.15   $ -0.01   0.0%
AMR    11.14   9.44   SEP  10.00  1.65   $ -0.05   0.0%
FFIV   14.04  11.32   SEP  12.50  2.55   $ -0.17   0.0%
MLNM   14.16  11.06   SEP  12.50  2.45   $ -0.65   0.0%

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


The major equity averages dropped drastically to start off the
month of September, much to the chagrin of the Bulls.  The "not
too bad" Intel (NASDAQ:INTC) update and a bullish surprise from
the Jobs Report appeared to salvage a rather worrisome week but
capital preservation remains the prevailing theme.  Many of the
stocks in the Covered-Calls portfolio have consolidated while
remaining technically strong.  Last week's comments suggested
that Millennium Pharmaceutical (NASDAQ:MLNM) would be showing
weakness if it moved below $12 during its pullback.  Next week
we will show the position closed.  Rolling down to a JAN-$10
call is also reasonable for those investors who wish to retain
the stock long-term but want more downside protection (the new
cost basis would be near $9.40).  In the current horrid trading
environment, investors should continue to monitor each position
closely and exit (or adjust) as necessary to preserve against
excessive capital loss.  Better to run away today so as to live
to fight another day.

Positions Closed: Semtech (NASDAQ:SMTC), Tibco Software 
(NASDAQ:TIBX) Myriad Genetics (NASDAQ:MYGN), and Cree 


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

ABFS   27.46  SEP 25.00   FDQ IE  3.00 56    24.46   14    4.8% 
CKFR   11.70  SEP 10.00   FCQ IB  2.05 154    9.65   14    7.9% 
CVC     9.48  OCT  7.50   CVC JU  2.50 130    6.98   42    5.4% 
FLE     6.02  OCT  5.00   FLE JA  1.30 10     4.72   42    4.3% 
NOK    13.95  OCT 12.50   NOK JV  2.20 5110  11.75   42    4.6% 
OSTE    9.45  OCT  7.50   OQQ JU  2.50 250    6.95   42    5.7% 
QCOM   28.46  SEP 25.00   AAW IE  3.90 6712  24.56   14    3.9%

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

CKFR   11.70  SEP 10.00   FCQ IB  2.05 154    9.65   14    7.9% 
OSTE    9.45  OCT  7.50   OQQ JU  2.50 250    6.95   42    5.7% 
CVC     9.48  OCT  7.50   CVC JU  2.50 130    6.98   42    5.4% 
ABFS   27.46  SEP 25.00   FDQ IE  3.00 56    24.46   14    4.8% 
NOK    13.95  OCT 12.50   NOK JV  2.20 5110  11.75   42    4.6% 
FLE     6.02  OCT  5.00   FLE JA  1.30 10     4.72   42    4.3% 
QCOM   28.46  SEP 25.00   AAW IE  3.90 6712  24.56   14    3.9%

Company Descriptions

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

ABFS - Arkansas Best  $27.46  *** A Competitor Is Gone ***

Arkansas Best (NASDAQ:ABFS) is a diversified holding company 
engaged through its subsidiaries primarily in motor carrier
and intermodal transportation operations.  The main subsidiaries
are ABF Freight System, Clipper Exxpress and related companies.
ABFS’ less-than-truckload (LTL) motor carrier operations are 
conducted through ABF Freight System, ABF Freight System (B.C.),
ABF Freight System Canada, ABF Cartage, and Land-Marine Cargo. 
Clipper operates through Clipper Freight Management and Clipper
LTL, and offers domestic intermodal freight services.  This week,
Consolidated Freightways, the nation's third-largest LTL carrier,
said it would shut down operations immediately and planned to 
file for Chapter 11.  This reduction in the competition will 
likely give a boost to rival trucking companies Yellow (NASDAQ:
YELL), Roadway (NASDAQ:ROAD) and Arkansas Best by reducing the
industry's excess capacity and allowing them to raise prices.
Investors appear to agree with the bullish assessment as ABFS 
has rallied strongly this week.  This position offers a great 
way to speculate, in a conservative manner, on the share price
of Arkansas Best.

SEP 25.00 FDQ IE LB=3.00 OI=56 CB=24.46 DE=14 TY=4.8% 

CKFR - Checkfree  $11.70  *** Earnings Surprise ***

Checkfree (NASDAQ:CKFR) is a provider of electronic billing and
payment services.  The company operates its business through 3
independent but inter-related divisions including Electronic 
Commerce, Investment Services and Software.  CKFR’s electronic 
commerce services are primarily targeted to consumers through 
financial institutions and Internet portals.  Checkfree is also
a provider of electronic commerce and financial applications 
software and services for businesses and financial institutions. 
In August, Checkfree reported 4th-quarter pro forma earnings per
share of $0.14, beating expectations, and forecast a range of 
$0.58 to $0.62 for the fiscal year 2003.  Based on the recent 
bullish technical indications, investors agree that Checkfree is
one of the leading issues in its sector and this company would
certainly be a candidate for any long-term portfolio.

SEP 10.00 FCQ IB LB=2.05 OI=154 CB=9.65 DE=14 TY=7.9% 

CVC - Cablevision  $9.48  *** Bottom-Fishing ***

Cablevision Systems (NYSE:CVC) is a cable operator in the U.S.
through its wholly owned subsidiary, CSC Holdings.  CVC also 
has investments in cable programming networks, entertainment
businesses and telecommunications companies.  Through Rainbow
Media Holdings, the company owns interests in and manages 
numerous national and regional programming networks, the 
Madison Square Garden sports and entertainment business, and
cable television advertising sales companies.  With Cablevision
Lightpath, the company provides switched telephone services and
high-speed Internet access to the business market.  The company
also owns or has interests in several complementary businesses 
and companies that include The WIZ, Clearview Cinemas, and 
Northcoast Communications.  Regardless of the long slump in its
share value, Cablevision is one of the top companies in the 
CATV Systems industry and among many institutional investors,
it is also one of the core holdings.  The current technical 
outlook is recovering and our position offers an excellent 
reward potential at the risk of owning this industry-leading
issue at a favorable cost basis.

OCT 7.50 CVC JU LB=2.50 OI=130 CB=6.98 DE=42 TY=5.4% 

FLE - Fleetwood  $6.02  *** Post-Earnings Rally ***

Fleetwood Enterprises (NYSE:FLE) manufactures recreational 
vehicles, including motor homes, travel trailers, folding 
trailers and slide-in truck campers, and also produces and
sells manufactured housing.  On Thursday, Fleetwood reported
a narrower quarterly net loss as stronger sales of RVs offset
declines in its manufactured housing business.  The company
posted a loss of $1.5 million, or $0.04 a share, and said
that revenues rose to $611.3 million from $564.1 million a 
year ago.  More importantly, Fleetwood expects to report a 
profit in the second quarter, helped by improving performance
in its RV business.  We simply favor the rally with heavy
volume that moved the share price above the August high, 
suggesting a bullish change of character.  Investors who want
a long-term position in a solid company can use this play to
establish a low risk cost basis in the issue.  Target a lower
net-debit to raise the potential yield in this position.

OCT 5.00 FLE JA LB=1.30 OI=10 CB=4.72 DE=42 TY=4.3% 

NOK - Nokia  $13.95  *** Bottom-Fishing: Part II ***

Nokia (NYSE:NOK) is a supplier of mobile telephones and a 
provider of mobile, fixed broadband and Internet protocol 
(IP) networks.  Nokia is comprised of Nokia Networks, Nokia
Mobile Phones and Nokia Ventures Organization, as well as 
the common group functions, which include Nokia's corporate
research unit, Nokia Research Center.  On Friday, the company
unveiled 2 new phones that feature color screens and multimedia
messaging (MMS) capabilities.  Nokia continues to dominate in 
the mobile phone space and cell phone sales are showing signs
of life after a lengthy downturn, according to analysts.  
Nokia is widely recognized as a leader its industry and the
balance sheet for the company has historically been very good.
The technical outlook depicts a short term "head-n-shoulders"
bottom and our conservative position offers an excellent way
to participate in the future movement of the issue with 
relatively low risk.

OCT 12.50 NOK JV LB=2.20 OI=5110 CB=11.75 DE=42 TY=4.6% 

OSTE - Osteotech  $9.45  *** Pullback = Entry Point? ***

Osteotech (NASDAQ:OSTE) provides services and products primarily
focused in the repair and healing of the musculoskeletal system. 
These products and services are marketed primarily to the 
orthopaedic, spinal, neurological, oral/maxillofacial, dental 
and general surgery markets in the United States and Europe. 
The allograft bone tissue Osteotech processes is procured by 
independent tissue banks or other Tissue Recovery Organizations,
primarily through the donation of tissue from deceased human 
donors and is used for transplantation.  The company has two
primary operating segments: the Grafton Demineralized Bone Matrix
Segment, and the Base Allograft Bone Tissue Segment.  Osteotech
rallied sharply almost doubling its share value after the company
reported a quarterly profit and raised its full-year outlook on
more tissue supply and legal settlements.  The stock has been
consolidating for the last week or so and this pullback could
be offering long-term investors a second chance at owning an
industry-leading issue at a favorable cost basis.

OCT 7.50 OQQ JU LB=2.50 OI=250 CB=6.95 DE=42 TY=5.7% 

QCOM - QUALCOMM  $28.46  *** Short-term Speculation ***

QUALCOMM (NASDAQ:QCOM) is a developer and supplier of code 
division multiple access (CDMA)-based integrated circuits 
and system software for wireless voice and data communications
and global positioning system (GPS) products.  The company 
offers complete system solutions, including software and 
integrated circuits for wireless handsets and infrastructure 
equipment.  This complete system solution approach provides 
customers with advanced wireless technology, enhanced component
integration and interoperability, as well as reduced time to 
market.  QUALCOMM has been in a tight trading range for the 
last several months and this position offers speculators a
reasonable short-term reward at the risk of owning the company
at a favorable cost-basis.  There was a rumor near Friday’s 
close that Samsung is going to produce its own chips, rather
than using QUALCOMM’s, which caused a late-hour pullback.
Target shooting a lower net-debit on any weakness Monday will
improve the potential yield in this position.

SEP 25.00 AAW IE LB=3.90 OI=6712 CB=24.56 DE=14 TY=3.9%



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

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

FFIV   11.32  SEP 10.00   FLK IB  1.85 135    9.47   14   12.2% 
MIMS   10.71  SEP 10.00   OQX IB  1.05 497    9.66   14    7.6% 
LUME    5.80  OCT  5.00   QFC JA  1.25 712    4.55   42    7.2% 
DAL    16.82  SEP 15.00   DAL IC  2.25 2969  14.57   14    6.4% 
ITMN   27.39  OCT 25.00   IQY JE  4.10 929   23.29   42    5.3% 
CAL     9.53  OCT  7.50   CAL JU  2.50 53     7.03   42    4.8% 
VRTS   17.51  OCT 15.00   VIV JC  3.40 437   14.11   42    4.6% 
MSFT   47.82  SEP 45.00   MQF II  3.70 12377 44.12   14    4.3%


Options 101: Q&A With The Editor
By Ray Cummins

This week we received some great E-mail questions and here's one
that deserves sharing with the OIN's astute readership.

Attn: Spreads/Combos Editor
Subject: Selling Puts or Buying Calls?

Hi Ray,

I have been exploring a strategy that Jim often uses in bullish
markets -- you called it the "short-put combination" in a recent
newsletter -- which involves selling long term in-the-money puts
and buying near term out-of-the-money puts for catastrophic
downside protection.  I read the article you listed on that
strategy and I agree with the approach, but I also wondered why
you couldn't use a deep-in-the-money call if you thought the
trend was bullish in the near term (or LEAPS for the long term)
to accomplish the same goal.

Thank you in advance for any comments or suggestions.


Editors Note: Here is the strategy article mentioned by the reader


Regarding option selection for momentum-based plays:

Indeed, buying in-the-money options can help a trader achieve
relatively large profits with reasonable capital risk, provided
there are realistic goals and effective loss-limiting techniques
are used to protect the value of the position.  Despite what most
people believe, deep-in-the-money options offer a comparatively
conservative approach to momentum-based trading because they give
a trader more control over the combined time value and intrinsic
value components of the option.  Buying this class of options is
similar to buying the underlying stock, but with the advantages
that options provide: a much lower capital outlay, limited risk,
leverage, and higher profit potential.  The biggest benefit is
the substantial intrinsic value that exists in deep-in-the-money
options, which significantly lowers the influence of time erosion
on a position.  The effects of time decay on an option will be
very small because most of the option's price comes not from its
premium, or extrinsic, value but rather from its absolute value.
On a percentage basis, the time premium for a deep-in-the-money
option is far less than that for an out-of-the-money option, so
a trader is not paying for potential but rather for actual worth.
Since the primary reason for trading options is increased leverage,
it's imperative to understand how different strike prices affect
the risk-reward outlook in a directional trade, as well as how
various combinations of strike prices and time frames can be used
to take advantage of a particular situation or market outlook.

As important as choosing the right option series is to success in
this unique game, it's also essential to focus on the basics when
using the core option techniques (buying and selling).  The oldest
rule in momentum-based trading is, "Don't trade against the trend."
Look for issues that are moving with the trend, and as Jim often
says, "Pick a bus that is going the right way and get on!"  We all
know that share values are affected by a myriad of complex factors
but in most cases, stock prices follow the general direction of the
market and industry group or sector.  Another important concept is
learning to take small profits on a consistent basis.  Don't go for
home runs -- that simply ties up money while you wait for the "one
big winner."  It also requires lots of patience and the ability to
withstand the capital drain that often occurs with that approach.
Successful traders know that consistent profits produce cash flow,
and those returns compound quickly, producing far better results
than the occasional long ball.  One of the best commentaries on the
subject of momentum-based strategies trading comes from a long-past
article by Jim on the art of "profiting from daily volatility."  It
was a very popular editorial in its day and I think it is invaluable
reading for anyone who wants to learn how to (successfully) trade

Surfing The Market

The market is like the waves on the ocean.  If you are standing on
one of the major surfing beaches you will see wave after wave come
crashing through.  Between each major wave is a period of calm,
which may have several smaller waves.  If you have ever stood in
the surf, you are familiar with the sensation called undertow.
This is when the water rushes back out to sea in preparation for
the next wave.  Now picture yourself with a desire to surf.  You
have seen people do it.  You go to a surfboard shop and purchase
a board.  You ask the salesman if surfing is hard.  No problem, he
says.  Lay on the board, swim out in the surf, catch a wave, stand
up on the board and surf back in.  Easy!  Now I ask you, can you
surf?  If you are like most beginner surfers, you get out to the
waves but now you feel more like a piece of driftwood bobbing in
an endless sea than a human mastering the art of surfing.  You are
battered, soaked, tired and more likely then not pretty frustrated
with being abused by every wave you tried to catch.  Option trading
is like surfing.  Trading, the salesman says, is easy.  You simply
open an account, (board), jump in the market (ocean), catch a wave
(stock), buy some calls (surf), and end up safely on the beach
(profit).  NOT!  Most beginning traders think it is this easy, but
most end up on the rocks (broke).

What we want to teach you is to be a successful trader, not a "buy
and holder."  When you are learning to surf you probably practice
on hundreds of smaller waves.  Each one moving you only a few yards
before you fall and have to start over.  Learning how to trade is
the same way.  You should try to catch many small moves and practice
improving your skills before attempting the long run to the beach.
I am constantly besieged by email on new people expecting to buy a
$3 option and sell it for $15.  That would be the equivalent of
swimming half a mile off shore, catching a fifty foot wave and
surfing all the way to the beach on your first try.  It just does
not happen...[learn to] take a small profit many times instead of
a large profit once in a while.

Hope that helps!


                        *** WARNING!!! ***

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


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

TYC    15.69  15.15   SEP  12.50  0.30  *$  0.30  13.3%
JDEC   13.05  13.25   SEP  10.00  0.45  *$  0.45  12.8%
PPD    20.67  19.96   SEP  15.00  0.35  *$  0.35  11.9%
MRVL   22.21  18.59   SEP  17.50  0.50  *$  0.50  11.0%
NWRE   14.00  17.10   SEP  10.00  0.40  *$  0.40  10.9%
FDRY    8.99   8.75   SEP   7.50  0.35  *$  0.35  10.3%
RGLD   14.86  14.90   SEP  12.50  0.25  *$  0.25   9.9%
AMLN   13.00  12.33   SEP  10.00  0.40  *$  0.40   9.7%
IMDC   23.45  24.09   SEP  20.00  0.40  *$  0.40   9.6%
INVN   28.36  32.58   SEP  22.50  0.85  *$  0.85   9.4%
JDEC   13.40  13.25   SEP  10.00  0.25  *$  0.25   9.3%
ICOS   27.49  22.76   SEP  20.00  0.75  *$  0.75   8.7%
WMGI   20.49  20.54   SEP  17.50  0.45  *$  0.45   8.6%
CVTX   26.01  20.01   SEP  20.00  0.70  *$  0.70   8.6%
ITMN   24.87  27.39   SEP  20.00  0.30  *$  0.30   8.5%
UOPX   28.78  30.08   SEP  25.00  0.45  *$  0.45   8.4%
PPD    21.95  19.96   SEP  15.00  0.35  *$  0.35   8.0%
ENZN   24.13  19.67   SEP  17.50  0.60  *$  0.60   8.0%
ADRX   24.63  24.00   SEP  15.00  0.25  *$  0.25   7.3%
SIE    22.88  18.30   SEP  17.50  0.40  *$  0.40   7.0%
TTWO   23.40  25.02   SEP  17.50  0.40  *$  0.40   6.8%
LNCR   33.38  33.80   SEP  30.00  0.80  *$  0.80   6.5%
NPSP   23.06  19.56   SEP  15.00  0.45  *$  0.45   6.4%
PPD    22.23  19.96   SEP  12.50  0.35  *$  0.35   6.3%
IVGN   35.60  34.51   SEP  30.00  0.35  *$  0.35   5.9%
HGSI   17.59  13.15   SEP  12.50  0.25  *$  0.25   5.8%
HD     32.93  33.25   SEP  30.00  0.40  *$  0.40   5.7%
HGSI   17.87  13.15   SEP  12.50  0.30  *$  0.30   5.6%
IMN    33.05  31.80   SEP  30.00  0.55  *$  0.55   5.6%
CLS    23.80  22.30   SEP  17.50  0.30  *$  0.30   5.2%
VRTX   22.41  19.06   SEP  20.00  0.65   $ -0.29   0.0% ***
MGAM   24.24  18.71   SEP  20.00  0.55   $ -0.74   0.0% ***
GISX   21.32  17.92   SEP  20.00  0.75   $ -1.33   0.0% ***

*$  = Stock price is above the sold striking price.
*** = Actual losses less than those posted in the summary.


The recent precipitous declines have made effective position
management crucial to maintaining portfolio profits and with
the tenuous condition of the market, preventing losses will
become even more important in the future.  Positions closed
during Monday's sell-off were Global Imaging (NASDAQ:GISX),
Multimedia Games (NASDAQ:MGAM), and Vertex Pharmaceuticals
(NASDAQ:VRTX).  One of the more bearish issues in the section,
Marvell Technology Group (NASDAQ:MRVL), continues to struggle
and traders should consider using any future rally to exit the
play.  CV Therapeutics (NASDAQ:CVTX), Human Genome Sciences
(NASDAQ:HGSI), and Icos Corp. (NASDAQ:ICOS) are also potential
"early-exit" candidates.  Issues worth watching include Sierra
Health (NYSE:SIE), Enzon (NASDAQ:ENZN), and Nps Pharmaceuticals

Positions Previously Closed:

OSI Pharmaceuticals (NASDAQ:OSIP)


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

ADRX   24.00  SEP 17.50   QAX UW  0.40 4282  17.10   14   16.7% 
AU     25.20  SEP 22.50    AU UX  0.25 1155  22.25   14    7.1% 
CCMP   43.60  SEP 35.00   UKR UG  0.35 2518  34.65   14    8.3% 
CIMA   22.99  SEP 20.00   UVK UD  0.30 743   19.70   14   10.0% 
HD     33.25  SEP 30.00    HD UF  0.30 5548  29.70   14    6.3% 
ITMN   27.39  SEP 25.00   IQY UE  0.75 293   24.25   14   17.5% 
KMX    19.02  SEP 17.50   KMX UW  0.35 178   17.15   14   11.8% 
LOW    44.03  SEP 40.00   LOW UH  0.35 3468  39.65   14    5.5% 
VIA    41.70  SEP 37.50   VIA UU  0.45 157   37.05   14    7.6%

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

ITMN   27.39  SEP 25.00   IQY UE  0.75 293   24.25   14   17.5% 
ADRX   24.00  SEP 17.50   QAX UW  0.40 4282  17.10   14   16.7% 
KMX    19.02  SEP 17.50   KMX UW  0.35 178   17.15   14   11.8% 
CIMA   22.99  SEP 20.00   UVK UD  0.30 743   19.70   14   10.0% 
CCMP   43.60  SEP 35.00   UKR UG  0.35 2518  34.65   14    8.3% 
VIA    41.70  SEP 37.50   VIA UU  0.45 157   37.05   14    7.6%
AU     25.20  SEP 22.50    AU UX  0.25 1155  22.25   14    7.1% 
HD     33.25  SEP 30.00    HD UF  0.30 5548  29.70   14    6.3% 
LOW    44.03  SEP 40.00   LOW UH  0.35 3468  39.65   14    5.5% 

Company Descriptions

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

ADRX - Andrx Corporation  $24.00  *** Generic Drug Speculation ***

Andrx Corporation (NASDAQ:ADRX) is a specialty pharmaceutical
company engaged in the formulation and commercialization of oral
controlled-release generic and brand pharmaceuticals utilizing
its proprietary drug delivery technologies.  Andrx also markets
and distributes pharmaceutical products manufactured by third
parties.  Andrx recently announced that the United States Food
and Drug Administration has approved the marketing of its 500-mg
strength generic version of Naprelan.  Naprelan is used for the
treatment of pain caused by arthritis, osteoporosis and other
inflammatory conditions.  Andrx plans to begin marketing its
generic version of Naprelan next month and the revenues should
bolster the company's bottom line.  From a technical viewpoint,
the issue appears to be forming a support area near $20 and this
position allows traders to speculate on the company's future in
a conservative manner.

SEP 17.50 QAX UW LB=0.40 OI=4282 CB=17.10 DE=14 TY=16.7% 

AU - AngloGold Limited  $25.20  *** Hedge With Gold ***

AngloGold Limited (NYSE:AU) conducts gold mining operations in
Africa, North America, South America and Australia.  The company
owns or has interests in 21 operations around the world.  In 2001,
AngloGold produced six million ounces of gold and the company's
production base spans four continents, with a mixture of open-pit
and underground operations and interests in Argentina, Australia,
Brazil, Mali, South Africa, Tanzania and the United States.  The
company's worldwide exploration programs encompass 10 countries
on four continents.  AngloGold Limited is this week's pick for a
broad market hedge.  Traders can use this position to attempt to
profit from a widespread sell-off in equities.

SEP 22.50 AU UX LB=0.25 OI=1155 CB=22.25 DE=14 TY=7.1% 

CCMP - Cabot Microelectronics  $43.60  *** 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
and if technology stocks find a bottom near the current levels, a
bullish resolution in CCMP's price may occur in the near future.

SEP 35.00 UKR UG LB=0.35 OI=2518 CB=34.65 DE=14 TY=8.3% 

CIMA - Cima Labs  $22.99  *** New Drug Delivery Technology ***

Cima Labs (NASDAQ:CIMA) develops and manufactures prescription and
over-the-counter products based upon its proprietary, fast-dissolve
drug delivery technologies, OraSolv and DuraSolv.  Based on their
technologies, an active drug ingredient, which is taste-masked, is
formulated into an orally disintegrating dosage form that dissolves
quickly in the mouth without chewing or the need for water.  Cima's
business involves a unique operating strategy.  They develop and
manufacture fast-dissolve versions of drugs for pharmaceutical firm
partners for whom they currently produce three branded prescription
pharmaceuticals and two over-the-counter brands.  CIMA is also in
the process of developing proprietary products utilizing their fast
dissolve technologies, as well as the OraVescent enhanced absorption,
transmucosal drug delivery system.  Cima Labs recently announced the
commencement of trials on its proprietary OraVescent product, a new
proprietary, drug delivery technology that improves the absorption
of active drug ingredients across mucosal membranes lining the mouth.
OraVescent is a key component of their proprietary product strategy,
thus investors are optimistic about its future benefits to the firm.
Traders can speculate, in a conservative manner, on the near-term
performance of CIMA's shares with this position.

SEP 20.00 UVK UD LB=0.30 OI=743 CB=19.70 DE=14 TY=10.0% 

HD - The Home Depot  $33.25  *** Blue Chip Retailer ***

Home Depot (NYSE:HD) is a home improvement retailer.  Home Depot
has 1,400 Home Depot stores throughout the United States, Canada,
Argentina and Mexico, and 41 EXPO Design Center stores in the
United States.  Home Depot stores sell a wide variety of building
materials, home improvement, lawn and garden products and provide
a number of services.  EXPO Design Center stores sell products
and services primarily for design and renovation projects.  EXPO
Design Centers offer interior design products, such as kitchen
and bathroom cabinetry, tiles, flooring and lighting fixtures and
installation services.  In addition, as of fiscal year-end 2001,
the company was operating four Villager's Hardware test stores in
New Jersey.  These offer products for home enhancement and small
projects.  The company also has one test store in Texas, The Home
Depot Floor Store, which sells flooring products.  For investors
with a long-term outlook, The Home Depot is great holding in the
retail group and this position offers a low risk cost basis in the

SEP 30.00 HD UF LB=0.30 OI=5548 CB=29.70 DE=14 TY=6.3% 

ITMN - InterMune  $27.39  *** New Drug Developments ***

InterMune (NASDAQ:ITMN), formerly InterMune Pharmaceuticals, makes
and commercializes products for the treatment of serious pulmonary
and infectious diseases and cancer.  In the United States, the firm
markets its lead product, ACTIMMUNE, for the treatment of chronic
granulomatous disease, a life-threatening congenital disorder of
the immune system, and severe, malignant osteopetrosis, also a
life-threatening congenital disorder causing an overgrowth of bony
structures.  Globally, InterMune markets Amphotec for the treatment
of invasive aspergillosis, a life-threatening fungal infection.
The firm has mid- or advanced-stage trials underway for ACTIMMUNE
and Amphotec in a range of new disease indications; idiopathic
pulmonary fibrosis, infections caused by various fungi that attack
patients with weakened immune systems, ovarian cancer, other types
of cancer and cystic fibrosis.  Shares of InterMune have been "on
the move" since the biotech firm said its Actimmune drug improved
survival rates among patients with a lung disease.  At the same
time, the firm also acknowledged that the results from late-stage
patient testing showed the drug failed to meet its primary goal,
which was slowing the progression of the disease.  But, InterMune's
stock rose even though the drug fell short of its main goal because
the survival benefit results convinced investors that Actimmune
would continue to post strong sales results.  Traders who agree
with that outlook can speculate conservatively on the future share
value of ITMN with this position.

SEP 25.00 IQY UE LB=0.75 OI=293 CB=24.25 DE=14 TY=17.5% 

KMX - CarMax Group  $19.02  *** Solid Earnings ***

CarMax Group (MNYSE:KMX) is a specialty retailer of used cars and
light trucks.  CarMax offers its customers a broad selection of
makes and models of used vehicles, including both domestic and
imported cars and light trucks, at competitive prices.  With its
headquarters in Richmond, Virginia, the company operates 40 retail
units in 38 locations, including 36 used-car superstores.  CarMax
also operates 18 new-car franchises, 16 of which are integrated or
co-located with its used-car superstores.  The firm also has wholly
owned finance operations that provide consumer revolving credit and
automobile installment loans.  Circuit City Stores said Friday that
overall sales rose 11% in the second quarter to $3.3 billion, and
that its electronics and auto businesses should meet second-quarter
earnings expectations.  CarMax Group's total sales reportedly rose
15% as new-car sales benefited from manufacturers' zero-percent
financing options available in July.  Investors who want a low risk
cost basis in a unique specialty-retail issue should consider this

SEP 17.50 KMX UW LB=0.35 OI=178 CB=17.15 DE=14 TY=11.8% 

LOW - Lowe's Companies  $44.03  *** Home Improvement Rally ***

Lowe's Companies (NYSE:LOW) is the world's second largest home
improvement retailer.  Headquartered in Wilkesboro, N.C., Lowe's
is the 14th largest retailer in the United States as well as the
30th largest retailer worldwide.  With over 100,000 employees,
Lowe's is "Improving Home Improvement" for over seven million
do-it-yourself retail and commercial business customers each week.
Home improvement stocks have rallied in recent weeks and investment
bank Credit Suisse First Boston on Friday said it raised its rating
on Lowe's shares to a "buy" from "hold."  CSFB analyst Gary Balter
gave the world's second-largest home-improvement retailer a 1-year
price target of $55 and investors who agree with a bullish outlook
can profit from future upside activity with this position.

SEP 40.00 LOW UH LB=0.35 OI=3468 CB=39.65 DE=14 TY=5.5% 

VIA - Viacom  $41.70  *** Blue-Chip Media Stock ***

Viacom (NYSE:VIA), together with its subsidiaries, is a widely
diversified worldwide entertainment company.  The company owns
and operates advertiser-supported basic cable television program
services through MTV Networks and BET: Black Entertainment TV and
and premium subscription television program services through the
Showtime Network in the United States and internationally.  The
Television segment consists of the CBS and UPN television networks.
Infinity's operations are focused on "out-of-home" media with
operations in radio broadcasting.  The Entertainment segment's
principal businesses are Paramount Pictures, which produces and
distributes motion pictures.  The company operates in the home
video retail business, which includes both rental and sale of
videocassette and DVD products.  The company also publishes and
distributes consumer hardcover books.  Readers have been asking
for more blue-chip stocks for their long-term holdings and this
issue is a good addition to any conservative portfolio.

SEP 37.50 VIA UU LB=0.45 OI=157 CB=37.05 DE=14 TY=7.6%



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

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

PLMD   25.00  SEP 20.00    PM UD  0.35 1335  19.65   14   14.2% 
ICST   17.42  SEP 15.00   IUY UC  0.30 390   14.70   14   13.4% 
WEBX   14.12  SEP 12.50   UWB UV  0.25 344   12.25   14   12.7% 
VRTS   17.51  SEP 15.00   VIV UC  0.25 5342  14.75   14   11.4% 
DRD    18.14  SEP 17.50   DRD UW  0.30 0     17.20   14    9.4% 
EDS    38.18  SEP 32.50   EDS UZ  0.35 823   32.15   14    7.6% 
BBBY   32.93  SEP 30.00   BHQ UF  0.30 814   29.70   14    6.2% 
IR     38.29  SEP 35.00    IR UG  0.30 60    34.70   14    5.3%



Stocks Rally To End The Week...But Don't Go Long Just Yet!
By Ray Cummins

                        - MARKET RECAP -

September 6, 2002

The major equity averages rallied Friday after robust employment
data gave investors hope that the U.S. economy is continuing to

The Labor Department announced that the jobless rate dropped to
5.7% in July, suggesting that American businesses are finally
starting to add workers to their payrolls.  It was the fourth
consecutive month of unemployment declines and the agency also
revised July's employment gain upward, bolstering the optimistic
economic outlook.  The bullish news propelled stocks higher with
technology shares leading the charge.  The NASDAQ Composite index
soared 44 points to 1,295 on strength in computer hardware and
Internet stocks.  Blue-chip bellwethers Hewlett-Packard (NYSE:HPQ),
Intel (NASDAQ:INTC) and Microsoft (NASDAQ:MSFT) pushed to the Dow
industrials to a 143-point gain at 8,427.  The broader market saw
buying pressure in retail and oil shares while gold, utility and
cyclical issues generally consolidated.  Standard & Poor's index
of 500 stocks recovered 14 points to close at 893. Trading volume
was moderate with about 1.2 billion shares traded on the New York
Stock Exchange and about 1.3 billion shares changing hands on the
NASDAQ.  Overall, advancers on the NYSE outnumbered decliners by
a 3-1 ratio while on the technology exchange, the ratio was more
than 2-1.  In the bond market, the benchmark 10-year Treasury was
25/32 lower at 102 26/32, yielding 4.03%.  The 30-year long bond
slid 1 9/32 at 107 26/32 to yield 4.86%.

Despite the recent rally, many investors remain unconvinced that
the market is "on the mend" and they point out that stocks remain
overvalued with high price-to-earnings ratios and low dividends.
The technical outlook supports that viewpoint with a pronounced
downtrend looming over the short-term recovery and heavy supply
meeting every buying binge.  A key test of support may occur in
the coming week if the major equity averages revisit the summer
lows and failing that trial, there is little to prevent stock
prices from falling to levels not seen since 1997.  That's not a
pleasant thought for any investor, regardless of how long they
plan to stay in the market.

                      - PORTFOLIO SUMMARY -

Last week's new plays (positions/opening prices/strategy):

XMS Radio   (NSDQ:XMSR)  JAN5C/JAN7.5C  $0.90  debit   bull-call
Harrah's    (NYSE:HET)   SEP50C/SEP42P  $0.20  credit  synthetic
Take-Two    (NSDQ:TTWO)  SEP20P/SEP30C  $0.05  credit  synthetic
Hershey     (NYSE:HSY)   SEP65P/SEP80C  $0.10  debit   synthetic
Corinthian  (NSDQ:COCO)  SEP30P/SEP35P  $0.65  credit  bull-put
Nike        (NYSE:NKE)   SEP50C/SEP47C  $0.25  credit  bear-call
United Tec. (NYSE:UTX)   SEP70C/SEP65C  $0.20  credit  bear-call
XL Capital  (NYSE:XL)    SEP85C/SEP80C  $0.40  credit  bear-call
Serena      (NSDQ:SRNA)  SEP15C/SEP15P  $2.00  debit   straddle
Dqe Inc.    (NYSE:DQE)   NOV15C/NOV15P  $1.75  debit   straddle

Our new group of speculative positions achieved mixed results as
XM Satellite Radio, Harrah's, and Take-Two provided acceptable
entry prices while Hershey's downside activity prevented an
opening credit in the bearish play.  The best available entry
debit (on a simultaneous order basis) was $0.10 and as expected,
the stock plunged on Wednesday after a Pennsylvania judge put the
sale of the company on hold.  Dauphin County Judge Warren Morgan
granted a preliminary injunction preventing any sale until he can
determine whether it needs court approval and the news drove the
company's share value to a low near $71.  The sell-off provided a
small one-day profit but it was not the result we had hoped for.
Take-Two Software finished the week on a sour note and that bodes
well for our bearish position.  In contrast, Harrah's rallied to
the top of a recent range and a test of the yearly highs near $50
seems probable.  Among the credit spreads, United Technology and
XL Capital did not offer the target entry prices, however the Nike
spread is performing well and with any luck, Corinthian Colleges
will continue its upward trend in the coming sessions.  The new
straddles were available at the suggested debits and both issues
were active during their first week in play.

Portfolio Activity:

Friday's broad-market rally helped the major stock indices remain
in their respective trading ranges and the move helped a number
of issues in our portfolio as well.  In the credit spreads group,
only International Business Machines (NYSE:IBM) is unsuccessful
and the bullish activity in Express Scripts (NASDAQ:ESRX), which
was unexpectedly testing the upper limit of its profit envelope,
was quelled for another week.  Cephalon (NASDAQ:CEPH) and Lexmark
(NYSE:LXK) are now on the watch-list, along with Lockheed Martin
(NYSE:LMT), which will be closed if the issue trades above $65 on
heavy volume.  Among the time-selling positions, Dupont (NYSE:DD),
Amlyn (NASDAQ:AMLN), and Kellogg (NYSE:K) continue to trade in a
relatively small range and older plays in Goldcorp (NYSE:GG) and
Maxim Integrated Products (NASDAQ:MXIM) enjoyed favorable activity
this week.  Last month's big winner in that category, Pharmacia
(NYSE:PHA), appears to be heading south thus traders in that play
should consider an early exit.  Neutral-outlook strangles in eBay
(NASDAQ:EBAY) and Forest Labs (NYSE:FRX) are holding up very well,
despite the recent volatility, and the debit straddle in Emulex
(NYSE:ELX) is cycling toward the top of its current range just in
time for the September expiration.  The speculative position in
Dupont Photomasks (NASDAQ:DPMI) offered a favorable "early-exit"
profit on Thursday and Mylan Laboratories (NYSE:MYL) bounced back
from recent lows with a solid rally during the mid-week market
slump.  Of the long-term positions in JDS Uniphase (NASDAQ:JDSU),
Oracle (NASDAQ:ORCL), Peoplesoft (NASDAQ:PSFT), and Check Point
Software (NASDAQ:CHKP), the best observation I can offer is that
technology stocks have lots of upside potential, when and if they
ever return to a bullish trend.

Questions & comments on spreads/combos to Contact Support
                      - SPECULATIVE PLAYS -

These positions are based on recent increased activity in the
stock and/or its underlying options.  All of these plays offer
favorable risk-reward potential, but they should be evaluated
for portfolio suitability and reviewed with regard to your
strategic approach and trading style.

LUME - Lumenis  $5.80  *** Upside Potential! ***

Lumenis (NASDAQ:LUME), formed by the union between ESC Medical
Systems and Coherent Medical Group, develops, manufactures, and
markets state-of-the-art proprietary laser and intense pulsed
light devices.  Its systems are used in a variety of aesthetic,
ophthalmic, surgical and dental applications, including, hair
removal, non-invasive treatment of vascular lesions and other
pigmented lesions, acne, psoriasis, open angle glaucoma as well
as secondary cataracts, age-related macular degeneration, ENT,
gynecology, urinary lithotripsy, benign prostatic hyperplasia,
neurosurgery and dentistry.

PLAY (speculative - bullish debit spread):

BUY  CALL  JAN-5.00  QFC-AA  OI=235  A=$1.85
SELL CALL  JAN-7.50  QFC-AU  OI=82   B=$0.75
POTENTIAL PROFIT(max)=150% B/E=$6.00

                      - SYNTHETIC POSITIONS -

Despite the bearish market trend, bullish plays are theoretically
favorable in this strategy because "out-of-the-money" puts are
slightly inflated when compared to equivalent "out-of-the-money"
calls.  However, we have a listed a variety of positions in this
category and traders with a directional outlook on the underlying
issues may find the risk-reward outlook in these plays attractive.

BYD - Boyd Gaming  $17.71  *** Hot Sector! ***

Headquartered in Las Vegas, Boyd Gaming Corporation (NYSE:BYD) is
a leading diversified owner and operator of casinos and various
entertainment properties located in Nevada, Illinois, Indiana,
Mississippi, and Louisiana.  The company conducts substantially
all of its business through eight wholly owned subsidiaries:
California Hotel and Casino, Boyd Tunica, Boyd Kenner, Boyd
Louisiana, Par-A-Dice Gaming, Boyd Indiana, Boyd Atlantic City,
and Boyd Louisiana Racing.  Boyd Gaming is also developing "The
Borgata," a $1 billion entertainment resort in Atlantic City,
through a joint venture with MGM MIRAGE.

PLAY (conservative - bullish/synthetic position):

BUY  CALL  DEC-20.00  BYD-LD  OI=6   A=$1.00
SELL PUT   DEC-15.00  BYD-XC  OI=30  B=$0.65

Note:  Using options, the position is similar to being long the
stock.  The initial collateral requirement for the sold (short)
put is approximately $500 per contract.  Since there is low open
interest in the December options, traders should enter the play
with a combination (net-debit/net-credit) order or wait for a
consolidation in the underlying issue.

CVC - Cablevision Systems  $9.48  *** Media Sector Speculation ***

Cablevision Systems Corporation (NYSE:CVC) is a cable operator
in the United States through its wholly owned subsidiary, CSC
Holdings.  Cablevision also has investments in cable programming
networks, entertainment businesses and telecommunications firms.
Through Rainbow Media Holdings, the company owns interests in
and manages numerous national and regional programming networks,
the Madison Square Garden sports and entertainment business, and
cable television advertising sales companies.  Through Lightpath,
the company provides switched telephone services and high-speed
Internet access to the business market.  The company also owns
or has interests in a number of complementary businesses and
companies that include The WIZ, a chain of consumer electronics
stores; Clearview Cinemas, a chain of movie theaters; and also
Northcoast Communications, a wireless personal communications
services business.

PLAY (very speculative - bullish/synthetic position):

BUY  CALL  DEC-15.00  CVC-LC  OI=339   A=$0.70
SELL PUT   DEC-5.00   CVC-XA  OI=3048  B=$0.50

Note:  Using options, the position is similar to being long the
stock.  The initial collateral requirement for the sold (short)
put is approximately $250 per contract.

MET - MetLife  $25.25  *** Moody Outlook = NEGATIVE ***

MetLife (NYSE:MET) is one of the nation's leading providers of
personal, property and casualty insurance with more than 2.7
million policies in force.  The company operates through its
affiliates and subsidiaries as a provider of insurance and other
financial services to a range of individual and institutional
customers.  The MetLife group serves approximately 10 million
individual households in the United States and companies and
institutions with approximately 33 million employees and members,
including 88 of the Fortune 100 companies.  MetLife is organized
into six major business segments: Individual, Institutional,
Reinsurance, Auto & Home, Asset Management and International.

PLAY (conservative - bearish/synthetic position):

BUY  PUT   JAN-20.00  MET-MD  OI=165   A=$0.70
SELL CALL  JAN-30.00  MET-AF  OI=1239  B=$0.60

Note:  Using options, the position is similar to being short the
stock.  The initial collateral requirement for the sold call is
approximately $600 per contract.

PFE - Pfizer  $30.75  *** Pregabalin NDA Delayed ***

Pfizer (NYSE:PFE) is a research-based, global pharmaceutical firm.
Pfizer discovers, develops, manufactures and markets prescription
medicines for humans and animals as well as consumer products.
The company operates in two business segments: Pharmaceuticals
and Consumer Products.  The Pharmaceuticals segment includes
prescription pharmaceuticals for treating cardiovascular diseases,
infectious diseases, central nervous system disorders, diabetes,
urogenital conditions, allergies, arthritis and other disorders;
products for food and companion animals; and the production of
empty gelatin capsules.  The Consumer Products segment includes
self-medications, shaving and fish food and fish care products, as
well as confectionery products consisting of chewing gums, breath
mints and cough tablets.

PLAY (speculative - bearish/synthetic position):

BUY  PUT   DEC-25  PFE-XE  OI=3880   A=$1.00
SELL CALL  DEC-35  PFE-LG  OI=14812  B=$0.95

Note:  Using options, the position is similar to being short the
stock.  The initial collateral requirement for the sold call is
approximately $900 per contract.

                        - CREDIT SPREADS -

These candidates are based on the underlying issue's technical
history or trend.  The probability of profit in these positions
may be higher than other plays in the same strategy, due to
small disparities in option pricing.  Current news and market
sentiment will have an effect on these issues, so review each
play individually and make your own decision about its outcome.

BLL - Ball Corporation  $53.75  *** New All-Time High! ***

Ball Corporation (NYSE:BLL) is one of the world's top suppliers
of metal and plastic packaging, primarily for beverages and foods,
and a supplier of aerospace and other technologies and services
to commercial and governmental customers.  Ball's main business
is the manufacture and sale of rigid packaging products for foods
and beverages and polyethylene terephthalate packaging is Ball's
newest product line.  The company's aerospace and technologies
segment includes civil space systems, defense operations as well
as commercial space operations.  The defense operations business
unit includes defense systems, systems engineering services and
advanced antenna and video systems, as well as electro-optics and
cryogenic systems and components.  Civil space systems, defense
operations and commercial space operations include hardware,
software and services to domestic and international customers,
with emphases on space science, environmental and Earth sciences,
defense and intelligence, manned missions and space exploration.
Ball reported 2001 sales of $3.7 billion, of which approximately
$3.3 billion came from its packaging segment and $400 million
from its aerospace and technologies segment.

PLAY (conservative - bullish/credit spread):

BUY  PUT  OCT-45  BLL-VI  OI=65   A=$0.50
SELL PUT  OCT-50  BLL-VJ  OI=223  B=$1.20
POTENTIAL PROFIT(max)=18% B/E=$49.25

MIK - Michaels Stores  $48.35  *** Another New High! ***

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 company 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.

PLAY (conservative - bullish/credit spread):

BUY  PUT  SEP-40  MIK-UH  OI=1514  A=$0.25
SELL PUT  SEP-45  MIK-UI  OI=494   B=$0.60
POTENTIAL PROFIT(max)=8% B/E=$44.60

PHA - Pharmacia  $40.86  *** Back To The Bottom Of The Range? ***

Pharmacia Corporation (NYSE:PHA) is primarily involved in the
development, manufacturing and sale of pharmaceutical products.
Prescription pharmaceuticals is the company's only business
segment and includes general therapeutics, ophthalmology and
hospital products, including oncology as well as diversified
therapeutics.  The company also operates several business units
that do not constitute reportable business segments.  These
include, among others, consumer healthcare, animal health,
diagnostics and contract manufacturing and bulk pharmaceutical
chemicals.  Due to the size of these operating units, they have
all been grouped into the Other Pharmaceuticals category.  The
company's products are sold throughout the world to a range of
customers, including pharmacies, hospitals, chain warehouses,
governments, physicians, wholesalers and other distributors.

PLAY (conservative - bearish/credit spread):

BUY  CALL  OCT-50  PHA-JJ  OI=305  A=$0.20
SELL CALL  OCT-45  PHA-JI  OI=325  B=$0.75
POTENTIAL PROFIT(max)=15% B/E=$45.60

RJR - R.J. Reynolds  $52.58  *** Bearish Earnings Outlook ***

R.J. Reynolds Tobacco Holdings (NYSE:RJR) is a holding company
whose wholly owned subsidiaries include its operating groups,
R. J. Reynolds Tobacco Company, referred to as RJR Tobacco, and
Santa Fe Natural Tobacco Company.  RJR also owns RJR Acquisition.
RJR has one reportable operating segment, RJR Tobacco, a major
cigarette manufacturer in the United States.  The firm's largest
selling cigarette brands, Camel, Winston, Salem and Doral, and
its other brands, including Vantage, More, Now, Monarch and Best
Value, are manufactured in a variety of styles and marketed in
the United States to meet a range of adult smoker preferences.

PLAY (aggressive - bearish/credit spread):

BUY  CALL  SEP-60.00  RJR-IL  OI=1154  A=$0.15
SELL CALL  SEP-55.00  RJR-IK  OI=455   B=$0.80
POTENTIAL PROFIT(max)=17% B/E=$55.70

                   - STRADDLES AND STRANGLES -

The recent extreme market activity boosted the implied volatility
in options, thus there are few issues that meet our criteria for
favorable debit straddles.  However, traders who want to speculate
on a stock with relatively inexpensive option premiums, a history
of adequate price movement and the potential for some volatility
in its sector should consider this candidate.

ISSX - $15.25  *** Potential Volatility ***

Founded in 1994, Internet Security Systems (NASDAQ:ISSX) is a
pioneer and world leader in software and services that protect
critical information assets from an ever-changing spectrum of
threats and misuse.  As organizations increasingly move business
operations online, the number and sophistication of threats to
the networks, servers and desktops that allow these initiatives
also continue to escalate.  Internet Security Systems' solutions
dynamically detect, prevent and respond to these threats, making
Internet Security Systems the trusted security provider for more
than 9,000 corporate customers.  These include 49 of the Fortune
50, the top 10 largest U.S. securities firms, 10 of the world's
largest telecommunications companies and major agencies and
departments within U.S. local, state and federal governments.
Headquartered in Atlanta, GA, Internet Security Systems also has
operations throughout the Americas, Asia, Australia, Europe and
the Middle East.

PLAY (very speculative - neutral/debit straddle):

BUY  CALL  SEP-15.00  ISU-IC  OI=548   A=$1.10
BUY  PUT   SEP-15.00  ISU-UC  OI=1080  A=$0.85

                     - INDEX OPTION SPREADS -

As a trader, you may be familiar with options on individual stocks
where you have the right to buy (call option) or the right to sell
(put option) a particular stock at some predetermined price within
some predetermined time.  The buyer has the rights and the seller
the obligations.  With index options the basic ideas are the same.
Index options allow you to make investment decisions on a specific
industry group or on the market as a whole.  Spread strategies can
be made with index options similar to those made with individual
stock options and professional traders also employ index spreads
in hedge strategies.  We favor debit spreads on the S&P 500 index
(SPX) for momentum and hedging as well as out-of-the-money credit
spreads on the S&P 100 index (OEX) when the risk-reward outlook is
acceptable.  Low risk disparity spreads will also be listed (when
available) for the conservative index trader.

OEX - S&P 100 Index  $446.00  *** Trading Range? ***

The Standard & Poor's 100 Index is a capitalization-weighted index
of 100 stocks from a broad range of industries.  The component
stocks are weighted according to the total market value of their
outstanding shares.  The impact of a component's price change is
proportional to the issue's total market value, which is the share
price times the number of shares outstanding.

Traders who participate in OTM credit-spreads often utilize S&P
100 (OEX) options because they generally contain more premium
than options on individual stocks and also provide an underlying
instrument less prone to huge, gapping moves.  The strategy will
profit if the underlying remains in a relatively small range and
from a technical viewpoint, the overall market seems likely to
move in constrained price pattern as the long-term outlook is
somewhat uncertain.  Review the OIN's Market Sentiment section
for more specific technical information on the current trends in

A Conservative, Neutral-Outlook Strategy:

By combining two credit-spread positions, you can participate
in a popular neutral strategy known as the "Long Iron Condor."
It is often used with range-bound issues and it is a limited
risk, limited profit position that gives you a wide range for
success.  The benefit to this technique is that some brokers
require less collateral for the combined position, as only one
spread can lose money at expiration.  You should consult your
brokerage firm to determine the maximum margin requirements
before initiating the position.

PLAY (conservative - bearish/credit spread):

BUY  CALL  OCT-500 OEB-JT  OI=1862  A=$3.40
SELL CALL  OCT-495 OEB-JS  OI=47    B=$3.80

- and -

PLAY (conservative - bullish/credit spread):

BUY  PUT  OCT-395  OEW-VS  OI=27    A=$7.50
SELL PUT  OCT-400  OEW-VT  OI=3005  B=$7.90


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