Option Investor

Daily Newsletter, Sunday, 09/15/2002

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The Option Investor Newsletter                   Sunday 09-15-2002
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: Cautious Bears Circling the Picnic.  
Index Trader Wrap: Like a carrot in a juicer
Editor’s Plays: Failed Target
Market Sentiment: Not So Fast
Ask the Analyst: The Bigger Picture
Coming Events: Earnings, Splits, Economic Events

Updated on the site tonight:
Swing Trade Game Plan: Storm Warning

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
        WE 9-13          WE 9-06          WE 8-30          WE 8-23
DOW     8312.69 -124.51  8437.20 -236.30  8663.50 -209.46  + 94.90
Nasdaq  1291.36 -  3.94  1295.30 - 19.76  1315.06 - 65.51  + 19.56
S&P-100  444.24 -  2.43   446.67 - 14.13   460.80 - 13.70  +  6.06
S&P-500  889.80 -  4.12   893.92 - 22.16   916.08 - 24.78  + 12.09
W5000   8440.88 - 40.32  8481.20 -172.84  8654.04 -222.85  +106.61
RUT      389.98 - 40.32   391.57 +   .61   390.96 -  9.17  +  4.16
TRAN    2246.87 - 10.20  2257.07 -  8.56  2265.63 -128.69  + 54.92
VIX       39.31 -   .73    40.04 +  4.24    35.80 +  2.99  -  0.01
VXN       55.85 -   .69    56.54 +  1.56    54.98 +  7.36  -  3.03
TRIN       1.53             0.93             1.20             2.87
Put/Call   0.89             0.79             0.84             0.80

Cautious Bears Circling the Picnic.  
by Jim Brown

Honeywell pulled the plug on the Dow for Friday and Adobe helped
float the Nasdaq. Everybody else ended the week flat and failed to
recoup Thursday's losses. Bears were out and about and every bounce
was met with selling but there was no concentrated effort to press
their luck. With a three day weekend ahead for many traders there
was no urge to open new positions on Friday.

Dow Chart


Nasdaq Chart


Economically Friday was not a good day. The PPI was flat and less
than the +0.2% expected. Excluding energy and food the number fell
-0.1% while prices for core goods rose +0.4%. There is a hint of
inflation starting to appear even though the rise in gasoline and
electricity failed to carry forward into the headline number. 
Falling food prices offset the hikes in energy prices. It continues
to show that the recovery is very tentative and the minor inflation
increase will not deter the Fed from further rate cuts. This is
not a significant possibility (cuts) anyway so the PPI was basically
a non-event. 

Retail Sales came in stronger than expected at +0.8% but only half
that rate, +0.4%, without the strong auto sector. However electronics
and appliances fell -0.4%. Clothing and accessories fell -0.3% with
the biggest gains in furniture at +1.7% and auto parts +1.9%. It 
appears the nesting consumer is feathering their nest and fixing
up their cars. Back to school sales fell at department and apparel
stores which when coupled with the slow electronics sales is still
bad news for the PC sector. Consumers appear to be taking money out
of the markets to buy houses at once in a lifetime interest rates
and cars at zero percent down. 

The ECRI Weekly Index dropped slightly to 120.5 from 120.7 and remained
near the lows of the year. The drop was attributed to the spike in
Jobless Claims to 426,000 from 407,000. This is signaling that the
rebound is faltering. It would be much worse if not for the strong
mortgage application rate. With any tick up in interest rates those
applications will come to a screeching halt. 

The biggest report of the day was the Michigan Consumer Sentiment
and if fell from 87.6 in August to 86.2 in September. The current
conditions component showed the biggest drop of -2.6 points. This
was the fourth consecutive decline and the lowest level since last 
November. The University said respondents were commenting on their
drop in wealth more than any other time in the history of the survey.
It appears the only thing holding up the current expectations
component is the zero percent autos and low mortgage interest. Do
you see the trend here. Once the auto buying spree fades as it is 
expected to do in the 4Q and the mortgage interest rates start 
climbing this indicator should fall quickly. 

The Dow was the biggest loser of the day after HON warned that 
for the quarter and the year. HON fell -17% to $23.56. Only 13
of the 30 Dow stocks fell and four of them were aerospace related. 
UTX dropped -5% to $58, GE dropped a dollar to $27 and Boeing
dropped -$1 to $35 on the news as well as the strike vote. Another
major NYSE loser was LU which traded 107 million shares to close
-20% lower at $1.32. Lucent warned that sales for this quarter
would be -25% less than expected and guaranteed the ninth straight
quarterly loss. They now expect to lose -.45 cents, nearly three
times the -.16 cent loss expected by analysts. Two major rating
services downgraded Lucent debt again. Lehman said they were 
redefining what "worst case scenario" in the telecom sector meant. 
Lucent said the baby bells were cutting spending again and delaying
major purchases. They also are taking charges for significant 
customer financing defaults. I guess not selling equipment is
bad but selling it and then not getting paid is worse. 

The chip sector just keeps taking hit after hit. AMD announced
today it was delaying the release of its Hammer chip, their
answer to Intel's high performance P4. They also said they were
delaying the new version of the Athlon chip. No reason was given
but AMD had repeatedly tied its future to the Hammer chip. If 
it can't bring it to market until the 1Q or 2Q of 2003 then the
Intel lead will skyrocket. Intel is going to release a 3GHZ P4
next month. An entire product cycle will be lost to AMD as Intel
is expected to release a 4GHZ P4 in the 1Q of 2003. This is the
competition the Hammer will face. AMD fell to $7.21 on the news. 
Intel gained +.33 to $16.00.

In other chip news ESST warned that slow sales of its DVD chips
would sharply lower earnings for the second half of the year. 
Competitors to ESST, CRUS and ZRAN also lost on the news. GNSS
gains to $9.30 however after being upgraded and after raising
guidance for the quarter.

While the Dow finished the week in the negative due to the HON
warning the other major indexes recovered from negative territory
at the close as possible terrorist news stories were resolved. 
The three men in Florida were released after convincing police
they were just pulling a joke on the waitress. The Liberian
cargo ship was called no risk to the publics health and safety
by the FBI who said the radiation was from some Spanish tile. A
terrorist who bragged on TV just last week that he helped organize
the 9/11 attack was finally arrested in Karachi. Police in New
York arrested five men of Yemeni descent on suspicions of 
operating a terrorist cell in the U.S. They were discovered by
an increase in communications traffic with a terrorist location
overseas and some evidence at a training camp linked to Osama. 
The authorities said there was no evidence on an immediate
attack plan in progress. All this positive terrorist news helped
to strengthen the bulls and worry the bears. 

Still the bulls could not make any major moves off Thursday's 
close. Even a couple of short covering rallies failed to post 
decent gains. Money is flowing out of mutual funds again after
there was no post 9/11 rally. Volume was very low again with less
the three billion shares trading across all markets. It was a
dead heat with 1.5B up volume and 1.4B down volume. The volatility
continued to be a factor with the OEX/SPX trading on both sides
of positive several times during the day. The Nasdaq riding on
the back of Adobe and Intel was the strongest index by far and
it only closed up +11 for the day but still negative for the
week. Adding to the 9/11 anniversary week volatility was the
triple witch option expiration week ahead of us. 

Traders planning to be out for Yom Kippur on Monday were either
squaring positions on Friday or out of the market all together.
Next week in addition to the options expiration we have a flood
of economic reports. Business Inventories on Monday, Industrial
Production on Tuesday, CPI on Wednesday, Building Permits and
Housing Starts and Phily Fed on Thursday. The following week
leads with Consumer Confidence and a Fed meeting. Needless to 
say there will be plenty of challenges. Many of those challenges
will come in the form of earnings warnings. The Q3 season will
shift into full swing next week and the Q3 season is the worst
of the year, even in good economic times. Expect dozens of
warnings with some coming from high profile companies. 

Bulls keep talking about the coming rally. Can you have a real 
rally without banks, drugs, manufacturing, telecoms, aerospace 
and techs? Can you have a rally on the backs of the already 
extended housing sector and defense sectors? If you are planning
a rally on the basis of ADBE and GNSS then I suspect it is going
to be very narrow. Even the oil sector will be negative if Bush
gets a coalition going. Maybe it is just the cool weather here
in Denver and the fact that my bear skin coat feels so comfy
this weekend but my outlook has changed drastically since the
post 9/11 relief rally was DOA. The Dow closed Friday resting 
on 8300 and has now posted three negative weeks in a row. If
8250 breaks next week the get out your parachute because 7500
is right around the corner again. Before I depress you totally
there are still those that think next week will be the start
of the relief rally. They point to the 9/11 stress and the 
numerous terrorist news stories as reasons it did not appear
this week. If they are right then Tuesday should be the day.
With many traders off Monday for Yom Kippur there is not likely
to be enough bullish volume on Monday to make it stick. Just
keep your focus on 8250. If that level fails then all the 
bullish rally talk was just that, talk.    

We added a new section to OptionInvestor beginning this Sunday.
We added stock picks for investors with retirement accounts that
may or not have options capability. The link to these picks is 
listed in the "Strategy" section on the left side of the website. 
We only started with three stocks this week since our outlook
is negative for the next month. For the stocks we list there
we will provide options strategies as well to limit the risk of
going long stocks. If you have an IRA account that does not 
allow options then buy the stock in your IRA and buy the option
in your trading account. You will still be hedged just not in 
the same account. The outlook for these stocks will be from three
to 24 months but nothing prevents you from holding longer. In the
future we will try to focus on lower priced stocks to minimize
entry cost and maximize gains on successful plays. We will try
to structure the plays to limit risk to $1 or less per share. 
We would appreciate your input and questions on this section.

Enter Very Passively, Exit Very Aggressively!

Jim Brown


Like a carrot in a juicer

It's been awhile since I've seen an infomercial where some guy 
with big bushy eyebrows, who calls himself "Dr. Juice," 
demonstrates the benefits of drinking a combination of healthy 
homemade beverages from carrots, celery, tomatoes, radishes, 
zucchini, or any other type of fruit or vegetable that one could 
imagine cramming into a blender-type device, which then 
relinquishes a concoction that's supposed to be good for you.

"Dr. Juice" fires up his blender and elevates his voice in an 
excited tone so you can hear him talk and he begins shoving in 
carefully measured allotments of fruits and vegetables.

Of course, as he pushes the food items into the blender, the 
small motor begins to bog down as a high "whirrrr" sound slowly 
drags down to a lower pitch as it become a bit overloaded.  "Dr. 
Juice" releases some pressure, lets the motor come back up to 
speed and then slowly applies more pressure to the food items, 
with a finger-protecting plunger, and juice eventually begins to 
flow out of a spout.

All of the above is somewhat descriptive of today's market action 
as it relates to a bearish index trader licking his/her chops in 
the early morning with stock futures to the downside, but was 
perhaps served up just enough bullish economic data to help put a 
bid under the major market averages.  While some carrots were 
shoved into the blender in the early going, there just wasn't 
enough selling pressure from bulls caving in to burn out a motor 
which kept many of the market averages above their trend lines 
and key near-term levels of support.

While a bear was licking his/her chops in the early going, almost 
as if in anticipation of a healthy dose of profits from downside 
action, what came out the spout by sessions end wasn't as 
delicious as a bear would have liked.

Of the major market averages discussed here, only the Dow 
Industrials (INDU) 8,312 -0.79% finished in negative territory.  
The 66-point decline wasn't necessarily that bad when considering 
Dow component Honeywell (NYSE:HON) $23.56 -16% plummeted after 
lowering guidance last night, which helped drag down United 
Technologies (NYSE:UTX) $58.00 -5.07% along with cyclicals Alcoa 
(NYSE:AA) $21.99 -3.4% and Caterpillar (NYSE:CAT) $40.64 -4.12%.  

The hefty losses in previously mentioned Dow components were 
partially offset by gains in retailing components Wal Mart 
(NYSE:WMT) $54.40 +2.4% and Home Depot (NYSE:HD) $33.45 +2.98% 
after this morning's stronger than expected retail sales numbers 
for August.  

It's noteworthy that Dow component General Motors (NYSE:GM) 
$44.08 -2.92% didn't participate in the "retail segment" of gains 
like WMT and HD after this morning's retail sales numbers shows a 
1.9% gain in auto sales for the month.  This may hint that market 
participants are shunning away from "larger ticket item" stocks 
as consumer confidence toward purchases my be limited to smaller 
ticket items or at least away from cars, which can be considered 
a depreciating asset once driven off the dealer's lot.

Recently beaten down technology components had shares of Intel 
(NASDAQ:INTC) $16.03 +2.1%, Microsoft (NASDAQ:MSFT) $47.91 +1.61% 
and IBM (NYSE:IBM) $72.50 +0.87% showing gains, while Hewlett 
Packard (NYSE:HPQ) $13.50 -0.73% lagged on trader talk that the 
recent acquisition of Compaq may be presenting some challenges.

While not a component of the NASDAQ-100 (NDX.X) 923 +0.96%, 
shares of IBM (IBM) $72.51 +0.87% found intra-day resistance at 
its now-flat 50-day SMA of $72.75.  As it relates to Dow Diamonds 
(DIA) 83.53 -0.72% traders, a move either side of IBM's 50-day 
SMA may also influence Dow trading in the coming sessions.  In 
essence a move above the 50-day SMA in IBM, could have the DIA 
trying to elevate back up toward its 50-day SMA, which currently 
resides at $85.97.

Once a week, I like to kind of "step back" and take a look at how 
the weekly market action unfolded.  In a way, this kind of helps 
me understand what was weak and/or strong.  I keep a weekly 
spreadsheet where I group the major market averages near the top.  
for me, a "meaningful move" is +/- 1%.  As such, I attempt to try 
and "color code" the different averages/sectors with "blue" being 
a gain greater than 1%, "black" being relatively unchanged, and 
"red" representing a decline greater than 1%.

I also like to "group" the sectors in some type of manner as I'll 
explain in the following spreadsheet.  As mentioned in prior 
intraday comments, I believe the MARKET moves similar to a snake.  
In essence, money can shift from sector to sector based on 
various MARKET scenarios that are in play.  

While I keep a weekly tally of percentage change, I also like to 
keep a year-to-date tally and then break it down by quarter.  
What this does in a way is help me "understand" percentage change 
on a daily or weekly basis in a greater scope of things.  For 
instance, if I'm long a call in an index and the index jumps 7% 
in one day and 12% by week's end, I can perhaps put that type of 
movement into a greater context of things when compared to year-
to-date and quarterly moves found in recent past.

Weekly Index/Sector Changes


As you can see, the major market averages (grouped at the top) 
were little changed on the week.  Only the Dow Industrials (INDU) 
fell by more than 1% and the bulk of that decline came in the 
last three sessions.

I consider the major market averages like an "ocean" and their 
"tides" or movement/fluctuation is impacted by the various 
sectors, which may be considered "rivers" that eventually flow 
into the ocean's themselves.  Then, individual stocks represent 
"fish" that swim within the "rivers"/indexes themselves.

There's always some overlap between the various indexes, but I've 
tried to group "technology" sectors near the top.  Biotech is in 
a world all its own.  For the most part the group is not that 
sensitive to the "economy" and may not necessarily be too 
dependent on "healthcare" type needs, but more dependent on 
future breakthroughs in biologic sciences.

I need to move Networking down a few notches and get it closer to 
the Wireless, Fiber Optic, and Telecom indexes.  Today's guidance 
lower and further restructuring comments from Lucent (NYSE:LU) 
$1.26 -23.63%, which set the Networking Index (NWX.X) $114.26 
-4.38% into a tail-spin today, and had that sector experiencing 
this week's biggest decline in technology.  

QQQ traders may use the above spreadsheet to focus on those 
sectors within the technology "arrows."  Once again, sector 
"weighting" comes into play.  See how there were a lot of 
negative percentages for 6 out of the 8 sectors?  So why was the 
NASDAQ-100 (NDX.X) showing a marginal gain by week's end?  In 
part, the "bullishness" in software (GSO.X) represents a 31.42% 
weighting in the QQQ, while biotech (BTK.X) represents 11.91% 
weighting.  While networking (NWX.X) got pounded lower, there's 
not too many "networking" stocks that trade over $10 anymore that 
have much impact.  QQQ component ADC Telecommunications 
(NASDAQ:ADCT) $1.47 +13.5% had a banner day today.  Unfortunately 
for QQQ bears, Lucent (NYSE:LU) $1.26 -23% and Nortel (NYSE:NT) 
$0.95 -10.37% aren't listed on the NASDAQ and not eligible for 
being components of the QQQ.  Note:  The above percentage 
weighting are taken from the NASDAQ site.  If you're interested 
in reviewing specific stock weightings for the QQQ, then this 
link will be helpful


A neat little invention called the NASDAQ-100 Dynamic 
Heatmap, shows intraday % gain/losses of individual stocks at 
this link


Moving on, we get into "financials," where I generally group 
together the Banks, Brokers and Insurance stocks.  Here's where a 
S&P index trader starts to perk up.  Again, many of the NASDAQ-
100 stocks are components of the S&P 500 and S&P 100, but more of 
a "financial" representative begins to take place in the S&P 
indexes.  Subscribers that would like a more detailed an inward 
look at the stocks/weightings can browse around at the Standard & 
Poor's site at this link


Most traders might only be interested in the 500 and 100, and their 
respective links are at the left of the page link just given.  
Trader's in the S&P 500 Index (SPX.X) will note that "financials" 
represent a 21% weighting and "healthcare" a 14.6% weighting, 
while "information technology" represents a 13.6% weighting.  
It's notable that "consumer discretionary" represents a 13.5% 
weighting.  In general, this would be considered some of the 
retailers like a Wal-Mart (WMT) $54.40 +2.4% on the day and 
Target (TGT) $36.22 +2.49% today.

Laughing.... my mom used to always say .... "do you know just 
what is in those hot dogs you so love to stuff in your mouth?"  
For index traders, it's always a good thing to know just what's 
in that index your trading.  I don't think a trader needs to 
"know" every little detail, but how things are weighted and how 
the various sectors can at times become "key" sectors to monitor, 
which might influence your trade size.

For instance.  If your a short-term trader in the S&P's, then 
perhaps last night's comments regarding the potential importance 
of this morning's retail sales numbers caught your eye.  With 
"consumer discretionary" being a 13.5% weighting in the S&P 500 
this morning's economic report had some influence on SPY traders.

I'm rather "bearish" the SPY since Wednesday evening's Index 
Trader Wrap, but if there's going to be trouble for a bear in the 
S&P 500 Index (SPX.X), it most likely is going to start with the 

In the above spreadsheet, I'm using the Retail HOLDRS (AMEX:RTH) 
$82.40 +1.61%, which pretty much mimics the S&P Retailing Index 
(RLX.X) 300.73 +2.12%.  The "reason" I'm using the RTH in the 
spreadsheet is that for some reason, between 05/14/02 and 
06/05/02 the RLX.X didn't appear to trade and I don't have data 
for that time and it messed up any attempt at my quarterly 
benchmarking levels.  Regardless, I'm going to put a scenario 
together as it relates to the RTH from a bearish trader's 

This scenario basically reads like a very simple computer program 
with a statements of if, then, else.  

Let's take a look at the RTH.  As a trader, I always look for 
potential trouble that could adversely impact my trade (bullish 
or bearish).  A bearish trader loves weakness, but is always on 
the alert for bullishness that may threaten a position.  

Retail HOLDRS Chart - Daily Interval


Here's a "sector" that could give a bearish S&P trader some 
trouble.  A bear hates to see any type of "leadership" or 
strength that could threaten his/her position.  As such, I like 
to look for strength that could threaten my position.  Here's my 
thinking, which I describe somewhat as computer logic.

IF the RTH breaks above $84.50, THEN I must be alert to strength 
in the SPX, ELSE a decline from current levels my bearish SPX 
trade stands a better chance of reaching my target near SPX 835.

Now, note three levels in the above chart.  Note the 38.2% 
retracement in the RTH at 82.96 (say 83 round number), then note 
the 50-day and how "strong" the RTH is when we compare to the SPX 
chart, and then note the 19.1% retracement level.

While some may think I'm crazy for saying the MARKETS  (S&P 500 
is a MARKET) are the Oceans, that the sectors/rivers (Retailers 
are a sector) flow toward, and the stocks (Wal-Mart is a stock, 
in the retail sector, which is a LARGE component of the S&P 500) 
are the fish within the sectors, you'll get this concept by the 
end of the update.  Write down the "levels" from the RTH 38.2% of 
$83 and the 19.1% retracement of $77 on a piece of scratch paper 
to keep handy for reference in the S&P 500 chart below.  Special 
note here.  Retracement in the RTH is from this spring's highs to 
the July relative lows, JUST LIKE WE'VE done with the SPX chart 
in recent nights.  CONSISTENCY is important, otherwise it becomes 
very difficult to pick up on DIVERGENCE like we're seeing with 
the retailers versus the SPX.

S&P 500 Index Chart - Daily Interval


The SPX did pierce below upward trend on the bar chart, but 
managed to rally back and close right near trend.  While the 
retailers are just a portion of the SPX, traders can see how an 
SPX bear wants to see a decline in the RTH back to its 19.1% 
retracement to help provide some weakness in the SPX and increase 
the likelihood of a break below SPX retracement of 868, which is 
a "hurdle" to a trader's target near 835.

It still look like the "tide" is falling for the SPX so still 
bearish, but not complacently so (see last night's wrap).  
However, just want to see one of the stronger running "rivers" in 
the retailers show some weakness as a bear hates to see any type 
of leadership come from an economically sensitive group.

As it relates to "fish" in the retail sector, I spent quite a bit 
of time talking about Wal-Mart (WMT) as a stock for equity bulls 
to be studying back in July regarding some historical pattern 
recognition dating back to last fall.  Thought was that WMT would 
"eventually" give a point and figure buy signal, which did take 
place at $49.00 on July 29th and I mentioned this in the intra-
day update at 01:00 EST

This "BIG Bugger" has yet to give a sell signal on its point and 
figure chart, and past scenario was that this discount retailer 
(consumer discretionary) might trade bullish into the holiday 
shopping season.  

It's also "interesting" that WMT's bullish vertical count was 
$58, after that "buy signal" at $49 was generated.  Just three 
day's ago, WMT traded a high of $57, and got suspiciously close 
to its bullish target.  An SPX bear is looking for this one to 
stay in check as it relates to the retailers.

OK, real quickly I need to cover the very bottom portion of the 

Precious metals stocks as depicted by the Gold/Silver Index 
(XAU.X) 75.90 -0.23% recovered from a late morning decline and 
pegged their highs into the close.  This was perhaps a 
"defensive" move I was looking for today to a degree, but this 
morning's economic data was just a bit too strong.  I still don't 
think the bullishness in gold and 3.8% gain this week is 
"inflation" related, which gold is a perceived hedge against.  
No, its a defensive move based on a potential "Iraq attack."  
True, an attack on Iraq could have oil spiking higher, which 
could be partially inflationary, but if inflation were a BIG 
concern, then we wouldn't be seeing Treasury YIELDS as depicted 
by the 10-year Treasury YIELD closing at a new multi-year low of 
3.9%.  Inflation is one of the biggest threats to bonds, so I 
don't think bonds are seeing buying (lower YIELD) based on 
inflation.  No sir/mam, the MARKET bought bonds in the past 4-
weeks because it is looking for some safety.

An finally, the U.S. Dollar.  For the most part, I'm using this 
as a very simplistic way to try and get a feel for foreign equity 
flows into and out of the U.S.  In essence, foreign capital that 
wants US-based assets, needs to convert from foreign currency 
into US Dollars, while money that wants out, sells dollars to 
convert back to its local currency, or rotate to another part of 
the world.  The last month and 1/2, the Dollar has been range-
bound between 106-108.  Months ago I set up a retracement on the 
US Dollar Index (dx00y) using a fitted retracement technique, and 
currency traders look to be trading that like clockwork.

I'll talk about what I think is the "relation" between the 
Dollar, Treasuries and stocks in a later update, but right now I 
think some money continues to flow toward the dollar, but has 
been placed in Treasuries.  This makes sense perhaps as foreign 
investors seek out some safety from a "global power" like the 
U.S. should an attack on Iraq take place.

Think about it.  If you were a large investor in Europe or 
anywhere close to Iraq and Saddam Hussein, you're probably trying 
to shift some assets away from danger, unless you're betting Iraq 
is a victor.  Nope.  I'd think Saddam might get a little crazy, 
and perhaps launch chemical weapons if his end is near.  If I 
shift assets to the U.S. and am lucky enough to escape with my 
life before Saddam gets me with the chemical weapons, then I've 
got some assets in the U.S. that I can eventually get my hands on 

Ugh!  Terrible thoughts, but investing is all about risk 

Lets take a quick look at the S&P 100 Index (OEX.X) 444.24 
+0.22%, which managed to battle back from early morning lows and 
close relatively unchanged on the day.  I'm going to "blow up" 
the daily interval bar chart a bit tonight and talk real quick 
about two different upward trends.

There's been discussions over the years as to where an upward 
trend should be "anchored" from.  Do you take an anchor point 
from the very low of a bottom, or anchor to the low close of the 
bottom.  Both arguments have merits as it relates to supply and 

Those that anchor to the bottom will say, "you anchor to the 
bottom, because for some unknown reason, that's where the shift 
from excess supply to building demand took place."

Those that anchor to the relative low close say, "you anchor to 
the bottom, because for some unknown reason, the MARKET decided 
that was the meaningful price the market agreed upon as the 
relative lows trade."

Personally, I like to try and create as much trouble as I can in 
the technicals as this helps keep me honest.  Here's what I'm 
talking about.  Did the OEX close above, on, or below trend?

S&P 100 Index Chart - Daily Interval


The upward trending "pink" line is what I call a more 
"conservative" trend and is anchored to the 07/23 CLOSE.  The 
"green" line is more "aggressive" and is anchored to the 07/23 

Encouraging for a bear is that BOTH trends were punctured.  The 
OEX also closed below its more aggressive trend, while closing 
right on the more conservative trend.

If anything, this still has me cautious as a bear and not getting 
overly short/put in my account.

Oh... I'm limited in how big my charts can be in these updates 
and the "data box" for Price, Open, High, Low, Close, MA(50), MA 
(200) etc., covers up the oscillator settings on the chart.  
Subscribers asked me after last night's wrap what settings I use 
for MACD on the OEX.  I use the same MACD settings of (12,26,9) 
on all charts unless otherwise noted.  Some traders like to "fine 
tune" there settings to try and get a more "exact" historical 

Every technician has a personal preference as to what they put 
more weight into.  I put the most weight in the point and figure 
charts, then bar chart trends, moving averages, and finally MACD, 
volume and then stochastics.  

As it relates to the previous discussion with the retailers (RTH) 
and any bullish move above the $84.50 level, a short-term bear in 
the OEX, not willing to risk a move to 38.2% retracement, places 
a stop just above the 459 level or rounding 21-day SMA at 461.50.

One thing to be cognizant of early next week is this.  I do think 
that there was some bullish selling in the OEX and shorting ahead 
of this weekend on terrorist fears (code Orange) and Iraq issues.  
Should the weekend pass without any events, bears might expect 
some very short-term bearish speculators to perhaps cover 
speculative short positions on a move much above today's OEX high 
or 450.

In last night's wrap I showed a point and figure chart of the Dow 
Diamonds (DIA) $83.53 -0.72%.  Let's take a similar "blow up" 
look at the DIA as we just did in the OEX, with similar 
"aggressive" and "conservative" trends in place.  Depending on 
YOUR tolerance for risk, trade the trend that you deem 
appropriate.  "Aggressive bears" like the break and close just 
below "green" upward trend, while "conservative bears" still see 
a somewhat resilient DJX despite some of the weakness in AA, CAT, 
GE, HON and UTX today.

Dow Diamonds Chart - Daily Interval


As we look at the various daily interval bar charts, traders are 
undoubtedly saying .... "holy smokes, these darned charts all 
look pretty much the same right now" as it relates to the major 
market averages.  I couldn't argue with that a bit, and is common 
when a MARKET is "fearful" of something.  What tends to happen 
under more fearful conditions like we're currently experiencing 
is a more systematic amount of selling by bulls looking to shift 
some risk away from equities.

One subject I want to cover quickly is the placement of stops.  
Stops are used by traders (bullish or bearish) to control risk in 
their account.  As such, every trader has their own tolerance for 
risk and stops can be placed accordingly.

In last night's wrap, I showed a chart of the DIA on the point 
and figure chart.  Today's action would have a p/f chartist 
simply drawing in an "O" (supply) just under the current column 
of O at $83.  The first sign of "meaningful" strength for the DIA 
would be a trade at $88 on the point and figure chart, which 
would generate a new "buy signal" and negate the current bearish 
vertical count of $74.

Now, some trader's may say "there's no way I'm going to risk a 
move to $88 before stopping out, especially since I shorted the 
DIA at $85!"  That's fine, and based on a trader's risk 
tolerance, they could well turn to the above bar chart and begin 
looking at moving averages or levels of resistance, that if 
broken would take them out of a bearish trade.

Traders that may have been only establishing partial position 
shorts (1/4 or 1/2) as the DIA has not yet broken its bullish 
support trend on it point and figure chart, and waivers at both 
aggressive and conservative trends on the bar chart above, may 
have in essence limited some risk in their accounts as apposed to 
traders that currently have full positions on.

As such, "true" bullishness in the DIA begins with the point and 
figure chart and a trade at $88 with a potential profit potential 
from the bearish vertical count at $74.

A trader combining the bar chart can perhaps "limit risk" in 
his/her bearish trade with a stop just above the 50-day MA, 21-
day MA or even Wednesday's high.  It's really up to the 
individual trader and based on his/her own risk/reward profile.

Sometimes, I find it useful to "trade places" with a bull, if I'm 
holding a bearish trade in a stock or index.  For example, let's 
imagine that you shorted the DIA at $85.00 Thursday morning after 
reading a compelling index trader's wrap the previous night.

Now switch places and put yourself long the DIA at $85, and 
holding long at $83.53.  What are you thinking right now?  I'm 
probably thinking "ugh!... I'm glad the economic data had retail 
sales rather strong today, but I just don't know if WMT and HD 
have enough umph to get the DIA above the $88.00 level and back 
on a p/f buy signal, let alone get me above the crisscrossing 
downward trend and horizontal resistance on the bar chart at 
$88.70.  All this Iraq and "code orange" stuff seems to have 
buyers kind of sitting on the sidelines.  Maybe if I can get a 
rally back near the 50-day or 21-day MA's, I should maybe sit 
things out too.  But a break much below $82, then I'd better give 
up, stop out, as the spouse is already a little mad after I held 
a full position long in Cisco (CSCO) from $50."

NASDAQ-100 Tracking Stock (QQQ) - 60-min./Daily Interval


Here's a comparison chart of the QQQ, with the hourly interval 
chart on the left, and a daily interval chart on the right.  In 
my opinion, the chart looks a little "neutral" currently as the 
60-minute chart on the left looks as if a the possibility of some 
bullishness to the $23.50 level could take place early next week, 
depending on how things go over the weekend.  However, we do find 
some correlative resistance in the QQQ near the $24 level.

The QQQ has become increasingly "difficult" and harder to analyze 
as there are a lot of "garbage" stocks in the group that trade 
under $5.00, and on any given day, these now smaller stocks and 
10% gains or losses can spark some unpredictable results as 
bullish and bearish trader may see a 10% move in a component and 
reality sets in on the volatility that can take place in a "like 
stock" they're trading and a move in then influenced.  As such, 
traders need to live with some volatility and give the QQQ some 
room to move.  Currently, a very short-term upward trend anchored 
from the August 5th low of $21.30 and attached to the September 
5th relative of $21.93 is what stands between a bear and an 
initial bearish target of $21.35.

Note the DIVERGENCE between the stochastics on the 60-minute and 
Daily Interval chart.  I'd interpret the 60-minute as hinting at 
an "overbought" condition near $23.50, which would have the QQQ 
filling it's Thursday morning gap lower (gaps are similar to an 
area void of supply near-term).  Meanwhile the Daily Interval 
chart has stochastic hinting lower with a possible test of upward 
trend.  Note though, how the daily chart and stochastics reached 
"oversold" levels on August 28th when the QQQ traded down to 
$23.83, the QQQ then traded rather sideways the next two 
sessions, then fell lower again to the $22.00 level over the next 
three days.

On a side note

If traders or investors ever think there aren't some "perma 
bulls" in the market, then here's some comments from Bernstein 
regarding "exceptional value" that exists in the market.

As reported by Briefing.com at 09:13 AM EST, before the market 
open.  Bernstein says that net loss carry forwards represent 
significant real shareholder value for some network equipment 
companies.  Net loss carried forwards (NLCFs) cannot be 
recognized until they are no longer expected to generate future 
losses, but the value is high as they will be used to offset 
future tax liabilities.  Lucent (LU) has more than $7 billion to 
offset tax liability and in unlikely to pay cash tax for the next 
7 years, which is worth $0.44 to LU; value also significant for 

Hmmmmm.... LU trading $1.26, PALM $0.80, NT $0.95 and COMS $4.92.

Folks... as an old broker during the hay days of the late 90's 
and early 2000, I'll tell you what I told a client regarding 
paying taxes (on capital gains, income, whatever).  It does 
little good to NOT pay taxes on a gain, when the alternative 
could be seeing profits slip away and then turn into a loss, 
especially when the sector's bullish % is overbought and the 
stock you're long begins giving "sell signals."

My grandfather once told me that when you're paying taxes, it 
means you're making money.  When you're not paying taxes, it 
means you're not making money.  

In essence, TAXES alone should never be the primary criteria in 
an investment decision.

For any investment firm to say there is "value" in any company 
simply because it has NLCFs is rather remarkable.  

If you ever wondered why the government did away with individuals 
being able to write off their credit card debt interest payment, 
or interest on car loans, it was because some Americans actually 
believed that building up euphoric levels of debt was "OK" 
because the interest paid was tax deductible.

These comments by Bernstein came before the market opened for 
trading.  The MARKET responded to Bernstein and flushed Lucent 
(NYSE:LU) $1.26 -23.6% to a new 52-week low.

Oh.  At 10:51 AM EST, S&P cut Lucent's corporate credit to B, so 
I'm thinking they didn't see any exceptional value in the NLCFs 

I wonder what Enron's and WorlCom's  NLCFs were/are worth?

Jeff Bailey

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Editor's Plays

Failed Target

The QQQ call play from two weeks ago ran into trouble when the
post 9/11 relief rally failed to appear. All hope is not yet
lost. If you still have your puts as insurance then you can 
continue the play for another week. Since the calls are for
October there is still five more weeks. Granted those are not
usually up weeks but then anything is possible.

The calls, which cost us an average of $.98 cents traded at $1.60
on Wednesday. There was plenty of time to get out for a nice
profit if a trader realized the market was going to tank. 

I don't expect that anyone took that exit however. We are all
greedy and our expectations were for higher numbers after the
initial post bounce sell off. The trouble was there was no
secondary bounce. 

I suggest exiting the play, at least the call side on any bounce
and for those who have the put insurance still open I would ride
it down to the wire on Friday. Look for a nice dip to inflate your
premiums and exit. 


CTSH - Cognizant

This directional play from last week rocked to over $64 on Monday
and then went sideways while the market was trending down the last
three days. It is holding at $62 and I am looking at that level as
an entry point. However, just like helium balloons are forced down 
in a down elevator, good stocks go down in a bad market. If the 
market drops I would watch for a lower low in CTSH to get back in. 


New Plays

PNRA - Panera Bread - long put

This stock has seen a cult following for the last two years but
some analysts say it has come too far too fast. Insiders are
selling in large amounts and when the CEO was questioned about
his sales on CNBC he tripped over his tongue and could hardly
complete a sentence. That was two weeks ago on August 29th when
it was trading at $30. Some analysts have compared it with 
Boston Chicken. As long as they keep building stores they can
increase sales but once the newness of those stores fades the
sales will die. 

The stock looks like it has formed a perfect head and shoulders.
A breakdown below the $25 level could spell a quick drop to $15. 
There was a volume print of 3,284,307 on Qcharts at 14:48 on Friday
just before the bottom fell out. If this is correct it would be
well over 10% of the outstanding 26 million shares. However I 
could not find it on a time and sales report and the total volume
for the day is showing to be 1.36 million shares. Either way
somebody was selling in quantity at the close. 

As a gambler I like the September $25 put for $1.00. A quick 
drop from the H&S pattern could double or triple it in a couple
days. However, any bounce or even $1.00 for a couple days would
make it worthless. 

The safest option is the Nov $25 put for $2.70 with plenty of
time to run or even the $22.50 for $1.75. If the target comes
to pass either will be a home run. 



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

Good Luck

Jim Brown  


Not So Fast
by Steven Price

Divergence.  This is the key word for today.  After the markets 
had been moving in unison, we saw the techs higher (not very 
often that I get to say that), the S&P 500 higher, but the Dow 
lower. The Nasdaq Composite finished up 11.72 to close at 
1291.40, while the NDX tacked on 8.82 to close at 923.83.  The 
Dow gave up 66.72 to close at 8312.69, while the S&P 500 added 
2.90 to close at 889.81.  We were actually on the brink of a 
significant technical breakdown in all four major indices, before 
today's action threw us a bullish bone. 

A bearish head and shoulders had been forming in the Dow, Nasdaq, 
NDX and S&P 500.  A neckline break looked as though it was about 
to occur at the Dow's 50% retracement level of its gains from 
July 24 to August 22, which is 8303.  Lo and behold, the Dow 
found support at this level once again, after doing so on five 
straight occasions last week.  So while the index was down on the 
day, the recovery from 8247 was actually somewhat bullish.  Maybe 
bullish isn't the word just yet, but it could have been much 

A similar phenomena occurred in the NDX and Nasdaq Composite, 
where the neckline breaks looked certain, only to find buyers 
committed enough to bring the averages positive on the day.  I'd 
like to think it was due to Adobe's earnings, released last 
night, which beat the street and sent the stock up $2.32 to 
$20.77. This would have been the easy explanation and I could 
have predicted a failure on Monday instead, after the news wore 
off.   However, if that were the case, the Nasdaq would not have 
dropped 9 points earlier in the day.  No, it appears the buyers 
showed up at a critical level, much like they did in the Dow.

What makes the support even more impressive is that it came after 
warnings from Honeywell (HON) and Lucent (LU).  Honeywell lowered 
estimates, saying, "We are revising our 2002 outlook because it 
is clear that the broad economic recovery is not materializing."  
Lucent warned that 4th quarter earnings would come in below 
expectations citing market softness and uncertainty about 
consumer spending.

Sounds pretty bearish, and yet there were still enough buyers to 
prevent this technical breakdown.  The good news came from the 
retailers, whose sales rose by 0.8 percent in August.  Even 
excluding auto sales, retail sales rose a better than expected 
0.4 percent.  This was in contrast to the University of Michigan 
Consumer Sentiment Index, which fell to 86.2 from 87.6 in August.  
This was the lowest number since last November.  The Current 
Conditions Index dropped to 95.9 from 98.5 in August and the 
Expectations Index dropped from 80.6 to 80.0.  These are also the 
lowest readings since November.

So why did the buyers come back.  That is the $64,000 question 
and next Tuesday's Cisco earnings will most likely give us the 
answer.  Adobe did say that they saw a rebound in their U.S. 
business, which is the first time we have heard that in a while.  
What's more, they cited the education market as a significant 
reason for that rebound.  Schools that are buying new software 
are most likely purchasing computers as well, and that is a 
pretty big customer.  However, this still amounts to government 
spending, rather than business spending, and Alan Greenspan is 
trying to reduce that as I write.  Maybe not specifically 
educational spending, but government spending in general.  The 
main problem for the techs has been lack of IT spending by 
businesses, and we have yet to hear about an increase in that 

I still have a hard time seeing a rebound, but somebody out there 
held serve today.  I will continue to look for a close under 8300 
in the Dow as a very bearish sign for the market.  However, I 
will also trade what I see and right now that is keeping me on 
the sidelines until I get confirmation.


Market Averages


52-week High: 10679
52-week Low :  7702
Current     :  8312

Moving Averages:

 10-dma: 8450
 50-dma: 8586
200-dma: 9635

S&P 500 ($SPX)

52-week High: 1226
52-week Low :  797
Current     :  889

Moving Averages:

 10-dma:  899
 50-dma:  903
200-dma: 1054

Nasdaq-100 ($NDX)

52-week High: 1782
52-week Low :  892
Current     :  923

Moving Averages:

 10-dma:  923
 50-dma:  959
200-dma: 1290


The Retail Index:  Consumer spending is alive and well.  For the 
month of August, anyway.  We got a 0.8% increase in retail sales 
this morning, which was above expectations.  The index jumped 
back over the 300 level and is looking at a double top formation.  
The second top actually traded higher than the first in intraday 
trading on Wednesday, but closed weakly near its lows.  If the 
sector can take out its recent high of 306.72 and stay there, it 
could possibly lead a recovery in the broader markets.  This is a 
big "IF," however.  It was turned back from this level after 
August 22nd and is one of the few sectors actually re-testing 
resistance, rather than support.  The index was reformulated 
earlier in the year, so the 52 week high/low levels are not 
reflective of current positioning and I have left them out below.

52-week High: n/a
52-week Low : n/a
Current     : 300

Moving Averages:

 10-dma: 294
 50-dma: 288
200-dma: 329


Market Volatility

The VIX just keeps hanging in there around 40.  The head and 
shoulders neckline test was successful across the board, and it 
appears that traders are not sure what to make of these levels.  
Even with 3 days of time decay ahead, premium levels have 
remained high.  The divergence between a sinking Dow and rising 
Nasdaq hasn't made the picture any clearer, and it will take both 
indices heading up for several days together to bring the 
premiums down.

CBOE Market Volatility Index (VIX) = 39.31 –1.41
Nasdaq-100 Volatility Index  (VXN) = 55.85 –0.59


          Put/Call Ratio  Call Volume   Put Volume

Total          0.89        397,403       352,949
Equity Only    0.71        298,430       211,055
OEX            1.00         29,293        29,223
QQQ            0.83         34,899        28,821


Bullish Percent Data

           Current   Change   Status
NYSE          43      + 0     Bull Confirmed
NASDAQ-100    34      - 8     Bull Correction
DOW           50      - 2     Bull Correction
S&P 500       51      - 1     Bear Confirmed
S&P 100       46      - 2     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  1.25
10-Day Arms Index  1.41
21-Day Arms Index  1.33
55-Day Arms Index  1.31

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       1523          1168
NASDAQ     1743          1404

        New Highs      New Lows
NYSE         13              58
NASDAQ       27             108

        Volume (in millions)
NYSE     1,487
NASDAQ   1,248


Commitments Of Traders Report: 09/10/02

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 reduced long positions and added to shorts, 
reflecting an increase of almost 8,000 short contracts overall.  
Small traders increased both sides of the equation considerably, 
leaning long by an extra 3,000 contracts.

Commercials   Long      Short      Net     % Of OI 
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%)
09/10/02      426,230   470,537   (44,307)   (5.0%)

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
08/20/02      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%
09/10/02      166,696    85,259    81,437     32.3%

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

Commercials added to both long and short positions, for a net 
reduction of 1,000 contracts to the short positions.  Small 
traders also added to both sides, netting out about the same as 
they finished the last period.

Commercials   Long      Short      Net     % of OI 
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%)
09/10/02       53,309     58,745    (5,436) ( 4.9%)

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
08/20/02       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%
09/10/02       14,024    10,494     3,530    14.4%

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


Commercials added slightly to both sides, leaving their long 
contract positions slightly higher by about 800 contracts.  Small 
traders beefed up both sides, with an extra 1,000 short contracts 

Commercials   Long      Short      Net     % of OI
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%
09/10/02       22,946    14,936    8,010      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
08/20/02        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%)
09/10/02        7,568    10,129    (2,561)   (14.5%)

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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The Bigger Picture
by Steven Price

Pnra seems to be at a juncture at 25.13. It  appears it is ready 
to drop another leg to 20.00 my question is if I am reading the 
charts correctly for such at drop  It appears to have some 
support at 24.70  ?

PNRA - Panera Bread - $24.98

I received the above email regarding Panera Bread (PNRA), which 
has been the darling of many analysts recently.  The reader 
correctly identifies some pivotal support in the stock in 
assessing it as a short candidate.

The daily chart on PNRA shows the stock testing a pivotal level, 
with support just below $24.  The stock has crossed below its 200 
day moving average, and the last time this happened in July the 
stock gave up about $5 to where it is trading right now. The 
recent drop is actually more convincing.  It has come with a 
series of lower lows, rather than one big market sympathy drop.  
It has also come after earnings were released and analysts have 
had time to digest the future profit potential. The same store 
sales and earnings, released at the end of August, were actually 
pretty good.  However, it has not been enough to keep the yeast 

Panera Bread Daily Chart


A look at the longer-term charts actually shows an even more 
significant rollover.  When a trader is considering shorting a 
stock, he/she wants to see a couple of things.  Not only should 
the daily and intraday charts show weakness, but it helps if the 
long-term chart is showing weakness as well.  A look at the 
weekly chart shows an even smoother rollover from highs around 
$35.  The blue line is the same line from the daily chart, and 
you can see the significance of this level in the broader 
picture.  While a $20 target can be used on a break below $24, it 
is derived from the last level of resistance on the way up. This 
signals support because there had to be enough buyers at that 
level to overcome quite a bit of selling pressure.  The next real 
level of support on a downtrend is $15.

Panera Bread Weekly Chart


I have included the monthly chart as well, just to demonstrate 
how crucial these levels are in the big picture.  The bottom line 
is that all of the short and long term charts are painting the 
same picture.  A break below the recent low of $23.96 on July 24 
and a close below this level, look like an excellent short 
opportunity in PNRA.  

PNRA Monthly Chart


CSCO - Cisco Systems - $13.05

Any comments on where to open a long or short position on CSCO 
would be appreciated.

Thanks, Ben

Cisco will be on a lot of traders' minds this week as they get 
set for earnings on Tuesday.  The stock has been mired in a range 
between $11.50 and $15 since June.  The current price of $13.05 
puts it close to the center of this range and provides little 
directional guidance.  The last time CSCO released earnings there 
was some bullish action leading up to the release and then not 
much happened afterward that would provide profits for an options 
trader.  I responded to numerous emails about buying and selling 
straddles on the stock.  I thought they were too cheap to take a 
short chance on, but that the long move had already occurred and 
I didn't like the long straddle.  Sometimes the best trades are 
the ones that you don't make, and this turned out to be the case 
last quarter.  A look at Cisco's chart shows a couple of ranges 
in which to trade.  The problem with trading the stock from this 
level is that the next buy point doesn't come until the stock 
breaks $14, the point of its last resistance.  Just above that is 
$15 resistance, which doesn't provide room for a lot of profit, 
especially with time decay to fight in the calls. However, if we 
see the same bullish move up to $15 prior to earnings, a rollover 
from that level may be the best bet.

The best ranges seem to be a bounce from $11.50 to $15, a break 
to the upside from $15 to 17.50, the move from $17.50 to $20, and 
then up to $22 from there.  Because we are right in the middle of 
the broadest range, I would look for disappointing earnings, or 
accompanying statements, to provide the drop needed for the 
$11.50 to $15 range from the bottom, or for good news to drive 
the stock up to $15 and then look for a rollover back down to 

Chart of CSCO


Please send your questions and suggestions to: 
Contact Support 


Market Watch for the week of September 16th

Major Earnings This Week

Symbol  Company               Date           Comment      EPS Est

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


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

AAUK   Anglo American PLC    Tue, Sep 10  -----N/A-----        N/A
BBY    Best Buy              Tue, Sep 17  Before the Bell     0.18
BMET   Biomet                Tue, Sep 17  Before the Bell     0.24
CLL    Celltech Group Plc    Tue, Sep 17  -----N/A------       N/A
CPRT   Copart                Tue, Sep 17  After the Bell      0.17
IBC    Interstate Bakeries   Tue, Sep 17  -----N/A------      0.58
KR     Kroger                Tue, Sep 17  -----N/A------      0.37
ORCL   Oracle                Tue, Sep 17  After the Bell      0.07
PIR    Pier 1 Imports        Tue, Sep 17  Before the Bell     0.23

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

BSC    Bear Stearns          Wed, Sep 18  Before the Bell     1.21
CC     Circuit City Stores   Wed, Sep 18  -----N/A------      0.00
DRI    Darden Restaurants    Wed, Sep 18  -----N/A------      0.39
E      ENI SpA               Wed, Sep 18  -----N/A------       N/A
GIS    General Mills         Wed, Sep 18  Before the Bell     0.53
MLHR   Herman Miller         Wed, Sep 18  After the Bell      0.03
KBH    KB Home               Wed, Sep 18  Before the Bell     1.67
LEN    Lennar                Wed, Sep 18  Before the Bell     1.78
NKE    Nike                  Wed, Sep 18  Before the Bell     0.80
WOR    Worthington Indstrs   Wed, Sep 18  Before the Bell     0.24

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

COMS   3Com                  Thu, Sep 19  After the Bell     -0.03
CTAS   Cintas                Thu, Sep 19  -----N/A------      0.36
CAG    ConAgra Foods, Inc.   Thu, Sep 19  Before the Bell     0.40
FDX    FedEx Corp            Thu, Sep 19  08:00 am ET         0.49
JBL    Jabil Circuit         Thu, Sep 19  After the Bell      0.14
MDZ    MDS                   Thu, Sep 19  Before the Bell     0.18
PAYX   Paychex               Thu, Sep 19  Before the Bell     0.19
TEK    Tektronix             Thu, Sep 19  After the Bell      0.07

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

CCL    Carnival              Fri, Sep 20  -----N/A------      0.77

Upcoming Stock Splits In The Next Two Weeks...

Symbol  Company Name              Ratio    Payable     Executable

BLUD    Immucor Inc.              3:2      09/13       09/16
DORL    Doral Financial           3:2      09/14       09/16

Economic Reports This Week

Let this market watch help to excavate the ruins of the bear 
market over the next week.


Monday, 09/16/02
Business Inventories(BB)Jul  Forecast:   0.2%  Previous:     0.2%

Tuesday, 09/17/02
Industral Production(DM)Aug  Forecast:   0.2%  Previous:     0.2%
Capacity Utilization(DM)Aug  Forecast:  76.2%  Previous:    76.1%

Wednesday, 09/18/02
CPI (BB)                Aug  Forecast:   0.2%  Previous:     0.1%
Core CPI (BB)           Aug  Forecast:   0.2%  Previous:     0.2%
Trade Balance (BB)      Jul  Forecast:-$37.0B  Previous:  -$37.2B

Thursday, 09/19/02
Initial Claims (BB)   09/14  Forecast:    N/A  Previous:     426K
Housing Starts (BB)     Aug  Forecast: 1.650M  Previous:   1.649M
Building Permits (BB)   Aug  Forecast: 1.690M  Previous:   1.712M
Current Account (DM)    Sep  Forecast:    2.5  Previous:     -3.1

Friday, 09/20/02
Treasury Budget (AB)    Aug  Forecast:-$55.0B  Previous:  -$80.0B

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

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Storm Warning

We got several different terrorist warnings and several profit 
warnings on Friday but we did not get a storm warning, unless you 
count the new El Nino alert. Considering the perfect storm brewing 
in the markets we might have been better off with a civil defense 
alert instead. 

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Contact Support
The Option Investor Newsletter                   Sunday 09-15-2002
Sunday                                                      2 of 5

In Section Two:

Stock Picks: SUNW, GNSS, CSCO
Daily Results
Call Play of the Day: INVN
Put Play of the Day: FDX
Dropped Calls: CVG, OMC
Dropped Puts: AA, EXC


The Sun Will Come Out Tomorrow

Stock Pick: SUNW - Sun Microsystems, Inc  - Close: $3.10 
Strategy:   Long stock with put-option insurance 

We're not talking about the song sung by little orphan Annie.   
Reading some of the recent articles on SUNW you might picture its 
enthusiastic CEO Scott McNealy trying to lift the spirits of his 
employees and the company's stock price.

We hope Scott has been practicing because his company's earnings 
news have been hitting some sour notes with investors.  There is 
no mistaking that SUNW has been hit hard in the tech downturn but 
it is still fighting to gain market share.  They are the leading 
high-end server maker.  Unfortunately for SUNW they run with a 
tough crowd.  Their main competitors are IBM, HPQ and DELL but 
they occupy a niche that sets them apart. 

Despite the precipitous drop in their share price from its highs, 
SUNW's market cap is still above $10 billion and they are 
currently selling at less than 1x sales with over $6 billion in 
cash in the bank. They are not in any danger of going under but 
they need to re-convince Wall Street that they can compete. They 
were considered fairly valued last year at 10x revenues which for 
the year ended 6/30/02 were $12.5 billion.  

Recent news in late August had the share price dropping again 
when SUNW lowered their revenue forecasts for their fiscal Q1.  
Evidently corporate America is still not in the mood to spend 
money on their I.T. budgets.  This has brought the beleaguered 
share price extremely close to where many put the company's book 
value at $3.01 per share.

Yet not everyone agrees with this number.  A Salomon Smith Barney 
analyst has put a $2.00 price target on the company's stock price 
even while putting his own tangible book value for the company at 

In spite of all this negativity we believe the recent descent in 
the share price, so close to book value (where ever you want to 
value it) makes for an attractive investment.  SUNW is already 
trying to convince analysts that it will be able to snare new 
customers in new markets through new sales methods.  We all know 
that the economic recession won't last forever and tech spending 
will come back.  If you believe McNealy then SUNW will be 
stronger than ever when the economy returns.  Given the current 
share price, we don't see a lot of risk but even if Scott's wrong 
our strategy should keep any potential losses to an absolute 

SUNW's high share price in 2000 was $65. While we do not expect 
them to reach that again any time soon it is not unreasonable to 
assume they could get back into double-digit territory over the 
next 24-36 months. 

The play as we see it is to go long SUNW stock at our target of 
$3.00 and go long one contract of the Jan-2003 $2.50-strike puts 
SUQ-MZ for each 100 shares you are long.  As of Friday these puts 
settled at $0.45 (ask). 

There is no requirement to go long the put but it does prevent 
all but a very minimal loss should something unexpected happen to 
SUNW.  We like to think of it as insurance on our investment.

Here is how we see the possible outcomes for this play:

Option 1: 
If SUNW is not above $4 by the end of January 2nd, 2003 - close 
both positions and exit the play.

Option 2: 
If SUNW is below $3 on Jan-2nd then you have the option of 
closing the put for a potential profit and lowering your basis in 
the long stock play by the amount of the put premium received or 
closing both positions and exiting the play. 

Option 3: 
If SUNW is above $4.00 by Jan-2nd then close the put position for 
any remaining premium and set a stop loss on SUNW at your entry 
point of $3.00 plus any short fall on the put premium. We would 
aim to keep the $3.50 level our max ($3.00 per share plus 50 
cents for the option).

Weekly Chart of SUNW:



New Signs of Hope

Stock Pick: GNSS - Genesis Microchip, Inc  - Close: $9.30 
Strategy:   Long stock with put-option insurance 

In a year fraught with bad news spreading across the board for 
semiconductor companies we might be seeing the very beginning of 
a potential turnaround - at least for this company.

Genesis Microchip (GNSS) is a leading producer for chips in the 
digital video business.  Just think big-screen TV's and flat-
panel monitors and you'll know where to find chips from GNSS.  
2001 was a tough year on Wall Street but demand for these 
products were a boon for shares of GNSS.  The stock went from 
$9.25 to $66 in 2001.  Unfortunately after the holiday shopping 
season was over investors were quick to take some money off the 

And boy did they ever!  Shares of GNSS sank like a roller coaster 
that had just crossed the big peak at the start of the ride.  The 
company that had appeared immune to the economic recession was 
suddenly announcing lower revenue estimates for their coming 

The last six months have been very tough on the semiconductor 
sector.  Recently it seems that every brokerage house with a 
research department has downgraded the group and if that wasn't 
enough some of them seem to reiterate their bearish stance any 
time the SOX started to rally.  The good news is that GNSS may be 
able escape the downward pressure of the falling SOX index, or 
better yet, maybe it will help lead the way higher for when the 
group does recover.

This Thursday (Sept. 12th) after the close, GNSS announced that 
they would actually beat current Wall Street estimates.  What's 
ironic is that GNSS was the one to lower these estimates just a 
few months ago but that's all part of the game.  In the company's 
recent conference call, the CEO James Donegan told analysts that 
the company would bring in revenues of $45M to $46M for the 
quarter ending in September.  This is about $3M more than the 
latest forecasts in July.  

The company expects to end the quarter with a 25% to 28% 
sequential rise in total shipments.  The positive developments 
were due to a decline in previous inventory from buyers and the 
fact that prices for flat-panel displays had continued to drop 
making them more attractive to consumers.

Wall Street applauded the news with an 8.5% gain in the stock 
price on Friday and a number of broker upgrades based on the new 
revenue numbers.  This really shouldn't be a surprise considering 
that we are in the back-to-school shopping season and the 
holidays are just around the corner.  When money managers decide 
to step back into the tech arena GNSS will probably be a strong 

The stock is trading below book value of $12.15 per share.  Plus, 
shares of GNSS are currently trading at 1.2x sales with a P/E of 
less than 15.

Chart readers will also be encouraged to note that GNSS appears 
to be building a reverse-head-and-shoulders pattern and is 
quickly approaching the neckline.  An upside breakout would not 
only breakthrough the neckline of the pattern but also through 
the bottom of its gap-down window from its June drop.  If this 
were to occur we could see a potential rush of short-covering.  
These potential technical developments may be good news for 
short-term traders but we are interested in suggesting a position 
before the breakout occurs.

Given what could be the beginning of a recovery for GNSS we would 
not be surprised to see shares of this stock trading between $20 
and $30 in the next 24 to 36 months if not sooner.  To capture 
this move and keep our risk at a minimum we offer two potential 
strategies and both involve going long the stock and buying a 
protective put to reduce risk.

Option 1:
Shares of GNSS closed at $9.30 on Friday.  One way to play this 
is to go long the stock and for every 100 shares you buy also 
purchase a March 2003 $7.50 put (QFE-OU).  As of Friday, these 
options were $1.55 ask and we have six months to see if the play 
works out.

The breakeven point would be $10.85 for the stock price.  When 
March 1st, 2003 rolls around, if GNSS is below $10.85 then sell 
both positions.  If GNSS is above $10.85, then close the put and 
place your stop loss on the stock at $10.85 or higher or wherever 
you believe is appropriate based on the stock's current value.

Option 2:
The second alteration on this strategy would be to buy the March 
2003 $10.00 put (QFE-OB) for every 100 shares of stock you 
purchase.  These were trading around $2.95 as of Friday's close 
and might seem a bit expensive but the December 10's were $2.30.  
With the March contracts we would have six months to see if the 
play progressed as planned but the breakeven point, based on 
Friday's numbers, would be $12.25.  Of course if GNSS is 
significantly below the $10 mark the put is likely to be more 
valuable with a higher delta than the $7.50 strikes.

If GNSS is above $12.25 then close the put and adjust your stop 
loss on the stock accordingly.

Chart of GNSS:



No Competition

Stock Pick: CSCO - Cisco Systems - $13.05 
Strategy: Long stock with put insurance 

Cisco Systems has been hit hard in the tech downturn but is
continuing to gain market share. They are the leading computer
Networking firm and have continued to take market share back
from many of the upstarts in the sector like JNPR and SCMR.
Their main competitors were LU and NT, but clearly with NT
trading for less than $1.00 and LU likely to join it in the
very near future, CSCO really has no competition.

Their market cap is currently $95 billion and they are currently
selling at just over 3x sales with over $12 billion in cash in
the bank and growing quarterly. Most importantly, the company
continues to generate actual earnings.

Their high share price in 2000 was above $80. While we do not
expect them to reach that again in the near future it is
reasonable to assume they could get back to $22.00 over the next
24-36 months.  That would make for a nice percentage return.

Of course in order to start moving significantly higher, CSCO is
going to need to be able to show evidence of improvement in the
IT spending environment, which has proved quite elusive over the
past couple years.  Besides the fact that it appears to be
building strong support in the $11-12 range, it is hard to go
wrong with an industry leader, with well-respected management
and a strong balance sheet.

The play as we see it is to go long CSCO stock at our target of
$12.00-13.00 and go long one contract of the Jan-2003 puts
CYQ-MV at $1.65 for each 100 shares you are long. 

There is no requirement to go long the put but it does prevent
all but a very minimal loss should something unexpected happen
to CSCO. 

Option 1: If CSCO is not above $15 by Jan-2nd close both
positions and exit the play.

Option 2: If CSCO is below $12 on Jan-2nd then you have the
option of closing the put for a slight profit and lowering your
basis in the long stock play by the amount of the put premium
received or closing both positions and exiting the play. 

Option 3: If CSCO is above $15.00 by Jan-2nd then close the put
position for any remaining premium and set a stop loss on SUNW
at your entry point of $12.00-13.00 plus any short fall on the
put premium. ($13.50 max) 

Chart of Cisco Systems, Weekly


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For Best Alignment view in Courier Ten Font

CALLS              Mon    Tue    Wed   Thu   Week

AZO      74.42    1.91   0.45  -1.05 –2.28   1.62  New, pullback
CVG      18.89    0.56   0.65   0.04 -0.45   0.99  Drop, booooring
INVN     35.76   -0.47   0.07   0.97  0.91   3.63  New, thru resistance
LLL      56.98    1.99   0.11   0.17 –0.11   4.13  going strong
MSFT     47.91   -1.44   1.09  -1.75 –1.39   0.66  held up
OMC      61.69    2.04   1.20   0.89 –0.13   1.99  Drop, profit
TRMS     46.20   -1.05   0.17  -1.08 –0.84   0.41  found support


AA       21.99    0.71   0.46  -0.28 –1.10  -0.60  Drop, profit
AET      39.25    0.19  -0.57  -0.17 –1.75  -2.39  still broken
AGN      53.05   -0.61  -1.28  -1.21 –0.14  -4.00  keeps falling
AVY      60.00   -0.39   0.25  -0.31 –0.67  -2.00  New, below support 
CMA      53.50    0.43  -1.53  -1.20 –2.00  -4.30  weak rebound
CTX      49.80    1.59  -0.53  -0.53 –2.10   0.00  foreclosed
EXC      43.86    0.58  -0.22  -0.12 –1.62  -0.54  Drop, sideways
FDX      44.50   -0.03  -0.40  -0.50 –0.83  -1.93  New, breakdown
GE       27.05    0.63  -0.12  -0.36 –1.00  -1.10  leading lower
MTG      55.23    0.69  -1.09  -1.10 –2.07  -3.07  still heavy
TXU      44.30    0.09  -1.19  -0.55 –1.47  -1.50  new entry point

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Call Play of the Day:

INVN – InVision Technologies $35.76 (+3.18 last week)

See details in play list

Put Play of the Day:

FDX – FedEx Corporation $44.50 (-2.01 last 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.


CVG $18.89 (+0.95) Despite the fact that our CVG play managed
to dodge the weakness in the broad markets last week, we're
dropping it due to a lack of interest.  After testing the $19
level on several occasions, it is clear the bulls don't have
enough enthusiasm to get the job done, and with the deterioration
in the broad market, we don't want to get caught in a selloff.
There are better plays available and there is no sense having
capital tied up in a play that just isn't moving.


OMC $61.69 (+1.69) OMC treated us right last week, moving up from
the $61 level almost to $65, before the broad market weakness
dragged it back to earth.  In order to preserve gains that were
on the table, we tightened our stop to $62 last night and it seems
like that was a prudent move.  The stock fell sharply at the open
on Friday and was never really able to stage a meaningful rebound
going into the close.  With our violated stop and daily
oscillators rolling over from overbought, we're dropping the play
this weekend to make room for stronger candidates.  Use any sort
of rebound on Monday to exit open positions at a better level.


AA $21.99 -0.78 (-0.60 for the week) Short Play Alcoa has behaved 
admirably as the sector has suffered from oversupply, and falling 
prices.  The loss of China as a customer, which instead became a 
competitor, has also beaten up the sector.  We are removing this 
successful play to make room for others with bigger profit potential.  
For those readers already in the play, a stop loss of  $23.75, just 
above yesterday's high looks good.  We will no longer be updating the 
play, so consider it closed for a profit. However, if you wish to stay 
short AA, we have no argument.


EXC $43.86 (-0.54) Thursday's price action had EXC looking like
it would finally break down under the $44 support level.  While
the stock did break fractionally below that level, we think it
should have been weaker, given the selling in the broad market.
EXC remains mired in the fairly tight trading range of the past 2
weeks, and rather than spend any more time wishing it would break
down, we're going to drop it this weekend.  Use any weakness on
Monday to exit open positions and look to deploy the cash in
higher-odds plays.


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 09-15-2002
Sunday                                                      3 of 5

In Section Three:

New Calls: AZO, INVN
Current Calls: MSFT, TRMS, LLL
New Puts: AVY, FDX

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AZO - Autozone - $74.42  +1.34 (+1.13 for the week)

Company Summary:
AutoZone sells auto and light truck parts, chemicals and 
accessories through 3,052 AutoZone stores in 44 states plus the 
District of Columbia in the U.S. and 27 AutoZone stores in Mexico 
and also sells the ALLDATA brand automotive diagnostic and repair 
software. On the Web, AutoZone sells diagnostic and repair 
information through alldatadiy.com, and auto and light truck 
parts through AutoZone.com. (source: company release)

AZO has been hanging out on the OI watch list looking for a good 
entry point.  With each higher high and higher low, we've tried 
to avoid buying the top.  The most recent technical breakout saw 
a triple top point and figure breakout from a bullish wedge 
formation.  This wedge was the second in a row on the point and 
figure, and now the stock appears to be forming a third.  The 
consistency in the pattern is quite convincing as the last two 
wedges were formed with a three box up/four box down pullback, 
before an extended run to the upside. This latest pattern showed 
only a three box reversal before the recent bounce, although a 
trade of $75 will be needed to complete the PnF reversal.  The 
ascending bullish support line on the PnF chart has also served 
as support on the last three pullbacks, lending another element 
to the consistency in the pattern. The triple top had us looking 
for a pullback to support above the 200-dma as a long entry.  We 
got that pullback on Wednesday and Thursday.  We also got the 
show of support on Friday, as AZO rebounded just above the 200-
dma, and closing near its high of the day.    The series of bull 
flags has formed a larger ascending wedge, which had flattened 
out at $75.60.  The latest breakout pushed through that flat-top.   
The rising trend line joining the lows from July, August and 
September has also shown remarkable consistency, and is now above 
the 50-dma and 200-dma.  We will look for this trend line as 
support for the play.

The management of the company also seems to feel this level is a 
good point to go long, as it re-purchased $300 million worth of 
stock when it was at this level in July.  That was on the way 
down with the rest of the broad market swoon in July.  The 
recovery, however, has shown a consistent series of higher highs 
and higher lows, resulting in the latest pullback referenced 
above. We like the current level for long entry on AZO, with an 
initial target of $81, where there was resistance in June.  If 
the stock can break through that level, it will see all-time 
highs and we're not sure where it might stop, but the bullish 
vertical count of  $91 could be an indication.  We will place our 
stop loss at $71.00, just below recent support and the 200-dma.

*** September Contracts Expire In 1 week ***

BUY CALL SEP-70 AZO-IN OI= 2287 at $4.90 SL=2.50
BUY CALL SEP-75 AZO-IO OI= 2537 at $1.35 SL=0.75
BUY CALL OCT-70 AZO-JN OI=  203 at $7.20 SL=3.60
BUY CALL OCT-75 AZO-IO OI=  480 at $4.00 SL=2.00

Average Daily Volume = 556 K


INVN – InVision Technologies $35.76 (+3.18 last week)

Company Summary:
InVision Technologies is a provider of FAA-certified explosives
detection systems (EDSs) used at airports for screening checked
passenger baggage.  The company's EDS products are based on
advanced computed tomography (CT), which is the only technology
for explosives detection that has met the FAA certification
standards.  INVN was the first manufacturer and is one of only
two whose EDS products have been certified by the FAA for
screening baggage.  Through the end of 2001, the company had
shipped 18 EDS units for installation at United States airports
and 103 units for installation in airports outside of the United

Why We Like It:
Quick!  Name just one NASDAQ-listed stock that is up more than
1000% over the past 12 months.  It doesn't take a rocket scientist
to know that the stock couldn't possibly have come out of the
Telecom or IT sectors.  Following the attacks of last September,
shares of INVN launched out of a base near the $3 level and by
early March had reached as high as $50 as momentum investors
gobbled up shares in anticipation of rapid growth in the
explosives-detection market.  After being pulled lower last
spring, the stock built another base in the $20-25 area and since
then has been steadily working higher.  The PnF chart is a thing
of beauty, as INVN has generated one Buy signal after another
since late May.  Buying volume ticked up significantly over the
past 2 days (nearly triple the ADV on Friday) as INVN pushed
through the $35 resistance level and generating a fresh Buy signal
on the PnF chart.  Daily Stochastics are in steep ascent here,
and even though they are entering overbought territory, this has
the looks of a powerful momentum move.  While we'd prefer to get
a pullback to the $34 intraday support level ($33.25 would be
even better), we may just have to enter on continued price
strength.  If looking for a momentum entry, wait for INVN to power
through the $37 resistance on continued heavy volume.  Set stops
at $32.50, as a drop under that level would invalidate last
week's breakout move.

*** September contracts expire next week ***

BUY CALL SEP-35 FQQ-IG OI=4585 at $2.05 SL=1.00
BUY CALL OCT-35*FQQ-JG OI=2781 at $4.10 SL=2.50
BUY CALL OCT-40 FQQ-JH OI=1951 at $1.75 SL=1.00

Average Daily Volume = 917 K

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MSFT - Microsoft - $47.91 +0.76 (-1.21 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 rebounded from its PnF bullish support line today, the 
same way it has on each of the previous 5 times it tested that 
line.  A trade of $46 would be needed to break this trend and 
this would coincide with our stop loss.  Adobe's earnings 
surprise was positive for the software sector and Microsoft is 
the biggest fish in the pond.  We like the show of support and 
the potential upside profit, making for a good risk/reward 
scenario.  With Microsoft still selling the XP operating system 
at a record clip and a new OS on the way, the long-term prospects 
still look great for the company.  With Cisco's earnings coming 
out on Tuesday, anything positive can give the techs a real 
boost.  Today's rally into the close by both the Nasdaq and NDX 
looks bullish, as the indices approached a head and shoulders 
breakdown and found support.  A continued rally on Monday should 
keep MSFT heading in the right direction. We will leave our stop 
loss at $46, where the stock has strong support.  New entries 
should look for a trade above today's high of $48.26.

*** September Contracts Expire In Less Than 2 Weeks ***

BUY CALL SEP-45    MQF-II OI= 13422 at $3.40 SL=1.70
BUY CALL SEP-47.50 MQF-IW OI= 15796 at $1.50 SL=0.75
BUY CALL OCT-45    MQF-JI OI=  5825 at $4.90 SL=2.50
BUY CALL SEP-47.50 MQF-JW OI=  7211 at $3.20 SL=1.60

Average Daily Volume = 45.8 mil


TRMS - Trimeris - $46.20 +0.82 (+0.90 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 showed a nice bounce at $45.00 support, trading down to 
$45.01 before finding buyers.  It also found support from the 50-
dma of $44.77 just below. The recent dip appears to have found a 
higher low above the recent consolidation between $43 and $45. 
While the Biotech Index (BTK.X) has rolled over from its 50-dma, 
TRMS instead used it as a springboard.  The company will be 
presenting data at the end of the month that shows great 
tolerance of its HIV drug Fuzeon, previously known as T-20, which 
will be the first drug of its kind to hit the market.  This type 
of drug, known as a fusion inhibitor, prevents HIV from entering 
healthy cells, as opposed to other HIV drugs which interrupt the 
replication of the virus once it is inside.  There is incredible 
demand for the product, as patients who have become resistant to 
other therapies now have somewhere else to turn.  In fact the 
demand is outstripping supply right now.  Of course at $15,000 
per patient per year, I'm sure production will be ramped up to 
meet supply.  In addition to the data on Fuzeon, they will also 
be presenting evidence of the effectiveness of another drug in 
the pipeline, designated T-1249.  The conference they are 
presenting at (ICAAC) is one of the largest of its kind and 
attracts many analysts looking for the next hot product.  The 
stock should get a big boost at that point and the technicals 
look good for a run to $50 before then.

*** September Contracts Expire In 1 week ***

BUY CALL SEP-40 RQM-IH OI=    35 at $6.70 SL=3.50
BUY CALL SEP-45*RQM-II OI=   129 at $2.25 SL=1.10
BUY CALL OCT-40 RQM-JH OI=   337 at $7.90 SL=4.00
BUY CALL OCT-45 RQM-JI OI=   218 at $4.40 SL=2.20

Average Daily Volume = 556 K


LLL - L-3 Communications Holdings $5.98 (+4.14 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:
Traders looking for a robust call play in this topsy-turvy market
would have a hard time doing better than our LLL play.  The
Defense sector (DFI.X) has been consolidating its recent advance
near the $575 level and with the continuing war rhetoric coming
out of Washington, could be setting up for another leg higher.
LLL hasn't been content to wait for the DFI index, and has been
stubbornly powering higher over the past week.  After stumbling
a bit over the past few days with the $55-56 resistance level, it
looks like the stock is ready to push even higher.  Even with the
broad market weakness on Friday, the stock dipped right to the $55
level before reversing and heading higher throughout the day,
closing very close to the high of the day.  We were looking for an
entry on a pullback to the $55 level, and the market conveniently
stepped forward and gave it to us, just like we asked.  The next
overhead resistance of significance appears to be $58.50, followed
by $60.  A pullback early next week can be used for new entries,
so long as the bounce comes above the $55 level.  If looking to
trade a breakout, a move through Friday's high ($57.10) looks
attractive, but look out for profit-taking as LLL approaches its
next level of resistance.  Keep stops set at $54.

*** September contracts expire next week ***

BUY CALL SEP-55 LLL-IK OI=1904 at $2.70 SL=1.25
BUY CALL OCT-55 LLL-JK OI=1845 at $4.40 SL=2.75
BUY CALL OCT-57*LLL-JY OI=2264 at $2.90 SL=1.50
BUY CALL OCT-60 LLL-JL OI=1927 at $1.80 SL=1.00

Average Daily Volume = 2.00 mln


AVY - Avery Dennison - $60.00 -0.72 (-2.00 for the week)

Company Summary:
Avery Dennison is a global leader in pressure-sensitive 
technology and innovative self-adhesive solutions for consumer 
products and label materials. Based in Pasadena, Calif., the 
Company had 2001 sales of $3.8 billion. Avery Dennison develops, 
manufactures and markets a wide range of products for consumer 
and industrial markets, including Avery-brand office products, 
Fasson-brand self-adhesive materials, peel-and-stick postage 
stamps, battery labels, reflective highway safety products, 
automated retail tag and labeling systems, and specialty tapes 
and chemicals.

Why We Like It:
Avery is suffering from a lack of business cutbacks much like we 
hear from the tech giants.  Business spending is business 
spending.  Budget cutbacks affect everything from employee 
salaries to PCs to office supplies.  As more businesses fold up 
shop, the market for Avery's products shrinks.  The stock was 
downgraded last month.  Salomon Smith Barney lowered the rating 
from "buy" to "outperform." The analyst note based the downgrade 
on valuation and a defensive outlook for packaging stocks.

From a technical standpoint, AVY had struggled mightily at $65 in 
the middle of August, before falling back into the low 60s.   It 
found support from a rising 200-dma and 50-dma.  It looked very 
heavy as it tested those levels throughout the past week.  
Today's breakdown took it below both of them. The low of $59.25 
shook out some of the support at $60.  Although the stock closed 
at $60, this level now looks like resistance, rather than its 
recent role as a level of support.  A look at the short term 
charts (1-5 min) show the stock being repeatedly turned back from 
efforts to hold over this level throughout the day after breaking 
through it this morning.  The trade of $60 created a new point 
and figure sell signal.  The current bearish vertical count is 
$55, but it is still being added to negatively by the current 
column of "O"s.  Each $1 box down will decrease the target by $2.  
Right now the stock is sitting right on its bullish support line 
and a trade of $59 would be a breakthrough to the downside.   
There is currently some support just below $57, which the stock 
will have to get through before testing the first major support 
level is between $52 and $53.  We will target $53 on the play.  
We will use a stop loss of  $63, which acted as resistance during 
the last week, however more conservative traders may want to 
place stops at $62, just above Thursday's high and the 10-dma.

*** September Contracts Expire In 1 week***

BUY PUT SEP-60 AVY-UL OI= 53 at $1.15 SL=0.50
BUY PUT OCT-60*AVY-VL OI= 67 at $3.10 SL=1.60

Average Daily Volume = 547 k


FDX – FedEx Corporation $44.50 (-2.01 last week)

Company Summary:
FedEx Corporation is a global provider of transportation,
e-commerce and supply chain management services.  Services
offered by FedEx companies, through over 215,000 employees and
contractors, include worldwide express delivery, ground
small-parcel delivery, less-than-truckload freight delivery,
supply chain management, customs brokerage, and trade
facilitation and commerce solutions.

Why We Like It:
If the bearish news coming out of the Trucking sector is any
indication, the economic recovery has not yet arrived.  First
came the CNF bankruptcy 2 weeks ago and multiple carriers have
been warning about lower than expected package shipments.  If
there are less shipments, then that mush mean that there is less
product that needs to be shipped.  Translation: consumers and
businesses are not buying as much because they don't see the
demand.  The impact of this bearish news can be seen in the recent
price action in the DOW Transports, which appear close to breaking
down under the $2200 level.  That breakdown will open the door for
a test of the July lows below $2100.  Shares of FDX have been
under pressure with the rest of the sector and came to rest on
Friday less than $1 above the intraday low on July 24th.  If FDX
trades below $44, it will put the PnF chart back on a Sell signal
with a double-bottom breakdown and will have the bears eyeing
strong support near $40 as an obvious target.  On a breakdown, we
can use a trade under $43.50 to trigger new momentum-based
entries, but only if the Transports are continuing to weaken below
the $2200 level.  In the meantime, we can use failed intraday
rallies near the $46 resistance level to initiate new positions
in anticipation of the eventual breakdown.  Note that FDX
announces earnings on September 19th, so this will be a short
play.  Place stops initially at $47, just above strong resistance.

*** September contracts expire next week ***

BUY PUT SEP-45 FDX-UI OI=1910 at $1.45 SL=0.75
BUY PUT OCT-45*FDX-VI OI=4754 at $2.90 SL=1.50
BUY PUT OCT-40 FDX-VH OI= 404 at $1.20 SL=0.50

Average Daily Volume = 1.89 mln

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Contact Support
The Option Investor Newsletter                   Sunday 09-15-2002
Sunday                                                      4 of 5

In Section Four:
Current Put Plays: AET, CTX, AGN, CMA, GE, MTG, TXU
Leaps: Who Won?
Traders Corner: Charting – Trendlines; Types & Construction
Traders Corner: Directional Spreads: Grab A Leg and Make A Wish
Traders Corner: Learning Curve

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Company Summary:
Aetna is one of the nation's leading providers of health care and 
related group benefits, serving approximately 14.4 million health 
care members, 11.9 million dental members and 12.0 million group 
insurance customers, as of June 30, 2002 (source: company 

Why We Like It:
AET dove today at the open, but showed some amazing resiliency in 
turning green by 0.02 by the end of the day.  This was most 
likely due to rumors that they were going to warn on earnings 
next week.  Apparently, the company made some comments during a 
conference call that business was not going so well and this led 
to the pre-announcement rumor.  Our pick of AET as a short was 
not based on the rumor, so the rebound from a drop due to that 
rumor doesn't do much for the play.  The stock experienced a 
significant breakdown Thursday, falling through its 200-dma and 
establishing a triple bottom breakdown on the point and figure 
chart.  The stock had been in consolidation between $40 and $45 
since the middle of July. The longer the consolidation rectangle, 
the more significant is its breakout.  After a 6-week pattern, we 
expect to see a significant downside to AET's break. The current 
bearish vertical count on AET is $29 and a reversal up to the 
200-dma of 40.46 would solidify this count with a three-box 
reversal from today's low under $37.  New short entries should 
look for a failed rebound at the 200-dma of $40.46, or a move 
below the July low of $38.30.  The downside minimum measuring 
objective, based on the rectangle pattern, is approximately $35. 
Given the strong downtrend since the middle of June and the 
support break, we can see this stock re-testing its February lows 
around $30.

*** September Contracts Expire In 1 week ***

BUY PUT SEP-40*AET-UH OI=2205 at $1.65 SL=0.85
BUY PUT OCT-40 AET-VH OI=5008 at $3.00 SL=1.50

Average Daily Volume = 1.47 mil


CTX - Centex - $48.87 -2.10 (-1.00 for the week)

Company Summary:
Centex Corporation, through other subsidiaries, ranks as one of 
the nation's largest non-bank-affiliated retail mortgage loan 
originators and general building contractors. The company also 
has operations in home services and investment real estate and 
owns a majority interest in a publicly held construction products 
company. (source: company release)

Why We Like It:
After yesterday's precipitous drop in the homebuilding sector, 
following Alan Greenspan's warning about naturally increased 
interest rates, the group managed a mild rebound today.  The 
rebound, however, was unconvincing after the series of higher 
highs was reversed by a lower high for both CTX and the Dow Jones 
Home Construction Index (DJUSHB).  After such a terrific run in 
mortgages and new homes, resulting from the lowest interest rates 
in 40 years, we are finally starting to see cracks in the armour.  
Increasing layoffs are resulting in record foreclosure rates. 
With these stocks bought on speculation of rates staying low, it 
won't matter that the next rate move is most likely up, as fewer 
people will be able to afford homes without jobs.  The fact that 
foreclosures are up is very bearish. Foreclosure usually 
indicates that any home equity has already been drained as the 
economy has worsened and losing the house is a matter of last 
resort.  It also indicates that more people are being forced to 
sell their homes to rescue any equity, in order to avoid 
foreclosure.  More homes on the market equals more supply - not 
good for the builders.  Today's rally above the 50-dma indicates 
that traders should look for confirmation from the sector before 
entering new short plays. New entries should look for a break 
back below the 50-dma in CTX of $49.24 and a break in the DJUSHB 
(335.19) below its 50-dma of 323.93.  

*** September Contracts Expire In 1 week***

BUY PUT SEP-50*CTX-UJ OI=1149 at $1.65 SL=1.30
BUY PUT OCT-50*CTX-VJ OI=1485 at $3.60 SL=2.00

Average Daily Volume = 1.47 mil


AGN – Allergan, Inc. $53.05 (-4.04 last week)

Company Summary:
Allergan is a technology-driven, global healthcare company that
develops and commercializes specialty pharmaceutical products
for the ophthalmic neurological, dermatological and other
specialty markets, as well as ophthalmic surgical devices and
contact lens care solutions.  Its revenues are principally
generated by prescription and non-prescription pharmaceutical
products in the areas of ophthalmology and skin care,
neurotoxins, intra-ocular lenses and contact lens care products.
The company's are sold to drug wholesalers, independent and
chain drug stores, pharmacies, commercial optical chains,
commercial optical chains, food stores, hospitals and
individual medical practitioners.

Why We Like It:
In a bear market, the weak get weaker, and the strong, well they
weaken too.  AGN definitely falls into the 'weaker' group, as it
has been mired under its descending trendline since last
December.  After last rolling over near the $63 level (right at
the trendline 3 weeks ago, AGN has been steadily losing ground.
In the process, the stock has broken below all of its moving
averages and suffered an important technical failure when it
dropped under the $55 support level on Wednesday.  The current
vertical count from the bearish PnF chart is pointing to a price
target of $42, and that is looking more likely now that AGN has
broken its bullish support trendline at $55.  The July lows will
start to come into play near the $50-51 area, and with daily
Stochastics buried deep in oversold territory, an oversold bounce
could be just around the corner.  For that reason, we don't want
to consider new entries on further weakness, but instead want to
wait for a failed rally.  Use a dip near the July lows to harvest
partial gains on open positions and then look to re-enter on a
rollover from the vicinity of $55.  Keep stops set at $56.50.

*** September contracts expire next week ***

BUY PUT SEP-55 AGN-UK OI= 624 at $2.60 SL=1.25
BUY PUT OCT-55*AGN-VK OI=1325 at $4.10 SL=2.50
BUY PUT OCT-50 AGN-VJ OI= 341 at $1.95 SL=1.00

Average Daily Volume = 1.09 mln


CMA – Comerica Inc. $53.50 (-4.38 this week)

Company Summary:
Comerica Incorporated is a multi-state financial services
provider.  The company has strategically aligned its operations
into three major lines of business: the Business Bank, the
Individual Bank and the Investment Bank.  The Business Bank is
comprised of middle-market lending, asset-based lending, large
corporate banking, international financial services and specialty
deposit gathering.  The Individual Bank includes consumer
lending, consumer deposit gathering, mortgage loan origination
and servicing, small business banking and private banking.  The
Investment Bank is responsible for the sale of mutual fund and
annuity products, as well as life, disability and long-term care
insurance products.

Why We Like It:
After the opening drop on Friday, the sellers took a break,
allowing CMA to stage a minor recovery off its lows.  Despite the
green candle on the daily chart, it is important to note that the
stock was barely able to fill its opening gap.  Not only that, but
it is well below its $56 breakdown level from Thursday.  That
breakdown put CMA back on a PnF Sell signal and with the intraday
drop on Friday, the column of O's grew, extending the bearish
price target down to $46.  Provided the weekend passes
uneventfully, the stock's oversold bounce could continue on
Monday.  That should provide us with an attractive entry point as
CMA likely rolls over from the first tangible level of resistance
near $54.50.  If that fails, the heavy resistance at $56 should
keep the bulls in check and a rollover near that level would be a
very attractive entry point into the play.  Should the bears come
back from the weekend refreshed, then momentum traders can target
a breakdown under $53, but only if selling volume is strong and
the Banking index (BKX.X) returns to its recent pattern of
weakness.  Keep stops set at $57.

*** September contracts expire next week ***

BUY PUT SEP-55 CMA-UK OI=195 at $1.95 SL=1.00
BUY PUT OCT-55*CMA-VK OI=555 at $3.20 SL=1.50
BUY PUT OCT-50 CMA-VJ OI=200 at $1.30 SL=0.75

Average Daily Volume = 1.00 mln


GE – General Electric $27.05 (-1.25 last week)

Company Summary:
As one of the largest and most diversified industrial companies
in the world, GE's products include major appliances, lighting
products, industrial automation equipment, medical diagnostic
equipment, electrical distribution and control equipment and
power generation and delivery products.  Additionally, GE
provides commercial and military aircraft jet engines,
locomotives and nuclear power support services.  Through the
National Broadcasting Company (NBC), GE delivers network
television services, operates television stations and provides
cable, Internet and multimedia programming and distribution

Why We Like It:
As scrutiny of high-profile CEOs picked up again last week, GE's
former CEO found himself in the limelight over the details of his
retirement compensation package.  While that may not have been
meaningful to GE's price action, the spectre of asbestos-related
litigation certainly didn't motivate investors to buy the stock.
We started coverage on Thursday, looking for a breakdown under the
$28 level and we didn't have to wait long.  Friday's session began
with a gap down below our $27.75 entry trigger and then price fell
to the $27 area, where the stock spent the rest of the day
consolidating.  Also weighing on the stock was the warning from
HON on Thursday night.  After hitting the $28 level, GE's PnF
chart went back on a sell signal and Friday's drop extended the
column of O's, dropping the bearish price target to $21.  GE now
has significant overhead resistance at the $28 level and a failed
rally near that level would make for an attractive entry point.
Momentum traders will want to wait for a drop under $26.50 on
continued strong volume before entering new positions.  Lower
stops to $29.75, just above Wednesday's intraday high.

*** September contracts expire next week ***

BUY PUT SEP-27 GE-UY OI=28741 at $1.10 SL=0.50
BUY PUT OCT-27*GE-VY OI= 8366 at $2.10 SL=1.00
BUY PUT OCT-25 GE-VE OI= 2759 at $1.00 SL=0.50

Average Daily Volume = 29.5 mln


MTG – MGIC Investment Corp. $55.23 (-3.15 last week)

Company Summary:
MGIC Investment Corporation is a holding company that, through
its wholly owned subsidiary, Mortgage Guaranty Insurance
Corporation (MGIC), is a provider of private mortgage insurance
coverage in the United States to the home mortgage lending
industry.  Private mortgage insurance covers residential first
mortgage loans and expands home ownership opportunities by
enabling people to purchase homes with less than 20% down
payments.  Private mortgage insurance also facilitates the sale
of low down payment mortgage loans in the secondary mortgage
market, principally to the Federal National Mortgage Association
and the Federal Home Loan Mortgage Corporation.

Why We Like It:
Friday was a day of consolidation for the broad markets, with
very little meaningful price movement.  That was certainly the
case with MTG, as it spent the bulk of the day recovering from
the small opening gap down.  Recall that the primary catalyst
for the play is the fact that with foreclosures on the rise
(hitting a new record in the 2Q), which is very likely to have
a detrimental effect on MTG's bottom line.  After the sharp
decline earlier in the week, the stock was due for a bit of
consolidation.  This just looks like a pause in the dominant
downtrend, especially with the strong Sell signal on the PnF
chart.  After generating a double-bottom breakdown at $57, the
column of O's has grown such that the bearish price target is
now $46.  That leaves plenty of room to the downside, once the
play has been entered.  Speaking of entries, look for a rollover
near the $56 level as a first opportunity to open positions.
Should there be a bit stronger bounce, then look for a rollover
near $57 as the trigger.  Recall that there is still strong
support near $54, so we want to avoid entering on a breakdown
for the time being.  Stops remain in place at $58.

*** September contracts expire next week ***

BUY PUT SEP-55 MTG-UK OI=1222 at $1.60 SL=0.75
BUY PUT OCT-55*MTG-VK OI= 190 at $3.20 SL=1.50
BUY PUT OCT-50 MTG-VJ OI=  11 at $1.70 SL=0.75

Average Daily Volume = 803 K


TXU – TXU Corporation $44.30 (-1.62 last week)

Company Summary:
TXU Corporation is a global energy services company that engages
in electricity generation, wholesale energy trading, retail
energy marketing, energy delivery, other energy-related services
and, through a joint venture, telecommunications services.  TXU
owns over 22,600 megawatts of power generation and sells 335
terawatt hours of electricity and 2.8 trillion cubic feet of
natural gas annually.  The company delivers or sells energy to
approximately 11 million residential, commercial and industrial
customers primarily in the United States, Europe and Australia.

Why We Like It:
We've been focused on the weakness in the Utility sector (UTY.X)
over the past week, as the sector has continued to weaken.  Last
week the UTY index broke support at $270 and then proceeded to
take out the $260 level on Thursday.  With that damage, Friday's
recovery looks like little more than an oversold bounce.  We saw
a similar pattern in our TXU play, as it recovered from the $43
support level on Friday.  But there is no question that the bears
are still in control, as the stock was unable to move back above
the $45 level.  In fact, a rollover near that level next week
looks like a decent entry, although a failed rally closer to
major resistance at $46 would look even better.  Given that the
daily Stochastics is buried in oversold territory, we don't want
to attempt new entries on a decline to new lows.  Risk is much
easier to manage by fading the failed rallies.  Keep stops set
at $46 and confirm renewed weakness in the UTY index before
entering new positions.

*** September contracts expire next week ***

BUY PUT SEP-45 TXU-UI OI= 180 at $1.30 SL=0.75
BUY PUT OCT-45*TXU-VI OI=1378 at $2.60 SL=1.25
BUY PUT OCT-40 TXU-VH OI=1334 at $0.95 SL=0.50

Average Daily Volume = 1.76 mln

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Who Won?
By Mark Phillips

It seems like you can't turn on CNBC without another passel of
airhead (not the word I wanted to use, but let's keep this
professional) analysts pounding the drum that the bear market is
over and we should expect significantly higher equity prices over
the next 12 months.  Yadda, yadda, etc.  About as valuable as all
those Styrofoam peanuts with which products are shipped.  Those
peanuts have no intrinsic value (even though you have to pay for
them), but they serve the purpose of protecting what is being
shipped.  Analysts on the other hand, get paid exorbitant
salaries, have very little to say that has any value, but they do
have a purpose.  That purpose is to keep Joe and Jane average
invested in the stock market all the way down.

One of the constants of my youth was watching Wall Street Week
with Louis Rukeyser every Friday night at 8:30pm.  Most of what
was said on the show went right over my head, but Dad was
watching it and he seemed to think it was pretty important stuff.
I remember thinking at the time that someday I wanted to
understand all the important-sounding concepts that were covered
each week.  I didn't watch old Louis again until a few weeks ago
when he moved his show to CNBC.  He comes on while I'm still
writing the weekend content, so it makes for good background noise
as I try to transfer my thoughts into a coherent printed form.

Well, I started watching again recently, and have come to the
conclusion, that Mr. Rukeyser is an arrogant and smug buffoon.
Either that or he is a menace on par with Abbey Joseph Cohen.
Long-time readers will recall that I don't have much respect for
Ms. Cohen, as she and the rest of the analyst community are
largely at fault for an incredible destruction of investor wealth
in the past 30 months.  I'm not talking about people like you and
I -- I'm referring to those that have held investments for
DECADES.  Ms. Cohen and her ilk continued to preach ever higher
stock prices even as it was clear that the bubble had been
pricked.  Thousands of investors have now watched very profitable
long-term investments wither away because they made two mistakes
-- they had no defined approach for harvesting gains and they
listened to the siren's song of the analyst community, which
preached that stock's could grow to the sky.  

Take the very staid company of McDonalds (NYSE:MCD), which nobody
could argue has much of anything to do with the burst Technology
bubble.  But the food chain's stock price hit another 52-week low
last week.  Since late 1999, MCD has given up well over half its
value and has now fallen to levels not seen since late 1995.
Don't you think some cautionary comments from the analyst
community would have been appropriate.  I know, I'm preaching old
news to the choir, because you all "get it" already.  Like me,
you probably laughed heartily at the Barron's article last
weekend, where all the leading analysts put forth their
prognostications for the S&P500 over the next 12 months.  All
except for one (Doug Cliggot) see the S&P being substantially
higher than it currently is, with estimates ranging as high as
1300.  How do you say the S&P500 is capable of advancing 45% in
a 12 month period without cracking a smile?

Coming back to Sir Rukeyser, I've noticed that since having Doug
Cliggot (his S&P500 estimate is 750, by the way) on several week's
ago, his new show is heavily biased to the bullish side.  I can
deal with that, but not when he's talking like it is a new secular
bull market.  Oh speaking of that, did you hear Dick Hoey on CNBC
last week stating that the market would be in a secular bull
market by November first?  Yes, of this year!  But I digress. 
Coming back to old Louis, here's what he said this week, that
launched me on this long tirade.  In his opening dialogue, he
pointed out that the market was up for 5 weeks, down for 3 and
then flat last week.  That's fine as far as it goes, but then he
goes on to state that we are in neither a bull or bear market?
Huh?  You know, I don't think the guy would recognize a trendline
on a chart or a chart for that matter if it jumped up and bit
him in the...  Well, you know what I mean.

Since I'm on the topic though, let's take a look at a chart and
try to divine what king of market we're faced with.  


My wife just drifted into the room, so I asked her if the chart
above looked like an established trend.  She said "Yes, down!"
But then we need to take her opinion with a grain of salt,
because she isn't the "investment professional" that Mr.
Rukeyser is.

The pattern of lower highs and lower lows that began in September
of 2000, hasn't even come close to being broken.  In fact, if I
had put on the center line of that channel, you would notice that
the SPX is back in the lower half of the channel.  That sure
wasn't a very convincing rally, now was it?  Stochastics tell a
very similar picture, as the peaks have been coming at lower and
lower levels since late 2001.  Note that the oscillator is rolling
over again after having barely traversed half the distance to
overbought.  The bears are definitely in charge and will likely
remain so until there is some definitive evidence that the
economic picture is actually improving.

You've all heard my feelings on this before, but it doesn't hurt
to repeat them from time to time to let you know that I haven't
changed my opinion.  Especially when those with access to a
microphone are spouting such blatantly foolish things about the
'imminent bull market'.  Based on the recent rebound off the July
lows and the subsequent muddled market action, I expect the
historical pattern of a market selloff in September-October will
put in a repeat performance this year.  Best case, we get a
retest of the July lows.  Worst case, we break those lows and
start having to take Bill Gross seriously.  Recall his prediction
from a couple weeks ago, where he called the DOW fairly valued at
5000?  I hope that doesn't happen, but then again, how many times
have we said the market can't possibly go any lower?  Remember
back when 1600 looked like a solid floor for the NASDAQ Composite?
Well don't look now, but it hasn't been back above that level
since early June, and even 1400 is now looking like pretty stiff
resistance.  Remember, anything is possible in a bear market.

Let's look at a shorter-term picture for the rest of our visit
this weekend.  Amazingly, the VIX is still hanging around near
40, as investors are clearly nervous with the lack of good
economic news, record foreclosures, fear of war with Iraq,
potential for terrorist actions, and the usually bearish pattern
of this time of the year.  Did I leave anything out?  Actually,
when you look at it in that light, it's impressive that the market
hasn't fallen back further.  At least not yet.  There's been a lot
of discussion in the newsletter of late about the pending H&S
pattern in the broad market.  I don't have time to discuss it
here tonight, but tune in on Monday, as I plan to dice and slice
the SPX and possibly the DOW to show how the same chart pattern
can be interpreted a couple of different ways.  I'll actually
write it up this weekend, so I won't have the benefit of knowing
what happened on Monday until the article is complete.  But coming
back to the title of this week's column, I believe the answer is
nobody yet -- but the bears will win in the weeks to come.

Alright, without further ado, let's take a look at the play lists.


I told you it wouldn't be long and we'd start to repopulate the
Portfolio.  The only thing that would make me happier would be to
see us get entries on the BBH and MO plays.  All in good time.
For this week, we have new Portfolio positions for both QQQ and
SMH.  See the writeups below for details.

Watch List:

MO - MO keeps drifting lower, but it is now back under the 50-dma,
and I think the only thing holding it up is the fact that the
broad market can't decide whether its going to sell off or
rebound.  Keep that entry target where it is, as I suspect the
weakness in the broad markets in coming weeks is going to give
us exactly the entry that we're looking for.

BA - About as exciting as watching paint dry, BA continues to work
its way down towards our entry target.  Don't be in a hurry here,
as IO suspect we'll get our opportunity right around the time that
the broad market finds a relative bottom over the next 6 weeks.
Patience is the key.

BBH - I really thought a post-9/11 rally was going to be the
ticket to give us a tasty entry into the BBH play, but the fact
that there was no follow-through to the opening gap kept us on
the sidelines.  Look for a failed rally near our target to give
us the motivation to enter the play.  Eager traders can consider
initiating 1/2 positions on a failed rally near the $84-85 area,
while we'll leave our official entry target at $86-88.  After
entry, we'll look to establish a stop at $90.

Even though the playlists are rather light again this weekend,
I actually feel pretty good about it.  The broad markets are at
an important crossroads here.  Either they will bounce from near
current levels or they are going to break down and likely retest
the July lows.  If we get the breakout, our QQQ play has us well
positioned for upside movement.  If we get a breakdown, then our
SMH play should lead to the downside, given the abysmal
conditions in the industry.  Be sure to check out my Monday
Trader's Corner article, and then I think you'll understand my
trepidation at adding more plays until things become a bit more

Have a great week!


LEAPS Portfolio

Current Open Plays


QQQ    09/09/02  '03 $ 24  QAV-AX  $ 2.20  $ 2.10  - 4.55%  $21
                 '04 $ 24  KLF-AX  $ 4.10  $ 4.20  + 2.44%  $21

SMH    09/11/02  '04 $ 20  KBS-MD  $ 3.40  $ 4.30  +26.47%  $26
                 '05 $ 20  ZTO-MD  $ 4.70  $ 5.40  +14.89%  $26

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

BBH    08/30/02  $86-88        JAN-2004 $ 80  EVK-MP
                               JAN-2005 $ 80  EIL-MP

New Portfolio Plays

QQQ - NASDAQ-100 Trust $23.08  **Call Play**

Well, that sort of worked the way I had in mind.  With the
nervousness in the market ahead of the 9/11 anniversary, QQQ
dropped to $22.39 on Monday, right in the middle of our desired
entry range and pulling us into the play.  But instead of a
relief rally after the anniversary, the markets did an about
face and apparently "sold the news" as there was apparently
nobody left to buy.  We'll need to see what happens next week
before we'll know if this was a good play or a fool's errand.
Despite the weakness in the Technology arena (particularly due
to the Chip stocks), there was a bright spot from the ADBE
earnings report and if we hear anything positive from MSFT during
this earnings cycle, it could reinvigorate the entire Software
group.  For now, we'll keep our stop set at $21.  Late-comers can
use any successful bounce above the $21.50 level to enter the
play, ahead of an expected end-of-year rally that should take the
QQQ up near the $26 level.

BUY LEAP JAN-2003 $ 24 QAV-AX $2.20
BUY LEAP JAN-2004 $ 24 KLF-AX $4.10

SMH - Semiconductor HOLDR $24.51  **Put Play**

Alright, I cheated!  Even though the desired entry zone was
$25.50-26.00, that pop and drop on 9/11 was just too good to pass
up.  The intraday high was only $25.25, but I think that's good
enough for a solid entry into the play.  There is no joy in
Chip-ville, as warnings and downgrades seem to now be a daily
occurrence.  Nobody is venturing predictions about an IT spending
recovery until mid-2003, and that is likely to continue pressuring
the SOX ever lower.  In fact, the last trip down that set new
lows at $22, put the PnF chart back on a Sell signal, and the
bearish price target is -- are you ready? -- $14!!  Holy price
discounts, Batman!  I don't know if it will get there, but both
the technical and fundamental picture is downright ugly.  If you
missed that entry point, use any failed rally below the $25.50
level to initiate new positions, because this ship is going down.
We'll initially place our stop at $26, just above the top of the
descending channel that began back in March.

BUY LEAP JAN-2004 $ 20 KBS-MD $3.40
BUY LEAP JAN-2005 $ 20 ZTO-MD $4.70

New Watchlist Plays





Charting – Trendlines; Types & Construction 
By Leigh Stevens

I often assume OI readers know all the basics of technical 
analysis, but then I get e-mails that suggest otherwise – as an 
old college chum used to say: “never assume” – and he was right!

A trendline is one of the most basic and useful tools in 
assessing trends or trend reversals in stocks, stock indexes and 
other financial instruments; e.g., bonds, currencies, etc.  A 
trendline is, as the name implies, a line that attempts to 
measure and define a price trend in any market that involves 
prices set by the free actions of buyers and sellers. “Free” 
trading is worth noting as, for example, the fed funds rate is 
not such a market.   

A trendline is also by definition a line that either slopes up or 
down to some degree in keeping with the primary definition of a 
trend as meaning a predominant up or down price direction. 
Parallel lines that are drawn across the highs and lows of a 
sideways trend or trading range are usually referred to simply as 
“horizontal” lines.    

A (I’m tempted to say “the”) basic technique of charting is the 
use of trendlines.  However, not all trendlines are drawn the 
same or rather, there is not ONE correct way to construct 
trendlines.  I tend to be a bit creative in the construction of 
trendlines in that I will use a type of construction that could 
be called “best fit” analysis or use of “internal” trendlines. 

A “conventional” trendline, or what we learn in charting 101, is 
to draw an initial trendline through the 2 or more (preferably a 
minimum of 3 points) highest highs or lowest lows on a bar, 
candlestick or line (close-only) chart. An internal trendline 
draws a line through the MOST number of highs or lows - more on 
this later.    

A rising up trendline is usually drawn by connecting 2 or more – 
3 if available, however you can “start” with 2 - of the lowest 
lows. The resulting line is then generally BELOW the level of the 
other periodic price drops that occur in a rising market.  Some 
other names for these minor counter-trend movements are: price 
“dips”, “pullbacks”, “corrections” and “reaction” lows – for 
every action there is some “re-action”, such as caused by sellers 
who think a stock is overvalued, even if perhaps only 

What really defines a rising up trendline is not the advancing 
price moves or price swings, but the low point of the downswings, 
dips or pullbacks on the way up.  You hear the saying “buy dips” 
or buy weakness.  This generally refers to buying the corrections 
in a rising trend or buying pullbacks to the up trendline.  

Downside reactions in an uptrend will usually stop above, at or 
near the rising up trendline.  The chart below illustrates a 
simple up trendline and connects 3 or more intraday lows – you 
never have to search very far for examples of trendlines. 


A down trendline slopes down as it measures a declining price 
trend and is typically drawn by connecting two or more, usually 
three if available, of the highest highs of the periodic upswings 
or rallies that occur in a downtrend.  The points that establish 
the down trendline are the high points or peaks of the upswings, 
or minor rallies that run counter to the general downward 

The advice to “sell rallies” is typically in reference to a 
declining trend and a rebound to the down trendline would be a 
good way to do it - there are always some countertrend movements.
In a decline, trendlines that slope down in a very steep manner 
are more common than those that have a radically steep upward 
slope.  Rallies in a downtrend will usually stop below, at or 
near a falling down trendline. 

Trendline resistance is the expected selling that tends to 
develop on rallies that carry up to a down trendline.  The chart 
below is a line chart that “touches” or connects 3 or more 
closing lows.  


The downtrend above is best defined on the 3rd touch or defining 
point of a down trendline, in February – note the steep drop 
after that.  A downtrend is then assumed to be in effect until 
May, when (on a closing basis) there was a rally to above the 
dominant down trendline.  

There was a steeper down trendline (not shown) that could have 
been drawn through the rebound high in early-March, the later 
rally high in late-March and through the price peak of early-
April – 3 “touches” or points – the upside breakout above this 
line in mid-April was a tip off that that at least the short-term 
trend was reversing 

Note that the rebound from the resistance trendline on the lower 
right of the chart illustrates the principal that support and 
resistance trendlines can assume also opposite roles at a later 
stage – here, the resistance trendline, once broken, later 
defines a support area.  

This brings us an obvious question of which chart TYPE to use and 
does it make a difference?  Generally it does not make a 
difference whether you use a bar (or candlestick) or line chart, 
assuming you have enough points to construct a trendline, in 
terms of whether one is “better” than the other.  

I use both and sometimes see slightly different things.  A 
pullback in an uptrend may dip under the trendline that uses the 
lows, but not be apparent on a close-only line chart.  I tend to 
prefer drawing trendlines on daily bar charts.  For weekly and 
monthly charts, I generally draw a line first with a bar chart, 
than switch to a line chart for comparison.  If the line chart 
gives me a clearer trendline definition I save and use that one.  

You can also draw trendlines on Point & Figure charts, which 
makes a third choice as can be seen in the chart below, that of 
the S&P 500 (SPX) Index. The upside penetration of the down or 
resistance trendline at the extreme right suggests a trend 
reversal from down to up.


Charting applications based on a monthly fee, like Q-Charts and 
TradeStation have the most feature rich trendline functionality.  
However, even free internet sites like BigCharts (“java” chart 
option) will allow you to construct simple trendlines.    

Next are some charts that include descriptions related to methods 
and points related to trendline construction.  Because the use of 
trendlines is often an “art”, rather than a “science”, traders 
can get frustrated when the trendline “rules” do not seem to 
work.  Also, there is the fact that it takes some months and 
years to see how trendlines work in a variety of stocks and 
market conditions. 

Conventional or traditional trendlines are straight lines drawn 
through at least two lows or highs, preferably three, and such a 
trendline never bisects or “cuts through” any bar (price range) 
in a bar chart or any part of a candlestick – or, any close on a 
line chart.  

However, if we look at trendlines as angular measures of price 
MOMENTUM and that momentum is not always precisely defined, we 
have made a case for trendlines that cut through some of the 
bars.  I call these “best fit” trendlines - ones that go through 
the greatest number of highs and lows.  And, I always remember 
that I am trying to visually depict the dominant momentum of the 

Trendlines that go through the most number of high and low points 
and/or involve subjective judgments as to “best fit”, have been 
called internal trendlines by Jack Schwager, a technical analyst 
and writer in this field.  

Although there is more than one way to draw a trendline – the 
guidelines for best USE of trendlines are the same as seen in the 
concluding charts.    


The guidelines for using trendlines regardless of how they are 
precisely constructed, is to buy on declines to or near a support 
(up) trendline and sell rallies that touch or approach a 
resistance (down) trendline.  A decline that goes through 
(breaks) an up trendline is an indication that the trend has 
reversed and a shorting/put buy strategy is suggested.

A rally that goes through (breaks out above) a down trendline is 
an indication that the trend has reversed and a buy/long call 


In a further Trader’s Corner article on trendlines, I’ll discuss 
what they can (and can’t) do to help you spot trends and trend 
reversals – sometimes trendlines don’t “work” in providing a good 
definition of a trend, such as in choppy markets or sideways 
trends. Nevertheless, there are ways to minimize losses in such 

PAST Trader’s Corner ARTICLES by Leigh Stevens
Indicators - Arms Index (TRIN): 
Indicators - Bollinger Bands – 
Indicators - Moving Average Envelopes:
Indicators_Oscillators – MACD: 
Indicators_Oscillators - RSI:
Indicators_Oscillators – Stochastics:
Patterns_Continuation – Flags: 
Patterns_Continuation - Triangles & Rectangles:
Patterns_Reversals - Head & Shoulder's:
Patterns_Reversals – Wedges:
Program trading & Stock/Index Futures Arbitrage: 
Sentiment; as a contrary indicator –


Directional Spreads: Grab A Leg and Make A Wish
By Mike Parnos, Investing With Attitude

Occasionally Couch Potato Trading Institute students will have an 
opinion.  Or, more likely, they heard someone else’s opinion and 
now it’s their own.  A few CPTI rebels have torn themselves away 
from a Bow-Flex infomercial long enough to request a way of 
playing a direction with limited risk and significant upside.
Although contrary to our usual trading strategies, it’s true.   
Such an animal exists. As much as we encourage neutrality in our 
trading, there will always be a few students who buck the trend.  
At the CPTI we feel an obligation to teach them how they can 
cover their assets, before they bend over and kiss them goodbye.

A “calendar spread” is the purchase of a long-term option on a 
stock and the subsequent sale of a short-term option on the same 
stock/index.  There are a number of “calendar spread” variations.  
The following example, will explain the most popular version – 
the “diagonal calendar spread.”  The “diagonal” simply means that 
both the long-term option and the short- term option are sold at 
the different strike prices.  If the strike prices were the same, 
it would be a “horizontal calendar spread.”

It’s a powerful strategy that allows you to control a large 
amount of money with a relatively small amount of money.  It uses 
the passage of time and the erosion of premium to put profits in 
your account – if you pick the right direction.

Lately some analysts are predicting a DOW 5,000.  If you have a 
bearish view of the DOW, a calendar spread can help you play that 
opinion with a defined risk and a reasonable amount of time to be 

In this example, we will use a horizontal calendar spread to take 
advantage of an index that has moved up, hit resistance, and 
seems to be on its way back down to the July lows, or perhaps 

The Scenario:
The DOW is trading at 8,450 (at this writing).  When we trade DOW 
options, we like the DJX because of its liquidity, small spreads 
and one or two dollar strike price increments.
1) Buy 10 contracts Dec. $84 strike put @ $5.70 = 	$5,700 
2) Sell 10 contracts Oct. $80 strike put @ $2.00 = 	$2,000
      					Total cost:		$3,700
Regardless of where the DOW moves, our total risk is defined at 

What happens if . . .
a) What if the DOW is 8,200 at Oct. expiration?  
The Oct. $80 put will expire worthless.  The Dec. $84 put will be 
$2 in the money and headed in the right direction.  You can now 
sell 10 contracts of the Nov. $78 strike put for about $1.50 = 
$1,500.  The total risk is now only $2,200 ($3,700 - $1,500).  

b) What if the DOW is 7,800 at Oct. expiration?
The Oct. $80 put will have a value of $2.00.  The Dec. $84 put 
will have a value of  $6.00 plus a little time value.  The 
positions can be liquidated on expiration for about $6.25 
($4,250).  Your adjusted defined risk was $3,700. Thus, you still 
make a small profit of $550.  Or, you could buy back the short 
Oct. $80 put and roll it down and out if you believe the DOW has 
further to fall.

c)  What if the DOW is 8,600 at Oct. expiration?  
The Oct. $80 put will expire worthless.  The Dec. $84 puts will 
be $2 out of the money, but will still have a value of about 
$3.25.  You could liquidate and accept the small $.45 ($450) 
loss.  Or, if you still believe the DOW will go down, you could 
sell the Nov. $80 put for about $1.50 and further reduce your 
risk to $2,200.

Now, let’s move ahead to November expiration.  Scenario “a” has 
played out and your adjusted risk is only $2,200.  You are long 
the Dec. $84 puts and short the $78 puts.  Your projection 
(guess) of the direction of the DOW was accurate.  It closes at 

If you buy back the $78 put for $2 ($2,000) and sell the Dec. $84 
put for $8 ($8,000), you will have taken in $6 ($6,000).  
Subtract your adjusted risk of $2,200 and you have a profit of 
$3,800.  That a nice piece of change.

If you still believe the DOW will tank further, you could just 
hold the Dec. $84 put and ride it down (with a tight stop, I 
hope). Or, you could use the common sense God gave a dog and come 
in out of the rain.  Take your profits and count your lucky 

Are you ready for a little icing on the cake?  Look at the DOW 
chart for the last six months.  You’ll notice there’s some near 
term resistance at 8,800 and substantially stronger resistance at 

Let’s put on a bear call spread on the DOW and take in some more 
money.  Hmmm.  “More Money” – I like the sound of that.
If you were to sell the Oct. $88 calls and buy the Oct. $92 
calls, you would take in an additional $.90.

If scenario “a” played out as we described above, you could do 
that again in November and perhaps take in another $.90 with a 
slight downward adjustment of the strike prices for the November 
bear call spread.

The $1.80 ($1,800) in proceeds from the Oct. and Nov. bear call 
spreads could conceivable reduce the risk to $400 ($2,300 – 
$1,800).  A $3,800 profit on only a $500 risk.  It’s almost too 
good to be true, but so is winning the Lottery.

With a “diagonal calendar spread,” it’s the months of time you 
buy in the long option that gives you flexibility.  You can buy 
more or less time, depending on how long you think it will take 
for the underlying to go in your direction.  It gives you 
choices.  You can take profits (if they exist) by liquidating at 
any time during the life of the long option.
WARNING:  To CPTI students and the rest of our semi-sane trading 
world.  Be careful.  The worst thing that can happen is that you 
pick the right direction on one or two trades.  You’ve become the 
speculator instead of the casino.  You begin to feel invincible.  
You think it’s OK to double your bets.

Just because you put on a Superman costume doesn’t mean you can 
fly.  We want to make sure CPTI students don’t have to pawn their 
remote for a bus ticket back home.

Retail option traders are a lot like plungers.  They spend most 
of their time cleaning up messes.

At the CPTI, we aim to teach that good judgment will save you 
pain -- both financial and emotional.  Too often, a lot of good 
judgment comes from bad judgment.  Let it be someone else’s bad 
judgment you learn from. 

Iron Condor Update:  BBH is at $81.35.  On Monday, BBH dropped 
below $80 and we shorted 1,000 shares at $79.80 to protect our 
short $80 put.  Later, on Monday, we covered our short 1,000 
shares at $80.00 as BBH moved back over $80.

On Thursday, we again shorted 1,000 shares at $80 and today 
(Friday) we covered again at $80.  We’re starting to feel like a 
yo-yo, but most of our profits are intact and our position is 
protected.  We may still get bounced around a bit near this 
support level, but the situation is under control.  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.  


Learning Curve
By John Seckinger

I know of millions of things that won’t work.  I’ve certainly 
learned a lot. – Thomas Edison

Roughly six months before I actually put on a trade, I began “paper 
trading”.  This was my first of many mistakes.  While at the CBOT, 
I would flash the array of hand signals to myself, always executing 
my trades perfectly while taking monstrous “profits” every day with 
little trouble.  Moreover, I was never stressed while paper trading; 
excited about how easy this trading thing was going to be.  

Mistake Number two was when I decided to listen to all the 
“professionals” working at the CBOT.  This filtering-out process is 
important, since putting a trade on while believing in a “10-year 
veteran” gets extremely costly.  Why?  First of all, there are 
people who work 10-years, and then there are people who work 
one—year, ten times over.  See my point?  Most traders are afraid 
to change, looking at the market with the same dull perspective.  
This lack of dynamism is analogous to going to grad school and 
trying to use logic learned in kindergarten.  It is too limited 
in scope to be effective.

After speaking with hundreds of traders, I decided only two of them 
had a good feel for the market.  Fortunately, we became great 
friends and tackled the market as a team for many years.  
Disclaimer:  I have known Jim Brown and Jeff Bailey for quite some 
time now, and it is my honest opinion that they do in-fact have a 
“cutting edge” view of trading conditions.  There view of the market
is definitely given significant weight.

The third costly error I made was using too many trading indicators 
at once.  I was also under the impression that all the indicators 
not only worked, but worked on every single contract.  They really 
don’t, believe me.  It took roughly five years of trading before I 
was down to using only a select group of indicators.  Are these 
indicators the Holy Grail to trading?  Of course not.  I just feel 
most comfortable (not to be confused with complacent) when using 
them.  Volume, RSI, MACD (sometimes), and sometimes Bollinger Bands 
(five-minute chart only).  In fact, most of the time I don’t use 
any indicators, just price action.  Well, I guess that indicator 
could be called “mass psychology.” 

Number four in horrible trading mistakes was the impression that 
execution only “kind of mattered.”  Boy was I wrong.  Execution is 
the most important of all, and that includes cutting slippage to a 
minimum.  Part of my beginning execution problems was that I was 
greedy.  I wanted to be in the market so bad, that I would put on 
a trade when price action “got close enough” to my objective.  That 
mistake alone cost me thousands.  Why?  Quick example:  After 
analysis, I would decide to go long shares of XYZ at 42.  During 
trading, shares would fall to 44 and then quietly sit there.  I 
would go long.  Minutes later shares fell to 42, and then 41.50 
(hitting stops).  I would get nervous, sweat, get upset, and look 
for an exit.  Shares would then bid back to 42 and sit there for 
a while.  I would sell, take the loss, and after a while shares 
would rise substantially. 

That brings me to me to mistake number five.  Using the previous 
example, I would only use mental stops.  I promised myself that I 
would exit at 41; however, with no actual stop in place, I would 
change that price as I saw fit.  Fortunately, this use of mental 
stops was not long lasting.  Note:  When I trade options, I only 
use prices in the underlying shares for exit reasons.  

The sixth error might not be well accepted by all readers.  It has 
to do with attempting to trade stock options on pretty illiquid 
securities.  Some traders can do it, I cannot.  This has been the 
most costly of all for me, since market makers could play with 
the spread and seemingly taunt me as the trade went the opposite 
direction.  Example:  Bought 10 at-the-money calls of XYZ at 3.50.  
The bid at the time was 3.00 and various attempts to by at 3.25 
failed.  Minutes later, shares fell and went under my exit price.  
The quote was 3.10 offer at 2.25.  “You have to be kidding me,” I 
told myself.  I tried to sell at 3, 2.75, and even 2.25 once just 
to get out.  Nothing.  The bid mysteriously fell to 2 while the 
offer stayed at 3.10.  I eventually exited with a sizable loss.  

Number seven deals with trying to trade one timeframe and 
forgetting to realize the importance of other longer or shorter 
timeframes.  Example:  I would tell myself, “Support has to hold 
at $30.”  Then, minutes later, shares would be at 29, 28, and 
then 27.25 before large bids entered.  The problem was, I would 
find out later that market participants were looking at a weekly 
low from many months prior.  Looking at a weekly chart, the 27.25 
did seem significant; however, I would either not draw a line or 
discount its importance.  Mistake. 

Eight.  This mistake could also be called “eight hundred.”  Why?  
It refers to putting on commission intensive trades that somehow 
forced me to keep a position longer than normal.  Example:  I 
would put on a number of Bond futures diagonal calendar spreads 
(commissions roughly 300) and then not exit the trade when it 
either (a) went against me, or (b) rose to only breakeven level 
and then gave a pretty obvious sell signal.  I now try my best to 
put commissions in the back of my mind.

The ninth “sin” was thinking about becoming a long-term trader 
when the trade entered was clearly intended on a short-term basis.  
Did I need the immediate gratification of a short-term trade, or 
was the position entered to be kept for weeks or even months?  If 
I sold too quickly, was that a form on insecurity?  Short-term 
trading quickly became the most comfortable for myself; something 
that I have not changed.  Note:  I am talking about my trading 
account and not an account designed specifically for retirement.  

Rounding out the top ten is realizing that having a negative 
attitude and taking the market home with me was debilitating 
and hindered future performance.  There is a fine line between 
confidence and arrogance.  In the past, I would exit a trade at a
loss, go home extremely frustrated, and then look at chart 
patterns in a different light.  It would turn into a battle 
between me and the market.  “The market owes me this money,” I 
would tell myself.  A poor mindset and negative attitude can 
offset a plethora of successful trading notions.

One of the errors I want to touch on in-depth is Number Four, 
execution.  One definition of execution is “a carrying into 
effect or to completion; performance; achievement; consummation; 
as, the execution of a plan, a work, etc.”  As a trader, it would 
hard not to define execution as “The completion of an order to 
buy or sell securities.”

I have to be able to execute the absolute second a new technical 
pattern takes hold.  The word “new” refers to the market reversing 
through a support area; something that should not happen when a 
trader is long.  Unfortunately, this “second” is during a market 
opening and it feels like eternity.  

Almost every day I battle with myself about whether I am actually 
right about market direction.  Who wins this battle?  Technical 
analysis, always.  Every morning, I look at a weekly chart (making 
sure I didn’t miss anything the day before), daily, 60 minute, and 
then 5-minute chart.  Support and resistance lines are drawn, and 
then a sentiment reading constructed.  

What about fundamental analysis for execution purposes?  I use 
fundamental analysis only when the market seems to be following 
the news and goes opposite of my opinion on market direction as 
well as under intermediate support levels.  Example:  Non-farm 
productivity reported at 200k, while expectations were for a rise 
of 15k.  In the current market environment, this should be good 
news for blue-chip holders.  Let’s further say that I was long 
the broad market.  Following the report, the Dow falls 200 points 
and breaks an obvious bullish trend line.  Why the sell-off?  Now 
it is time to look at fundamental analysis.  Is there wage-push 
inflation?  Wage-push inflation shouldn’t matter with today’s 
deflationary concerns, so I doubt that.  Seasonal adjustments?  
Sure, but the market is usually more forward looking.  With no 
answers, it would make sense to take another look at the overall 

To me, following all the other indices is a form of fundamental 
analysis.  Reading the headline news is a form of fundamental 
analysis, mainly because I have something to talk about with my 
trader friends.  However, learning about some moratorium on 
interest payments in Argentina usually will not lead to a more 
profitable trading account.

Ok, time for some illustrations.  With another trading week behind 
us, I first begin with a weekly chart of the Dow and note possible 
support and resistance levels.  

Chart of the Dow Jones, Weekly


The next timeframe I choose is a daily chart, changing the colors 
for support and resistance to black.  If at least two time frames 
match up, the color becomes green.  The Daily chart, with its use 
of black and thicker line, makes it more obvious to determine trend 
and possible psychology.  The Dow is currently under an intermediate 
trend line, most likely taking sentiment to either “neutral” or 
“slightly bearish”.  Of course, this is more of an overview reading 
and does not mean I will be selling the market immediately on 

Chart of Dow Jones, Daily


Chart of the Dow Jones, 60 minute


Only a few lines were added to the graph when the time frame went 
to a 60-minute chart.  One line, between 8300 and 8400 was turned 
to green.  Now let’s look at a five-minute chart and take things 
to a more practical trading level.

Chart of Dow Jones, Five Minute


After all of these time frames, my sentiment going into Monday is 
relatively neutral, with a slight bearish slant.  This would mean 
that a slightly larger position would be put on if prices fall.  
A move above 8353 (top green line) should have bullish traders 
entering equities, while a rise above the black line (from 8375 
to 8395 for Monday) should confirm the bullishness for more 
conservative traders.  Under 8243 (lower green line) should take 
things to more bearish readings, while a drop under 8214 (darker, 
thicker line) should have bearish traders looking for a move 
towards the declining black line at 8043 to 8017.  I like doing 
these lines because it takes emotion out and gets things to more 
of a science.  I hope you do too.  

John Seckinger

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The Option Investor Newsletter                   Sunday 09-15-2002
Sunday                                                      5 of 5

In Section Five:

Covered Calls: Trading Basics: Market Terms & Definitions
Naked Puts: Options 101: More Q&A With The Naked-Puts Editor
Spreads/Straddles/Combos: Nothing Sweet About This Honey!

Updated In The Site Tonight:
Market Watch
Market Posture

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Trading Basics: Market Terms & Definitions
By Mark Wnetrzak

One of our new readers asked about the term "Target-Shoot" with
regard to covered-call positions.

Attn: Covered-calls Editor
Subject: Option Trading Terms

Hello Mark,

I joined the OIN last month and I have found it to be a very
useful service for both option traders and stock buyers like
myself.  I am comfortable with covered-calls and that's why I
like your section but I don't quite understand all the terms
and phrases you use in your descriptions.  Specifically, what
does "target shoot" mean when it involves a covered call?  Is
that referring to the stock price or the option or both?  Also,
you sometimes talk about potential play adjustments in the
summary section but I did not think there was anything to be
done after a call is sold against the stock.  You are either
called or you keep the stock, right?!?   Anyway, thanks for a
great product and keep up the good work!


Regarding the technique of "Target-Shooting" with Covered-Calls:

This method of opening a position involves placing a buy-write
(with a net-debit) order at a price less than the current market
and waiting for a dip to fill the order.  A buy-write involves
the buying of stock, whilst simultaneously writing a call against
the purchase of that underlying security.  Sometimes you can wait
days for a dip, but in the current market climate we are seeing
volatile activity almost every day.  Normally the dips are too
quick to react with manual orders but if you have an existing
(limit) order, you can get filled when it happens and sometimes
at the low for the day.  Obviously, if you use this method, you
will enter fewer plays because not all the orders will be filled.
However, the plays you do enter will have better profit potential
and you may be buying-in at the low for the day.  In simple terms,
using the buy-write order can help you establish a new position at
an acceptable risk/reward ratio without the possibility of loss
during the transaction.  The stock does not have to be monitored
during the day's trading as the order will be executed only when
the appropriate net-debit is achieved.  This type of trading works
well with low volume issues and provides the market-maker with an
opportunity to fill the request based on other orders in the pits.
It can also be used with volatile stocks that new investors might
otherwise avoid when utilizing the conservative, covered-writing

Regarding potential adjustments with Covered-Calls:

The important thing to remember when you're in a covered-call
position is there are different strategies you can use as the
play progresses.  Despite what many people think, you are not
"locked-in" to only one situation.  At the same time, you need
to be flexible and creative to ensure long-term success with the
strategy.  An example would be when the stock rallies shortly
after the position is initiated.  You can repurchase the sold
call and "roll" up to the next higher strike, taking advantage
of the opportunity to continue in a more aggressive position with
potentially higher profits.  Of course, the downside break-even
point is increased by the amount of money required to complete
the transition so when one rolls up, it is generally beneficial
to move to a future expiration date as it reduces the overall
cost of the new position.  Another illustration of flexibility
in the covered-call strategy can be seen when investors with
large positions in a specific stock diversify by spreading the
sold calls over time, as well as different strike prices.  One
can gain several benefits by writing a portion of the options
near-term and the remaining calls further in the future.  In the
event of significant stock price movement, all of the various
positions will not need to be adjusted at the same time.  This
may include either having the stock called away, or buying back
one written call and selling another.  A second advantage is the
level of option premiums may become more favorable than when the
original series of calls were written.  At worst, only one group
of options would be sold when the premiums are low and hopefully,
they would increase in value before the next expiration period.
This type of flexibility will allow you to own various positions
at different strike prices, smoothing your portfolio balance as
the market fluctuates.  This approach also prevents all of one's
stock from being committed at a single price, thus is offers an
excellent balance between potential return and favorable downside

Trade Wisely!

Note:  Margin not used in calculations.

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

ALKS    7.70   7.75   SEP   7.50  1.25  *$  1.05  11.8%
IMCL    8.30   7.67   SEP   7.50  1.30  *$  0.50  10.9%
NXTL    5.49   8.29   SEP   5.00  1.10  *$  0.61  10.1%
MDR     6.00   6.72   SEP   5.00  1.50  *$  0.50   8.0%
CKFR   11.70  13.05   SEP  10.00  2.05  *$  0.35   7.9%
OSTE    9.34   9.30   SEP   7.50  2.20  *$  0.36   7.7%
WEBX   15.02  14.54   SEP  15.00  1.40   $  0.92   7.3%
TDY    17.80  18.40   SEP  17.50  1.05  *$  0.75   6.8%
MNS    11.20  10.41   SEP  10.00  1.75  *$  0.55   6.3%
NWRE   16.94  15.97   SEP  15.00  2.65  *$  0.71   5.4%
V      12.96  13.12   SEP  10.00  3.30  *$  0.34   5.4%
XOMA    5.66   6.05   SEP   5.00  0.95  *$  0.29   5.4%
NWRE   17.82  15.97   SEP  15.00  3.30  *$  0.48   5.0%
ABFS   27.46  28.22   SEP  25.00  3.00  *$  0.54   4.8%
AFFX   18.51  19.07   SEP  15.00  4.40  *$  0.89   4.6%
MRCY   24.79  25.51   SEP  22.50  3.60  *$  1.31   4.5%
NET    14.56  14.22   SEP  12.50  2.55  *$  0.49   4.4%
VMSI   22.30  20.33   SEP  20.00  2.80  *$  0.50   3.9%
QCOM   28.46  28.58   SEP  25.00  3.90  *$  0.44   3.9%
ICST   20.74  17.01   SEP  17.50  4.20   $  0.47   2.5%
ORCL   10.79   9.73   SEP  10.00  1.15   $  0.09   1.0%
IDTI   15.20  11.85   SEP  12.50  3.30   $ -0.05   0.0%
ISIS   11.25   8.97   SEP  10.00  2.05   $ -0.23   0.0%
JDEC   13.05  11.41   SEP  12.50  1.30   $ -0.34   0.0%
FFIV   14.04  10.79   SEP  12.50  2.55   $ -0.70   0.0%
AMR    11.14   7.36   SEP  10.00  1.65   $ -2.13   0.0%

OSTE    9.45   9.30   OCT   7.50  2.50  *$  0.55   5.7%
CVC     9.48  10.98   OCT   7.50  2.50  *$  0.52   5.4%
NOK    13.95  14.04   OCT  12.50  2.20  *$  0.75   4.6%
FLE     6.02   7.51   OCT   5.00  1.30  *$  0.28   4.3%

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


The major averages threaten to move lower as investors pause to 
remember and pray.  The strength in the NASDAQ on Friday was
encouraging though the SP-500 and DOW appear poised for a test
of the July low.  Two issues stand out on the early exit watch 
list and will be shown closed.  AMR Corporation (NYSE:AMR), which
said it sees a weaker September, and J.D. Edwards (NASDAQ:JDEC),
which appears to have boosted its earnings.  Both stocks offered
agile investors a less painful exit at the open on Friday.  Other
early exit candidates include : F5 Networks (NASDAQ:FFIV), ISIS
Pharmaceuticals (NASDAQ:ISIS), Integrated Device Tech. (NASDAQ:
IDTI), Alkermes (NASDAQ:ALKS), WebEx Communications (NASDAQ:WEBX),
Ventana Medical Systems (NASDAQ:VMSI), and Integrated Circuit
System (NASDAQ:ICST).  The current consolidation in these stocks
appears a bit excessive and with the current market environment,
capital preservation still rules.

Positions Closed: Semtech (NASDAQ:SMTC), Tibco Software 
(NASDAQ:TIBX), Myriad Genetics (NASDAQ:MYGN), Millennium 
Pharmaceutical (NASDAQ:MLNM), and Cree (NASDAQ:CREE).


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

BSTE   29.40  SEP 25.00   BQS JE  5.70 148   23.70   35    4.8%
CMLS   16.85  SEP 15.00   UUC JC  2.55 268   14.30   35    4.3%
LMNX    7.53  SEP  7.50   UEN JU  0.60 20     6.93   35    7.1%
MACR    8.49  SEP  7.50   MRQ JT  1.45 11     7.04   35    5.7%
NWRE   15.97  SEP 12.50   QQA JV  4.10 159   11.87   35    4.6%
PRX    28.20  SEP 25.00   PRX JE  4.30 12    23.90   35    4.0%
RSTO    5.70  SEP  5.00   URF JA  1.20 133    4.50   35    9.7%

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

RSTO    5.70  SEP  5.00   URF JA  1.20 133    4.50   35    9.7%
LMNX    7.53  SEP  7.50   UEN JU  0.60 20     6.93   35    7.1%
MACR    8.49  SEP  7.50   MRQ JT  1.45 11     7.04   35    5.7%
BSTE   29.40  SEP 25.00   BQS JE  5.70 148   23.70   35    4.8%
NWRE   15.97  SEP 12.50   QQA JV  4.10 159   11.87   35    4.6%
CMLS   16.85  SEP 15.00   UUC JC  2.55 268   14.30   35    4.3%
PRX    28.20  SEP 25.00   PRX JE  4.30 12    23.90   35    4.0%

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).

BSTE - Biosite  $29.40  *** Resolution Rally ***

Biosite (NASDAQ:BSTE) is a research-based diagnostics company
dedicated to the discovery and development of novel protein-
based tests that improve a physician's ability to diagnose 
disease.  The company combines separate, yet integrated, 
discovery and diagnostics businesses to access proteomics 
research, identify proteins with high diagnostic utility, 
develop and commercialize products and educate the medical
community on new approaches to diagnosis.  In March 2002, 
Biosite entered into a multi-year collaborative agreement with
Amgen (NASDAQ:AMGN).  Shares of Biosite have rallied almost $10
since the company announced that it and Xoma (NASDAQ:XOMA) had
"resolved all outstanding disputes" related to patents for 
certain research technologies involving antibodies.  Obviously,
investors are pleased with the news and this position offers a
way to speculate conservatively on the company's future share
value with a cost basis closer to technical support.

SEP 25.00 BQS JE LB=5.70 OI=148 CB=23.70 DE=35 TY=4.8%

CMLS - Cumulus Media  $16.85  *** Radio Sector Speculation ***

Cumulus Media (NASDAQ:CMLS) is a radio broadcasting company that
focuses on acquiring, operating and developing radio stations in
mid-size radio markets in the United States.  As of December 31,
2001, the company owned and operated 208 stations (153 FM and 55
AM) in 44 U.S. markets.  The company also provides sales and 
marketing services under local marketing agreements (pending FCC
approval of acquisitions) for 14 stations in six U.S. markets.
The company will own and operate a total of 245 radio stations 
in 51 U.S. markets upon consummation of all of its pending 
acquisitions and dispositions.  Merrill Lynch on Tuesday said
it started coverage of the radio, broadcast and outdoor
advertising industries with a "positive" rating, saying radio
stocks are poised to outperform other advertising media during
the next 12 months.  We simply favor the rally back above the
long-term moving average which completes the recent consolidation
phase.  Traders can speculate on the near-term performance of the
issue with this conservative position.

SEP 15.00 UUC JC LB=2.55 OI=268 CB=14.30 DE=35 TY=4.3%

LMNX - Luminex  $7.53  *** Bracing For A Rally? ***

Luminex (NASDAQ:LMNX) manufactures and markets products featuring
a proprietary technology that advances and simplifies biological 
testing for the life sciences industry.  LMNX's xMAP technology
allows its Luminex 100 System to simultaneously perform up to 100
bioassays on a single drop of fluid by reading biological tests
taking place on the surface of microscopic polystyrene beads 
called microspheres.  xMAP technology combines this miniaturized 
liquid array bioassay capability with small lasers, digital signal
processors and proprietary software to create a system offering
advantages in speed, precision, flexibility and cost.  Luminex's
xMAP technology is used within the various segments of the life 
sciences industry in the fields of drug discovery, clinical 
diagnostics, genetic analysis and biomedical research.  Luminex
recently announced the completion of its Rules-Based Medicine(TM) 
research and development project ("RBM").  Luminex received a 
stock interest and will receive royalties from the marketing of
RBM's products based on Luminex's xMAP technology, as well as 
revenue from the sale of instruments and microspheres.  We 
simply favor the recent bullish technical indications and our
conservative position offers a method to participate in the
future movement of the issue with relatively low risk.

SEP 7.50 UEN JU LB=0.60 OI=20 CB=6.93 DE=35 TY=7.1%

MACR - Macromedia  $8.49  *** On The Mend? ***

Macromedia (NASDAQ:MACR) provides software that empowers millions
of developers and designers to create effective user experiences 
on the Internet.  The company's integrated family of software 
technologies enables the development of a wide range of Internet 
solutions including Websites, rich media content, and Internet 
applications across multiple platforms and devices.  With an 
installed base of more than 3 million developers and designers,
and with Macromedia Flash Player available to 98% of Web users,
the company is a strategic information technology supplier to 
customers in the business, government and educational markets. 
There's not much news on MACR but technical indications suggest
the issue has successfully completed a recent consolidation and 
is poised for future gains.  This position offers excellent
reward potential at the risk of owning this industry-leading 
issue at a favorable cost basis.

SEP 7.50 MRQ JT LB=1.45 OI=11 CB=7.04 DE=35 TY=5.7%

NWRE - Neoware Systems  $15.97  *** Pullback = Entry Point? ***

Neoware Systems (NASDAQ:NWRE) provides software and solutions to
enable appliance computing, a web-based computing architecture
targeted at business customers that is designed to be simpler
and easier than traditional personal computer-based computing.
The company's software and management tools power and manage a
new generation of smart computing appliances that utilize the
benefits of open, industry-standard technologies to create new
alternatives to PCs used in business and a variety of proprietary
business devices.  Neoware Systems provides its software on top
of a number of embedded operating systems, including Microsoft's
Windows CE and NT Embedded, as well as an embedded version of the
Linux operating system.  The company reported sharply higher 
revenue and earnings for its 4th-quarter and fiscal year ended 
June 30, 2002.  Neoware is gaining market share with growing 
profitability, a strong balance sheet and no debt.  Neoware has
been in "rally mode" since last November with the issue moving 
from $2 to $18 in only 10 months and the recent consolidation
may be offering a second chance entry point.  Investors looking
for a long-term holding can use this position to obtain a low 
risk entry point in the issue.

SEP 12.50 QQA JV LB=4.10 OI=159 CB=11.87 DE=35 TY=4.6%

PRX - Pharmaceutical Resources  $28.20  *** Bullish Outlook ***

Pharmaceutical Resources (NYSE:PRX) is a holding company that, 
through its subsidiaries, is in the business of developing, 
manufacturing and distributing a broad line of generic drugs 
in the United States.  PRX operates primarily through its wholly
owned subsidiary, Par Pharmaceutical, Inc., a manufacturer and
distributor of generic drugs.  PRX's product line consists of
prescription and, to a lesser extent, over-the-counter generic 
drugs consisting of approximately 119 products representing 
various dosage strengths for 51 drugs.  The company also has
strategic alliances with several pharmaceutical and chemical 
companies.  PRX markets its products primarily to wholesalers,
retail drug store chains, drug distributors and repackagers.
On Thursday, Pharmaceutical Resources raised its profit forecast
amid strong sales of its anorexia drug and the launch of generic 
versions of an ulcer drug and a treatment for muscle spasms.  The
company also will make a presentation on Wednesday, September 18
at the Bear Stearns Healthcare Conference.  Our outlook is also
bullish, due to the recent technical strength and this position
provides a low risk cost basis in the issue.

SEP 25.00 PRX JE LB=4.30 OI=12 CB=23.90 DE=35 TY=4.0%

RSTO - Restoration Hardware  $5.70  *** Post-Earnings Rally ***

Restoration Hardware (NASDAQ:RSTO) with its subsidiaries, is a 
specialty retailer of home furnishings, functional and decorative
hardware and related merchandise.  RSTO markets its merchandise
through retail locations, mail order catalogs and on the worldwide
Web (www.restorationhardware.com).  The company's merchandise 
strategy and its stores' architectural style create an attractive
selling environment designed to appeal to an affluent, well 
educated 35- to 60-year old customer.  The company operated 104 
stores in 31 states, the District of Columbia and in Canada as of
February 2, 2002.  The company operates a direct-to-customer sales
channel, in addition to its retail stores, which includes both 
catalog and Internet, and a wholly owned furniture manufacturer.
RSTO rallied in August after the company posted a second-quarter
loss of $3.6 million, or 12 cents a share, narrower than its year
ago loss of $6.9 million, or 30 cents a share.  Sales rose 12%
for the quarter and the company expects same-store sales growth
in the 12 to 15 percent range in the third quarter.  We simply
favor the break-out above resistance at $5 and the recent move
through the 50-dma on increasing volume.  Cheap speculation for

SEP 5.00 URF JA LB=1.20 OI=133 CB=4.50 DE=35 TY=9.7%



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

VRSN    7.57  SEP  7.50   QVR JU  0.95 757    6.62   35   11.6%
SEE    17.14  SEP 15.00   SEE JC  3.10 1621  14.04   35    5.9%
OVER   22.78  SEP 20.00   GUO JD  4.00 127   18.78   35    5.6%
NET    14.22  SEP 12.50   NET JV  2.45 87    11.77   35    5.4%
PPD    21.41  SEP 17.50   PPD JW  4.80 136   16.61   35    4.7%
VRTS   17.74  SEP 15.00   VIV JC  3.50 449   14.24   35    4.6%
ESPD   10.25  SEP 10.00   ENU JB  0.75 240    9.50   35    4.6%
QCOM   28.58  SEP 25.00   AAW JE  4.70 2702  23.88   35    4.1%
INVN   35.76  SEP 30.00   FQQ JF  7.00 5227  28.76   35    3.7%


Options 101: More Q&A With The Naked-Puts Editor
By Ray Cummins

Much like the market, the OIN is forever in a state of flux and
sometimes that makes it difficult to keep track of everything.

Attn: Contact Support
Subject: Position tracking and Summaries


I am a faithful reader and follower of your advice.  In trying to
track your recommendations I am having trouble finding previous
recommendations on each weeks listing of Current Positions.

For example, today (9/11/02) the summary is as of 08-27-02.  I
can find none of the New Candidates from 8-25-02 like GISX or
IMN.  What am I doing wrong or what am I missing?


Hello PH,

First, thanks for being a faithful OIN reader!!!

Next, I must apologize, as there is occasionally some confusion
about the two sections you referred to...and the many newsletter
products are continuously evolving with little explanation
offered as to the ongoing changes.

The collection of "premium selling" issues offered on Wednesdays,
which until recently was called "Big Covered Calls & Naked Puts"
because it historically focused on large-capitalization stocks
(now few and far between), has nothing to do with the week-end
edition of "Naked-Puts."  The two groups of candidates are
completely separate; Wednesday's plays include "at-the-money"
options and various spread and combination positions while
Saturday's candidate list, which is directed at the conservative
trader, is limited to "out-of-the-money" plays on relatively
low-priced issues.  The summaries and comments for both sections
are published once each week along with their respective sections.

I hope this explanation helps you understand the differences in
these two products and regardless of what section you favor,
remember that the newsletter simply provides 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.

Have A Great Day!


Attn: questions@OptionInvestor.com
Subject: High Volume and Open Interest

Dear OIN,

I have only been trading options for a few months and you might
say I am still "learning the ropes."  This week, I was watching
the volume in the September options for Hershey - HSY and the
number of large trades was incredible.  Since these are certainly
not normal traders, I assume they are mutual fund managers and
major brokers trying to profit from the sale (or protect against
no sale) of the company.  

My question is who are these big players and do they make option
prices better or worse for the average trader?



Hello RM,

Indeed, option trading in Hershey has been rather active lately,
due to the possible sale of the company and the complications
surrounding the deal.  The large block trades are likely the
result of mutual fund managers protecting their holdings and
institutional traders speculating on the future of the company.
Institutional traders use futures, options and other financial
instruments to help control risk and maximize the value of their
portfolios.  In the stock-options market, portfolio managers are
often option sellers as well as buyers, writing both call and
put options to improve the income of their equity holdings and
provide a margin for downside movement in volatile markets.  The
covered-write strategy has also become a popular technique for
pension funds and other specialized investment vehicles, who
use this method to outperform the major indices.  Since pension
funds have few alternatives to holding a major portion of their
assets in common stocks, covered-writing also provides a form of
risk management with no additional cash outlays our expenditures.
Another shared strategy among institutional option traders is the
protective put.  Fund managers who want to eliminate the risk of
a downward price movement can simply purchase a block of puts to
"protect" the value of a specific holding.  This method is more
common because it allows the buyer to "lock-in" a realized profit
at specific cost basis and also participate in any future upside
activity in the underlying.  Institutions are almost always in
the market for put options and they are willing to pay a premium
for the insurance against a drop in the price of the held asset.
This is the main reason that put options have enjoyed relatively
high premiums over the past few months and the trend is likely to
continue for some time.

Some of the most frequent institutional traders in the options
market are hedge fund managers.  Hedge funds are simply private
pools of capital usually limited to a small number of "qualified"
investors and administered by a fund manager (who may also have
his/her own money in the fund).  Hedge funds profit through the
use of a range of unique strategies including everything from
sophisticated arbitrage techniques to speculation in high growth
issues and short-term structured products.  Some funds invest only
in ordinary stocks and bonds while others focus on intricate risk
management systems and complex financial derivatives.  Almost all
of them use high leverage instruments and short positions in their
portfolios but most of these funds don't actually "hedge" as the
title suggests.  The concept of "hedging" refers to the practice
among traders of buying or selling opposing futures contracts or
other derivatives to limit or reduce exposure to unwanted price
movements.  Most hedge funds simply use a variety of strategies to
reduce their overall exposure to the market in which they trade.

As you can see, institutional traders do have a significant impact
on the options market and even more so with equity-index options,
which are used to insure portions of, or entire stock portfolios.
The activity of institutional traders adds liquidity to the market
and allows retail traders to enter and exit their positions much
more efficiently and with better prices, and that's something we
can all use help with!

Good Luck! 

                        *** WARNING!!! ***

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


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

ITMN   27.39  29.29   SEP  25.00  0.75  *$  0.75  17.5%
ADRX   24.00  24.65   SEP  17.50  0.40  *$  0.40  16.7%
TYC    15.69  16.88   SEP  12.50  0.30  *$  0.30  13.3%
JDEC   13.05  11.41   SEP  10.00  0.45  *$  0.45  12.8%
PPD    20.67  21.41   SEP  15.00  0.35  *$  0.35  11.9%
KMX    19.02  18.50   SEP  17.50  0.35  *$  0.35  11.8%
MRVL   22.21  20.70   SEP  17.50  0.50  *$  0.50  11.0%
NWRE   14.00  15.97   SEP  10.00  0.40  *$  0.40  10.9%
FDRY    8.99   8.30   SEP   7.50  0.35  *$  0.35  10.3%
CIMA   22.99  23.37   SEP  20.00  0.30  *$  0.30  10.0%
RGLD   14.86  18.05   SEP  12.50  0.25  *$  0.25   9.9%
AMLN   13.00  12.98   SEP  10.00  0.40  *$  0.40   9.7%
IMDC   23.45  23.65   SEP  20.00  0.40  *$  0.40   9.6%
INVN   28.36  35.76   SEP  22.50  0.85  *$  0.85   9.4%
JDEC   13.40  11.41   SEP  10.00  0.25  *$  0.25   9.3%
ICOS   27.49  23.72   SEP  20.00  0.75  *$  0.75   8.7%
WMGI   20.49  18.75   SEP  17.50  0.45  *$  0.45   8.6%
CVTX   26.01  21.68   SEP  20.00  0.70  *$  0.70   8.6%
ITMN   24.87  29.29   SEP  20.00  0.30  *$  0.30   8.5%
UOPX   28.78  30.60   SEP  25.00  0.45  *$  0.45   8.4%
CCMP   43.60  44.12   SEP  35.00  0.35  *$  0.35   8.3%
PPD    21.95  21.41   SEP  15.00  0.35  *$  0.35   8.0%
ENZN   24.13  21.65   SEP  17.50  0.60  *$  0.60   8.0%
VIA    41.70  42.47   SEP  37.50  0.45  *$  0.45   7.6%
ADRX   24.63  24.65   SEP  15.00  0.25  *$  0.25   7.3%
AU     25.20  27.90   SEP  22.50  0.25  *$  0.25   7.1%
SIE    22.88  18.52   SEP  17.50  0.40  *$  0.40   7.0%
TTWO   23.40  27.00   SEP  17.50  0.40  *$  0.40   6.8%
LNCR   33.38  31.91   SEP  30.00  0.80  *$  0.80   6.5%
NPSP   23.06  19.70   SEP  15.00  0.45  *$  0.45   6.4%
PPD    22.23  21.41   SEP  12.50  0.35  *$  0.35   6.3%
HD     33.25  33.45   SEP  30.00  0.30  *$  0.30   6.3%
IVGN   35.60  36.29   SEP  30.00  0.35  *$  0.35   5.9%
HGSI   17.59  12.95   SEP  12.50  0.25  *$  0.25   5.8%
HD     32.93  33.45   SEP  30.00  0.40  *$  0.40   5.7%
HGSI   17.87  12.95   SEP  12.50  0.30  *$  0.30   5.6%
IMN    33.05  31.43   SEP  30.00  0.55  *$  0.55   5.6%
LOW    44.03  44.97   SEP  40.00  0.35  *$  0.35   5.5%
CLS    23.80  21.60   SEP  17.50  0.30  *$  0.30   5.2%

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


Technology stocks struggled to remain "in the black" Friday
after recent sharp declines and although the outlook is rather
bleak, the range-bound activity may continue for the next few
weeks.  From a long-term viewpoint the trend is bearish, thus
stock selection and effective position management will be the
key to achieving portfolio profits.  Marvell Technology Group
(NASDAQ:MRVL) has bounced back and Wednesday's rally provided
a great "early-exit" opportunity with a profitable outcome.
J.D. Edwards (NASDAQ:JDEC) is our new concern and despite a
favorable earnings outlook, the issue's technical indications
are less than outstanding.  Human Genome Sciences (NASDAQ:HGSI),
CV Therapeutics (NASDAQ:CVTX), and Icos (NASDAQ:ICOS) continue
to be potential exit candidates and issues on the watch-list
include Sierra Health (NYSE:SIE), Enzon (NASDAQ:ENZN), Wright
Medical (NASDAQ:WMGI), and Imation (NYSE:IMN).

Positions Previously Closed:

OSI Pharmaceuticals (NASDAQ:OSIP), Global Imaging (NASDAQ:GISX),
Multimedia Games (NASDAQ:MGAM), and Vertex Pharmaceuticals


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

AMZN   16.61  SEP 12.50   ZQN VQ  0.30 5771  12.20   35    7.2%
BSX    30.18  SEP 27.50   BSX VY  0.85 278   26.65   35    7.2%
COF    38.92  SEP 27.50   COF VY  0.60 187   26.90   35    6.2%
IDE    25.50  SEP 22.50   IDE VX  0.75 10    21.75   35    8.2%
INVN   35.76  SEP 25.00   FQQ VE  0.45 1453  24.55   35    5.1%
MDG    20.40  SEP 17.50   MDG VW  0.55 310   16.95   35    8.2%
PPD    21.41  SEP 15.00   PPD VC  0.60 562   14.40   35   10.7%
RGLD   18.05  SEP 15.00   MJQ VC  0.50 303   14.50   35    9.3%
STN    14.15  SEP 12.50   STN VV  0.25 117   12.25   35    5.1%
UTHR   16.50  SEP 15.00   FUH VC  0.55 0     14.45   35    8.5%

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

PPD    21.41  SEP 15.00   PPD VC  0.60 562   14.40   35   10.7%
RGLD   18.05  SEP 15.00   MJQ VC  0.50 303   14.50   35    9.3%
UTHR   16.50  SEP 15.00   FUH VC  0.55 0     14.45   35    8.5%
IDE    25.50  SEP 22.50   IDE VX  0.75 10    21.75   35    8.2%
MDG    20.40  SEP 17.50   MDG VW  0.55 310   16.95   35    8.2%
AMZN   16.61  SEP 12.50   ZQN VQ  0.30 5771  12.20   35    7.2%
BSX    30.18  SEP 27.50   BSX VY  0.85 278   26.65   35    7.2%
COF    38.92  SEP 27.50   COF VY  0.60 187   26.90   35    6.2%
INVN   35.76  SEP 25.00   FQQ VE  0.45 1453  24.55   35    5.1%
STN    14.15  SEP 12.50   STN VV  0.25 117   12.25   35    5.1%

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).

AMZN - Amazon.com  $16.61  *** Internet Retail Giant ***

Amazon.com (NASDAQ:AMZN) is a website where customers can find
and discover anything they may want to buy online.  The company
lists millions of items in categories such as books, music, DVDs,
videos, consumer electronics, toys, camera and photo items, PC
software, computer and video games, tools and hardware, outdoor
living items, kitchen and house-wares products, toys, baby and
baby registry, travel services and magazine subscriptions.  At
its Amazon Marketplace, Auctions and zShops services, businesses
and individuals can sell virtually any product to millions of
customers, and with Amazon.com Payments, sellers are able to
accept credit card transactions in addition to other methods of
payment.  The company operates a U.S.-based Website: amazon.com,
and four internationally focused Websites: www.amazon.co.uk,
www.amazon.de, www.amazon.fr and www.amazon.co.jp.  Amazon.com
in July posted a second quarter net loss of $94 million, or $0.25
per share, but boosted its full-year sales outlook.  Earlier this
month, Moody's Investors Service raised one of AMZN's ratings,
saying the Internet retailer has improved its ability to generate
cash.  Investors who wouldn't mind owning the Internet's retail
leader near a cost basis of $12 should consider this position.

SEP 12.50 ZQN VQ LB=0.30 OI=5771 CB=12.20 DE=35 TY=7.2%

BSX - Boston Scientific  $30.18  *** Solid Outlook! ***

Boston Scientific (NYSE:BSX) is a global developer, manufacturer
and marketer of less-invasive medical devices.  The firm's unique
products are offered by two major business groups, Cardiovascular
and Endosurgery.  The Cardiovascular segment focuses on products
and technologies for use in the firm's interventional cardiology,
interventional radiology, peripheral vascular and neurovascular
procedures.  The Endosurgery organization focuses on products and
technologies for use in oncology, vascular surgery, endoscopy,
urology and gynecology procedures.  Standard & Poor's recently
said that FDA approval of Boston Scientific's Express2 coronary
stent system will help keep the company "on track" because it
allows them to participate in the forthcoming $5 billion U.S.
drug-coated coronary stent market.  Investors apparently agree
with a bullish outlook as they pushed the issue to a test of
two-year highs last week.  Traders who believe the upward trend
will continue can profit from that outcome with this play.

SEP 27.50 BSX VY LB=0.85 OI=278 CB=26.65 DE=35 TY=7.2%

COF - Capital One  $38.92  *** Premium Selling! ***

Capital One Financial (NYSE:COF) is a holding company whose major
subsidiaries market a variety of financial products and services
to consumers using its proprietary information-based strategy.
The company's primary business is consumer lending, with a focus
on credit cards, but including other consumer lending activities
such as unsecured installment lending and automobile financing.
The company's principal subsidiary, Capital One Bank, a limited
purpose, state-chartered credit card bank, offers credit card
products.  Capital One, F.S.B., a federally chartered bank, offers
consumer lending and deposit products.  Capital One Services, the
other major subsidiary, provides various operating, administrative
and business services to the company and its subsidiaries.  Option
premiums in COF are at historically high levels and traders who
wouldn't mind the stock in their long-term portfolio can establish
a cost basis near $27 with this position.

SEP 27.50 COF VY LB=0.60 OI=187 CB=26.90 DE=35 TY=6.2%

IDE - Integrated Defense Tech.  $25.50  *** New Acquisition ***

Integrated Defense Technologies (NYSE:IDE) is a developer and
provider of advanced electronics and technology products to the
defense and intelligence industries.  The company offers over 500
products comprising electronic combat systems, diagnostics and
power systems and communications and surveillance systems.  These
are installed on or used in a broad array of military platforms
in order to enhance their operational performance or extend their
useful life.  Integrated Defense Technologies' installed product
base is found on major military platforms such as the F-16 and
C-17 aircraft, the DDG-51Destroyer and the Trident submarine, the
M1 Abrams Main Battle Tank and the Light Armored Vehicle, the High
Mobility Multi-purpose Wheeled Vehicle as well as the Patriot and
Tomahawk missile systems.  Shares of IDE soared Friday after the
provider of electronic products for the defense and intelligence
industries said it had reached an agreement to buy the BAE Systems'
advanced systems business, which makes radio frequency surveillance
equipment, for $146 million in cash.  The company says the deal,
which is expected to close early in the fourth quarter, will be
accretive to 2003 earnings and investors are apparently in favor
of the acquisition.

SEP 22.50 IDE VX LB=0.75 OI=10 CB=21.75 DE=35 TY=8.2%

INVN - InVision Technologies  $35.76  *** Aviation Security ***

InVision Technologies (NASDAQ:INVN) is a provider of Federal
Aviation Administration certified explosives detection systems
used at airports for screening checked passenger baggage.  The
company's EDS products are based on complex computer tomography,
which is the only technology for explosives detection that has
met the FAA certification standards.  InVision was the first
manufacturer, and is one of only two manufacturers, whose EDS
products have been certified by the FAA for screening checked
baggage.  Invision has been in "rally mode" over the past few
months and with the increased demand for detection of bombs and
other explosive devices, this looks like an excellent long-term
portfolio issue.

SEP 25.00 FQQ VE LB=0.45 OI=1453 CB=24.55 DE=35 TY=5.1%

MDG - Meridian Gold  $20.40  *** Market Hedge! ***

Meridian Gold (NYSE:MDG) is a precious metals producer with a long
and successful history of discovering, developing, and profitably
operating gold ore mines.  Meridian has been active in the gold
business since 1981, when it was FMC Gold, and during its history
the company has discovered five "grass roots" deposits containing
over 8.7 million ounces of gold, invested nearly $400 million in
gold extraction facilities, successfully built three gold mines:
El Pen; Beartrack and Paradise Peak, established three joint
ventures from discoveries, two of which were developed into very
successful gold mines and the third of which (Rossi) is currently
being developed by joint venture partner Barrick Gold Corporation.
Meridian Gold is one of our broad-market hedge plays for the month
of October and traders who believe that equity values will slump
can profit from the likely rise in gold stocks with this position.

SEP 17.50 MDG VW LB=0.55 OI=310 CB=16.95 DE=35 TY=8.2%

PPD - Pre-Paid Legal  $21.41  *** More Premium Selling! ***

Pre-Paid Legal Services (NYSE:PPD) was one of the first companies
in the United States organized solely to design, underwrite and
market legal expense plans.  The company's legal expense plans
(referred to as Memberships) currently provide for a variety of
legal services in a manner similar to medical reimbursement plans.
Plan benefits are provided through a network of independent law
firms, typically one firm per state or province.  Members have
direct, toll-free access to their Provider law firm rather than
having to call for a referral.  Legal services include unlimited
attorney consultation, traffic violation defense, auto-related
criminal charges defense, letter writing/document preparation,
will preparation and review and a general trial defense benefit.
Pre-Paid shares rallied Friday, despite news that it had been
reported to the U.S. Securities and Exchange Commission for not
disclosing fees paid to a magazine that subsequently recommended
its stock.  The report said Pre-Paid Legal Services issued a press
release Tuesday boasting about the recommendation but the release 
didn't disclose that PPD paid more than $30,000 to the publication.
Pre-Paid always seems to be doing something wrong, but the stock
is a great speculative candidate for traders who favor aggressive
"premium-selling" positions.

SEP 15.00 PPD VC LB=0.60 OI=562 CB=14.40 DE=35 TY=10.7%

RGLD - Royal Gold  $18.05  *** Broad-Market Hedge ***

Royal Gold (NASDAQ:RGLD) is the largest U.S.-based royalty firm
engaging in the acquisition and management of precious metal
royalty interests.  Royal Gold seeks to acquire existing royalties
or to finance projects that are in production or near production
in exchange for royalty interests.  The firm, to a reduced extent,
also explores and develops properties thought to contain precious
metals and seeks to obtain royalty and other carried ownership
interests in these properties through the subsequent transfer of
operating interests to other mining companies.  Substantially all
of the firm's revenues are and can be expected to be derived from
royalty interests, rather than from mining operations conducted by
the company.  During 2001, the company focused on the acquisition
of royalty interests, rather than the creation of such interests
through exploration, followed by further development and property
transfers to larger mining companies.  Royal Gold is another good
candidate for a broad-market hedge and traders who want to profit
from a decline in the major equity averages should consider this

SEP 15.00 MJQ VC LB=0.50 OI=303 CB=14.50 DE=35 TY=9.3%

STN - Station Casinos  $14.15  *** Hot Sector! ***

Station Casinos (NYSE:STN) is the leading provider of gaming and
entertainment to the residents of Las Vegas, Nevada.  Station's
properties are regional entertainment destinations and include
various amenities, including numerous restaurants, entertainment
venues, movie theaters, bowling, and convention/banquet space, as
well as traditional casino gaming offerings such as video poker,
slot machines, table games, bingo and race and sports wagering.
Station owns and operates Palace Station Hotel & Casino, Boulder
Station Hotel & Casino, Santa Fe Station Hotel & Casino and Wild
Wild West Gambling Hall & Hotel, Texas Station Gambling Hall &
Hotel and Fiesta Rancho Casino Hotel in Las Vegas, Nevada, and
Sunset Station Hotel & Casino and Fiesta Henderson Casino Hotel
in Henderson, Nevada.  Station also owns a 50% interest in both
Barley's Casino & Brewing Company and Green Valley Ranch Station
Casino in Henderson, Nevada.  Casino and Resort stocks have been
"on the move" in recent weeks and this position offers a low risk
cost basis in a rebounding issue with favorable buying support.

SEP 12.50 STN VV LB=0.25 OI=117 CB=12.25 DE=35 TY=5.1%

UTHR - United Therapeutics  $16.50  *** Own This One! ***

United Therapeutics (NASDAQ:UTHR) is a biotechnology firm focused
on combating various chronic and life-threatening cardiovascular,
infectious and oncological diseases with unique therapeutic drugs.
United Therapeutics is active in three primary therapeutic areas
(cardiovascular medicine, infectious disease and oncology), with
four major therapeutic platforms: prostacyclin analogs, arginine
formulations, telemedicine and iminosugars.  Most of the company's
resources are focused on its analogs of the endogenous hormone
prostacyclin for the ongoing treatment of pulmonary hypertension,
peripheral vascular disease and metastatic cancer.  The firm's
second principal focus is the development of iminosugar compounds
for the treatment of hepatitis B and C.  United Therapeutics also
devotes resources to the commercialization and further development
of arginine therapy, especially in coronary artery disease, and of
telecardiology, principally for cardiac arrhythmia.  Investors who
are interested in owning a unique biotechnology stock with a solid
outlook and bullish technicals should consider this position.

SEP 15.00 FUH VC LB=0.55 OI=0 CB=14.45 DE=35 TY=8.5%



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

CKFR   13.05  SEP 10.00   FCQ VB  0.50 120    9.50   35   14.0%
GNSS    9.31  SEP  7.50   QFE VU  0.30 165    7.20   35   11.8%
ITMN   29.29  SEP 25.00   IQY VE  0.95 748   24.05   35    9.9%
ROAD   33.06  SEP 30.00   EJQ VF  1.30 40    28.70   35    9.9%
ADRX   24.65  SEP 15.00   QAX VC  0.60 434   14.40   35    9.4%
GYMB   18.80  SEP 17.50   GQU VW  0.65 4     16.85   35    8.2%
AU     27.90  SEP 25.00    AU VE  0.85 417   24.15   35    8.1%
ADBE   20.77  SEP 17.50   AEQ VW  0.50 729   17.00   35    7.8%
GTK    24.02  SEP 22.50   GTK VX  0.70 0     21.80   35    6.9%
VRTS   17.74  SEP 12.50   VIV VV  0.25 298   12.25   35    5.7%



Nothing Sweet About This Honey!
By Ray Cummins

                         - MARKET RECAP -
September 13, 2002

A sell-off in blue-chip stocks pulled the Dow Industrials lower
Friday after a grim profit forecast from Honeywell International.

Despite upbeat data showing low inflation and strong retail sales,
industrial stocks struggled throughout the session amid concerns
over earnings at one of America's most well-known conglomerates.
Honeywell became the biggest percentage loser on the Dow after the
company slashed earnings estimates for the third quarter and full
year, saying the broad economic recovery was not materializing,
especially in the aviation industry.  The unexpected news weighed
on industry competitors United Technologies (NYSE:UTX) and General
Electric (NYSE:GE), who both contributed to the 66-point Dow drop.
On the bright side, investors sought refuge in technology stocks
after Adobe Systems (NASDAQ:ADBE) announced that net earnings rose
from a year earlier as investment losses narrowed.  The software
firm also forecast growth in the current quarter and the optimistic
outlook helped lift the tech-heavy NASDAQ Composite Index 11 points
to 1,291.  In the broader equity sectors, retailers enjoyed some
bullish activity amid upbeat sales data and construction, media,
and consumer services shares also edged higher.  Standard & Poor's
500-stock index rebounded 3 points to 889.  Advancing stocks paced
declining issues by roughly 4 to 3 on both the NASDAQ and the New
York Stock Exchange.  Big Board volume was light at 1.59 billion
shares while the technology exchange saw 1.2 billion shares trade
hands.  The benchmark 10-year Treasury climbed 4/32 to 103 26/32,
yielding 3.91%.  For the week, the major stock averages ended lower
and the combination of poor earnings, uncertainty about terrorism,
and waning consumer confidence will likely lead to future declines
in the equity markets.

                       - PORTFOLIO SUMMARY -

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

Lumenis      (NSDQ:LUME)  JAN5C/JAN7.5C  $1.00  debit   bull-call
Ball Corp.   (NYSE:BLL)   OCT45P/OCT50P  $0.70  credit  bull-put
Michaels     (NYSE:MIK)   SEP40P/SEP45P  $0.35  credit  bull-put
Pharmacia    (NYSE:PHA)   OCT50C/OCT45C  $0.60  credit  bear-call
RJ Reynolds  (NYSE:RJR)   SEP60C/SEP55C  $0.70  credit  bear-call
S&P 100      (CBOE:OEX)   OCT395P/400P   $0.45  credit  bull-put
S&P 100      (CBOE:OEX)   OCT500C/495C   $0.45  credit  bear-call
Boyd Group   (NYSE:BYD)   DEC20C/DEC15P  $0.15  debit   synthetic
CableVision  (NYSE:CVC)   DEC15C/DEC5P   $0.10  debit   synthetic
Met-Life     (NYSE:MET)   JAN20P/JAN30C  $0.05  credit  synthetic
Pfizer       (NYSE:PFE)   DEC25P/DEC35C  $0.15  credit  synthetic
Int.Sec.Sys. (NSDQ:ISSX)  SEP15C/SEP15P  $1.80  debit   straddle

The majority of our new combination plays were available near the
suggested entry prices, although some targets would not have been
achieved (on a simultaneous order basis) until late in the week.

Portfolio Activity:

The recent decline in equity values had relatively little effect
on the Spreads/Combos portfolio as most positions remained in a
profitable range.  In the largest category: Credit Spreads, 16 of
19 plays are currently successful and all of the losing positions
were previously identified as potential "early-exit" candidates.
Spreads in International Business Machines (NYSE:IBM) and Express
Scripts (NASDAQ:ESRX) should have been closed (or adjusted), but
one play that has yet to be decided is Lockheed Martin (NYSE:LMT).
as the issue is struggling to move beyond short-term resistance
(and our break-even point) near $66.  In the time-selling group,
Amylin (NASDAQ:AMLN) and Nextel (NASDAQ:NXTL) have been the top
plays but older spreads in Goldcorp (NYSE:GG) and Kellogg (NYSE:K)
have rebounded in recent sessions.  Neutral-outlook plays in eBay
(NASDAQ:EBAY) and Forest Labs (NYSE:FRX) are at maximum profit and
the speculative debit straddle in Emulex (NYSE:ELX) reached the
upside break-even point when the stock rallied to $19.75 during
Wednesday's rally.  Traders who chose to exit the bullish portion
of the play now have a free (and profitable) SEP-$17.50 put to
sell in the coming week.  Among the synthetic positions, Dupont
Photomasks (NASDAQ:DPMI), Hershey (NYSE:HSY) and Mylan (NYSE:MYL),
have all offered small gains.

Next week, we will be making some changes to the summary format.
The new layout will be similar to Wednesday's "Big-Cap Plays"
design with a data-based summary and comments for individual
positions within each strategy group.  This method will allow all
of the portfolio plays to be tracked with one spreadsheet and the
ongoing results will be posted on a weekly basis.  In order to
make the transition simple and less cumbersome, plays published
prior to September will not be included.  Traders with questions
previous positions should send them to: Contact Support

                 - READER'S WRITE E-MAIL REPLIES -

Attn: Contact Support
Subject: Option Trading Books

Hi Ray,

While I have been an OI subscriber for over 5 years, I have up
until now not explored option strategies more complex than simple
calls or puts for short term trading.  I would like to expand my
horizon so it looks like I will become a regular reader of your
section in the newsletter dealing with combinations and straddles.
My personal library has quite a selection of books on technical
analysis, swing trading, point and figure charting etc.  I have
just ordered the book titled Option Volatility & Pricing, and I
already own McMillan's book on Options as a Strategic investment.
Are there any other books that you know of dealing with the
subject of complex option strategies that would complement what
I currently have today?

By the way, I would normally say something like great article or
something comparable.  Quite honestly I could not say, one way or
the other.  What I can say is that over time I have been able to
learn and educate myself through OI and have a great deal of
respect for what you guys are doing.  It really is awesome and
reminds me of some of the more productive teams I have worked
with in my other professional life and career at Hewlett Packard.

Best regards,

DS (Sko)

Hello Sko,

Thanks for your interest in my section and, more importantly, in
being a long-time subscriber to the Option Investor Newsletter.
Your comments about the "team" were very generous and I can say
from a personal perspective that the core members of the OIN
(from the pre-website days) are truly dedicated to offering the
best retail option trading resource, at a reasonable price, on
the Internet.  Of course, the newsletter has evolved substantially
over the years and we are always trying to make improvements and
conform to the reader's requests -- which seem to change on a
regular basis.  One thing that hasn't changed is the way options
are traded and that fact, along with subscriber comments, has led
me to do far less writing on the subject of strategies and focus
more on simply providing candidates.  Indeed, that's the current
direction of my small contribution to the OIN and I have found
that most readers of the Spreads/Combos section want little more
than a high-quality list of potential plays.  It is important
however, that successful trading techniques and strategies are
covered by other writers and I believe with the current staff, we
have finally achieved a favorable balance between market coverage,
commentaries and play research.

Regarding books on spreads and combination trading, a short list
of the titles I have found to be most useful includes:

Option Volatility & Pricing: Advanced Trading Strategies and
Techniques; by Sheldon Natenberg

McMillan on Options; by Lawrence McMillan

Options As a Strategic Investment (4th ed.); by Lawrence McMillan

Option Market Making: Trading and Risk Analysis for the Financial
and Commodity Option Markets; by Allen J. Baird

Advanced Options Trading: The Analysis and Evaluation of Trading
Strategies, Hedging Tactics and Pricing Models; by Robert Daigler

Hope that helps,


                   - STRADDLES AND STRANGLES -

One of our subscribers suggested we offer some additional credit
(short) strangles to take advantage of the recent increase in
option premiums (implied volatility) and the range-bound trends
of many stocks.  Indeed, the current market conditions make that
approach viable and here are some new candidates for aggressive
traders who favor premium-selling strategies.  All of the issues
have relatively stable chart patterns but current news and market
sentiment will have an effect on these positions, so review each
play individually and make your own decision about its outcome.

ADRX - Andrx Corporation  $24.65  *** Generic Drug-Maker ***

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.  The firm has nine
proprietary controlled-release drug delivery technologies that
are patented for certain applications or for which it has filed
for patent protection for certain applications.  Andrx uses its
proprietary drug delivery technologies and formulation skills to
develop bioequivalent versions of selected controlled-release
brand name pharmaceuticals, and brand name controlled-release
formulations of existing immediate-release or controlled-release
drugs.  The company is also developing bioequivalent versions of
specialty, niche and immediate-release pharmaceutical products
and markets and distributes pharmaceutical products manufactured
by third parties.

PLAY (aggressive - neutral/credit strangle):

SELL CALL  OCT-40  QAX-JH  OI=334  B=$0.45
SELL PUT   OCT-15  QAX-VC  OI=434  B=$0.60
UPSIDE B/E=$41.10  DOWNSIDE B/E=$13.90

ISIS - ISIS Pharmaceuticals  $8.97  *** Antisense Technology ***

ISIS Pharmaceuticals (NASDAQ:ISIS) is a biopharmaceutical company
focused on delivering RNA-based drug discovery technologies to
identify and commercialize novel drugs to treat important diseases.
RNA (ribonucleic acid) is a molecule that provides to a cell the
information that it needs to produce proteins, including those
proteins that are involved in disease.  Interference with RNA can
keep the body from producing proteins that are involved in disease.
The company has a strong proprietary position in RNA-based drug 
discovery technologies. With its primary technology, antisense,
ISIS creates inhibitors designed to bind with high specificity to
their RNA target and modulate protein production.  With its Ibis
technology, the firm uses its discoveries in RNA to design small
molecule therapeutics that bind to RNA.  ISIS also uses its unique
antisense technology in collaborations with pharmaceutical firms
to identify and prioritize attractive gene targets for their drug
discovery programs.

PLAY (very aggressive - neutral/credit strangle):

SELL CALL  OCT-15.00  QIS-JC  OI=3825  B=$0.60
SELL PUT   OCT-7.50   QIS-VU  OI=1150  B=$0.90
UPSIDE B/E=$16.55  DOWNSIDE B/E=$5.95

QCOM - Qualcomm  $28.58  *** Trading Range? ***
Qualcomm (NASDAQ:QCOM) is a developer and global 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.
PLAY (aggressive - neutral/credit strangle):

SELL CALL  OCT-32.50  AAW-JZ  OI=10411  B=$0.80
SELL PUT   OCT-22.50  AAW-VX  OI=3525   B=$0.65
UPSIDE B/E=$34.00  DOWNSIDE B/E=$21.00

TKTX - Transkaryotic Therapies  $34.41  *** Another Biotech ***

Transkaryotic Therapies (NASDAQ:TKTX) is a biopharmaceutical firm
dedicated to the development and commercialization of products
based on its proprietary development platforms: Niche Protein
products, Gene-Activated proteins, and gene therapy.  The firm's
Niche Protein product platform is based on protein replacement for
the treatment of rare genetic diseases, a small group of disorders
characterized by the absence of certain metabolic enzymes.  TKT's
gene activation technology is a proprietary approach to the large
scale production of therapeutic proteins, which does not require
the cloning of genes and their subsequent insertion into non-human
cell lines.  The firm's primary gene therapy technology, known as
Transkaryotic Therapy, is focused on the commercialization of non
viral, ex vivo gene therapy products for the long-term treatment
of chronic protein deficiency states.

PLAY (aggressive - neutral/credit strangle):

SELL CALL  OCT-45.00  UFT-JI  OI=3693  B=$0.75
SELL PUT   OCT-25.00  UFT-VE  OI=36    B=$0.75
UPSIDE B/E=$46.55  DOWNSIDE B/E=$23.45

                      - SYNTHETIC POSITIONS -

Both of these stocks have established trends and favorable option
premiums.  Traders with a directional outlook on the underlying
issues may find the risk-reward outlook in these plays attractive.

BRCD - Brocade Communications  $12.33  *** Can It Go Lower? ***

Brocade Communications Systems (NASDAQ:BRCD) is a provider of
infrastructure for storage area networks (SANs), offering a
product family of Fibre Channel fabric switches that provide an
intelligent networking foundation for SANs.  The firm delivers
and enables hardware and software products, education and other
services that allow companies to implement highly available,
scalable, manageable and secure environments for a wide range of
business-critical storage applications.  Companies can leverage
the Brocade's SAN infrastructure solutions to connect servers
with storage devices and scale them independently, consolidate
and share servers and storage resources, centralize and manage
data and share valuable backup resources across the enterprise,
and provision and manage additional storage without increasing
personnel resources.

PLAY (conservative - bearish/synthetic position):

BUY  PUT   OCT-10.00  BQB-VB  OI=2690  A=$0.75
SELL CALL  OCT-15.00  BQB-JC  OI=6720  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 $310 per contract.

TARO - Taro Pharmaceutical  $32.55  *** Next Leg Up? ***
Taro Pharmaceutical Industries (NYSE:TARO) is a multinational,
science-based pharmaceutical company dedicated to meeting the
needs of its customers through the discovery, development,
manufacturing and marketing of the highest quality healthcare
products.  The company was founded with the goal of building a
pharmaceutical company in Israel that would provide quality
pharmaceutical products while investing in research to develop
an international presence.

PLAY (conservative - bullish/synthetic position):

BUY  CALL  OCT-37.50  QTT-JU  OI=154  A=$0.65
SELL PUT   OCT-27.50  QTT-VY  OI=91   B=$0.70

Note:  Using options, the position is similar to being long the
stock.  The initial collateral requirement for the sold (short)
put is approximately $875 per contract.

                        - CALENDAR SPREADS -

A calendar spread (or time spread) consists of the sale of one
option and the simultaneous purchase of an option of the same
type and strike price, but with a future expiration date.  The
premise in a calendar spread is simple: time erodes the value of
the near-term option at a faster rate than the far-term option.

SGP - Schering-Plough  $23.67  *** Cheap Speculation! ***

Schering-Plough Corporation (NYSE:SGP) is a holding company whose
subsidiaries are engaged primarily in the discovery, development,
manufacturing and marketing of pharmaceutical products worldwide.
Discovery and development efforts target the field of human health
but occasionally, applications in the field of animal health can
result from these efforts.  The company views its animal health
applications as a means to maximize the return on investments in
discovery and development.  The company operates primarily in the
prescription pharmaceutical marketplace however, where appropriate,
Schering-Plough has sought and may in the future seek regulatory
approval to switch prescription products to over-the-counter (OTC)
status as a means of extending a product's life cycle.  In this
way, the OTC marketplace is yet another means of maximizing the
return on investments in discovery and development.

Strategy Explanation:

A less neutral and more bullish type of calendar or time spread
is initiated when the current value of the underlying issue is
below the strike price of the options.  This type of position is
speculative with low initial cost and large potential profits.
Two favorable outcomes can occur: the underlying stock rallies in
the short-term and the position is closed for a profit as time
value erosion in the short option produces a net gain or; the
underlying stock consolidates, allowing the sold option to expire
and then eventually rallies above the long option's strike price.
It is generally best to establish this type of spread at least
2 - 3 months before the long option expires, capitalizing on the
ability to sell another option against the longer-term position.
That is the basic idea in this spread play; selling time value
in the options when they are overpriced (high implied volatility)
and buying it back (if necessary) when they return to intrinsic
value.  Ideally, the trader would like to have the stock finish
just below the sold strike when the near-term option expires.  If
the short options are "in-the-money" at expiration, he will have
to buy them back to preserve the long-term position.

PLAY (conservative - bullish/calendar spread):

BUY  CALL  JAN-27.50  SGP-AY  OI=9399  A=$1.40
SELL CALL  OCT-27.50  SGP-JY  OI=1398  B=$0.65

                        - 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.  Both 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.

OHP - Oxford Health Plans  $42.62  *** On The Rebound! ***

Oxford Health Plans (NYSE:OHP) is a healthcare company providing
health benefit plans in New York, New Jersey & Connecticut.  The
company's product line includes its point-of-service plans, the
Freedom Plan and Liberty Plan, health maintenance organizations,
preferred provider organizations, Medicare+Choice plans and other
third-party administration of employer-funded benefit plans.  The
company offers its products through its HMO subsidiaries, Oxford
Health Plans (NY), Oxford Health Plans (NJ), and Oxford Health
Plans (CT), and through Oxford Health Insurance, Oxford's health
insurance subsidiary.

PLAY (conservative - bullish/credit spread):

BUY  PUT  OCT-32.50  OHP-VZ  OI=90   A=$0.30
SELL PUT  OCT-35.00  OHP-VG  OI=149  B=$0.55
POTENTIAL PROFIT(max)=14%  B/E=$34.70

SLAB - Silicon Laboratories  $19.66  *** Bearish Outlook! ***

Silicon Laboratories (NASDAQ:SLAB) designs, builds and markets
proprietary high-performance mixed-signal integrated circuits for
the wire-less, wire-line and optical communications industries.
Mixed-signal ICs are electronic components that convert real-world
analog signals such as sound and radio waves into digital signals
that electronic products can process.  The company's mixed-signal
design engineers utilize complementary metal oxide semiconductor
(CMOS) technology to create ICs that can reduce the cost, size and
system power requirements of devices that the company's customers
sell to their end user customers.  The firm's expertise in analog
CMOS and mixed-signal IC design allows the company to develop new
products rapidly, which enables their customers to improve their
time-to-market with end products that respond to consumer demand
in the communications industry.

PLAY (conservative - bearish/credit spread):

BUY  CALL  OCT-30.00  QFJ-JF  OI=677   A=$0.20
SELL CALL  OCT-25.00  QFJ-JE  OI=1083  B=$0.65
POTENTIAL PROFIT(max)=11%  B/E=$25.50


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