Option Investor

Daily Newsletter, Sunday, 09/22/2002

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The Option Investor Newsletter                   Sunday 09-22-2002
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: That Makes Four in a Row!
Index Trader Wrap: Big volume, but little movement
Editor’s Plays: Dead Cats and Found Money
Market Sentiment: Wake Me Up
Ask the Analyst: Historically Speaking
Coming Events: Earnings, Splits, Economic Events

Updated In The Site Tonight:
Swing Trade Game Plan: No Bounce For The Weary

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
        WE 9-20          WE 9-13          WE 9-06          WE 8-30
DOW     7986.02 -326.67  8312.69 -124.51  8437.20 -236.30  -209.46
Nasdaq  1221.08 - 70.28  1291.36 -  3.94  1295.30 - 19.76  - 65.51
S&P-100  423.90 - 20.34   444.24 -  2.43   446.67 - 14.13  - 13.70
S&P-500  845.39 - 44.41   889.80 -  4.12   893.92 - 22.16  - 24.78
W5000   8023.17 -417.71  8440.88 - 40.32  8481.20 -172.84  -222.85
RUT      367.28 - 22.70   389.98 - 40.32   391.57 +   .61  -  9.17
TRAN    2184.02 - 62.85  2246.87 - 10.20  2257.07 -  8.56  -128.69
VIX       44.55 +  5.24    39.31 -   .73    40.04 +  4.24  +  2.99
VXN       59.08 +  3.23    55.85 -   .69    56.54 +  1.56  +  7.36
TRIN       0.86             1.53             0.93             1.20
Put/Call   1.16             0.89             0.79             0.84

The markets have now posted four losing weeks in a row and the odds
are really good they will stretch it to five. The triple witching 
options expiration week expired peacefully with all the major 
indexes posting minimal gains on Friday but down for the week. 
Earnings warnings are accelerating and the biggest week is still 

Dow Chart

Nasdaq Chart

Nasdaq Weekly Chart

Nasdaq Monthly Chart

With no economic reports at the open the markets were left to trade
on stock news and that news was led by Duke Energy, which warned
before the bell for 2002 and said 2003 would be flat as well. 
Bowater, a large newspaper and paper products company, warned that 
they would miss earnings because of the weak economy. The reason? 
Fewer job ads and fewer merchandise ads in newspapers and magazines 
had cut the consumption of paper drastically. There is a real 
indicator! Knight Ridder (Nyse:KRI) warned on the same lines that 
classified and  general advertising had continued to decline into 

The Nasdaq closed with a +4 gain on Friday thanks to QCOM and the
biotech sector. Software and chips tried their best to derail the
gains. SEBL dropped -8% after bear Stearns warned that they were
having trouble closing big deals this quarter. SABA dropped -11%
on inline earnings despite affirming estimates. 

Chip stocks just can't get a break. TXN was cut to "inline" by 
Salomon Smith Barney citing slowing chip unit growth, continued
weak PC demand and an anticipated peak in wireless components
coming in the 4Q. They cut the price target to $15 from $30. Micron
dropped nearly -10% after Bear Stearns cut estimates on the 
company through 2004 on weak PC demand and pricing pressure on
DRAM chips. UTEK fell after warning that revenue for the 3Q could
drop as much as 50% from the 2Q. They credited this to the lack
of a recovery in chips and slowing order rates along with push 
outs and outright cancellations. Still the SOX only lost -3.59
and is fighting to hold the 250 level. A couple analysts are
predicting 200 as the index low. 

The only big chip winner Friday was Triquint Semi (TQNT). The 
company said it would lose less than previously expected and it 
forecast revenues to be up in the 4Q to a possible profit. TQNT
is a broad based chip maker for everything from wireless phones
to aerospace and defense. 

CIEN announced they were going to layoff another -450 employees
due to the continued weakness in the telecom and networking
sector. They said the layoffs would result in $50 million in
yearly cost savings. That is over $110K per employee. That is
some serious bucks!

The warning season has hit full speed and next week will be
very busy for the confessors. So far this quarter there have
been 457 negative warnings, 209 positive announcements and
208 inline affirmations. According to First Call the pace of 
warnings is worse than both the 1Q and the 2Q and we still 
have three weeks to go. 

Dow components have been doing their share to maintain the
warning rate. To date MCD, HON, JPM, INTC, HD, DIS have already
warned if my memory is correct. EK affirmed current estimates
but talked down future expectations. CAT is rumored to be
going to warn and PG raised guidance. This is not meant to be
a comprehensive list of all the Dow 30 but it is the ones I
remember off the top of my head. Notably absent from the list
are IBM and GE. We have been speculating on an IBM warning for
some time and with the magnitude of the EDS warnings it is 
almost unthinkable that IBM will not warn. 

That leaves us with GE, yes GE! Last quarter GE was rushing 
to affirm about twice a week. Every time somebody even close 
to their sectors would warn, GE would make an announcement 
and affirm their outlook of 17% growth for the year and defend 
their stock. Well, things have changed. Times are tougher and 
Dow components are dropping like flies around them and their 
stock is at $26. There have been cuts in estimates by several 
high profile analysts due to the weakness in the power and 
airline sectors but no response from GE. There have been 
several news articles about increased pension fund liabilities 
but no word from GE. One analyst said the reduced pension 
fund income could knock three cents off of GE earnings. 
GE is notorious for taking costs out of their balance sheets 
to enable them to make estimates. With the increased scrutiny 
over financials and accounting rules it is doubtful they can 
be as free with their reporting this time. I am not predicting 
a warning from GE but the fact that they did not affirm during 
the problems with Honeywell makes investors nervous. With their 
stock price hitting a low of $26.02 on Friday, -$7 off its 
August highs, it is obvious there is serious concern. Put a 
warning from GE and IBM in the same week and we could see a 
really ugly market. 

Another Dow component, Citigroup, just continues to be pressured.
The stock broke under $27 on Friday on worries that their legal
problems and loan liabilities were growing. One Prudential
analyst estimated they had a $10 billion liability in the 
Enron, Global Crossing, Worldcom problems. With Jack Grubman
close to turning states evidence against Salomon Smith Barney
and civil liability and even criminal cases on the horizon it
does not look good for Citigroup. 

All of these problems paint a picture for the Dow that is far
from rosy. The failure to close the week over 8000 was a technical
failure for the Dow. Now only 450 points away from the July lows
there is a good possibility that those lows will not hold. This
is a scary prospect for most traders. Just like the 8062 level
was supposed to hold for the Dow in July and didn't, the 7532
July lows may not hold in October. If we do break that level 
then it is not a successful retest but just a new low in a 
longer term pattern. 

The Nasdaq is on the verge of breaking critical lows as well. 
1216 has held for two days now but worries in the tech sector
are far from over. That critical level is Nasdaq 1200. Once that
level is broken there are several trains of thought that sees
it going to sub 1000. We are getting almost daily chip warnings 
and downgrades and over valued comments. The PC sector is 
dying without the back-to-school sales and we are only 30 
days away from the holiday surge being over for the PC 
manufacturers. The chips are made, boxed and awaiting orders
for holiday inventory. With consumers buying houses and cars
there is not a lot of money left for computers. 

Next week we have a full calendar of economics reports next
week and Tuesday is the Fed meeting to determine changes in
the monetary policy. I see only the slimmest chance of a rate
cut on Tuesday. If they were going to do it this would be the 
meeting since there is not another meeting before the November
elections. The Fed funds futures have spiked from 8% to
something in the 30% range but the indicators are not there
to support a cut. The Fed always telegraphs their intentions 
to change rates so the bond markets do not get wiped out by
unexpected events. The only comments we have had lately have 
been that the Fed was going to stand pat while the economy
recovered slowly. There have been no comments about the Fed
needing to take action. The Fed is stuck on this one. If they
cut then they are admitting the economy is slipping into danger
and the markets may crash. If they don't cut then the markets
will realize there is no additional help on the horizon and 
will sell off as well. The Fed likely sees the coming market
weakness and is still unwilling to use one of their remaining
bullets. They need to save them in case there is another 
terrorist event or the economy really starts to decelerate. 
Still there are some respected analysts calling for a cut
on Tuesday. It would be a surprise and could give the market
a bounce, but only a bounce.

This sets up a couple of rocky weeks ahead of us. We have an
almost 100% chance of a retest of the July 7532 low and the
Nasdaq falling below 1200. However, even at these levels 
analysts are still calling stocks overvalued. We are on track
to attack Iraq in the next couple of months and Brazil is 
going to elect an anti IMF candidate. Japan held a bond auction
on Friday and nobody came. For the first time since auctions
began in 1988 Japan could not sell all the bonds it needed
to fund its programs. This is in an economy that has a negative
interest rate and a stock market at a 19 year low. Analysts
said the auction failed because investors don't feel Japan
has the resolve to correct its currently spiraling economy. 
The U.S. may be one big economic island but these types of
problems will continue to weigh on our markets. 

We closed under Dow 8000 for the week. Many investors with day
jobs will open the paper this weekend and see the number for
the Dow starting with 7 and think, damn, I should have taken
my money out when it bounced to 9000 and now it is 7000 again.
(obviously it is not 7000 but the impression is what counts). 
The decision will be made to remove the rest of their shattered
account from harms way and wait for better times. Funds will
get those dreaded withdrawal calls on Monday and the rest is
history. OIN readers know better than to withdraw money now
and are looking forward to the coming buying opportunity. 
Unfortunately the herd is not that smart and will be looking
to exit at the bottom. I had several readers tell me this 
week they were transferring more money into their trading
account to be ready. Obviously our readers are smarter than
the herd. (shameless plug) Buckle your seatbelts and watch 
out for sudden drops ahead. 

Enter Very Passively, Exit Very Aggressively!

Jim Brown

"Chance favors the prepared mind"


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Big volume, but little movement

With quarterly triple-witching complete, volume was heavy today 
at both the NYSE and NASDAQ with over 1.7 billion shares traded 
at each exchange, but there was little volatility that can often 
come at quarter expirations.

Breadth finished slightly positive at both the NYSE and NADAQ, 
with advancers edging out decliners by a narrow 16:15 margin on 
the big board and 17:16 at the NASDAQ.

Triple-witching can be an informative even for index traders and 
sometimes, the quarterly expiration action can give traders a 
"window" to make note of as it relates to where some institutions 
were rolling contracts to.  I'm not going to do this for every 
index, but lets take a quick look at the S&P 500 Index (SPX.X) 
845.39 +0.24%.  For now, this is for historical purposes only so 
that we can come back and take a look at where some institutions 
may have been making bets.

Some options traders believe that options were created in order 
for investors to "speculate and leverage from."  This is not 
true.  Options were created so that institutions can hedge their 
holding.  For the most part, when market volatility is high, like 
it is now as depicted by the Market Volatility Index (VIX.X) 
44.55, institutions are SELLING premiums.  Only when it's low 
will they buy and then hedge positions.  You know this to be true 
as the saying goes... "buy low, sell high."

This information is not provided for trader/investors to now go 
hog wild on.  No, what we want to do is plant a seed of potential 
ranges of support and resistance.  As time passes, a trader can 
benchmark from this Triple-witching expiration and track open 

09/20/02 SPX Contracts Traded - Sorted by Volume

What I'm looking for right now is where the volume was at this 
day after index expiration.  Where were some institutions perhaps 
rolling?  Volume tells me nothing about future price direction, 
but it hints where interest (not open interest, just today's 
interest) is at and may help us define a range of trading for the 
next month and quarter.  If you believe like I do that 
institutions prefer to sell premium when volatility is high then 
we can perhaps imagine that we're selling calls and puts at 
levels we feel we won't lose money when expiration comes around.

The hypothesis:  There was a lot of volume today is the Oct. 700 
puts.  So what I've done is "pretend" that I'm an institutional 
trader and selling premium.  As such, if I sold this put today, 
my average price (mid-point of High/low was $4.85) was $4.85.  If 
I sold that put, then I would keep that premium if the SPX closes 
above 695.15, come October 17, 2002.  I could begin calling this 
my monthly support (I've placed an M/S by this option to depict 
Monthly Support).

Let's also look at the call side of things.  Again, if 
institutions are selling premium, then the sale of the October 
875 call with an average price today of $18.50, would have the 
trader thinking that 875 + 18.50 = 893.50 is resistance.  After 
all, a trader wouldn't want to sell the 875 calls if he/she 
thought the SPX was going above 893.50 level before the end of 
the month. 

Again, these are hypothetical thoughts, but may help get a trader 
in the mindset of establishing some ranges of monthly and quarter 
support/resistance levels if institutions are indeed selling 
premium right now.

Real quick then, lets take the two most actively traded SPX 
options today for October expiration and state a hypothesis.  

Hypothesis stated:  Based on the belief that institutions sell 
option premium when volatility is high, today's volume interest 
in the October 700 puts and October 875 calls has October's SPX 
trading range between 695.15 and 893.50.  

We should also benchmark against the SPX open interest.  It would 
not be correct to assume a trading range on one-days volume.  The 
reason I want to benchmark current open interest is that over 
time, based on information obtained gathered each day by 
investors, there will be changes to current scenarios in play.  
Should open interest build at a strike price, then that can 
become a "peg level" where the bulk of market participants are 
making bets on or against.  

09/20/02 SPX Contracts - Sorted by 09/19/02 Open Interest

I'm doing the same things with my establishment of support and 
resistance.  I didn't calculate all the potential levels of 
quarterly support (Q/S), quarterly resistance (Q/R), monthly 
support (M/S) and monthly resistance (M/R) from the various open 
interest of the options.

Do you notice how the open interest is all in December?  That's 
because most institutions have already made some bets on fourth-
quarter levels based on the information they currently have at 

From the above open interest, one could also state a hypothesis 
from current open interest.

Hypothesis stated:  Based on the belief that institutions sell 
option premium when volatility is high, current open interest in 
the October 800 puts and October 900 calls has October's SPX 
trading range between 780.75 and 910.60.

Again, I'm stating the hypothesis off of the greatest amount of 
open interest.  You will note that there are several option 
contracts in the December expiration that have very similar open 
interest right now.  As time passes, open interest can change 
markedly as expirations near and more information is gathered 
from market participants and positions put on.

Let's take a look at the S&P 500 Index Chart (SPX.X) 845.39 
+0.25% and see if our last hypothesis based on open interest 
makes any sense.

S&P 500 Index Chart - Daily Interval

Triple-witching Friday's are tough to interpret because we get so 
many hedges coming off and getting rolled forward to future 
expirations that it can really cloud a more naturally traded 
market.  Once again, SPX trader's came close to their bearish 
trader's target of 835, but fell short by about 4 points.  A 
trader bearish after our 09/11/02 Index Trader Wrap (You were 
bearish) has been holding a trade for 7 days.  I'd look to 
protect gains on Monday with a stop just above today's high and 
continue to monitor the Dow Industrials for weakness/strength as 
discussed in last night's Index Wrap.

I've also placed our "hypothesis" levels.  I don't know about 
you, but I sure like that 910 level, which correlates very nicely 
with the original stop we had in place for SPX bears as 
resistance in our 09/11/02 wrap of 912 
http://members.OptionInvestor.com/itrader/marketwrap/091102_1.asp . This perhaps gives the trader some confidence that he/she made a proper move the following morning and perhaps some confidence in the above stated hypothesis for monthly resistance at 910. If your a trader that believes in trading targets, you know what your risk is (the profits you're holding in your trade) versus your potential gain to target of 835. I can't answer for every trader, but I'm leaning toward a stop just above today's high to protect current gains. I think SPX bulls could attempt a bullish trade in the SPX on Monday. The trade here would be to go long above today's high. I would NOT chase a gap above 855 for a bullish trade. Stop would be just under the 835 level for a bullish trade. With the S&P 500 Bullish % charts in columns of O's, I would NOT make any big bets on a bullish trade. Target for a bull would be a rally back near the 19.1% retracement near 870 and ready to get short/put again. As an idea, a bull that understands the risk of selling naked puts and is comfortable in doing so, with volatility high, the play is to be selling premium. As such a DISCIPLINED bull that is willing to sell naked puts (obligation to buy at the specified strike, less the premium received) could look to sell an at/out the money put (Oct. 850 or 840) on a break above 850, stop 835 and target 870. If the SPX were to rally on the break above 850, the price of the put you sell so decline, and as Market Volatility decreases (in a higher moving market) premium should erode somewhat. Under current market conditions, I would be hesitant to hold a large naked put position overnight. Again, if you don't know what your doing here, then don't do it. The idea is that a call option will have premium jacked into it and even though you are long a call, the rise in the market (if the trade goes your way) actually has volatility decreasing and works somewhat against the call. By selling premium in the put, as the market rises, the put option will deteriorate more as volatility declines. 09/20/02 OEX Contracts - Sorted by 09/19/02 Open Interest I didn't take the time to calculate out all the potential monthly and quarter support/resistance levels, but this will serve as a benchmark for the OEX. For the most part, institutions don't use the OEX as much as the SPX for hedging, but some larger cap only funds will dabble with them. I also believe that "smart money" sells out-the-money and buys in-the-money. Therefore, I've selected the 450 call and 400 puts for my initial hypothesis of monthly support/resistance range. Again, I just took the mid- point of today's trades, then added to call and subtracted from put to calculate potential monthly support/resistance. S&P 100 Index Chart - Daily Interval I got a couple of e-mails from OEX bears that said they took some profits today as the OEX came "inches" away from our targets and they were happy with what the OEX had given them. A couple said they just didn't want to let two-days weekend premium erode as the market looked like it might stabilize. I agree with not trying to "squeeze ever last cent" from a trade as it relates to trading a target, but as I said earlier, it's difficult to interpret market action on triple-witching as there is a lot of positioning going on. Again... depending on a traders tolerance for risk and need for profits, I'd look to lock in a bearish gain on a much above the OEX 427 mark. Same type of bullish trade setup for a rally back near 435 with a trailing stop under the 419 level. I hope traders are getting a feel for how we can slowly lower our stops in a bearish trade as we get closer to our target, but give just enough room to the upside to make the index PROVE itself and take us out of the trade. I'm all for giving a trade further opportunity to move in the direction of the bet, but there's no way I would be willing to risk a bearish gain from 450 entry to try simply let the OEX rally back to 440 or higher when my target was 419. OEX and SPX bears should also be paying attention to the Dow Industrials technical action today per last night's Index Trader Wrap. The focal point is what is taking place today at the lower-end of our regression channel as correlated against the 09/03-09/05 dates. Dow Diamonds (AMEX:DIA) Chart - Daily Interval As I mentioned last night. Our lower-trending regression channel is rather young (not a lot of bars to establish regression from), but the DIA is acting somewhat similar to what we were wanting to monitor against from 09/03 to 09/05. While some bears may have locked in gains on Thursday at our target of $80.45, I'm not sure they're regretting it that much even today. I'd still be waiting for a DIA rally back near $83 or Dow Industrials (INDU) 7,986 +0.54% rally back near 8,300. That would provide a better level to then control risk in a bearish trade. All 30 of these components are major institutional holding and price action can be swayed by triple-witching. I would think a DIA bull could look for a bullish trade next week, but just like an OEX/SPX bull, a bullish trader is only looking to play a brief type of short-covering rally using similar parameters of tight stops. A bullish target for a DIA bull is near the $82.20 level or 50% retracement. I'm thinking there's going to be some "old" bulls that gave us bears some up- ticks from 09/12/02 above $84 with some stock for sale on a rally back higher. If the markets continue a continuation move lower on Monday, a DIA bearish trader could leg back in with a partial position on a break lower. Understand the 09/05 bar on the bar chart and how it did undercut the 09/04 bar for the "leg in" part of a trade. Follow with a tight stop on such a move just above today's high. NASDAQ-100 Index Tracking Stock (QQQ) - Daily Interval I did not speak with the AMEX today and couldn't get a hold of a specialist in the QQQ as traders were quite busy with triple- witching activity. However, I received a plethora of e-mails from subscribers regarding the disparity between Thursday's % decline in the Q's and the NASDAQ-100 Index (NDX.X) 871.60 +0.65% , which I can't seem to reproduce, but the "disparity" I noted all day Thursday may have simply been the closing prices marked from Wednesday and Thursday. As such, I'm a little calmer tonight as it relates to being a little "upset as a bearish trader in the QQQ." While the QQQ didn't trade our target of $21.35, it didn't hit my stopping level of $22.13 either. Just like the DIA, SPX and OEX, the QQQ violated Thursday's low and couldn't get above Thursday's high. Some traders e-mailed me with the question of not trading the $21.35 target and instead "holding out" to see what happened if the QQQ broke its July lows of $21.30. I have no problem with that as a trader never knows what could take place when a stock or index violates a 52-week low. As such, I've marked the $21.75 level, which is an approximation of the mid-point of our regression channel, which was taken from way back to the December, 2001 relative highs. Trader will note how the QQQ did find support and bounced from this mid-point on September 5th from $21.93. Hey! Today's high was $21.90. Thinking here, if the QQQ closes below its mid-point of regression, which would be a new 52-week low close, then the lower end of regression may then be assessed as downside risk. Subscribers know I'm a supply/demand guy. If the QQQ closes at a new 52-week low, then all the bulls are "losers" in their positions. If they start thinking.... "I know what happened the last 5-times I held this thing after a 52-week low and I'm getting out" then who knows what might happen on a break to knew lows. For bears willing to risk a stop to $22.13, they can remove their $21.35 target if they wish to. I will note that Qualcomm (NASDAQ:QCOM) $28.08 +9.16% did close right below its 21-day SMA of $21.10 and just above its flattened out 50-day SMA of $27.84. Volume was heavy at 32.6 million shares (average daily has been 16.7 million). While I think the stock finds seller at $30 on any further rally, QQQ bears should just be cognizant that QCOM near-term price action could influence QQQ price action and technology sentiment. The "fundamental" side of me notes that while QCOM was guiding higher on unit sales of its CDMA chips, it didn't raise revenue or EPS guidance. This hints they are probably discounting prices to increase volume, but that puts pressure on gross margins. Dell Computer (NASDAQ:DELL) $28.00 -1.77% had similar comments last month with bullishness coming from "increased market share," but not much in the way of growth to the bottom line. The stock rallied from $26-$28, but now trades $24.83. Microsoft (NASDAQ:MSFT) $47.48 +0.59% traded in a tight range (48-47.30) all day. No interpretation here as this one is in just about every index that would have been impacted by triple- witching and traded even with the major averages on a percentage basis. Note today's volume of 65.3 million, which is about 10 million shares above average daily volume. I'd say that extra 10 million shares was all triple-witching related. How about you? Here's a quick look at the major market averages and various indexes I follow. Trader's can review last Sunday's Index Wrap http://members.OptionInvestor.com/itrader/marketwrap/091502_1.asp if they missed it on how a trader can "step back" a little and view things on a weekly/quarterly/yearly basis and interpret the various sectors as it may relate to the economy. To simply say this week was a "bearish" week would be an understatement. Note that about 1/3 of the "so far Q3" losses for the bulk of the quarter were found this week. Coloration is red=down more than 1%, black=unchanged, blue=up more than 1%.(For those that may be color blind, there wasn't a spot of blue this week). As it relates to Treasury YIELD, thought YIELD was lower in the benchmark 10-year, this equates to upward price in the bond. Weekly Index/Sector Changes "Not even gold stocks" could muster a gain this week. I would have thought this week's negative news in some of the bankers would have had the XAU.X 75.38 -0.59% breaking above that 76-77 resistance level. That's the group I would use as a DIVERGING sector against the major averages. If gold stocks bid and catch some fire above 76-77, look for some short-squeezes to be in play. A move higher in gold combined with a lower DIA, SPX, OEX and QQQ could be taken as a very defensive signal from the market. Conversely a move lower in the XAU.X offset by a move higher in the major averages could be a near-term "relief" of fear signal. This will be a topic for another update, but I think we might be able to use it to our advantage. Have a great weekend and see you back here Monday! Jeff Bailey ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** Editor's Plays ************** Dead Cats and Found Money When good stocks get hit from unexpected sources the sell off can be drastic. Many times it is a knee jerk reaction and the investor ends up selling at levels that others think is an entry point gift. Last July JNJ got hit with a bolt out of the sky and fell from $50 to $41 in one day. Within a month it was trading back at $56 and even higher than before the drop. Investors who exited at the bottom lost heavily and those who saw a bargain got a 36% return in 30 days. Granted that is a specific case but it makes a good example for the stock I am profiling today. INVN - $30.90 Dead Cat bounce Invision was knocked for a loss this week when the Senate voted to delay the airline screening mandate for one year. Short term investors bailed out of the stock on heavy volume. INVN said they welcomed the decision and felt it was a positive development. They said it would give them time to build an in-line automated baggage screening system. They also said the decision should have no impact on standing orders or delivery schedules. http://biz.yahoo.com/bw/020920/200033_1.html I view this event as a buying opportunity. The stock has been on a run with a steady uptrend since early June and the $20 range. This drop from $37.00 to $29.50 only retraced about 38% of those gains. I would use the April-$35 call (FQQ-DG) as my vehicle for capturing any rebound. It was ASK on Friday at $5.40. Since I am anticipating a market dip over the next two weeks I would try to buy that call for something less than $5.00 maybe even $4.00 depending on the dip. The key is to prevent the stock from running away. I would put a market buy just over 31.50, which was the post dip high, at $31.75. If it trades there then bite the bullet and enter the position. ****************** Found money Astrazeneca (AZN) is the maker of Prilosec. This is a very expensive heartburn medication that runs between $80-$120 a month for patients on the drug. It produces $6 billion a year for AZN and a few bucks for Merck as well. Prilosec is going off patent soon, maybe any day. There is a high profile case in court right now to decide when it should be released as a generic. AZN has sued to try and prevent it from being released and the judge is deciding the case now. All the arguments have been heard and they are just waiting on the ruling. If I remember correctly AZN claimed they changed something in the formula that would give them new life as the sole maker. Almost nobody expects AZN to win. The reason for the battle is the $6 billion a year. For every day the drug is delayed AZN reaps another $5 million windfall. Just in the time it has taken for the case to wind its way through the courts has provided AZN with billions more in revenue. The company's patent protection ended on Oct-5th 2001. The judge ruling on the case has take on several new cases recently including the WorldCom fraud case. Many believe it means a ruling is imminent. There are a couple other factors but I will let you read them yourself. http://biz.yahoo.com/rc/020911/health_prilosec_1.html This play is not about AZN. It is about Andrx Corp. (ADRX) ADRX is leading the charge to take Prilosec generic. If the patent expires ADRX will have a six month exclusivity period where they could generate an additional $500 million in revenue. This would be a 50% increase in their current revenue. The difference in revenue estimates from the current AZN windfall is because PG is trying to license Prilosec for over the counter use and if approved would significantly cut into prescription sales. Still, if the judges decision was in the next couple weeks as expected AND favorable which most expect then ADRX would be the immediate beneficiary. Since we are only looking for that approval pop in the stock price we are not concerned about the PG approval which could come later. We are also not concerned with how long it takes ADRX to deliver the drug. We are only concerned with the announcement pop. I would use the March 2003 $25 Call QAX-CE at $5.00 to maximize the pop in time premium on the announcement. This also protects against several weeks going by without an announcement. Once in the call position I would set an alarm on the stock price at $26.50, just over the recent high and check the news when it goes off. If the stock reacts as expected it could hit $30 on the news depending on where it is when the court decision is announced. The downside would be some form of compromise that put off the patent expiration but since it is already a year old I would imagine the court would take that into account. ******************** Remember, these are high risk plays and should only be made with risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** Wake Me Up by Steven Price I would love to say it was a slow day in the market. The end of day figures suggested that was the case. The Dow finished the day up 43.63, ho-hum. The S&P 500 was up 2.07, so what. The Nasdaq gained 4.64, snoooore. Volume was how much!?! 2 billion shares traded on the NYSE and 1.7 billion traded on the Nasdaq. While these numbers are less than excessive, they are still significant, as were some technical developments. Many investors were expecting somewhat of a rebound in the Dow after giving up over 300 points this week and breaking through two significant levels of support. The index broke its hold at the 50% retracement of the late summer rally and then took out 8000 as though all it could see was July's low of 7532. The group did bounce, but the bounce was turned back just over 8000, at 8017. The fall back below, to close at 7986, appears as though we have found new resistance at 8000. A look at the intraday chart shows the Dow struggling to get above that level all day, peek above it briefly, before falling again. This is how new trading ranges are defined, and my guess is that our range is now somewhere between 7500 and 8000. The scary part of this prediction is not being wrong to the upside, but rather what might happen if I'm wrong to the downside. The next level of support below 7400 is 7000 and then 6500. While there is minor support between these levels, those are the major points and you have to go back to 1997 to find them. The Semiconductor Sector Index (SOX.X) also looked as though it had finally found support after its drop from 300 to just over 250. Qualcomm came out with good news about cell phone chip orders after the bell last night and it looked like it would coincide nicely with the landing at possible support of 250. A bounce seemed to be in the making, but the euphoria was short lived. Texas Instruments was downgraded by Salomon Smith Barney, and saw its price target cut in half from $30 to $15. It approached that level quickly as it finished the day down $1.25 to close at $15.78. The downgrade also broke whatever momentum the SOX may have established on the Qualcomm news. The SOX broke 250 to finish the day at 248. While this loss may not seem very big, the level it crossed looks significant and hopes of a rebound look slim. It is hard to sustain a broad market rally without help from the Nasdaq and it is hard to sustain a Nasdaq rally without help from the semiconductors. I stated on Thursday that I though the drop in the market would most likely slow down as we reached toward July's lows. Today's weak bounce, however, has me wondering if that prediction was premature. If the bulls are not willing to put their toes back into the water at significant support levels, instead finding the bears overhead simply too strong to overcome, the trip to Dow 7532 and Nasdaq 1200 could be pretty fast. A look at the bullish percentages, which measure the number of stocks in an index currently giving point and figure buy signals tells an ugly story. While the Dow, S&P 500 and NDX were all at or above 50% just a few weeks ago, they have all reversed down into the thirties. While all were giving bullish readings, they are all either in bull correction or bear confirmed status. I still expect some type of "dead-cat" bounce along the way to 7500, and I don't mean 40 Dow points. We could see a 300-point rally, which would still be only a bear market bounce. Look for a hold above 8000 before initiating long broad market plays. And remember to keep tight stops on individual longs in a downward trending market. There will be long opportunities, but the shorts definitely have more weight behind them. We may see a rally on Monday ahead of the FOMC meeting, on the slim hope of a rate cut. However, after they announce that they are not cutting rates, any rally will fade quickly on Tuesday afternoon. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10679 52-week Low : 7532 Current : 7986 Moving Averages: (Simple) 10-dma: 8308 50-dma: 8492 200-dma: 9593 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 775 Current : 845 Moving Averages: (Simple) 10-dma: 882 50-dma: 893 200-dma: 1046 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 856 Current : 871 Moving Averages: (Simple) 10-dma: 910 50-dma: 947 200-dma: 1272 ----------------------------------------------------------------- The Semiconductor Index (SOX.X): So much for the bounce predicted in this space on Thursday. Qualcomm's flames of increased chip demand were quickly doused by Texas Instruments' price target being cut in half this morning by Salomon Smith Barney. Must have been an interesting day at the CBOE, where those two stocks trade in the same pit. The index got a bounce of a whopping four points before rolling over and taking out support at 250. I've seen recent analyst predictions of SOX 200, but that was an eventual target. That eventuality may be happening sooner rather than later. There will likely be a bounce somewhere before then, but it only took seven trading days to drop from 300 to 248 and only a month to drop from 360 to today's close. At those rates we may see single digits by Christmas. Of course, that's not going to happen, however 200 seems a lot more reasonable today than it did a week ago. 52-week High: 657 52-week Low : 248 Current : 248 Moving Averages: (Simple) 10-dma: 274 50-dma: 318 200-dma: 472 ----------------------------------------------------------------- Market Volatility The VIX may have dropped slightly, but the failure of the Dow at 8000 no doubt kept traders nervous. A 44.55 VIX carries an awful lot of time decay over the weekend, but on a day when the market actually finished up slightly, no one was selling cheap puts. We will most likely see the VIX remain over 40 until the Dow closes over 8000, or we drop much further and then find a bottom. If the latter is the case than we may see 50 soon. CBOE Market Volatility Index (VIX) = 44.55 -1.61 Nasdaq-100 Volatility Index (VXN) = 59.08 -3.68 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 1.16 597,946 695,685 Equity Only 1.03 439,576 454,388 OEX 1.29 44,942 58,182 QQQ 2.13 20,124 42,920 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 37 - 1 Bull Correction NASDAQ-100 27 - 2 Bull Correction Dow Indust. 33 0 Bull Correction S&P 500 37 - 3 Bear Confirmed S&P 100 33 - 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 1.64 10-Day Arms Index 1.44 21-Day Arms Index 1.52 55-Day Arms Index 1.32 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 points. ----------------------------------------------------------------- Market Internals Advancers Decliners NYSE 1428 1287 NASDAQ 1642 1555 New Highs New Lows NYSE 26 188 NASDAQ 26 238 Volume (in millions) NYSE 2,071 NASDAQ 1,770 ----------------------------------------------------------------- Commitments Of Traders Report: 09/17/02 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 Increased long positions by a whopping 50,000 contracts and shorts by 33,000. Small traders followed suit with large increases, but leaned toward short position increases more heavily. Commercials Long Short Net % Of OI 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%) 09/17/02 476,224 503,268 (27,044) (2.7%) Most bearish reading of the year: (111,956) - 3/6/02 Most bullish reading of the year: ( 36,481) - 10/16/01 Small Traders Long Short Net % of OI 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% 09/17/02 182,243 116,377 64,866 21.7% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 114,510 - 3/26/02 NASDAQ-100 Commercials increased long positions by 35% and shorts by 29%. Small traders increased longs by only 1,000 contracts, but increased short positions by 4,000, or 34% Commercials Long Short Net % of OI 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%) 09/17/02 72,522 75,815 (3,293) ( 2.2%) 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 08/27/02 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% 09/17/02 15,288 14,142 1,146 3.9% Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 8,460 - 3/13/02 DOW JONES INDUSTRIAL Commercials increased their long positions by 4,000 contracts, while increasing shorts by 7,000. Small traders increased longs by 6,000 contracts, almost doubling the position, while increasing shorts by only 1500, or 15%. Commercials Long Short Net % of OI 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% 09/17/02 26,863 21,187 5,676 11.8% 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 08/27/02 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%) 09/17/02 13,393 11,637 1756 7.0% Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *************** ASK THE ANALYST *************** Historically Speaking by Steven Price Hi Steve, I'm watching IBM and thinking put at failed rally at the 66 area. What do you think? Thanks, Steve IBM suffered a fate of association this week. Electronic Data Systems lowered its earnings estimate by a whopping 80%, and IBM lost over $6 in two days. As the world's largest computer services company, the news from the second largest - EDS - scared investors silly. It is assumed that IBM will also have to lower guidance at some point and long holders didn't want to be anywhere near the stock at that time. IBM had been in a consolidation rectangle from the end of June through the middle of August, between $66 and $74. The August breakout followed textbook technical analysis, achieving its measuring objective $8 higher at $82, before rolling over and heading back into the previous pattern. The stock then encountered some resistance at the $74 level briefly, before temporarily breaking to the upside. The 50-dma also served as resistance on the recent rebound after the stock broke below $74. The reason for this history is that IBM tends to act according to the book, with respect to support and resistance levels. The drop below the previous floor of $66 will be a test of that level as resistance for the first time since it acted as support. Daily Chart of IBM It requires a look back several years to find a period below the current level that acted similarly to the $66-74 level. That period was August 1997 to February 1998. At that time, the stock consolidated between $47 and $55, the same $8 range at a lower level. Weekly Chart of IBM If IBM were to act in a similar fashion to the downside as it did to the upside, and history indicates that it should, the new downside measuring objective would be $58. However, the problem with simply piling on at this level short is the uncertainty of downside activity mirroring upside activity. A re-test of $66 and failure at that level would suggest that supply at that level should at the very least act as resistance if the short play is wrong. Also, entry from that level would provide a logical stop loss just above that resistance at $67, for a small risk to the upside. The recent breakdown has led to a double bottom breakdown on the point and figure chart, following triple bottom support. This breakdown looks bearish, however the current column of "O"s is very extended and the re-test of $66 would not provide the three-box reversal that is likely to happen on the PnF chart at some point, unless the stock trades $63 first. This is something that shorts may want to watch even on a failed rebound at $66. I still like a short play on the stock on a failed rebound under $66 and we will be watching this entry point for an official play on OI. Please send your questions and suggestions to: Contact Support ************* COMING EVENTS ************* ================================================== Market Watch for the week of September 23rd ================================================== ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- SCS Steelcase Mon, Sep 23 After the Bell -0.03 ------------------------- TUESDAY ------------------------------ GS Goldman Sachs Tue, Sep 24 Before the Bell 0.99 LEH Lehman Brothers Tue, Sep 24 Before the Bell 0.87 RAD Rite Aid Corporation Tue, Sep 24 -----N/A----- -0.13 WOS WOLSELEY Tue, Sep 24 Before the Bell N/A ----------------------- WEDNESDAY ----------------------------- AZO AutoZone Wed, Sep 25 Before the Bell 1.41 BBBY Bed Bath&Beyond Wed, Sep 25 After the Bell 0.23 STZ Constellation Wed, Sep 25 After the Bell 0.53 MKC McCormick & Co Wed, Sep 25 Before the Bell 0.25 ------------------------- THURSDAY ----------------------------- AM American Greetings Thu, Sep 26 Before the Bell -0.27 COGN Cognos Thu, Sep 26 After the Bell 0.14 GUC Gucci Group NV Thu, Sep 26 -----N/A----- 0.60 SLR Solectron Thu, Sep 26 After the Bell -0.04 ------------------------- FRIDAY ------------------------------- None ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable FBP First Bancorp 3:2 Sep 27 Sep 30 -------------------------- Economic Reports This Week -------------------------- The headline economic event this week will be the FOMC meeting on Tuesday. Currently there is almost zero expectation for the Fed to cut rates again. Given all the talk about a potential housing bubble the two home sales reports might merit watching. Keep an eye on the Sentiment report that comes out on Friday. ============================================================== -For- Monday, 09/23/02 ---------------- Leading Indicators (DM) Forecast: -0.1% Previous: -0.4% Tuesday, 09/24/02 ----------------- Consumer Confidence (DM)Sep Forecast: 95.0 Previous: 93.5 FOMC Meeting (DM) Wednesday, 09/25/02 ------------------- Existing Home Sales (DM)Aug Forecast: 5.35M Previous: 5.33M Thursday, 09/26/02 ------------------ Initial Claims (BB) 09/21 Forecast: N/A Previous: N/A Durable Orders (BB) Aug Forecast: -1.8% Previous: 9.2% New Home Sales (DM) Aug Forecast: 990K Previous: 1.017M Help-Wanted Index (DM) Aug Forecast: N/A Previous: 44 FOMC Minutes (DM) 08/13 Friday, 09/27/02 ---------------- GDP-Final (BB) Q2 Forecast: 1.2% Previous: 1.1% Chain Deflator-Final (BB)Q2 Forecast: 1.1% Previous: 1.1% Mich Sentiment-Rev. (DM)Sep Forecast: N/A Previous: 86.2 Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************* SWING TRADE GAME PLAN ********************* No Bounce For The Weary For two days I expected a bounce on short covering at the close on Friday. It finally arrived but if you blinked you missed it. The only thing that prevented the markets from going negative again was the clock. Time expired with the OEX less than one point from negative territory. As triple witching Fridays go this one was positively boring. There was no conviction on either side and the markets did 50% of their volume in the first hour. That is saying a lot since the total market volume was over 4.1 billion shares. The NYSE said there was 175 million shares in the first minute and over 400 million shares in the first ten minutes. This volume was option related and linked to the expiration of the DJX/SPX option settlements at the open. After the opening fireworks the rest of the day was worse than watching grass grow. To read the rest of the Swing Trader Game Plan click here: http://www.OptionInvestor.com/itrader/indexes/swing.asp FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to Contact Support with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter                   Sunday 09-22-2002
Sunday                                                      2 of 5

In Section Two:

Daily Results
Call Play of the Day: ABT
Put Play of the Day: BBOX
Dropped Calls: None
Dropped Puts: AVY, TIN

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For Best Alignment view in Courier Ten Font

CALLS              Mon    Tue    Wed   Thu   Week

AZO      74.78    0.70  -0.31  -0.69   0.53   +1.07 Rally mode
MMM     117.19   -0.99  -2.40   1.69  –1.16   -0.37 Contrarian
ABT      75.58   +1.69  +0.28   +1.83 -0.32   +4.18 triple top


AVY      56.62   -0.09  -0.63  -0.41 –2.25   -2.30 drop, profits
BRL      62.72   -0.20  -0.68  -1.03 –2.57   -3.52 looking good
BSC      58.21    0.11  -2.20   1.93 –2.22   -3.39 safety net gone
LTR      47.55    0.13  -1.41   0.30 –1.37   -7.68 Smokers'cough
MAR      28.51    0.57  -0.74  -0.76 –1.99   -2.60 weak bounce
MXIM     24.45   -1.07  -0.89  -0.18 –0.86   -3.70 sector rolling
TIN      43.52   -0.29  -0.94  -1.95 –1.05   -3.52 drop, profits
JCI      77.04   -1.08  -1.10  -1.92 -0.36   -4.64 Hanging out
BBOX     29.85   -0.40  -0.88  -0.17 -2.52   -4.43 Under support
AIG      56.35   +0.20  -0.69  +0.63 -1.24   -2.25 Filled Gap

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Call Play of the Day:

ABT - Abbott Labs - $41.80 +1.70 (+4.18 for the week)

See details in play list

Put Play of the Day:

BBOX – Black Box Corporation $29.85 (-4.43 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.




AVY $57.70 +1.08 (-2.30 for the week) Originally picked at $60.00, 
AVY has had a poor week to say the least.  With products used in a 
variety of businesses, it has failed as the business world has cut 
costs and closed many doors.  Today's rebound fell short of 
yesterday's high, but nonetheless rebounded strongly.  We will 
close this play for a profit, and look to other stocks with less 
support.  We would not argue with traders who wanted to retain this 
short, as the failed rally is still a bearish sign, however we are 
taking our profits and investing them elsewhere.

TIN $44.47 (-3.52) Turn out the lights, the party's over!  As
weakness resurfaced in the Housing sector last week, shares of
TIN came under extreme selling pressure, treating us to a very
well behaved put play, dropping as low as $43 after we picked up
near $46.50.  As we mentioned on Thursday, it looked like the
stock could be ready to bounce, and Boy, did it ever on Friday.
After the early morning dip failed to produce a breakdown, the
shorts started covering and that helped to lift the stock by more
than 2% by the close.  The daily candle looks like a pretty solid
reversal signal, and rather than risk a further erosion of our
gains, we're closing the play this weekend to make room for
other bearish candidates with more room to fall.


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 
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 09-22-2002
Sunday                                                      3 of 5

In Section Three:

New Calls: ABT
Current Calls: AZO, MMM
New Puts: AIG, BBOX, JCI

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

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



ABT - Abbott Labs - $41.80 +1.70 (+4.18 for the week)

Company Summary:

Abbott Laboratories is a global, broad-based health care company 
devoted to the discovery, development, manufacture and marketing of 
pharmaceuticals, nutritionals, and medical products, including 
devices and diagnostics. The company employs approximately 70,000 
people and markets its products in more than 130 countries. In 
2001, the company's sales and net earnings were $16.3 billion and 
$2.9 billion, respectively, with diluted earnings per share of 
$1.88, excluding one-time charges.  (source: company release)

Why We Like It: 
Abbott has outperformed both the Pharmaceutical Index (DRG.X) and 
Biotech Index (BTK.X) this week.  Those indices sold off 4% and 5% 
respectively his week, while ABT gained 11%. The FDA recently 
approved Abbot's Vysis PathVysion® fluorescence in situ 
hybridization (FISH) test to be included in labeling for Herceptin, 
a treatment for breast cancer.  This will increase use of the test 
to determine which patients are candidates for the treatment.  
Edward L. Michael, Vice President of Diagnostic Commercial 
Operations for  Abbott said, " We're pleased by the FDA's decision 
to include PathVysion as part of Herceptin's label and believe it 
opens the door for this important test to become more widely used 
in the selection of appropriate therapy for women with breast 
cancer."  Earlier this year, the FDA approved inclusion of 
Herceptin in PathVysion's label, making it the only product of its 
type to have three claims: Herceptin therapy selection; Adriamycin-
based therapy selection and prognosis.  While this will probably 
mean more to doctors than to traders, it basically opens the door 
for Abbot's product to be more widely used, especially with the 
most common form of cancer among women in the U.S.  Following the 
announcement, Abbott was upgraded from a "hold" to a "buy,"  by 
A.G. Edwards.

The stock has found recent resistance at $42 since the end of July.  
However, it has also maintained itself over $37 after the gap up on 
July 25 following the FDA's approval of its 47-year old drug, 
Synthroid, for thyroid disease management.  While the market has 
sold off heavily since its run from July 24 to August 22, Abbott 
has hung in there, giving up less than 10% of its price during the 
slide. The 50-dma in the stock provided support throughout the 
first part of September.  ABT has rebounded during the last week, 
taking out the $42 resistance level intraday, before finishing at 
$41.80.  The trade of $42 established a triple top point and figure 
breakout after forming a bullish flag pattern.  This combination of 
patterns has us bullish.  The triple top breakout, according to 
Professor Earl Davis' study, is profitable 87.9% of the time for an 
average gain of 28.7% over a period of 6.8 months.  While we are 
targeting a shorter time frame, this probability lends support to 
our bullish sentiment.  These numbers are also for use in a bull 
market (which we are not in), however the Pharmaceutical Index is 
in bull alert status. The closing price is also above recent 
relative highs.  We would look for a long entry on a trade above 
today's high of $42.27.  More conservative traders may want to wait 
for a trade of $43 to avoid a possible "bull trap," which is a one-
box breakout followed by a reversal.  The bullish vertical count on 
the stock is $64, which is a bit higher than the earlier mentioned 
percentage gain, which brings with it a target of $54.05.  These 
numbers seem awfully aggressive, however they serve underscore the 
possibilities of the long play. Keep in mind that the Dow failed to 
break back above 8000 and longs may want to wait for a hold above 
that level before initiating entries. Place stops at $38.25, just 
below the 50-dma of $38.37.

BUY CALL OCT-40*   ABT-JH OI= 1703 at $ 3.20 SL=1.60
BUY CALL OCT-42.50 ABT-JV OI= 1460 at $ 1.65 SL=0.80
BUY CALL NOV-40    ABT-KH OI= 4730 at $ 3.80 SL=1.90
BUY CALL NOV-42.50 ABT-KV OI= 4664 at $ 2.30 SL=1.20

Average Daily Volume = 5.02 mil

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AZO - Autozone - $75.85 +1.07 (+1.43 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 continued to show strength on both down days and up over 
the last week.  It has not yet broken the $77.00 level, as it seems 
to have the weight of the market on its shoulders, however it got 
close today. This was very bullish, given yesterday's intraday 
resistance at $76.00.  A look at the intraday chart shows a series 
of higher highs and higher lows, with buyers stepping in at each 
pullback.  Zack's liked the stock enough to add it to its 
recommended list recently, even before the triple top point and 
figure breakout.  That came at $76 and the possibility of a bull 
trap, which is a one-box breakout that is immediately followed by a 
sell-off, seems to have been overcome by the subsequent three-box 
reversal finding support and reversing up once again.  Although the 
stock has traded over $76, it needs to trade $77 for a bullish 
catapult to be achieved.  The catapult is a triple top breakout 
followed by a double top breakout.  The continuing series of higher 
highs and higher lows on the daily chart remains very bullish, and 
although the stock has experienced sideways movement the last ten 
days, it has outperformed the overall markets tremendously.  Any 
broad market rally could see this stock achieve our initial target 
of $83 in a hurry. The bullish vertical count of $91 would be the 
secondary target.  A hold above $76 could be seen as an entry point 
for new longs.  More conservative investors looking for another buy 
signal can wait for a trade of $77.00.  We are raising the stop 
loss to $72.00, just below the new higher lows. Remember that AZO's 
earnings are September 25, so we will close the play ahead of that 

BUY CALL OCT-70 AZO-JN OI=  226 at $ 7.20 SL=3.60
BUY CALL OCT-75*AZO-JO OI= 1162 at $ 4.60 SL=2.30
BUY CALL DEC-70 AZO-LN OI=  794 at $10.30 SL=5.50
BUY CALL DEC-75 AZO-LO OI= 1370 at $ 7.40 SL=4.00

Average Daily Volume = 556 K

MMM – 3M Company $119.46 (-0.37 last week)

Company Summary:
Commonly known as the maker of the ubiquitous, adhesive-backed
Post-It Notes, MMM is also a leading manufacturer of a variety
of industrial, consumer, and medical products.  Reflective
sheeting on highway signs, respirators, spill-control sorbents,
and Thinsulate brand insulations are just some of the company's
industrial products.  MMM also makes microbiology products,
making it easier for food processors to test for the
microbiological quality of food.

Why We Like It:
Talk about resilience!  When it became clear that the bears
weren't going to take a serious run at driving the markets lower
on Friday, the bulls started putting money to work in the
strongest names in the DOW.  MMM headed that list with a nearly
2% gain heading into the weekend.  Fortunately, we got a great
entry before the run began, as MMM dipped to just above the $117
level in the early going.  After several slightly higher lows
throughout the day, the shorts covered and MMM rebounded into the
close.  It is interesting to note that the high print of the day
was $119.99.  Recall that momentum traders want to see a strong
push through $120 before taking a position, and clearly the
enthusiasm wasn't there ahead of the weekend.  Those looking to
buy the dips can still take advantage of intraday trips down near
the $117 level, and with the broad markets still looking weak,
we're likely to get that opportunity early next week.  Once clear
of the $120 level, MMM will need to clear its 200-dma ($120.72)
before making a concerted attempt at a real rally.  Look for MMM
to lead on any broad market rally, and if the broad market
actually follows through, we could be looking at the stock trading
in the $124-126 area in fairly short order.  Keep stops in place
at $115.

BUY CALL OCT-115 MMM-JC OI=1894 at $8.00 SL=5.75
BUY CALL OCT-120*MMM-JD OI=4015 at $4.80 SL=3.00
BUY CALL OCT-125 MMM-JE OI=4139 at $2.50 SL=1.25
BUY CALL JAN-125 MMM-AE OI=1596 at $7.10 SL=5.00

Average Daily Volume = 2.73 mln


AIG – American International Grp. $56.35 (-2.25 last week)

Company Summary:
Engaged in a broad range of insurance and insurance-related
activities through its subsidiaries, AIG's primary focus is on
its general and life insurance businesses.  Additionally, the
company is growing its presence in financial services and asset
management.  Other operations include auto insurance, mortgage
guaranty, annuities, and aircraft leasing.  With operations in
130 countries, AIG generates more than half of its revenues
outside the United States.

Why We Like It:
In the wake of the September 11th attacks last year, Insurance
stocks got sold off pretty hard, as investors tried to envision
how bad the financial hit would be.  Clearly, investors are
still worried about a repeat event, as demonstrated by the
strong negative action in select Insurance stocks on Friday when
rumors surfaced that the U.S. would go to Red alert on its
terrorist status.  Those rumors turned out to be false, but a
quick look at the chart of AIG shows just how quick on the
trigger some traders were.  Once bitten, twice shy!  In about 30
minutes, the stock crumbled from $57 down to  $55.40, before
gradually recovering for the remainder of the day.  Of course,
the string of downgrades to about 3 dozen life insurance
companies on Thursday certainly didn't help the bullish case for
AIG as another negative week drew to a close.  Quite possibly,
the cause for the rebound from just above $55 on Friday was due
to the stock hitting its bullish support trend on the PnF chart.
The weakness in the rebound (as well as the bearish price target
of $47) hints that there is more downside to come and we can look
to initiate new positions on the next failed rally.  A rollover
from $57 would work, although a rebound and failure up at $58
would be even better.  Owing to the possibility of a
short-covering rally early next week, we want to start out with
a fairly wide stop at $60.

BUY PUT OCT-60 AIG-VL OI=5670 at $5.30 SL=3.25
BUY PUT OCT-55*AIG-VK OI=6720 at $2.85 SL=1.50

Average Daily Volume = 7.10 mln

BBOX – Black Box Corporation $29.85 (-4.43 last week)

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

Why We Like It:
As the broad markets broke down through important support levels
late last week, there were numerous individual stocks that made
their own break to the downside.  Second only to the weakness in
the Semiconductor index, the Networking index (NWX.X) has shown
zero signs of life, as warnings and downgrades continue to flow
out of the industry.  The NWX broke below its July lows last
Monday ($114) last Monday and never looked back, closing below
$100 for the first time on Thursday.  Even the attempted rally in
the broad markets couldn't inject any life into the sector and
our new put play BBOX generated its own breakdown.  The bulls had
tried valiantly to hold the line at $32 (the site of the early
August low), but in the end the bearish news throughout the sector
took its toll and the stock crumbled to below $30 at Friday's
close.  PnF aficionados will recognize the importance of this
latest move, as it created a fresh triple-bottom Sell signal, and
the vertical count is now pointing to the $21 level as the stock's
eventual downside target.  While there is still some old
historical support at $27 to contend with, the weekly chart shows
the importance of the $21 level as it provided support both in
1997 and 1998.  At this stage, any lift will be a gift, as it will
give us a better entry into the play as the stock continues to be
a favorite of the bears.  Look for a failed rally near last week's
breakdown ($32) to provide for new entries or else enter on a
breakdown under $29.50 (Friday's intraday low).  We are initially
setting our stop at $33, as a rally through that level appears
very unlikely at this juncture.

BUY PUT OCT-30*QBX-VF OI= 105 at $2.55 SL=1.25
BUY PUT DEC-25 QBX-XE OI=1591 at $2.00 SL=1.00

Average Daily Volume = 460 K

JCI – Johnson Controls, Inc. $77.04 (-4.64 last week)

Company Summary:
Johnson Controls, Inc. is engaged in automotive systems and
facility management and control.  In the automotive market, the
company is a major supplier of seating and interior systems and
batteries.  For non-residential facilities, JCI provides
building control systems and services, energy management and
integrated facility management.  

Why We Like It:
The bloom is off the rose of zero-percent auto financing, as it
is becoming clearer that consumers are running out of money they
can spend (or debt that they can assume).  This much is evident
by looking at the charts of the Big Three auto-makers, all of
which have been falling for the past month.  But the real play
here isn't in the actual manufacturers.  It's in their suppliers
and here's how the logic works.  If consumers are buying fewer
cars, then the manufacturers will be building fewer of them and
that means they don't need to buy as many parts from their
suppliers.  It's trickle-down economics in reverse.  JCI is a
major supplier to this industry, and judging by the recent sharp
plunge in share price, the future doesn't look good.  The stock
posted a lower high near $86 about 2 weeks ago, and since then it
hasn't been pretty, with the stock plunging by more than 10%. 
Note that early last week, the stock broke back below the 50-dma
($81.17), putting it below all of its moving averages.  The PnF
chart is a thing of beauty (to a bear), with the current column
of O's giving a bearish price target of $65, which is below the
July lows. Not only that, but the large gap down on Wednesday
placed the stock below its bullish support line of $78.  Since
that gap, the $78 level has proven to be formidable resistance
and we want to target a rollover near this level for new entries.
Alternatively, use a drop below $75.50 (Wednesday's intraday low)
to initiate new momentum-based positions.  Should JCI push
through overhead resistance, we will want to be out of the play,
so we are placing a tight stop at $78.50.

BUY PUT OCT-80 JCI-VP OI=326 at $5.10 SL=3.00
BUY PUT OCT-75*JCI-VO OI=254 at $2.65 SL=1.25

Average Daily Volume = 582 K

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The Option Investor Newsletter                   Sunday 09-22-2002
Sunday                                                      4 of 5

In Section Four:
Current Put Plays: BSC, MAR, MXIM, BRL, LTR
Leaps: Confirmation
Traders Corner: Capitalizing Without Using Capital
Traders Corner: Charting: Trendlines; Price Channels -

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BSC - Bear Stearns - $57.72  -0.49 (-3.39 for the week)  

Company Summary:
Founded in 1923, The Bear Stearns Companies Inc. is the parent 
company of Bear, Stearns & Co. Inc., a leading investment banking 
and securities trading and brokerage firm serving governments, 
corporations, institutions and individuals worldwide. With 
approximately $29.6 billion in total capital, the company's 
business includes corporate finance and mergers and acquisitions, 
institutional equities and fixed income sales, trading and 
research, private client services, derivatives, foreign exchange 
and futures sales and trading, asset management and custody 
services. Through Bear, Stearns Securities Corp., it offers prime 
broker and broker dealer clearing services, including clearing 
and securities lending. Headquartered in New York City, the 
company has approximately 10,500 employees worldwide. 

Why We Like It:

Bear Stearns has continued its sell-off since getting a boost after 
releasing earnings on September 18.  This boost actually just 
provided a better short entry point. The fact that the earnings 
boost failed at the 200-dma and 50-dma demonstrates a lack of 
conviction from buyers who should have been able to move the stock 
over those levels if they were true believers.  It now appears 
anyone who bought on those numbers has left the building. The 
entire brokerage and investment banking sector has sold off amid 
worries of falling profits and illegal dealings.  After J.P. Morgan 
warned that earnings would be much lower than expected, investors 
looked to one of the reasons - lower trading revenues, and began 
selling the sector.  Investors have been pulling money out of 
mutual funds in record numbers for the last several months, as 
evidenced by the slide in the overall markets.  A firm that relies 
heavily on trading is bound to see lower revenues as a result.  
After CSFB and Goldman Sachs handed over IPO documents to the U.S. 
House Financial Services Committee yesterday, it is obvious the 
hunt for financial offenders is far from over.  If Salomon Smith 
Barney and Merrill Lynch were seeing a crossover between the 
investment banking and brokerage divisions, it is likely plenty of 
other firms were as well. While this investigation may not land on 
BSC's doorstep, it is likely to sell-off with the rest of the 
sector as violations are uncovered at other firms.  This isn't to 
say it won't wind up at their doorstep either, which would 
certainly kick start the short play.  The next level of support 
appears to be $55.80 and then it looks clear dwon to the July low 
of $50.50.  We will leave our stop loss at $61.00, as today's 
movement was not enough to justify a move.  While the stock only 
dropped half a dollar, it still went our way on an up day for the 

BUY PUT OCT-60*BSC-VL OI= 5917 at $4.40 SL=2.20
BUY PUT OCT-55 BSC-VK OI= 2505 at $2.20 SL=1.10

Average Daily Volume = 1.22 mil

MAR - Marriott International - $28.58 +0.09 (-2.62 for the week)

Company Summary:
MARRIOTT INTERNATIONAL, INC., a leading worldwide hospitality 
company celebrating its 75th Anniversary in 2002, has over 2,600 
operating units in the United States and 64 other countries and 
territories. Marriott International operates and franchises 
hotels under the Marriott, JW Marriott, The Ritz-Carlton, 
Renaissance, Residence Inn, Courtyard, TownePlace Suites, 
Fairfield Inn, SpringHill Suites and Ramada International brand 
names; develops and operates vacation ownership resorts under the 
Marriott Vacation Club International, Horizons, The Ritz- Carlton 
Club and Marriott Grand Residence Club brands; operates Marriott 
Executive Apartments; provides furnished corporate housing 
through its Marriott ExecuStay division; and operates conference 
centers. Other Marriott businesses include senior living 
communities and services, and wholesale food distribution. The 
company is headquartered in Washington, D.C., and has 
approximately 145,000 employees.

Why We Like It:
Marriott attempted a bounce from yesterday's sell-off, but managed 
on a $0.09 gain.  Not terribly impressive after breaking $30 
support and dropping almost $4.00 in three days. We would have 
still seen a failed rebound to $30 as an entry point, but today's 
weakness looks even more bearish.  A look at the intraday chart 
shows MAR's initial venture over $29 turned back quickly and then 
subsequent attempts at $29 turned back on at least 8 occasions.  It 
now appears that $30 will serve as a ceiling on the stock after 
acting as support since the end of July.  The break from the $5 
rectangle pattern that had been holding the stock between $30 and 
$35 between the end of July and Thursday would indicate a minimum 
downside objective of $25 on this play. The rule about 
consolidation patterns is that the longer the pattern holds, the 
more significant is its breakdown. The 5 week pattern would seem to 
fit this bill.  The decline in hotel revenues, particularly among 
the higher end hotels, has been hard on the entire industry.  The 
month of September will likely be even harder.  The stock was 
downgraded by J.P. Morgan from a "long term buy" to a "market 
perform" the day after the 9/11 anniversary and shortly after the 
hotel revenue numbers were released.  A "market perform" rating in 
the current market is not much of an endorsement.  After the mild 
rebound attempt we will leave our stop loss unchanged at $31.50. 
Today's failure under both $30 and $29 is a signal for new short 
entries on the weakness.

BUY PUT OCT-30*MAR-VF OI= 2780 at $3.00 SL=1.60
BUY PUT JAN-30 MAR-MF OI=   67 at $4.10 SL=2.20

Average Daily Volume = 1.54 mil

MXIM - Maxim Integrated Products - $25.48 -0.89 (-2.42 for the 

Company Summary:
Founded in 1983, Maxim Integrated Products (MXIM) designs, 
develops, manufactures, and markets a broad range of linear and 
mixed-signal integrated circuits (ICs) for use in a variety of 
electronic products. Maxim circuits "connect" the real world and 
the digital world by detecting, measuring, amplifying, and 
converting real-world and communications signals, such as 
temperature, pressure, sound, voice, or light to the digital 
signals necessary for computer and DSP processing. (source: 
company release)

Why We Like It:
The Semiconductor Sector Index (SOX.X) looked like it was ready for 
a bounce, as it had sold off from 300 down to what appeared to be 
support at 250.  The index closed at 252 yesterday and the bounce 
was good for all of 4 points before rolling over and breaking below 
250, to close at 248.  This failed rebound makes the sector look 
even weaker.  Bank of America and Prudential recently cut 2002 and 
2003 earnings outlooks on a combined 15 stocks in the sector.  Not 
that this was really news, since earnings and revenues cuts for the 
semiconductors have become as common as rain in April.  However, 
last night's announcement by Qualcomm that it was raising estimates 
for mobile phone chip demand in the fourth quarter looked as though 
it might give the sector a boost.  The good vibes lasted until this 
morning, when Salomon Smith Barney downgraded Texas Instruments and 
cut its price target for the stock from $30 to $15.  The entire 
sector continues to look extremely weak, and although it is hard to 
imagine the downtrend to continue without some form of a bounce, 
there will need to be some overwhelming good news to achieve a 
meaningful rally.  Until then, we will continue to play it short 
with Maxim, which is continuing its slide from a triple bottom 
point and figure breakdown.  The series of lower highs and lower 
lows has turned into simply lower lows, with each failed rebound.  
The PnF bearish vertical count of $17 will be our eventual target, 
but it will have to get through $20 round number support first.  
the stock attempted a rally early this morning, but was stopped at 
$25.01.  New entries can looked for another failed rally at $25 or 
simply go short at the current level.  

BUY PUT OCT-25 XIQ-VE OI= 1249 at $2.80 SL=1.40
BUY PUT NOV-25*XIQ-WE OI= 1537 at $3.80 SL=1.90

Average Daily Volume = 8.96 mil

BRL – Barr Laboratories $63.65 (-3.52 last week)

Company Summary:
Barr Laboratories is a pharmaceutical company engaged in the
development, manufacture and marketing of generic and
proprietary prescription pharmaceuticals.  Barr markets
approximately 85 pharmaceutical products, representing various
dosage strengths and product forms of approximately 35 chemical
entities.  BRL's product line focuses principally on oncology
and female healthcare categories, including hormone replacement
and oral contraceptives.  The company's Duramed subsidiary
develops, manufactures and markets a line of prescription drug
products in tablet, capsule and liquid forms.

Why We Like It:
After beating up on shares of BRL all week, the bears took a
break on Friday, allowing a slight lift to come into the stock
as Friday's session drew to a close.  Underscoring just how weak
the stock is though, it couldn't even approach Thursday's highs
(following a gap down) near $64.50.  It made sense for BRL to
find support where it did on Friday, as it is now resting just
above its 50-dma ($63.11).  The broad market appears to be
resting on the edge of a cliff, preparing to retest the July
lows, and judging by the weakness in the Pharmaceutical sector
(DRG.X), which is barely clinging to support near $276, our BRL
play is likely to trade significantly lower before finding any
meaningful and lasting support   Following the recent breakdown
on the PnF chart, there is a bearish price target of $55 in play,
and the only real obstacles in the way of the bears achieving
that goal are mild support near $61 (late July swing high) and
the bullish support line on the PnF chart at $57.  A continuation
of Friday's late day lift could give us an attractive entry into
the play on a rollover from the vicinity of $64.50.  We would
even look favorably on a rally as high as $65.25 (the top of
Thursday's gap) for initiating new entries once the rollover
begins.  Alternatively, momentum traders can enter on weakness,
as BRL falls under $62.50 (just below Friday's intraday low) if
accompanied by the DRG index breaking its own support.  Keep
stops set at $65.50.

BUY PUT OCT-65 BRL-VM OI=2834 at $4.10 SL=2.50
BUY PUT OCT-60*BRL-VL OI= 444 at $2.25 SL=1.00

Average Daily Volume = 588 K

LTR – Loews Corp. $45.97 (-4.29 last week)

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

Why We Like It:
They say there is no rest for the wicked, and for those of you
that apply the moniker 'Sin Stocks' to the shares of those
companies involved in the Tobacco industry, the saying appears
to be true.  Pressured by a flurry of bearish analyst comments
about increasing price pressures from low cost producers on one
side and increased litigation risks on the other, the whole
Tobacco group has been under significant pressure in recent days.
Of course, LTR is also involved in the Insurance industry.  This
group of stocks hasn't been doing very well either, as measured
by the Insurance index (IUX.X), which shed another 1.2% on Friday.
One factor pressuring the LTR was Moody's confirming their
Negative outlook on LTR's senior unsecured debt.  Thursday's
selling party in LTR commenced on Friday with a gap down open,
and the stock then proceeded to trade down near the $45 level
before catching a bit of a bounce in the final 2 hours.  Support
at the $45 level is rather tenuous, and once it breaks, LTR will
likely seek out its July lows in the $41 area.  Use any failed
rallies that run out of steam below the $48 level (old support
becomes new resistance) to initiate new positions ahead of the
eventual breakdown.  If you'd prefer to enter on the breakdown,
then wait for the stock to trade below $44.90 before entering.
Our stop has been lowered to $49, just above Thursday's intraday

BUY PUT OCT-50 LTR-VJ OI=114 at $4.50 SL=2.75
BUY PUT OCT-45*LTR-VI OI=150 at $1.75 SL=0.75

Average Daily Volume = 600 K

”If you haven’t traded options online – you haven’t really traded 
options,” claims author Larry Spears in his new compact guide book:

“7 Steps to Success – Trading Options Online”.

Order today and save 25% (only $15) by clicking on PreferredTrade 
and clicking on the link to the book on its home page.



By Mark Phillips

We didn't quite get to it last weekend, but we did cover in
detail in Monday's Trader's Corner article the important
technical patterns shaping up in the broad markets.  Up through
last Monday, the bulls were still hanging onto some semblance
of support, but then the patterns broke down and with a
vengeance too!  Let's recap what has happened so that we can
perhaps gain a better perspective on where we're going.

All of the major indices (DOW, S&Ps and NASDAQ) broke down early
last week, confirming the bearish H&S patterns, each of which
carries a downside price target that isn't going to be comforting
to the bulls.  The targets for the DOW and S&Ps is fairly close
to the intraday lows set back in July.  But on the NASDAQ
Composite, the picture isn't quite so appealing, with a current
target down near 1100, which is nearly 100 points below the July

Turning to the Point and Figure (PNF charts), we can see that all
of the major indices are on Sell signals again and the bearish
price targets are not encouraging:

Index              Current       July low       Bearish Target
DOW                7986          7532           7150
S&P 500             845          775            755
S&P 100             424          385            384
NASDAQ-100          871          856            750
NYSE Composite      459          418            420

Ouch!  Note that aside from the NYSE Composite and the OEX, all
of the PnF price targets currently in play are well below the
July lows.  Not only that, but most of the columns of O's used
to generate these targets are STILL GROWING.  That means those
downside targets are continuing to move further away.

And the Bullish Percent charts are providing little in the way
of bullish indications.  Both the SPX and OEX have gone back into
Bear Confirmed, the DOW, NYSE and NASDAQ-100 have reversed into
Bull Correction mode, and only the NASDAQ Composite is still
hanging out in Bull Confirmed territory.  Note that while the
COMP has not yet reversed into a more bearish condition, it is
only at 30, a handful of points away from going back into Bear

I won't even waste any time here going on a rant about the
broken-clock analysts that still have ridiculously high price
targets for the markets by year end.  You already know the drill
and if you have been paying attention over the past several
months you have a clear picture of my expectations for the broad
markets -- DOWN.  We had our little bullish rally off the July
lows, and we're likely to get another one into the end of the
year.  But not before testing and most likely breaking the July

Note that the VIX is lurking in the mid-40s again, having broken
its string of lower highs that began with its foray to above the
56 level on July 24th.  While the underlying market dynamics are
significantly different (then we were in a raging bull and now we
are in a mauling bear), but the VIX pattern now is eerily
reminiscent of that seen in late 1998.  I've often said that we
have some of the smartest subscribers.  The observation about
that similarity to the 1998 timeframe didn't come out of my grey
matter, it came from one of you.  Keep it up, because I need all
the help I can get!  GRIN

My expectation is that we will test and likely break the July
lows over the next 6 weeks, and in the process, the VIX will
shoot over 55 again.  This may make for another attractive MOCO
play like we had back in July, but at this juncture I just can't
say.  But the point I want to make here is that there is a lot
of downward pressure on the markets and I certainly don't want
to jump in front of that speeding train until it stops in front
of the station.  In the meantime, bearish plays are the way to
go.  Either that or stay in cash, in anticipation of a decent
long entry near the end of October.

I went round and round with myself this weekend about adding new
Watch List plays and for the life of me, I'm still undecided.  Not
about what stocks I want to add, but what the entry strategy
should look like.  I have 3 stocks that I think are going to be
solid performers for us, if only we can pick an advantageous
entry.  So in a slight deviation from my normal Watch List writeup
this weekend, I'm going to give you the symbol, along with a
brief description of why I like it.  They'll each probably make
it onto the Watch List in the weeks ahead, but right now the
technicals are a bit too muddled for me to feel right about
actually listing entries.

MSFT - I continue to be amazed with this stock's refusal to sell
off, even with the rest of the market looking ugly.  I think the
overall market will likely drag MSFT down with it, but I think
this is one that may actually stay to the upper side of its July
lows.  This play is all about Relative Strength.  Look for a
formal Watch List Play in the next couple weeks.

KBH - I've been bearish on the housing sector for quite a while
now, but it looks like the fundamentals and technicals are finally
coming together, pointing to a topping out in the industry (and
some of the stocks).  Very few of the Housing stocks have LEAPS
available, but KBH is one of them.  It appears to be topping out
near the $50 level.  I need to do some more detailed research,
but look for KBH to show up as a new Put play on the Watch List
next weekend.

GOLD - While I'm not what would normally be termed a 'gold bug',
I am starting to recognize that there is a shifting tide in the
inter-market dynamics.  While the equity markets continue to
weaken, the Gold market is persistently moving higher.  If Gold
continues to increase in price, then that increase will help to
propel the share prices of many gold stocks higher, especially
those of the companies that do not hedge their forward
production.  While ABX has hedged in the past, the company has
radically curtailed its production.  We successfully played ABX
last year due to the fact it was the only one of the gold stocks
that had LEAPS available.  Checking some options chains this
weekend, I found that NEM also is LEAP-able now.  I need to do
some more research, but those of you that are looking to play
the new bull market in gold, we'll shortly have one of these two
stocks on our Watch List.

To round things out, lets look at what we have active on the
Watch List and Portfolio


QQQ - Have you noticed how well the QQQ has held up in light of
the weakness in the broad market?  Sure, it is losing ground, but
very slowly, leading me to think we could get a successful retest
of the August low at $21.30.  See how little ground QQQ has given
up as our SMH play has slid substantially lower?  New entries near
current levels could work nicely, but I want to see evidence of
some buying interest first.  Keep in mind, our stop loss is set
at $21 -- a close below there and we're gone!

SMH - Picture perfect, is what I would call the action in the SMH.
The Semiconductor sector used to be the linchpin of every
broad-market rally, but those days are gone for some time to
come.  It looks like I did the right thing by pushing it a bit
on the entry, because the SOX just continues to print new
multi-year lows on a daily basis.  That has the SMH closing in on
the $20 level, and likely to go significantly lower throughout
the remainder of September and on into November.  The critical
event to watch for next week will be MU's earnings on Tuesday.
Should they admit to more problems on the demand side, it will
likely usher in the next downward leg.  We've got a nice downward
trend working in our favor, and I see no reason to squeeze it too
tight with our stop.  Move stops down to $24.25, just above the
top of the 6-month descending channel.

Watch List:

MO - Say thank you to Solly and Morgan Stanley for making bearish
comments on the Tobacco stocks related to pricing pressure for
tobacco products and the never-ending litigation risk.  This is
one that looks better and better, the cheaper it gets.  The reason
why is that nice fat dividend yield.  While we don't get the
yield as LEAPS buyers, investors as a whole are going to be
increasingly attracted to stocks that are paying out cash in
excess of what they can get, even from a 30-year bond.  I was
looking for the $43-44 level to provide an attractive entry into
the play, but it appears that price action is going to give us an
even better entry.  I'm lowering and widening the entry zone to
$40-42 this weekend, as any bounce in that vicinity ought to make
for a solid entry.  After entry, the stop will be set at $38.50,
to give it room to breathe.  Remember, don't try to catch a
falling knife - wait for this decline to run its course and then
buy it on the rebound.

BA - Is anyone else wondering if BA is ever going to get down to
our price target?  I'm willing to be patient, as a broad-market
decline back to the July lows may be just the catalyst we're
waiting for.  Then we'll be in a position to take an attractive
entry, managed with a tight stop at $30.  It's been a long time
coming, but I believe my patience is going to be rewarded.

BBH - Grrrr!  How many times can I be right on this one (in terms
of direction) and miss the entry?  Last week, I lowered the entry
to $84-85, and the BBH topped out at $83.30 intraday.  This is
the potential frustration of trying to pick entries based on
price points up to a week in the future.  Of course, when we do
get filled, it tends to be a position in which we can easily
manage risk, and I love that!  I'm willing to give it one more
shot with our BBH play.  Lower the entry target to $83-84.
Resistance has been building near $83 and $84 is now the site
of the descending trendline that began back in March.  If we get
an entry, then look to set stops at $85.

In my opinion, the markets are in their full bearish mode, with
all of the major indices having confirmed breakdowns from those
Head & Shoulders patterns.  It appears that a retest of the July
lows is a foregone conclusion and any long-term bullish positions
are likely to be unsuccessful over the near-term.  We have our
token long QQQ position right now and we'll let that one run to
completion -- either stopping us out or holding the line at
support.  Other than that, we're looking to have some attractive
plays on the Watch List when the current decline runs its

Trade Carefully!


LEAPS Portfolio

Current Open Plays


QQQ    09/09/02  '03 $ 24  QAV-AX  $ 2.20  $ 1.45  -34.01%  $21
                 '04 $ 24  KLF-AX  $ 4.10  $ 3.40  -17.07%  $21

SMH    09/11/02  '04 $ 20  KBS-MD  $ 3.40  $ 5.00  +47.06%  $24.25
                 '05 $ 20  ZTO-MD  $ 4.70  $ 6.20  +31.91%  $24.25

LEAPS Watchlist

Current Possibles


BA     06/30/02  $32           JAN-2004 $ 35  LBO-AG
                            CC JAN-2004 $ 30  LBO-AF
                               JAN-2005 $ 40  ZBO-AH
                            CC JAN-2005 $ 30  ZBO-AF
MO     08/25/02  $40-42        JAN-2004 $ 45  LMO-AI
                            CC JAN-2004 $ 40  LMO-AH
                               JAN-2005 $ 50  ZMO-AJ
                            CC JAN-2005 $ 40  ZMO-AH

BBH    08/30/02  $83-84        JAN-2004 $ 80  EVK-MP
                               JAN-2005 $ 80  EIL-MP

New Portfolio Plays


New Watchlist Plays





Capitalizing Without Using Capital

Couch Potato Trading Institute students know how to recognize a 
bargain when they see one.  Advanced CPTI students know how to 
create a bargain – their own man-made Blue Light Special.  Learn 
how we can take chicken and make chicken salad instead of chicken 
. . . . out of this market.  And, if it works out, you’ll get 
fries and an apple pie as a bonus.

The Adventure Begins
The QQQs, as well as the rest of the market, have taken a beating 
– and there’s a good chance that the beating isn’t over yet.  
There’s a way you can take advantage of the continuing downtrend 
and be positioned to profit by the rebound – and never take out 
your wallet.

The QQQs are trading at $21.58.
1.  We sell 10 contracts of the QQQ Oct. 21 calls @ $1.65 – a 
credit of $1,650.
2.  We buy 10 contracts of the QQQ Nov. 24 calls @ $.85 – a debit 
of $850
3.  We buy 200 contracts of the QQQ Nov. 26 calls @ $.40 – a 
debit of $800.
The total credit is $1,650 and the total debit is $1,650.  The 
net cost out of your pocket is ZERO.  That’s right!  Your pizza 
money stays in your pocket.

Ideally, at October expiration, the QQQs will be below $21.  
Thus, the short Oct. 21 call will expire worthless and you will 
be long 10 of the November $24 calls and 20 of the November $26 
calls at a cost of ZERO.  Then, you have an entire month for the 
rubber band to snap back if there’s still some twang in that 
thang.  You have an unlimited profit potential.

The Plot Thickens
If the QQQs benefit by a series of short covering bounces and 
make a few of their anticipated 3-point moves prior to November 
expiration, it could reach the heavy overhead resistance at $26.  
At $26, your 10 Nov. $24 calls will be worth about $2.25 
($2,250).  The 20 Nov. $26 calls will be worth about $.50 
($1,000).  That’s $3,250 profit – with NO costs.  If the QQQs 
really spike up in November, there is no limit to what you can 

Sound too good to be true?  Well, every silver lining has at 
least a little cloud.  You do have some exposure.  If the QQQs 
are between $21 and $24 at October expiration, you will need to 
buy back the short October $21 call.  Technically, the maximum 
exposure is $3.00, because, above $24, you are covered by the 10 
November $24 calls you purchased.

However, in reality, the exposure is significantly less.  If the 
QQQs finish at $23 at October expiration, you could sell the 
November $24 calls for about $1.00 ($1,000) and the 20 November 
$26 calls for about $.50 ($1,000).  After you subtract the 
proceeds of the sale of the November calls ($2,000), your 
exposure is really only about $1,000.   If the QQQs continue on 
down, and remain below $21, you have nothing to lose.

Your brokerage firm will want you to cover your $3,000 exposure 
in your account in the form of cash or margin.

Another Possibility Looms
There is an interesting variation.  Instead of buying 20 of the 
Nov. $26 calls for $800, you could buy 10 of the Nov. $19 puts 
for about the same money.  If the QQQs continue to circle the 
bowl in its current search for the septic system we call the 
market, you can profit dollar for dollar on movement below $19.

By buying the Nov. $19 puts, we’ve essentially created a November 
$24/$19 strangle at ZERO cost and ZERO exposure.  I’ve always 
enjoyed adding up zeroes, especially if there are a bunch of them 
preceded by a nice large digit.

While the majority of traders are getting regular financial 
wedgies, CPTI students, who know how to play the game, are adding 
up their profits – during commercials, of course.

I liked your article last week about taking advantage of the 
price discrepancies of options very near the strike price. I 
started tracking about 50 stocks near a strike price with this 
month’s and next month’s options.  Since last Thursday's close 
(9/12) the cost to buy next month's option and sell this month's 
has been in excess of $1.50 for each calendar spread.  Will this 
cost shrink as this week goes on (it is already Wednesday 
afternoon), or have I selected the wrong stocks?

Thanks for the kind words.  I'm glad you enjoyed the column.
You have to keep your eyes on the option chain of each stock (50 
seems like a lot to watch effectively).  If it's going to work, 
you'll notice the price of the Sept. call move up and the Oct. 
call go down.  The $1.50 difference figure might go down to $.70 
or $.80 late Thursday or some time on Friday.  That's when you 
make your move.  It doesn't happen on all stocks.  You may not 
see any -- it depends on the stocks you choose to monitor, but 
it's worth looking.

Trading the unwinding is a good strategy.  However, it's labor 
intensive and requires the ability to pull the trigger when the 
opportunity presents itself.  

Thanks for the response.  If I understand you correctly, if I am 
lucky, one or two of the stocks I am monitoring might fall to a 
good entry of .70 - .80, and I should enter the play no sooner 
than Thursday afternoon.

I set up a watch list on E-Signal that makes it easy to see the 
cost of the spread, so the monitoring of them is not difficult.
Thanks again!

Look for a stock that is moving toward the strike price (as I 
gave in my example in last Sunday’s column) as opposed to one 
that is moving away.  In this falling market, that might be very 
difficult to find.

It's nice to know that there is a scan that can possibly simplify 
the task for you.  However, remember that when you're looking for 
a spread, the scan will likely focus on one exchange.  Just as, 
when you place a spread order, both legs go to one exchange 
instead of searching for the best bid and best ask, which are 
usually on different exchanges.

Scanning one exchange out of four or five will not necessarily 
give you an accurate representation.  Possibly only one exchange 
out of the four might bump up the price of the September call.  
While another will have the artificially lowered price on the 
October calls. It's unlikely they will all go in unison. 

You might inquire what prices will show up on the E-signal scan.  
I’m not familiar with the software.  If it's scanning all 
exchanges and giving you the difference based on the best bid and 
best ask, it would really be a great tool for this strategy.  
Keep us posted.  A number of OI readers would be very interested.

You mentioned that the approximate average cost to close a 
September position and open the long October position is about 
$1.50.  You can't use $.80 as a monitor as to what the spread 
difference should be.  Look at QLGC.  At this writing, it's 
trading about $29.  Right now, the Sept. 30 can be sold for .55 
and the Oct. 30 can be bought for $3.00.  If the unwinding scheme 
works out, the $.55 might move up to $.85 and the $3.00 might 
move down to $2.60.   The point is that you can still possibly 
get the $.75 discount -- it will not seem as significant because 
it's a pricier stock, but $.75 is still $.75.

In this falling market, using puts, and going in the other 
direction, might be the wiser tact.  You would sell the September 
put and buy the October put.

Iron Condor Update:  
Hooray!! BBH is at $77.06.  It looks like BBH may have finally 
picked a direction – down.  Well, that’s great.  On Thursday, 
when BBH broke below $80, we shorted 1,000 shares again.  Now we 
can root for BBH to tank seriously.  The lower, the better.  

The minute BBH sinks below $75, we will be making money, over and 
above our credit spread profits, dollar for dollar. .  If BBH 
goes to $65, we’ve just made an additional $10,000 ($10 value of 
the $75 put X 10 contracts).  Our $80 short put is covered by our 
short stock.  That frees up our long $75 put to make us a bushel 
of money.

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 

Happy trading!  Remember 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.  

Charting: Trendlines; Price Channels - 
By Leigh Stevens

In two prior Trader’s Corner articles (9/15 & 9/19), I bisected 
and dissected trendlines and their use. Building further on this 
prior information about the construction and best use of 
trendlines takes us to trendline “channels”. 
A very useful further use of trendlines is incorporated in the 
drawing of price trend channels.  There is frequently a tendency, 
especially in the stock indices but also in individual stocks, 
for prices to trend higher or lower not only in relation to up or 
down trendlines, but also in relation to an opposite channel line 
drawn PARRALEL to the dominant trendline. 

Not only do prices tend to come down to an up trendline in a 
rising trend and then rebound, beginning a move to still higher 
levels, but there also often tends to be an ever-rising area 
where prices find resistance on rallies. In a rising trend, 
resistance (areas of selling interest) often rises along a 
straight parallel line linked to the up trendline. In an uptrend 
or downtrend, the two parallel lines form a rising or declining 

Going back to the uptrend example, we start with an up trendline 
- ongoing buying on price dips, will tend to place an effective 
floor under a rising trend.  A line through these downswing lows 
forms the up trendline. 

As well, there will develop areas where scale up selling goes on 
in an uptrend, by traders who take periodic profits on long 
positions and shorting by bearish traders on the stock or index. 
If a line is drawn through the various rally peaks, it often will 
form an upper boundary of a rising trading range.  

Conversely, in a downtrend, there can develop a falling “line” of 
support running parallel to a falling resistance down trendline 
(an area of selling interest or “supply” on the way down, related 
to scale-down selling) as traders take periodic profits on short 
positions by buying; and, those bullish also do some scale-down 
buying. Hey, if a stock was “cheap” at 50, it’s even “cheaper” at 
40 - or so goes the sometimes wishful thinking on the Street of 

A price channel is constructed by drawing a line parallel to 
either an up or down trendline that slopes in the same direction.  
A trendline is the first requirement, which can be constructed 
after 2-3 lows or highs form.  The second, parallel, line can 
then initially be constructed with only ONE high or low point, 
which is a concept quite different than the rule for drawing the 
underlying trendline. Most charting software will place a line 
parallel to another, as long as you have a starting point or any 
one point above or below a trendline.   

In an uptrend there are minor price swings that go with and 
against the direction of the trend.  The downswings are used to 
define an uptrend line.  The top of the first upswing can be used 
to define the upper boundary of the price “channel” within which 
a trend tends to proceed as seen below. 

The chart above shows how an uptrend channel is constructed.   
The upper channel line in an uptrend tends to define resistance, 
or a rising area of selling interest, as prices trend higher.  

Note here that after the first 2 downswing lows allowed the 
initial drawing of an up trendline, the first rally high AFTER 
these two lows, then defined a “line” of resistance not only 
going forward, but going back in time as well by extending the 
line “backward” from that point.  This is an interesting aside 
only, as the useful aspect of the upper channel line here is to 
see where the next rally highs might come in.    

There tends to be 3 results after selling pressure, at the upper 
end of the channel, acts in such a “deflecting” manner:  prices 
continue higher but stay just under or around the upper channel 
line, there is a pullback to around the middle of the channel, OR 
prices drop back to the low end of the channel – back to the 
support trendline.  

If there is a subsequent high that forms that is above the first 
top that has been used to construct the upper channel line, it is 
typically redrawn with a parallel line that goes through this 
higher high as is seen in the chart below. 

The widest point is used to construct the opposing channel line, 
relative to the trendline. This, because we want to see the 
widest possible parameters for our channel - in keeping with its 
intended use to define potential extremes within the price 
boundaries traversed by a trend in its “trajectory”. 

An example of a downtrend channel is provided in that next chart, 
that of General Electric (GE) below. 


There is always a point or an area where prices get ahead of 
themselves in an uptrend or downtrend – my saying that being 
“ahead” of itself refers to a price that overshoots a reasonable 
valuation level for the moment – market prices often go from 
undervalued to overvalued and back again.  Prices get over or 
under valued within the dominant trend and they will then adjust 

The usefulness of a channel line is that the upper boundary line 
of an uptrend channel and the lower boundary of a downtrend 
channel are potential areas for both profit taking and trading 
against the trend -- for short-term traders.  In addition, 
investors looking for an improved price entry may want to look 
for a price channel line to buy/sell, if one can be defined.  

After the upper line is reached in an uptrend channel, there is 
an increased likelihood that prices will dip from there, at least 
to the midpoint of the channel.  This tendency also suggests that 
a better (cheaper) price entry, on a reaction or countertrend 
move, is a likely possibility once the top or bottom end of a 
channel is reached.   

The channel pattern does not always appear nor, once constructed, 
do the boundaries always deflect and contain the price swings 
that unfold during a trend. However, when you do see this pattern 
holding up over time, it often works quite well in defining the 
pause or “resting” places for price swings.  And, if prices break 
out above or below a price channel that has existed for some time 
already, it’s a reason to look more closely at what is happening.  

An upside breakout above a well-defined uptrend channel is a 
definitive indication that the trend momentum and strength are 
accelerating in the direction of the trend.  If there is a 
decline under a lower channel boundary, it’s no different than 
any similar trendline break and is a likely reversal sell 

In my Index Trading wraps, I make extensive use of trend 
channels, ranging from hourly – 


to weekly charts – 

The above charts being recent (end-August) examples.  Then, as 
you can see in the example charts above, there other patterns and 
indicators along with the channels that can be used to make other 
related analysis of the trend.  For example, at the upper trend 
channel boundary on the weekly chart above, the S&P 500 (SPX) was 
at an overbought extreme according to the Relative Strength Index 
(RSI), at least on an 8-week basis. 

Or, in the example provided in the hourly SPX chart above (the 
weekly chart), a Head & Shoulder’s (H&S) top formed within the 
boundaries of the uptrend channel – the fact that the “left 
shoulder” and the “Head” formed at resistance implied by the 
upper channel line gives more credibility to the top implied by 
the H&S formation - more on the Head & Shoulder’s pattern in my 
past Trader’s Corner article at - 

Moreover, the H&S top pattern then had a “confirming” event when 
there was the break of the uptrend channel on the hourly SPX 
chart shown above.  After this event in turn, the rising bearish 
flag was given more credence because prices were outside (had 
“broken”) or below its former bullish/rising uptrend channel. We 
were on the alert, so to speak, for bearish patterns and places 
to sell rallies after the bearish break of the uptrend channel.   

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The Option Investor Newsletter                   Sunday 09-22-2002
Sunday                                                      5 of 5

In Section Five:

Covered Calls: Trading Basics: Using Margin In Covered-Calls
Naked Puts: Options 101: Questions Concerning Trading Stops
Spreads/Straddles/Combos: Looking For A Diamond In The Rough

Updated In The Site Tonight:
Market Watch
Market Posture

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Trading Basics: Using Margin In Covered-Calls
By Mark Wnetrzak

One of our readers asked if we recommend the use of margin in
covered-call positions.

Attn: Covered-calls Editor
Subject: Buying covered-call stocks on margin

Hello Mark,

I was scanning the summary for the covered-calls section and I
noticed you don't use margin when calculating the results for
your plays.  Is that because you don't recommend using margin
when buying stocks for these positions?  Also, what about stock
and option commissions -- do you factor them into the potential
monthly yield?  If so, what are the average costs used in these
calculations?  My broker charges $12 for stock orders and about
$35 for a 10-contract option trade.  That seems about average
for most online brokers...who do you use/recommend?

Thanks for all the great information and keep up the good work!


Regarding the use of margin with covered-call stocks:

Before you consider using margin, it's important to be aware of
the guidelines brokers have established for this type of trading.
To initiate and maintain a margin account, a broker requires a
minimum of $2,000-$5,000 in any combination of cash or marginable
securities to be on deposit at your brokerage.  Margin accounts are
obligated to maintain certain minimum equity levels; generally 30%
of the portfolio value.  If the market value of your margin account
declines below that ratio, the broker may request that you deposit
more collateral through a "margin" call.  A margin-maintenance call
should always be answered promptly with the delivery of additional
securities or funds to avoid liquidation of portfolio holdings.

If you are one of our regular readers, you know that our plays
are generally very conservative and almost always "in-the-money".
We focus on this method because our primary goal is to provide
positions that generate consistent, acceptable returns while still
receiving an above-average amount of downside protection.  Buying
stock on margin in a covered-call position is an excellent way to
enhance profit potential when the technique is used correctly.
The advantage of trading on margin is that your return is doubled.
The downfall lies in the fact that you may be asked to contribute
more collateral to the brokerage should the value of your stock
decline significantly.  In our current approach, we generally do
not expect to own the stock at the end of the strike period.  If
we open a new position and it turns negative (breaks technical
support and/or nears a 20% loss), we always recommend that you 
consider closing/adjusting the play to preserve capital.  The key
is to monitor your positions closely and use sound judgment (no
emotions!).  If you follow this practice, the net loss should 
always be kept to a minimum and then your remaining funds can be
moved into another play.

Regarding commissions, we do not include the cost of trading in
our results because different brokerages charge varying commission
fees and with discount online brokers, the overall effect on most
positions is minor.  E*trade, for example, charges $19.95 to buy 
a 1000 shares of stock and $37.50 to sell 10 option contracts.  If
the stock is called away at expiration, an additional $19.95 would
be charged to sell the stock for a total cost around $78.  This 
impacts the potential profit target of an ITM position by about 8
cents (on a per share basis).  Other discount brokers (such as 
Scottrade) charge even less.  Obviously, that's a relatively small
amount for most option-trading strategies, and I leave it up to the
individual investor to evaluate the impact on their in-the-money 
covered-calls.  It is important to understand how they affect the
potential gain of each position.

As far as favored brokers, we can't make recommendations because of
our current affiliations and since they all have their benefits and
disadvantages, it is important for your to carefully evaluate the
differences and choose the one that best fits your trading needs.

These web-sites will help you review the different features and




Then visit the chat sites and message boards such as:


for other trader's experiences.  With regard to overall popularity,
Ameritrade, Datek, E-trade, Schwab, and Scottrade seem to be the
most commonly used brokerages among the readers of this section.

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

NXTL    5.49   7.44   SEP   5.00  1.10  *$  0.61  10.1%
MDR     6.00   5.88   SEP   5.00  1.50  *$  0.50   8.0%
CKFR   11.70  11.45   SEP  10.00  2.05  *$  0.35   7.9%
OSTE    9.34   9.42   SEP   7.50  2.20  *$  0.36   7.7%
TDY    17.80  17.77   SEP  17.50  1.05  *$  0.75   6.8%
V      12.96  12.91   SEP  10.00  3.30  *$  0.34   5.4%
XOMA    5.66   5.84   SEP   5.00  0.95  *$  0.29   5.4%
ABFS   27.46  27.53   SEP  25.00  3.00  *$  0.54   4.8%
AFFX   18.51  19.38   SEP  15.00  4.40  *$  0.89   4.6%
MRCY   24.79  23.60   SEP  22.50  3.60  *$  1.31   4.5%
NET    14.56  13.50   SEP  12.50  2.55  *$  0.49   4.4%
QCOM   28.46  28.08   SEP  25.00  3.90  *$  0.44   3.9%
IMCL    8.30   6.74   SEP   7.50  1.30   $ -0.26   0.0%
MNS    11.20   9.15   SEP  10.00  1.75   $ -0.30   0.0%
NWRE   16.94  13.01   SEP  15.00  2.65   $ -1.28   0.0%
NWRE   17.82  13.01   SEP  15.00  3.30   $ -1.51   0.0%
ORCL   10.79   7.99   SEP  10.00  1.15   $ -1.65   0.0%

RSTO    5.70   5.53   OCT   5.00  1.20  *$  0.50   9.7%
OSTE    9.45   9.42   OCT   7.50  2.50  *$  0.55   5.7%
MACR    8.49   8.10   OCT   7.50  1.45  *$  0.46   5.7%
CVC     9.48  10.25   OCT   7.50  2.50  *$  0.52   5.4%
BSTE   29.40  28.44   OCT  25.00  5.70  *$  1.30   4.8%
NOK    13.95  12.84   OCT  12.50  2.20  *$  0.75   4.6%
NWRE   15.97  13.01   OCT  12.50  4.10  *$  0.63   4.6%
FLE     6.02   6.03   OCT   5.00  1.30  *$  0.28   4.3%
CMLS   16.85  17.00   OCT  15.00  2.55  *$  0.70   4.3%
PRX    28.20  27.98   OCT  25.00  4.30  *$  1.10   4.0%
LMNX    7.53   6.90   OCT   7.50  0.60   $ -0.03   0.0%

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


The major averages followed through with their threat, moving
closer to the July lows.  Will we have a successful test or
just another bear-trap rally and then a final breakdown?  Time
will tell but I don't like it when we move to test the "bottom"
of a support area.  In any case, we closed several positions
on our watch list though Alkermes (NASDAQ:ALKS) did rally on
Friday and provided a bit of vexation (shrug - Murphy's Law).
Overall, considering the bearish environment -- including the
threat of war -- the covered-call portfolio held up better than
expected.  This week, Oracle's (NASDAQ:ORCL) dismal earnings
(ouch!) was offset a bit by Qualcomm's (NASDAQ:QCOM) increased
chip demand.  As for Neoware Systems (NASDAQ:NWRE), we could
still see a pullback towards the 150-dma (near $11.00) before
the uptrend is broken - reevaluate your long-term outlook and
act accordingly.  As for October positions, Luminex (NASDAQ:
LMNX) is acting a bit worrisome as the share price has moved
below its 30- and 50-dmas.  A move below $6.50 on a closing
basis could be used for an exit signal.  Money management
remains paramount, especially if you believe the markets will
continue to move lower.  As for new positions, sitting on the
sidelines until bullish activity resumes may be the best bet.

Positions Closed: Semtech (NASDAQ:SMTC), Tibco Software 
(NASDAQ:TIBX), Myriad Genetics (NASDAQ:MYGN), Millennium 
Pharmaceutical (NASDAQ:MLNM), Cree (NASDAQ:CREE), J.D. 
Edwards (NASDAQ:JDEC), AMR Corporation (NYSE:AMR), 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 


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

AES     2.92  OCT  2.50   AES JZ  0.75 564    2.17   28   16.5%
CNXT    1.26  OCT  2.50   CZI JT  0.45 929    0.81   28   60.4% ***
CRY     2.94  OCT  2.50   CRY JZ  0.75 49     2.19   28   15.4%
GNSS    8.73  OCT  7.50   QFE JU  1.60 576    7.13   28    5.6%
PPD    21.80  OCT 17.50   PPD JW  5.00 147   16.80   28    4.5%
QCOM   28.08  OCT 25.00   AAW JE  4.20 5705  23.88   28    5.1%
UDI    22.58  OCT 20.00   UDI JD  3.30 765   19.28   28    4.1%

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

CNXT    1.26  OCT  2.50   CZI JT  0.45 929    0.81   28   60.4% ***
AES     2.92  OCT  2.50   AES JZ  0.75 564    2.17   28   16.5%
CRY     2.94  OCT  2.50   CRY JZ  0.75 49     2.19   28   15.4%
GNSS    8.73  OCT  7.50   QFE JU  1.60 576    7.13   28    5.6%
QCOM   28.08  OCT 25.00   AAW JE  4.20 5705  23.88   28    5.1%
PPD    21.80  OCT 17.50   PPD JW  5.00 147   16.80   28    4.5%
UDI    22.58  OCT 20.00   UDI JD  3.30 765   19.28   28    4.1%

*** OTM speculation play, stock price remains unchanged.  

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).

AES - AES Corp.  $2.92  *** Cheap Speculation Plays: Part I *** 

The AES Corporation (NYSE:AES) is a global power company comprised
of 4 lines of business.  The contract generation segment includes
generating plants that have entered into contracts with initial 
durations of five years or greater, accounting for at least 75% of
the company's estimated revenue stream.  The competitive supply 
segment includes both wholesale and retail sales of electricity 
directly to end users such as commercial, industrial, governmental
and residential customers.  The utility segment is characterized
by distribution businesses of significant size that often combine 
generation, transmission and distribution capabilities, and are 
subject to extensive local, state and national regulation.  The
growth distribution segment includes distribution facilities facing
particular challenges relating to operational difficulties that are
located in emerging markets and offer significant potential for
improved financial and operational performance.  AES is flirting
with resistance around $3.50 as the stock continues to forge a
Stage I base.  This position offers speculators who believe in the
long-term prospects of AES a favorable entry point in the stock.

OCT 2.50 AES JZ LB=0.75 OI=564 CB=2.17 DE=28 TY=16.5%

CNXT - Conexant Systems  $1.26  *** Oh Boy, an OTM Play! ***

Conexant (NASDAQ:CNXT)) provides semiconductor system solutions
for communications applications.  The Company's expertise in 
mixed-signal processing allows it to deliver integrated systems
and semiconductor products that ease communications worldwide 
through wireline voice and data communications networks, cellular
telephony systems and emerging cable, satellite and fixed wireless
broadband communications networks.  Conexant operates in two 
business segments: the Personal Networking business and Mindspeed 
Technologies, the company's Internet infrastructure business.
Do you want to own Conexant shares under 85 cents a share?  Do
you believe the company will be one of those that survive?  If
so, this position offers a great risk-reward potential even if
the share price remains unchanged.

OCT 2.50 CZI JT LB=0.45 OI=929 CB=0.81 DE=28 TY=60.4%

CRY - CryoLife  $2.94  *** Cheap Speculation Plays: Part II ***

CryoLife (NYSE:CRY) preserves human tissues for cardiovascular, 
vascular and orthopaedic transplant applications.  Additionally,
the company develops and commercializes implantable medical 
devices, including BioGlue Surgical Adhesive, glutaraldehyde-
fixed stentless porcine heart valves, and tissue-engineered 
SynerGraft porcine heart valves and bovine vascular grafts. 
CryoLife uses its expertise in biochemistry, cell biology, 
immunology and protein chemistry and its understanding of the
needs of the cardiovascular, vascular and orthopaedic surgery
medical specialties, to continue expansion of its preservation
business and to develop or acquire complementary implantable
products and technologies for these surgical specialties.  Last
month CryoLife was ordered by the FDA to recall some tissues
and halt further shipments until concerns over infection 
prevention could be resolved.  Earlier this month, CryoLife
said it had reached an agreement with the FDA that will allow
the resumption of some shipments.  Investors who believe a 
cost basis near $2.25 is a reasonable entry point from which
to speculate on the company's future should consider this

OCT 2.50 CRY JZ LB=0.75 OI=49 CB=2.19 DE=28 TY=15.4%

GNSS - Genesis Microchip  $8.73  *** A Chip In A Base ***

Genesis Microchip (NASDAQ:GNSS) designs, develops and markets
integrated circuits that receive and process digital video and
graphic images.  The company's ICs are typically located inside
a display device and process incoming images for viewing on that
display.  Genesis is targeting the flat-panel computer monitor, 
flat-panel television and progressive scan cathode ray tube (CRT)
television markets and other potential mass markets.  Genesis
operates through subsidiaries and offices in the United States,
Canada, China, India, Japan, South Korea and Taiwan.  Genesis
rallied on Friday the 13th (omen?) after it was upgraded by 
Pacific Growth Equities to "equal weight" from "underweight" 
following the company's mid-quarter conference call the day
before where Genesis raised fiscal second quarter and revenue 
expectations.  We simply favor the 3-month base with a trading
range near $7.50.  Reasonable speculation for investors who are
ready to "bottom-fish" in the semiconductor segment.

OCT 7.50 QFE JU LB=1.60 OI=576 CB=7.13 DE=28 TY=5.6%

PPD - Pre-Paid Legal  $21.80  *** Riding The Storm Out! ***

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 recently, 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 boasting about the recommendation but the release didn't
disclose that PPD paid more than $30,000 to the publication.  PPD
always seems to be doing something wrong, but the stock is still
managing to lure investors and move higher.  A speculative play
for traders who favor aggressive "premium-enhanced" positions.

OCT 17.50 PPD JW LB=5.00 OI=147 CB=16.80 DE=28 TY=4.5%

QCOM - Qualcomm  $28.08  *** A Positive Surprise ***

Qualcomm (NASDAQ:QCOM) is a developer and supplier of code 
division multiple access (CDMA)-based integrated circuits 
and system software for wireless voice and data communications
and global positioning system (GPS) products.  The company 
offers complete system solutions, including software and 
integrated circuits for wireless handsets and infrastructure 
equipment.  This complete system solution approach provides 
customers with advanced wireless technology, enhanced component
integration and interoperability, as well as reduced time to 
market.  Qualcomm threw the 'Street' a bone on Friday after the
company said strong demand for next-generation chips for wireless
phones prompted it to raise its shipment guidance for the fiscal
fourth quarter.  We continue to favor the stable trading range
Qualcomm has been in for the last several months and this
position offers speculators a reasonable short-term reward at 
the risk of owning the company at a favorable cost-basis.  

OCT 25.00 AAW JE LB=4.20 OI=5705 CB=23.88 DE=28 TY=5.1%

UDI - United Defense  $22.58  *** Unleash The Dogs Of War ***

United Defense Industries (NYSE:UDI) is a leader in the design,
development and production of combat vehicles, artillery, naval
guns, missile launchers and precision munitions used by the U.S.
Department of Defense and allies worldwide.  The company is
America's largest non-nuclear ship repair, modernization and 
conversion company.  UDI was started with a "buy" rating this
week by J.P. Morgan as analysts said the company's prospects
are strong despite the recent loss of the Crusader program.  J.P.
Morgan analyst Joe Nadol noted that the company has no commercial
aerospace exposure and Crusader's replacement weapon, the Army's
non-line-of-sight cannon, should easily make up for the loss of
Crusader.  If the Dogs of War are to be unleashed, United Defense
should move in sympathy with a broader defense-stock rise.  This
position offers a favorable cost basis for those investors looking
for a broad-market hedge against the threat of war.

OCT 20.00 UDI JD LB=3.30 OI=765 CB=19.28 DE=28 TY=4.1%



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

MDCO   10.29  OCT 10.00   MQL JB  0.95 382    9.34   28    7.7%
AEG    10.24  OCT 10.00   AEG JB  0.90 6260   9.34   28    7.7%
GILD   33.56  OCT 30.00   GDQ JF  5.20 305   28.36   28    6.3%
BSTE   28.44  OCT 25.00   BQS JE  4.80 561   23.64   28    6.2%
METHA  10.07  OCT 10.00   QME JB  0.60 203    9.47   28    6.1%
MATK   16.30  OCT 15.00   KQT JC  1.95 5     14.35   28    4.9%
FDS    25.95  OCT 25.00   FDS JE  1.95 10    24.00   28    4.5%
ADRX   22.91  OCT 17.50   QAX JW  6.10 25    16.81   28    4.5%
GM     42.93  OCT 40.00    GM JH  4.50 75    38.43   28    4.4%
STN    15.67  OCT 15.00   STN JC  1.25 69    14.42   28    4.4%
AMLN   13.90  OCT 12.50   AQM JV  1.85 945   12.05   28    4.1%


Options 101: Questions Concerning Trading Stops
By Ray Cummins

One of the most common questions we receive concerns the use of
trading stops in option positions.

Attn: Contact Support
Subject: Trading Stops - Mental or Mechanical

Do you use hard (mechanical) stops or mental?  Do you base them
on the price of the stock or the option?

Thanks, I appreciate your help


Hello Again,

Regarding trading stops: both mental and mechanical stops are
useful tools.  Which method you utilize depends on a number of
factors including the type of strategy and the time frame for
the play, the position size (number of contracts) and liquidity
in the underlying market (open interest) and of course, your
personal trading style.  The more important issue (than which
type to use) is the need to always have a plan to manage losses,
before a trade is initiated.  The key to long-term profits in the
market is to remove your emotions and the pressure of a decision
under duress, thus a successful trader always has a predetermined
exit point before he/she enters a position.

As I mentioned before, most methods for preventing losses (as
well as making adjustments or rolling to new positions) fit into
one of two categories: a pre-arranged target profit or loss limit;
or a technical exit based on the chart indications of the issue.
Using a mechanical or mental (closing) stop can be a part or either
technique and if you choose to use a technicals-based technique,
there are many different indicators available to establish the
target exit point such as moving averages, trend-lines, previous
highs/lows, etc.  Again, the decision to use a particular method
will depend on your personal trading style as well as your skills
and strengths in the various types of technical and fundamental

There's lots of information on trading techniques (including the
use of stops) in our archives of strategy commentaries -- Options
101 and Traders Corner:




Also, there is a wealth of self-directed option trading information
available at the Options Institute Online Learning Center:


My personal suggestions...

Read the newsletter, especially the back issues on the OIN site,
and any other worthy publications so you will have access to good
candidates and the most successful strategies for the current
market conditions.  Study all you can about option trading and
consider buying a copy of the bibles of option trading: "Options
as a Strategic Investment" and "Option Pricing and Volatility."
Other good books include: "Options: A Personal Seminar", "Secrets
For Profiting in Bull and Bear Markets", "Trading for a Living"
and "Martin Pring on Market Momentum".  Learn the "Golden Rules"
and live by them.  Keep it simple -- don't bother with exotic
strategies until you become an experienced trader.  Last, but not
least, repeat whatever you do successfully.

Good Luck!

Editors Note: One of our long-time subscribers had a unique way
of handling directional trades without the use of stops once they
became profitable.

When investors want to avoid getting stopped out in a midday move:
If they have a profitable trade at a given strike price, and they
don't want to lose their investment in a downturn but also want to
stay in the trend of the stock; they should consider simultaneously
selling their current option and buying another option, which is
further out-of-the-money and preferably expires one or two months
in the future.  This allows you to take the original investment
(and usually more) off the table while using only profits to buy
the longer-term OTM option.  This accomplishes two things.  First,
you are risking only gains and as a result, you are less concerned
about short-term reversals, and second, you are still in a position
which you believe will continue in a profitable direction.  No stop
losses are needed.  Of course, to do this in fast moving issues you
may need to set the sell price of the lower strike slightly below
the current bid and the buy price slightly above the current (i.e.,
Don't get greedy as you don't want to be out of one position while
the other one runs away from you.  Typically, since both strike's
will move somewhat in accordance with the underlying issue, you
will either sell/buy for a little lower or a little higher price).
One negative to this strategy is that you usually pay for more
time premium with the OTM strike price buy -- but that is usually
offset by taking the original capital off the table and playing
with profits.  Obviously, one can also simply sell the portion of
contracts of the original position that represent the initial cash
investment and hold the balance of contracts for additional gains,
but in a directional market, you will often enhance your percentage
returns with the adjusted position due to the extended time frame
and the increased leverage and relative potential of a (further)
out-of-the-money option.

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  27.60   SEP  25.00  0.75  *$  0.75  17.5%
ADRX   24.00  22.91   SEP  17.50  0.40  *$  0.40  16.7%
TYC    15.69  14.96   SEP  12.50  0.30  *$  0.30  13.3%
JDEC   13.05  10.00   SEP  10.00  0.45   $  0.45  12.8%
PPD    20.67  21.80   SEP  15.00  0.35  *$  0.35  11.9%
MRVL   22.21  18.45   SEP  17.50  0.50  *$  0.50  11.0%
NWRE   14.00  13.01   SEP  10.00  0.40  *$  0.40  10.9%
CIMA   22.99  23.16   SEP  20.00  0.30  *$  0.30  10.0%
RGLD   14.86  18.70   SEP  12.50  0.25  *$  0.25   9.9%
AMLN   13.00  13.90   SEP  10.00  0.40  *$  0.40   9.7%
IMDC   23.45  22.31   SEP  20.00  0.40  *$  0.40   9.6%
INVN   28.36  30.85   SEP  22.50  0.85  *$  0.85   9.4%
JDEC   13.40  10.00   SEP  10.00  0.25   $  0.25   9.3%
FDRY    8.99   7.45   SEP   7.50  0.35   $  0.30   8.8%
ICOS   27.49  21.99   SEP  20.00  0.75  *$  0.75   8.7%
WMGI   20.49  19.15   SEP  17.50  0.45  *$  0.45   8.6%
CVTX   26.01  20.08   SEP  20.00  0.70  *$  0.70   8.6%
ITMN   24.87  27.60   SEP  20.00  0.30  *$  0.30   8.5%
UOPX   28.78  31.50   SEP  25.00  0.45  *$  0.45   8.4%
CCMP   43.60  39.94   SEP  35.00  0.35  *$  0.35   8.3%
PPD    21.95  21.80   SEP  15.00  0.35  *$  0.35   8.0%
ENZN   24.13  20.00   SEP  17.50  0.60  *$  0.60   8.0%
VIA    41.70  40.30   SEP  37.50  0.45  *$  0.45   7.6%
ADRX   24.63  22.91   SEP  15.00  0.25  *$  0.25   7.3%
AU     25.20  28.20   SEP  22.50  0.25  *$  0.25   7.1%
TTWO   23.40  26.20   SEP  17.50  0.40  *$  0.40   6.8%
LNCR   33.38  30.65   SEP  30.00  0.80  *$  0.80   6.5%
NPSP   23.06  17.83   SEP  15.00  0.45  *$  0.45   6.4%
PPD    22.23  21.80   SEP  12.50  0.35  *$  0.35   6.3%
HD     33.25  31.23   SEP  30.00  0.30  *$  0.30   6.3%
IVGN   35.60  33.52   SEP  30.00  0.35  *$  0.35   5.9%
HD     32.93  31.23   SEP  30.00  0.40  *$  0.40   5.7%
LOW    44.03  42.39   SEP  40.00  0.35  *$  0.35   5.5%
KMX    19.02  16.65   SEP  17.50  0.35   $ -0.50   0.0%
HGSI   17.87  11.69   SEP  12.50  0.30   $ -0.51   0.0% ***
HGSI   17.59  11.69   SEP  12.50  0.25   $ -0.56   0.0% ***
IMN    33.05  28.82   SEP  30.00  0.55   $ -0.63   0.0% ***
SIE    22.88  16.16   SEP  17.50  0.40   $ -0.94   0.0% ***
CLS    23.80  15.36   SEP  17.50  0.30   $ -1.84   0.0%

PPD    21.41  21.80   OCT  15.00  0.60  *$  0.60  10.7%
RGLD   18.05  18.70   OCT  15.00  0.50  *$  0.50   9.3%
UTHR   16.50  17.01   OCT  15.00  0.55  *$  0.55   8.5%
MDG    20.40  19.82   OCT  17.50  0.55  *$  0.55   8.2%
IDE    25.50  23.94   OCT  22.50  0.75  *$  0.75   8.2%
BSX    30.18  29.30   OCT  27.50  0.85  *$  0.85   7.2%
AMZN   16.61  15.86   OCT  12.50  0.30  *$  0.30   7.2%
COF    38.92  34.85   OCT  27.50  0.60  *$  0.60   6.2%
INVN   35.76  30.85   OCT  25.00  0.45  *$  0.45   5.1%
STN    14.15  15.67   OCT  12.50  0.25  *$  0.25   5.1%

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


Stocks continued lower this week after a sharp technical breakdown
in the major equity averages.  Index values moved below important
support levels and other indicators, such as equity-only put-call
ratios and the volatility index confirmed the bearish trend.  Now
the question is whether the July lows will hold, and if so, for
how long.  Most analysts believe there is very little chance of a
sustained upward move from the current levels, so be prepared for
more downside activity.  The fall of Celestica (NYSE:CLS) started
Monday and although news of a profit warning did not surface until
Wednesday, there were plenty of signals to indicate the bearish
trend reversal.  After the company lowered its third-quarter sales
and earnings forecasts due to a reduction in business from some of
its largest customers, the stock gapped down to the $15 range and
never recovered.  Looking forward, all of our October plays are in
good shape but with the potential for a sizeable downdraft on any
unpleasant news, traders are forewarned to the have their stops in
place and be diligent in position management.

*** Positions on the watch-list that were closed during Thursday's
unexpected sell-off (for smaller than published losses) include:
Human Genome Sciences (NASDAQ:HGSI), Imation (NYSE:IMN) and Sierra
Health Services (NYSE:SIE).

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

ABFS   27.53  OCT 25.00   FDQ VE  0.90 29    24.10   28   10.4%
FDS    25.95  OCT 22.50   FDS VX  0.35 30    22.15   28    5.2%
GILD   33.56  OCT 25.00   GDQ VE  0.55 313   24.45   28    8.2%
RGLD   18.70  OCT 15.00   MJQ VC  0.45 379   14.55   28   11.6%
RMCI   25.80  OCT 22.50   UHU VX  0.60 246   21.90   28    8.6%
TTWO   26.20  OCT 20.00   TUO VD  0.30 124   19.70   28    5.9%
ULAB   18.83  OCT 15.00   HQZ VC  0.40 0     14.60   28   10.4%
UTHR   17.01  OCT 15.00   FUH VC  0.30 0     14.70   28    6.4%

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

RGLD   18.70  OCT 15.00   MJQ VC  0.45 379   14.55   28   11.6%
ABFS   27.53  OCT 25.00   FDQ VE  0.90 29    24.10   28   10.4%
ULAB   18.83  OCT 15.00   HQZ VC  0.40 0     14.60   28   10.4%
RMCI   25.80  OCT 22.50   UHU VX  0.60 246   21.90   28    8.6%
GILD   33.56  OCT 25.00   GDQ VE  0.55 313   24.45   28    8.2%
UTHR   17.01  OCT 15.00   FUH VC  0.30 0     14.70   28    6.4%
TTWO   26.20  OCT 20.00   TUO VD  0.30 124   19.70   28    5.9%
FDS    25.95  OCT 22.50   FDS VX  0.35 30    22.15   28    5.2%

Company Descriptions

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

ABFS - Arkansas Best  $27.53  *** Transport Sector ***

Arkansas Best (NASDAQ:ABFS) is a diversified holding company 
engaged through its subsidiaries primarily in motor carrier
and intermodal transportation operations.  The main subsidiaries
are ABF Freight System, Clipper Exxpress and related companies.
ABFS' less-than-truckload (LTL) motor carrier operations are 
conducted through ABF Freight System, ABF Freight System (B.C.),
ABF Freight System Canada, ABF Cartage, and Land-Marine Cargo. 
Clipper operates through Clipper Freight Management and Clipper
LTL, and offers domestic intermodal freight services.  The rally
in ABFS shares began when Consolidated Freightways, the nation's
third-largest LTL carrier, said it would shut down operations
and file for Chapter 11.  This reduction in the competition is
likely give a boost to rival trucking companies Yellow (NASDAQ:
YELL), Roadway (NASDAQ:ROAD) and Arkansas Best by reducing the
industry's excess capacity and allowing them to raise prices.
On Friday, ABFS was listed among the highest-rated stocks, based
on analyst comments contributed within the past month to First
Call's database.  Investors appear to agree with the bullish
assessment and this position offers a great way to speculate,
in a conservative manner, on the future share price of ABFS.

OCT 25.00 FDQ VE LB=0.90 OI=29 CB=24.10 DE=28 TY=10.4%

FDS - FactSet Research Systems  $25.95  *** Bottom Fishing! ***

FactSet Research (NYSE:FDS) supplies financial intelligence to
the global investment community.  The company combines more than
100 databases, including data from tens of thousands of companies
as well as multiple stock markets, research firms and governments,
into a single online source of information and analytics.  Through
FactSet's exclusive proprietary communication and software tools,
clients obtain access to the company's mainframe centers and its
aggregated data library using a private wide area network.  This
secure and reliable network provides a direct, high-speed data
transmission link between the firm's mainframes and the client's
personal computers or computer network.  An annual subscription
fee allows clients to use the FactSet system.  The firm recently
reported that its quarterly earnings rose 28% from last year as
the online financial information provider added new clients.  The
company's revenues rose to $54 million from $47 million last year
and revenue in the coming quarter is expected to be $54 million
to $56 million.  The chart pattern indicates the issue has made a
successful test of a historical support level near $22 and traders
who like to speculate on trend reversals should consider this play.

OCT 22.50 FDS VX LB=0.35 OI=30 CB=22.15 DE=28 TY=5.2%

GILD - Gilead Sciences  $33.56   *** Range-bound? ***

Gilead Sciences (NASDAQ:GILD) is an independent biopharmaceutical
company that discovers, develops and commercializes therapeutics
to advance the care of patients suffering from life-threatening
diseases.  The company has five products that are marketed in the
United States and in other countries worldwide.  These are Viread,
a drug for treating HIV infection; AmBisome, a drug for treating
and preventing life-threatening fungal infections; Tamiflu, a drug
for treating and preventing influenza; Vistide, a unique drug for
treating cytomegalovirus (or CMV) retinitis in AIDS patients, and
DaunoXome, a drug for treating AIDS-related Kaposi's sarcoma.
GILD is an excellent candidate for speculative "premium-selling,"
based on the underlying issue's technical background.  GILD has a
relatively stable trading range and those who believe there will
be no significant changes to its technical character prior to the
October expiration can profit from that outcome with this position.

OCT 25.00 GDQ VE LB=0.55 OI=313 CB=24.45 DE=28 TY=8.2%

RGLD - Royal Gold  $18.70  *** 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 a favorable
candidate for a broad-market hedge and traders who want to profit
from a decline in the major equity averages should consider this

OCT 15.00 MJQ VC LB=0.45 OI=379 CB=14.55 DE=28 TY=11.6%

RMCI - Right Management Consultants  $25.80  *** Stock Split? ***

Right Management Consultants (NASDAQ:RMCI) is the world's largest
career transition and organizational consulting firm.  It offers
services to corporations of all sizes through a global network of
more than 300 service locations and the Internet.  The company is
a worldwide leader in customized career transition solutions and
also offers a wide range of organizational consulting services,
including talent management, leadership development and business
organizational performance services.  In combination, the firm's
two lines of business enable Right to help customers manage the
entire life cycle of their employees.  Right Management's board
recently authorized another 3-for-2 stock split in an effort to
increase liquidity and trading volume.  In a press release last
week, the company said the stock split, which increases shares
outstanding to 22.7 million from 15.1 million, goes into effect
10/15 through a 50% stock dividend for shareholders of record on
10/1.  Right Management also noted that it remains positive for
fiscal 2002 on the strength of its career transition business.

OCT 22.50 UHU VX LB=0.60 OI=246 CB=21.90 DE=28 TY=8.6%

TTWO - Take-Two Interactive  $26.20 *** Solid Earnings! ***

Headquartered in New York City, Take-Two Interactive Software
(NASDAQ:TTWO), is an integrated global developer, marketer,
distributor and publisher of interactive entertainment software,
games and accessories for the PC, PlayStation, PlayStation2,
Xbox, Nintendo GameCube, and Nintendo Game Boy Advance.  The
company publishes and develops products through its wholly owned
subsidiary labels: Rockstar Games, Gotham Games, Gathering of
Developers, Joytech and Global Star.  The firm maintains sales
and marketing offices in Cincinnati, New York, Toronto, London,
Paris, Munich, Vienna, Copenhagen, Milan, Sydney and Auckland.
Shares of video game publisher Take-Two Interactive Software
have remained in a relatively bullish trend, despite the slump
in technology issues, in the wake of the company's favorable
quarterly earnings report.  TTWO recently posted a quarterly
profit, driven by sales of its hit "Grand Theft Auto 3," and
raised its financial forecast for the current year on prospects
for the holiday season.  Investors who want to own a popular
stock in the entertainment software industry can use this play
to establish a low risk cost basis in the issue.

OCT 20.00 TUO VD LB=0.30 OI=124 CB=19.70 DE=28 TY=5.9%

ULAB - Unilab  $18.83  *** Quest Acquisition! ***

Unilab (NASDAQ:ULAB), an independent clinical laboratory, provides
comprehensive laboratory testing services to physicians, managed
care groups, hospitals and other healthcare providers.  The firm
offers over 1,000 different tests that help physicians diagnose,
evaluate, monitor and treat disease by measuring the presence,
concentrations or composition of chemical and cellular components
in human body fluids and tissue. These tests range from simple
tests, such as glucose monitoring and complete blood count to
highly specialized tests, such as those designed to measure HIV
infection and hepatitis C. Unilab has a pending merger agreement
with Quest Diagnostics (NASDAQ:DGX) but the deal has been delayed
by the FTC on anti-trust concerns.  Quest announced Friday that
it now expects the settlement discussions with the FTC, and the
proposed transaction completion date, to extend beyond 9/30/2002.
Traders who like the outlook for Quest and believe the merger will
be approved can speculate on that outcome with this position.

OCT 15.00 HQZ VC LB=0.40 OI=0 CB=14.60 DE=28 TY=10.4%

UTHR - United Therapeutics  $17.01  *** 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 technical indications should consider this

OCT 15.00 FUH VC LB=0.30 OI=0 CB=14.70 DE=28 TY=6.4%



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

NXTL    7.44  OCT  5.00   FQC VQ  0.35 2190   4.65   28   20.7%
SGP    22.85  OCT 20.00   SGP VD  0.55 1107  19.45   28    8.7%
TARO   32.60  OCT 30.00   QTT VF  0.80 75    29.20   28    7.7%
MLHR   18.10  OCT 17.50   MHQ VW  0.50 5     17.00   28    7.6%
WOR    18.00  OCT 17.50   WOR VW  0.50 10    17.00   28    7.5%
ABT    41.80  OCT  7.50   ABT VU  0.60 881    6.90   28    7.3%
GENZ   21.42  OCT 15.00   GZQ VC  0.30 8609  14.70   28    7.1%
CPC    20.78  OCT 20.00   CPC VD  0.50 0     19.50   28    6.8%
SCHL   45.00  OCT 40.00   USC VH  0.70 31    39.30   28    5.6%
WMT    54.70  OCT 50.00   WMT VJ  0.90 4983  49.10   28    5.4%


Looking For A Diamond In The Rough
By Ray Cummins

Stocks edged higher Friday as investors searched for bargains in
a growing scrap-heap pile of past market bellwethers.

U.S. equities found a smidgen of late buying support to close the
day on an upbeat note after four consecutive weeks of losses.  The
Dow Jones Industrial Average rose 43 points to 7,986 on strength
in materials stocks.  Shares of Alcoa (NYSE:AA), DuPont (NYSE:DD),
Honeywell (NYSE:HON), Walt Disney (NYSE:DIS), International Paper
(NYSE:IP), and Boeing (NYSE:BA) were among the most popular issues.
The NASDAQ Composite climbed 4 points to 1,221 after four days of
losses amid a rally in Qualcomm (NYSE:QCOM).  The cell-phone giant
soared almost 10% after raising its forecast of chip shipments for
mobile phones and reporting that it's seeing strong demand for the
higher-end chips and brisk growth in China, a key market.  In the
broader market sectors, brokerage issues enjoyed a late-session
surge after trading lower for most of the day and buying interest
also emerged in defense, paper, chemical, biotechnology and drug
issues.  The Standard & Poor's 500 Index ended almost unchanged at
845.  Trading volume was 1.78 billion on the NYSE and 1.80 billion
on the technology exchange.  Market breadth was narrowly positive,
with advancers barely outnumbering decliners on both the NYSE and
the NASDAQ.  The quarterly "triple-witching" expiration of futures,
options on individual stocks and options on stock indexes was less
dramatic that expected, although the event was at the root of some
additional volatility.  The 10-year Treasury note slipped 1/32 to
yield 3.78% while the 30-year government bond slid 21/32 to yield
4.74%.  On the fund flow front, Trim Tabs said that equity funds
had outflows of $4.6 billion in the week ending 9/18 compared with
inflows of $1.8 billion during the prior week.


(As of 09-20-02)


Symbol  Pick   Last  Month L/P S/P Credit   C/B   (G/L) Status

MIK     48.35  44.86  SEP   40  45  0.35   44.65  $0.21 Closed
BLL     53.75  51.17  OCT   45  50  0.70   49.30  $0.70  Open
OEX    446.00 423.90  OCT  395 400  0.45  399.55  $0.45  Open
OHP     42.62  40.18  OCT   33  35  0.30   34.70  $0.30  Open


Symbol  Pick   Last  Month L/C S/C Credit   C/B   (G/L) Status

RJR     52.58  47.22  SEP   60  55  0.70   55.70  $0.70 Closed
PHA     40.86  38.40  OCT   50  45  0.60   45.60  $0.60  Open
OEX    446.00 423.90  OCT  500 495  0.45  495.45  $0.45  Open
SLAB    19.66  17.99  OCT   30  25  0.40   25.40  $0.40  Open


Symbol  Pick   Last  Month L/C S/P Credit  M/V   (G/L)  Status

BYD     17.71  17.41  DEC  20  15  -0.15   0.10  -0.05   Open
CVC      9.48  10.25  DEC  15   5  -0.10   0.60   0.50   Open
TARO    32.55  32.60  OCT  37  27   0.10   0.00   0.10   Open

On Monday, Cablevision (NYSE:CVC) rallied to $11.90, offering
a favorable "early-exit" credit for conservative traders.


Symbol  Pick   Last  Month L/P S/C Credit  M/V   (G/L)  Status

MET     25.25  23.56  JAN  20  30   0.05   0.55   0.60   Open
PFE     30.75  28.74  JAN  25  35   0.15   0.70   0.85   Open
BRCD    12.33  10.62  JAN  10  15  -0.05   0.85   0.80   Open
Brocade (NASDAQ:BRCD) and Pfizer (NYSE:PFE) have already achieved
favorable "early-exit" profits and Met-life (NYSE:MET) offered a
small gain for conservative traders.


Symbol  Pick   Last  Month  L/C S/C  Debit  M/V   B/E   Status

LUME    5.80   4.41   JAN    5   7   1.00   0.90  6.00   Open


Symbol  Pick   Last   Long-Opt  Short-Opt  Debit  M/V   Status
SGP     23.67  22.85  JAN-27.5C OCT-27.5C  0.80   0.75   Open


Symbol  Pick   Last  Month L/C S/C  Debit  M/V   (G/L)  Status

ISSX    15.25  13.52  SEP  15  15   1.80   2.00   0.20  Closed

The Internet Security Systems (NASDAQ:ISSX) straddle reached the
downside break-even point twice this week and traders who sold
the put for $1.80 or greater on Tuesday had a risk-free call to
trade for profits during Wednesday's brief recovery.


Symbol  Pick   Last  Month S/C S/P Credit  C/V   (G/L)  Status

ADRX    24.65  22.91  OCT  40  15   1.00   0.75   0.25   Open
ISIS     8.97   8.64  OCT  15   7   1.50   1.50   0.00   Open
QCOM    28.58  28.08  OCT  32  22   1.50   1.50   0.10   Open
TKTX    34.41  30.31  OCT  45  25   1.55   2.30  -0.75   Open

Shares of Transkaryotic Therapies NASDAQ:TLTX) slumped Friday
after the U.S. Food and Drug Administration said it postponed
a meeting to review the company's experimental treatment for a
rare disorder called Fabry Disease.  An FDA advisory panel had
been scheduled to meet next week to review the Transkaryotic
medicine Replagel and a rival drug being developed by Genzyme
General (NASDAQ:GENZ).  Transkaryotic did not say when the new
meeting would be held and FDA officials were not immediately
available to comment on the matter, but it appears the delay
was due to a conflict of interest among the members on the
FDA's Endocrinologic and Metabolic Drugs Advisory Committee.

Questions & comments on spreads/combos to Contact Support

Attn: Contact Support
Subject: Credit Spreads - Collateral Requirements


When you do a credit spread, what does the broker hold in your
account as security in case the trade goes against you?  Do you
think that debit spreads are as good as credit spreads?



Regarding collateral requirements:

A broker generally requires that you have enough collateral (cash
or securities or ?) to cover the maximum possible loss in a spread
position.  Using an example from last week's newsletter:

OHP - Oxford Health  $42.62
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
PROBABILITY OF PROFIT (based on 100 Day HV)=94%

The maximum possible loss in a credit spread is the difference
between the two strike prices, minus the premium (credit) received
in the position.  In this case, the spread is $2.50 and the credit
received is $0.30.  Thus the maximum loss is $2.20 X 100 X number
of contracts.  If you traded 10 contracts in this position, the
collateral requirement would be $2200.  The maximum gain is $300,
so the potential profit is 13.6% (300/2200) and the point at which
the play starts to lose money (break-even) is at $34.70.

Here is some additional information on this type of spread:

Bull-Put (put-credit) Spread: The bull-put spread consists of the
purchase of one put, and the sale of another put with a higher
strike price.  An investor would use this strategy when he thinks
that the stock price will remain above the strike price sold at
the end of the strike period.  The position will yield a credit
and this is the maximum amount of profit the investor can earn
with this strategy.

The risk-reward calculations are:

Maximum profit = the net credit received

Maximum risk (or collateral) = the difference between the strike
prices - the net credit received.

Break even point = the higher strike price - the net credit.

Return On Investment = premium received / position collateral


Most option spread strategies take advantage of the laws of
probability by enabling a trader to hold option positions over
longer periods of time.  They basically help to maintain profit
potential while reducing short-term risk.  While there is no
perfect position in option trading, successful investors learn
to "spread-off" risk in as many different ways as possible,
minimizing the effects of undesirable market activity.  You may
not be able completely eliminate the risk, but you can reduce it
much more than an inexperienced trader who does not use all of
the available strategies.

Concerning the differences between debit and credit spreads:

First, I assume you are referring to vertical spreads such as the
bull-call and bull-put, not calendar or time-selling strategies.
In that case, the two approaches are very similar because the
risk/reward outlook is the same and both techniques include one
long and one short option.  However, the ability to initiate both
strategies with the same risk/reward outlook is vastly different
when you move away from the "at-the-money" option.  The two main
obstacles are the large bid-ask spreads and the relative lack of
premium in in-the-money options.  A good example of that condition
can be seen in a comparison of an "in-the-money" debit spread
(bull-call) and an "out-of-the-money" credit spread (bull-put).
Rarely can these two strategies be utilized with equal success in
the derivatives market.

Hope that helps,



This following group of plays is simply a list of candidates to
supplement your search for profitable trading positions.  As
with any investment, you must decide if the selections meet your
criteria for potential plays.  Only you can know what strategies
are suitable for your skill level, risk-reward tolerance and
portfolio outlook.  In addition, we recommend that you avoid any
strategy or technique in which you are not completely comfortable
with the potential loss, the necessary adjustments and the common
entry-exit strategies.


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

AES - AES Corporation  $2.92  *** Cheap Speculation! ***

The AES Corporation (NYSE:AES) is a global power company comprised
of 4 lines of business.  The contract generation segment includes
generating plants that have entered into contracts with initial 
durations of five years or greater, accounting for at least 75% of
the company's estimated revenue stream.  The competitive supply 
segment includes both wholesale and retail sales of electricity 
directly to end users such as commercial, industrial, governmental
and residential customers.  The utility segment is characterized
by distribution businesses of significant size that often combine 
generation, transmission and distribution capabilities, and are 
subject to extensive local, state and national regulation.  The
growth distribution segment includes distribution facilities that
are facing particular challenges with operational difficulties
because they are located in emerging markets and offer significant
potential for improved financial and operational performance.

This speculative short-put combination utilizes Jim Brown's (OIN
Founder/Chief Editor) popular technique of writing "in-the-money"
Puts to profit from upward movement in the underlying issue.  A
near-term Put is also purchased to limit downside risk in the
position, if the recovery does not begin in the next few months.

More information on this unique strategy can be found at:


PLAY (speculative - bullish/short-put combination):

SELL PUT  JAN04-$7.50  LGC-MU  OI=1276   B=$5.30
BUY  PUT  JAN03-$2.50  AES-MZ  OI=7282   A=$0.95

Note:  There is a collateral requirement for the sold (short)
Put, whether it is partially covered in the initial spread or
exists "naked" when the long option expires.  Please review
the terms of the collateral requirements with your broker.


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.

LEH - Lehman Brothers  $49.69  *** Earnings Play! ***

Lehman Brothers Holdings (NYSE:LEH) is a global investment bank
serving institutional, corporate, government and high-net-worth
individual clients and customers.  The firm is engaged primarily
in providing financial services and operates in three business
segments: Investment Banking, Capital Markets and Client Services.
Other businesses in which the company is engaged represent less
than 10% of consolidated assets, revenues or pre-tax income.  The
company's business includes capital raising for clients through
securities underwriting and direct placements, corporate finance
and strategic advisory services, private equity investments,
securities sales and trading, research and the trading of foreign
exchange and derivative products and certain commodities.  The
firm acts as a market-maker in all major equity and fixed-income
products in both the domestic and international markets.  The
company's earnings are due 9/24/02.

Strategy Explanation:

A less neutral and more bearish type of calendar or time spread
is initiated when the current value of the underlying issue is
some distance above the strike price of the options.  This type
of play is speculative with low cost and large potential profits.
Two favorable outcomes can occur: the underlying stock drops 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 moves below 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 above 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 (speculative - bearish/calendar spread):

BUY  PUT  JAN-40  LEH-MH  OI=2366  A=$2.60
SELL PUT  OCT-40  LEH-VH  OI=4414  B=$0.80


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

NOC - Northrop Grumman  $124.54  *** Defense Sector ***

Northrop Grumman (NYSE:NOC) is a global defense firm that provides
unique technologically advanced products, services and solutions
in defense and commercial electronics, defense systems integration,
information technology and nuclear and non-nuclear shipbuilding
and systems.  Northrop Grumman has operations in 44 states and 25
countries, serving U.S. and international military, government and
commercial customers.  Northrop Grumman is aligned into six main
business sectors: Electronic Systems, Information Technology,
Integrated Systems, Ship Systems, Newport News and Component

PLAY (conservative - bullish/credit spread):

BUY  PUT  OCT-105  NOC-VA  OI=838   A=$1.00
SELL PUT  OCT-110  NOC-VB  OI=2476  B=$1.45
POTENTIAL PROFIT(max)=11%  B/E=$109.50

BRL - Barr Laboratories  $63.65  *** Triple-Top At $70 ***

Barr Laboratories (NYSE:BRL) is a specialty pharmaceutical company
primarily engaged in the development, manufacture and marketing of
generic and proprietary prescription pharmaceuticals.  The company
manufactures and distributes more than 100 different dosage forms
and strengths of pharmaceutical products in its core therapeutic
categories, including oncology, female healthcare (including some
hormone replacement and oral contraceptives), cardiovascular, anti
infective and psychotherapeutics.  In addition, the company has a
proprietary, novel vaginal ring drug delivery system it is using to
develop products intended to address a variety of female health
issues and unmet medical needs.  In 2001, Barr Laboratories merged
with Duramed Pharmaceuticals and in 2002, the company purchased
certain assets of Enhance Pharmaceuticals including a proprietary,
novel, vaginal ring drug delivery system.

PLAY (conservative - bearish/credit spread):

BUY  CALL  OCT-75  BRL-JO  OI=48   A=$0.25
SELL CALL  OCT-70  BRL-JN  OI=236  B=$0.80
POTENTIAL PROFIT(max)=14%  B/E=$70.60

LXK - Lexmark International  $43.49  *** New 2002 Low! ***

Lexmark International (NYSE:LXK) is a developer, manufacturer and
supplier of printing solutions including laser and inkjet printers,
multifunction products and associated supplies and services for
offices and homes.  The company also sells dot matrix printers for
printing single & multi-part forms for business users and develops,
manufactures and markets a broad line of office imaging products.
Lexmark International is the surviving entity of a merger between
itself and its former parent company, Lexmark International Group,
consummated on July 1, 2000.

PLAY (conservative - bearish/credit spread):

BUY  CALL  OCT-55  LXK-JK  OI=5374  A=$0.25
SELL CALL  OCT-50  LXK-JJ  OI=1980  B=$0.65
POTENTIAL PROFIT(max)=9%  B/E=$50.45

MMM - 3M Company  $119.46  *** An Old Favorite! ***

3M Company (NYSE:MMM), formerly known as Minnesota Mining and
Manufacturing Company, is an integrated enterprise characterized
by substantial intercompany cooperation in research, manufacturing
and marketing of products.  3M's business has developed from its
research and technology in coating and bonding for coated abrasives,
the company's original product.  Coating and bonding is the process
of applying one material to another, such as abrasive granules to
paper or cloth (coated abrasives), adhesives to a backing (pressure
sensitive tapes), ceramic coating to granular mineral (roofing
granules), glass beads to plastic backing (reflective sheeting) and
low-tack adhesives to paper (repositionable notes).  The company
conducts business through six major operating segments: Industrial
Markets; Transportation, Graphics and Safety Markets; Health Care
Markets; Consumer and Office Markets; Electro and Communications
Markets, and Specialty Material Markets.

PLAY (conservative - bearish/credit spread):

BUY  CALL  OCT-135  MMM-JG  OI=3278  A=$0.40
SELL CALL  OCT-130  MMM-JF  OI=4875  B=$0.95
POTENTIAL PROFIT(max)=14%  B/E=$130.60

WFC - Wells Fargo & Company  $46.89  *** Up-trend At An End? ***

Wells Fargo (NYSE:WFC) is a diversified financial services firm
organized as a bank holding and financial holding company.  The
company's subsidiaries engage in banking and related financial
services businesses in Alaska, Arizona, California, Colorado,
Idaho, Illinois, Indiana, Iowa, Michigan, Minnesota, Montana,
Nebraska, Nevada, New Mexico, North Dakota, Ohio, Oregon, South
Dakota, Texas, Utah, Washington, Wisconsin and Wyoming.  Other
financial services are provided by subsidiaries engaged in various
businesses, such as wholesale banking, mortgage banking, consumer
finance, equipment leasing, agricultural finance, commercial
finance, securities brokerage and investment banking, insurance
agency services, computer and data processing services, trust
services, mortgage-backed securities servicing and venture capital
investment. Wells Fargo has three operating segments: Community
Banking, Wholesale Banking and Wells Fargo Financial.

PLAY (conservative - bearish/credit spread):

BUY  CALL  OCT-55  WFC-JK  OI=13316  A=$0.15
SELL CALL  OCT-50  WFC-JJ  OI=15036  B=$0.65
POTENTIAL PROFIT(max)=12%  B/E=$50.55


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 momentum plays attractive.

MRK - Merck  $45.74  *** Downtrend Intact ***

Merck (NYSE:MRK) is a global, research-driven pharmaceutical firm
that discovers, develops, manufactures and markets a broad range
of human and animal health products, directly and through its
joint ventures, and provides pharmaceutical benefit services
through Merck-Medco Managed Care, L.L.C. (Merck-Medco).  Merck's
operations are managed principally on a products and services
basis and are comprised of two segments: Merck Pharmaceutical,
which includes products marketed either directly or through joint
ventures; and Merck-Medco.  Merck Pharmaceutical products consist
of therapeutic and preventive agents, sold by prescription, for
the treatment of human disorders.  The pharmaceutical benefit
services provided by Merck-Medco include sales of prescription
drugs through managed prescription drug programs as well as
services provided through programs to manage patient health and
drug utilization.

PLAY (speculative - bearish/synthetic position):

BUY  PUT   OCT-40.00  MRK-VH  OI=2835   A=$0.85
SELL CALL  OCT-50.00  MRK-JJ  OI=10588  B=$0.70

Note:  Using options, the position is similar to being short the
stock.  The initial collateral requirement for the sold call is
approximately $1,475 per contract.


Based on analysis of the historical option pricing and technical
background, these positions meet the fundamental criteria for
favorable volatility-based plays.  The recent high premium levels
support "selling" strategies and these issues have robust options
and relatively stable trading patterns.  As with any suggested
position, each play should be evaluated for portfolio suitability
and reviewed with regard to your strategic approach and trading

PPD - Pre-Paid Legal  $21.80  *** 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.

PLAY (aggressive - neutral/credit strangle):

SELL CALL  OCT-25.00  PPD-JE  OI=476  B=$1.10
SELL PUT   OCT-17.50  PPD-VW  OI=623  B=$0.90
UPSIDE B/E=$27.00  DOWNSIDE B/E=$15.50

STJ - St. Jude Medical  $36.29  *** Recent Volatility ***

St. Jude Medical (NYSE:STJ) is engaged in the development and
distribution of cardiovascular medical devices for the global
cardiac rhythm management (CRM), cardiology and vascular access
(C/VA) and cardiac surgery (CS) markets.  The company's primary
products in each of these markets are bradycardia pacemaker
systems, tachycardia implantable cardioverter defibrillator (ICD)
systems and electrophysiology (EP) catheters in CRM; vascular
closure devices, catheters, guidewires and introducers in C/VA,
and mechanical and tissue heart valves, valve repair products and
suture-free devices to facilitate coronary artery bypass graft
anastomoses in CS.  St. Jude markets its products primarily in
the United States, Western Europe and Japan.  The company also
sells its products in Eastern Europe, Africa, the Middle East,
Canada, Latin America and the Asia-Pacific region through
employee-based sales organizations and independent distributors.

PLAY (aggressive - neutral/credit strangle):

SELL CALL  OCT-40  STJ-JH  OI=2426  B=$0.50
SELL PUT   OCT-30  STJ-VF  OI=162   B=$0.65
UPSIDE B/E=$41.10 DOWNSIDE B/E=$28.90


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