Option Investor

Daily Newsletter, Wednesday, 10/02/2002

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The Option Investor Newsletter                Wednesday 10-02-2002
Copyright 2002, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Conflicting Signals
Index Trader Wrap:
Weekly Fund Family Profile: Longleaf Partners: Managed by Southern
                            Asset Management, Inc.
Options 101: Looking for Odd Clues

Updated on the site tonight:
Swing Trader Game Plan: Four Billion Dollar Mistake

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
10-02-2002                High    Low     Volume Advance/Decl
DJIA     7755.61 - 183.18 7969.37 7742.02  1912 mln   362/1513
NASDAQ   1187.30 -  26.42 1222.72 1183.76  1741 mln   456/1269
S&P 100   415.93 -   9.81  428.37  414.96   totals    818/2782
S&P 500   827.91 -  20.00  851.93  826.50
RUS 2000  360.22 -   7.87  369.68  360.18
DJ TRANS 2135.21 -  89.97 2225.71  2131.64
VIX        43.36 +   3.23   43.78  40.10
VIXN       58.15 +   0.91   59.45  56.35
Put/Call Ratio 0.83

Conflicting Signals

We're starting to see the first conflicting signals in some time.  
In fact, since August 22, when the end of summer rally ran out of 
steam at 9077, the signals have been pretty clear that we would 
be re-testing the July lows.  If they weren't evident immediately 
on the rollover from that level, they were at least consistent on 
the way down.  The first real sign came on September 3, when the 
Dow dropped 355 points.  While a big drop can signal a change in 
sentiment, the size of the drop was not as significant as the 
level it reached.  It marked the first lower low since the rally 
from a low of 7532 on the morning of July 24 took the Dow back 
over 9000 by the end of August.  The Dow then found support and 
rallied up to September 11.  The significance of the September 11 
high is that is was a lower high, following the lower low.  This 
was followed by a textbook head and shoulders pattern, with a 
neckline break at 8300 that signaled the continued drop. As of 
right now we have still not seen a higher high in the Dow or 
Nasdaq.  However, we have come awfully close and certain levels 
that now bear watching.  

In the Dow, I am watching the intraday high of 8012.42 on 9/26, 
and the closing level of 7997.12. Today's rally fell short of 
both of these levels, with an intraday high of 7969.37 and close 
of 7755.61.  However, now that we have tested the July low and 
rebounded, we need to watch for signs of a true bottom, or a 
false one.   A break above these levels, and a close above the 
psychological 8000 barrier, could be the first sign of a 
turnaround.  This may be premature, since we actually found a 
lower low than we did in July, but there has been an awful lot of 
activity between 7500 and 8000 and there are plenty of signs to 
watch for.  After today's warnings after the bell, we may be 
closer to re-testing the low by the end of the day Thursday, 
after failing at the high the last couple of days. Something to 
keep in mind when looking at technical levels of these indices is 
that they are made up of many stocks, so minor breaks in support 
and resistance levels should not be viewed as exactly as those in 
an individual stock, which requires and attracts more focused 
buyers and sellers.

Chart of the Dow

In the Nasdaq, we are closer to the center of the high/low range, 
but given the large swings in the index recently, we could test 
these levels on any day soon.

Chart of the Nasdaq

Dell's announcement after the bell on Tuesday, that it was 
raising revenue forecasts and earnings guidance, indicated that 
we would be seeing a follow through rally this morning.  That 
follow through did not materialize, and we were unable to set a 
higher high.  However, the Semiconductor Sector Index (SOX.X), 
which tracks companies with a heavy interest in Dell's business, 
did hit a higher intraday high today. It also looks to be forming 
higher lows, although just barely.   That intraday level did not 
hold up and by the end of the day, the closing price, in 
contrast, did not reach a higher high.  So how much stock do we 
put in the intraday high?  What it does is throw up a red flag.  
While I look at closing prices as a more significant measure, 
since they represent what traders are willing to take home 
overnight, the fact that the intraday range gave a signal tells 
me that a level where sellers were previously strong does not 
show the same strength as it once did.  The same is true for 
support, where buyers are not as committed as they once were, 
when we see a lower intraday low.  Now that we have seen a higher 
intraday high, I will be more cautious with shorts in the sector.

Chart of the SOX

After the bell, Advanced Micro Devices (AMD) warned of a 
substantial operating loss and revenues far below expectations 
for the third quarter.  The company said it would lose $0.49 per 
share and see revenues of $500 million, down from expectations of 
$614 million. The company said that it had cut inventories of its 
processors for the PC market, due to persistent weak PC demand.  
This takes some of the shine off of the Dell announcement and may 
make the intraday high a distant memory.  However, until we see a 
break below the low of 231, we are still in a range.  

After a massive rally of almost 350 points in the Dow yesterday, 
some type of pullback could be expected.  That makes it hard to 
tell whether the failure under 8000 is a significant sign of 
weakness from a failed rally, or a normal pullback.  Until we 
cross one of the levels described above, we may not know which 
direction we are ultimately headed.  That being said, there is 
still a 500-point range in which to trade, and we know that the 
trend is still down. There has been talk of a surprise rate cut 
by the Federal Reserve prior to their next meeting on November 6.  
That seems to have been the catalyst, along with the Iraq news, 
for yesterday's rally. However, that news wore off and we gave 
back about half of yesterday's gain. A warning from Dow Chemical 
seemed to be the catalyst for today's drop.  The company warned 
that its 3rd quarter earnings would be just over half of previous 
forecasts.  Dow said the decrease was due to higher feedstock 
costs, which is directly related to higher oil prices.  In a 
downward trending market, we still have to assume bearishness and 
today's drop was the reminder not to get too excited until we see 
a decisive break in the opposite direction. 

One indication that all was not necessarily well after 
yesterday's rally, was the Market Volatility Index (VIX.X).  In 
an upward trending market, implied volatility, as measured by the 
VIX, generally drops. The one exception to this rule was the 
internet boom, when volatility increased as stocks gapped up $20 
a day, and the risk seemed as significant to the upside as the 
downside.  With those days behind us, however, we are back to the 
old rules.  Implied volatility is higher to the downside because 
stocks generally fall quickly and go up slowly.  This can be seen 
in the implied volatility skew of options on almost any listed 
equity, with downside strikes holding more relative premium than 
upside strikes.  A 5-year weekly moving average of the VIX shows 
a reading of 26.75.  A reading of 40 is an increase over that 
average of almost 50%, and is considered very high.  The fact 
that yesterday's 346-point rally in the Dow was not able to push 
the VIX below 40 indicated continuing fear of a sell-off.  The 
VIX closed at 40.13 on Tuesday, and today ran back up to 43.36.  
Some traders see this as a trailing indicator and some see it as 
a contrarian indicator, but I've seen many institutions come into 
the pits selling premium when they consider it to be too high.  
The fact that there was not enough individual and institutional 
pressure to lower these levels is an indication that the 
institutions are not large sellers of premium at these levels, 
and are not believers in a big rally on the near horizon. A rally 
would shrink premiums and earn profits for those sellers. As for 
the contrarians, they tell us that VIX spikes usually foreshadow 
a market rally.  While this is true in the sense that the VIX 
spikes heavily on market crashes and then falls on the rebound, a 
consistently high VIX, which increases in a series of higher 
highs and higher lows, should not be considered a spike, and 
therefore not a contrarian indicator.  That is what we are seeing 
now - a series of higher highs and higher lows.

Chart of the Market Volatility Index (VIX.X)

The West Coast port lockdown has continued to get press, as the 
National Association of Manufacturers appealed to the unions to 
reopen the ports.  The group president said, "An extended 
shutdown will have a negative and cascading impact on economic 
growth, rob retailers of product, spoil food, shut down assembly 
lines, and eventually lead to layoffs."  My guess is that the 
U.S. President will get involved in plenty of time for the 
holiday shopping season, if an agreement cannot be reached.  We 
keep hearing that it is costing the economy $1 billion a day, but 
if demand simply becomes pent up during that period, at least the 
non-perishable goods should be able to make up a significant 
portion of the losses when the gates re-open. 

Additional warnings came after the bell from the Bank of New York 
(BK) and Guess (GES).  The BK warning followed a similar warning 
at Comerica (CMA) this morning, which echoed the sentiment heard 
a couple of weeks ago from J.P. Morgan (JPM).  Bad business loans 
are eating into the bank's bottom lines.  BK saw problems similar 
to those of JPM, which stemmed from non-performing loans to the 
telecom sector.  CMA blamed its restatement on problem loans to 
the retail automotive and manufacturing sectors.  The pattern is 
disturbing, as a second wave of bad news stems from the economic 
downturn in many industries.  These companies have either gone 
bankrupt or on their way there, and the banks that financed their 
growth are now taking the hit for a double dose to the market.  
There are likely many other banks facing the same problems, and 
if the banking sector tanks as the problems mount, any market 
recovery could be a long way off.

The Guess warning just reiterates what we have already heard from 
other retailers: that September sales were terrible, following 
poor sales over the summer months. Heading into the holiday 
season, it is becoming apparent that a spending turnaround is not 
happening, as consumers are worried about jobs, and the layoffs 
of the last couple of years have caught up to consumer spending. 

Ever hit the wrong button on the remote and turn off the T.V. 
instead of turning up the volume?  Well, a Bear Stearns clerk 
apparently hit the wrong button and almost turned off the S&P 
this afternoon.  At 3:40 p.m., Bear Stearns entered orders to 
sell $4 billion worth of S&P securities, rather than $4 million 
worth.  They were able to cancel all but $622 million of the 
orders prior to execution.  This would have been an easy excuse 
for the end of day drop, had it not been 20 minutes before the 
close. There may be a bounce in the morning in some of those 
issues that were hit by mistake, however, the overall market 
direction should only be affected slightly, as the Dow gave up 
only 25 points in the last 20 minutes of trading.

I would look for continued selling in the morning after the end 
of day warnings.  However, if we approach the recent lows, expect 
to see a slowdown once again.  We have bounced in the same area 
in the Dow on several occasions, so there are some buyers out 
there around that level.  If those bulls go into hibernation, we 
may see 7000 fairly soon.


What the heck was that?

At 03:15, things were "little changed," but by 04:00 PM and the 
closing bell, it appeared that a bull's nose ring got jerked and 
his eyes swelled with tears.

I know the feeling all too well.  No, not getting my nose ring 
pulled, but getting punched right in the nose and the tearing of 
the eyes that follows.

So what happened?  It turns out that a clerk at Bear Stearns' 
entered an S&P sell order at around 03:40 PM EST for $4 billion 
worth of S&P instead of $4 million, which was marked on the 
ticket.  When the trade began to execute other traders and 
computerized sell programs began to execute some risk management, 
sending the major averages lower.

So, as a "point of order" I do think index traders need to take 
today's late session decline with a grain of salt as the market 
action was really driven by an erroneous sell program of $4 
billion, compared to a smaller sell order of $4 million.  Hey, 
what's a few bucks between friends.  Right?

Tonight's "news" that may impact the markets has semiconductor 
maker Advanced Micro Devices (NYSE:AMD) $5.37 +1.89% falling to 
$4.30 (-19% from its close) after the company warned on earnings.  
I've noted before that anytime AMD gives guidance, it is suspect 
at best as the company has a history of not giving good guidance 
(bullish or bearish).  However, the company now expects Q3 sales 
of $500 million versus consensus of $615.1 million (from prior 
AMD guidance) and says that they now anticipate "a substantial 
operating loss" for the quarter, citing continuing weakness in 
the PC markets.

Other news that will get some attention is Bank of New York's 
(NYSE:BK) $26.76 -7.9% warning that it will take a combined 
after-tax charge of $260 million to recognize deterioration in a 
number of telecom loans as well as a valuation adjustment against 
it equity portfolio.  In New York Instinet trading, shares of BK 
fell to $23.51 (-12% from its close).

The reason I think BK's news will get attention is the weakness 
noted in today's 01:00 PM EST update regarding weakness in the 
banks, which was brought on by Comerica's (NYSE:CMA) $40.00 -20% 
announcement that it would have to record a $328 million charge 
($213 million after-tax) related to incremental provision for 
credit losses and goodwill impairment for the company's Munder 
Capital Management subsidiary.

For S&P and even Dow traders, look for the CMA and BK "write-
downs" and "loss provisions" to have financial bulls wondering 
"who's next"  and further questioning the financial/banking stocks.  

This puts my profiled bullish trade (partial positions) in the 
Dow Diamonds (AMEX:DIA) $77.92 -2.6% from today's market monitor 
(12:46:42) at DIA $79.70 partially at risk, as Citigroup (NYSE:C) 
$29.60 -4.5% and JP Morgan (NYSE:JPM) $18.25 -5.9% are both 
"banking stocks" and Dow components.

Dow Industrials Chart - Daily Interval

When I profiled the DIA bullish trade, the Dow Industrials were 
breaking to a session high and getting leadership from my "key 
stock" in Johnson & Johnson (NYSE:JNJ) $58.30 +3.5%.  If a trader 
took this bullish trade in the DIA's and did NOT over leverage 
and hold expiration calls from November or longer, I'd continue 
to hold that position (if YOU are comfortable with holding it).  
I would NOT be comfortable holding October expiration right now 
as I do not yet have any type of bullish reversal in the Dow 
Industrials Bullish % ($BPINDU).  

In today's 03:15 PM EST update, I did think that index bears 
could implement bearish trades in the S&Ps and NASDAQ-100.  The 
03:15 bearish trade profile was based on the work we did in last 
night's wrap and observations I thought a trader might make into 
today's close.

S&P 500 Index (SPX) Chart - Daily Interval

The SPX's session high of 851.93, was a 0.47% gain from 
yesterday's close of 847.01 and this was within my "2% gain 
limit" I felt a bearish SPX trader would want to see for a 
bearish trade into today's close.  I've placed a "risk averse" 
stop at 840 for those subscribers that shorted/put the SPY/SPX 
that are not willing to risk more capital than the 38.2% 
retracement would allow.  For those traders willing to give a 
bearish trade more time to work, I'd follow the trade with a 
trailing stop using the 21-day SMA as my maximum stopping point.  
The "first test" for a bear is to break back below our mid-point 
of regression near 815, with first bearish target of 800, then 
777 and finally 765.

If I were an options trader that couldn't watch the markets on a 
more frequent basis, I'd take a lunch break, see if the SPX has 
broken below 815.  If so, then I'd lower my stop to just above 
845.  Then after a nap, I check to see if the SPX has traded 800.  
If it did, then I could lower my stop to just above 815, or 
break-even.  Then, just before the close, I'd look to see if the 
SPX has traded 777.  If it has, then I might lower my stop to 

Please note.  The lower trending regression channel on the SPX 
chart above is what I consider LONGER-TERM and much wider 
regression dating back to the March highs.

On the S&P 100 Index (OEX.X) 415.93 -2.3% chart below, we're 
using a SHORT-TERM regression channel from the August 22nd 
relative high.

Test our scenario.... "If the commercials don't like the economic 
data, they'll be shorting back near 420-430."  This was a 
scenario we laid out in Monday's wrap, then revisited last night, 
to set up today's late session bearish entry.

S&P 100 Index Chart - Daily Interval

Evidently, one subscriber is still trading bearish in the 
indexes, or at least I think he/she is as I got an e-mail today 
asking about the bearish targets based on our 09/12/02 Index Wrap 
and the potential head and shoulders top pattern that was 
developing.  On 09/17/02, the neckline was broken and put into 
play the 380 level (based on our calculation from neckline=430 to 
head=480).  That ties in nice with our fitted retracement bracket 
and 0% near 380.42.  As the lower part of our regression channel 
is extended, I get a crossing point with 0% on October 14th. 

I will also note that on 09/12/02, we also discussed the OEX 
point and figure chart and bearish vertical count of 390.  
Combined, the head and shoulders pattern and bearish vertical 
count give OEX bears a target range of 380-390.

I'd also have to say that today's inability of the OEX to put in 
much of a move higher has a bear starting to believe that 
commercials may indeed have been putting on some short positions 
in the 420-430 range.

S&P trader's note:  We now know that there was an erroneous S&P 
sell program triggered by a Bear Stearns trade entry error.  As 
such, it makes it a little difficult to tell how stocks with S&P 
500 exposure will trade in the first hour of trading.  When the 
sell programs were triggered, computer generated sell programs 
kicked in and there was perhaps some selling that took place in 
the final 20-minutes of trading that shouldn't have.  Just be 
aware that there may be some partial positions bought back near 
the open tomorrow morning.

NASDAQ-100 Index Tracking Stock (AMEX:QQQ) - 60-minute intervals

The QQQ's closed a little "stronger" than I would have liked to 
see.  I would have preferred a more decisive close back below the 
$21.10 level.  However, a bear does like the fade of bullishness 
near the $22.21 level and rolling MACD.  Look for a break below 
today's low of $20.97 to eventually have the Q's trading a new 
52-week low and my near-term target of $20.20.

I played the October $21 puts (QAVVT) at $0.90, and look to cover 
at least 1/2 of the position on a trade near $20.20 to remove 
some risk from the trade (if a trade near $20.20 should take 
place).  For those outright short the QQQ, then I'd use a 
trailing stop just above today's high or the $22.21 level, 
whichever level of risk you are more comfortable with.

Advanced Micro Devices (NYSE:AMD) is NOT a NASDAQ-100 component, 
but it doesn't sound as if business has been booming and that 
tonight's news may weigh on technology stocks.

Head and Shoulder Targets

Here's a quick computation of potential bearish targets from the 
head and shoulders tops that were also present in the S&P 100 

Dow Industrials : head= 8,960 / neckline= 8,200 ; target=7,440
Note:  The Dow has traded a low of 7,460 on 09/30/02

SPX : head= 950 / neckline= 860 ; target= 770
Note:  The SPX has traded a low of 800 on 09/30/02

NASDAQ Comp: head=1,400 / neckline= 1,240; target= 1,080
Note:  The COMPX has traded a low of 1,160 on 09/30/02

QQQ : head= $25.50 / neckline= $22.00; target= $18.50
Note:  The QQQ has traded a low of $20.47 on 10/01/02

NASDAQ-100 : head= 1,025 / neckline= 875; target= 725
Note:  The NDX.X has traded a low of 824 on 10/01/02

Quickly revisit the XAU.X

For those trader using last night's thoughts on using the Gold/Silver Index (XAU.X) 67.16 -0.68% in their trading, here's a quick update.

Gold/Silver Index (XAU.X) Chart - Daily Interval

With 10-minutes left in trading, the XAU.X was actually showing a 
gain, but got hit lower into the close.  It may have been 
partially attributed to the sell programs, but I'm not sure.

However, I would think that with some banks "warning" of write-
downs that "gold" would find some bidders.  I do think our 
scenario for a "trap" in gold is in play, but we will have to 
wait until tomorrow to find out. (thinking is that gold is a 
hedge against financial concerns)

One way a trader that used the XAU.X scenario outlined last night 
might continue to use this index of gold stocks going forward is 

If bearish the Dow Industrials, SPX, OEX or NDX then ideally a 
bear would like to see the XAU.X rally higher to signal that 
market participants are "worried" about something (bank write-
downs, etc).  If gold stocks don't rally then.....

A Dow, SPX, OEX and NDX bear can become ALERT that maybe all this 
bad news (earnings, economic data, you name it) has already been 
factored into things and be more cautious in their bearish Dow, 
SPX, OEX and NDX trades by not being complacent and following any 
bearish action in their index trades with some disciplined stops.

You will note that I did redraw my downward trend on the XAU.X 
when compared to last night's update.  The reason I did this is 
to remind myself that the XAU.X has broken an upward trend and 
that the overriding trend is down right now.  

I will say this.  I did attempt some short-term bullish trades 
near XAU.X and looked for gaps higher in stocks the following 
mornings, but there seemed to be willing sellers in gold stocks 
at that level.

One advantage a bearish trader in the major market indexes may 
have in the near future is that if the index your trading gets 
close to your target and the XAU.X begins to find resistance at 
downward trend, then it may be signal to be locking in some gains 
near your bearish index targets.

Don't let the XAU.X trading action in the coming sessions be the 
OVERRIDING influence to your trading.  It's just one piece of a 
puzzle that traders may be able to use.  A piece of the puzzle 
that tends to DIVERGE from the major market averages from time to 

Jeff Bailey

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Note: Options involve risk. Risk disclosure:


Longleaf Partners: Managed by Southern Asset Management, Inc.

Southern Asset Management, Inc. ("SAM"), investment advisor to 
the Longleaf Partners Funds, is an independent, employee-owned 
investment firm founded in 1975.  The Memphis-based firm has a 
unique "code of ethics" requiring all employees to limit their 
equity investments to Longleaf Partners Funds - unless granted 
clearance by a compliance committee.  Also, all employees must 
report their securities transactions quarterly.

Due to this partnership approach, SAM employees and affiliates 
are collectively the largest shareholders across the Longleaf 
Partners Funds.  Southeastern does this to align its interests 
with those of shareholders and prevent conflicts of interest.  
Being the largest shareholders also means that the funds are 
managed simply, conservatively, effectively and with cost and 
expense in mind to maximize total return.

All three Longleaf mutual funds are offered on a true no-load 
basis meaning no sales loads, 12b-1 or exit fees.  The firm's 
flagship product, Longleaf Partners Fund (LLPFX), and sibling 
Longleaf Partners Small Cap Fund (LLSCX) have current expense 
ratios of just 0.91% and 0.95%, respectively, a roughly 0.50% 
annual expense advantage versus the average U.S. equity fund.  
Longleaf Partners International (LLINX) has a current expense 
ratio of 1.70%, which isn't cheap but is on par with its peer 
group.  Note that the Longleaf small-cap product is currently 
closed to new investors, with some exceptions.

Per the company website (www.longleafpartners.com), Longleaf 
Partners (LLPFX) is the largest of three funds with more than 
five billion dollars in net assets today.  Longleaf Partners 
Small Cap (LLSCX) has $1.9 billion in assets (why it's closed), 
while Longleaf Partners International (LLINX) has roughly one 
billion dollars in assets today.  Southeastern manages another 
$10+ billion in separately managed accounts for institutional 
investors.  Total assets under management are over $18 billion 

Investment Style/Strategy

Southeastern's investment team, approach and process are spelled 
out in the About Southeastern section of the fund website.  They 
currently have eight portfolio managers/analysts composing their 
investment team, including O. Mason Hawkins, the firm's chairman, 
CEO and all-star portfolio manager.  All three funds are managed 
using a value-oriented investment approach, while the investment 
process buzzwords are "unanimous decisions" and "team approach."

Southeastern is a true value investor.  The mutual funds seek to 
achieve superior long-term performance by purchasing equities of 
financially strong, well-managed companies at market prices that 
are significantly below SAM's assessment of their business value.  
Equity holdings are sold when they approach the firm's appraisal.

Like other value-oriented money managers, Southeastern believes 
that equities purchased at prices substantially less than their 
intrinsic worth protect capital from significant permanent loss 
and can appreciate substantially once the market recognizes the 
company's economic value.  A company's market price must be 60% 
or less of their appraisal to qualify for investment, according 
to the company website.  Southeastern is a deep-value investor.

What does being a deep-value manager mean for shareholders?  It 
means Southeastern won't invest unnecessarily in stocks just to 
be fully invested.  They would rather let the fund's cash level 
rise (and play it safe) than invest in an equity security which 
isn't trading well below their analysts' appraisal of the stock.  
Morningstar's Russ Kinnel wrote an article a few weeks ago that 
cited Mason Hawkins, Staley Cates, and John Buford and Longleaf 
Partners Fund (LLPFX) as among the best "cash-heavy funds" with 
approximately 18% of assets in cash recently.

Because Southeastern is so picky in its stock selections, their 
mutual funds have had low downside volatility compared to their 
respective broad peer group.  Per the Lipper Leaders website at 
www.lipperleaders.com all three Longleaf Partners funds are 1's 
or Lipper Leaders for "preservation of capital" in down markets.  
Longleaf Partners Fund and Longleaf Partners Small Cap Fund are 
also Lipper Leaders for expense, which permits them to employ a 
more conservative equity approach and still remain competitive.

In the next section we see how well Southeastern's disciplined 
philosophy and process have translated into superior long-term 
performance, the firm's primary investment objective.

Investment Performance

Our performance analysis begins with the Lipper Leaders website, 
which ranks funds against their broad peer group over the latest 
36-month period.  Two funds, Longleaf Partners Fund and Longleaf 
International Fund, are Lipper Leaders (1's) for "total return."  
Their international fund, which applies the flagship product's 
value-oriented discipline to international equities, is also a 
Lipper Leader for "consistent return."  Both are Lipper Leaders 
for "preservation," giving them strong return-risk profiles in 
relation to similar funds.

In Lipper's system, Longleaf Partners Small Cap Fund's relative 
grades are not as strong as its siblings.  While it is a Lipper 
Leader for preservation, the small-cap product is rated towards 
the bottom for "total return" and "consistent return."  That is 
most likely the result of swelled assets, which caused capacity 
constraints.  In the small-cap market you have to guard against 
chasing your own tail, and that may have hurt fund performance 
over the past three years.  The fund's trailing 5-year numbers 
are still relatively strong compared to all U.S. equity funds.

Relative to their Morningstar category peer group, all three of 
Longleaf Partners' funds are rated 4 stars (above average) or 5 
stars (highest).  Morningstar's star ratings are based on total 
return performance, as adjusted for risk and sales charges over 
various time periods with greater importance given to long-term 
performance.  Below is a summary of the three funds' return and 
risk ratings per Morningstar.

 Longleaf Partners (LLPFX):
 Morningstar Category: Mid Cap Value
 Morningstar Star Rating: 4 Stars 
 Morningstar Risk Rating: Average
 Morningstar Return Rating: Above Average

 Longleaf Partners Small Cap (LLSCX):
 Morningstar Category: Small Cap Value
 Morningstar Star Rating: 4 Stars
 Morningstar Risk Rating: Low
 Morningstar Return Rating: Above Average

 Longleaf Partners International (LLINX):
 Morningstar Category: Foreign Stock
 Morningstar Star Rating: 5 Stars
 Morningstar Risk Rating: Below Average
 Morningstar Return Rating: High

A few things to add.  Longleaf Partners Fund has a 5-star rating 
for the trailing 10-year period, based on "high" return relative 
to its mid-cap value category.  In Lipper's system, the flagship 
fund is classified as "multi-cap value," perhaps a more accurate 
description of its investment style.


For the trailing 3-year period ended October 1, 2002, Longleaf 
Partners Fund produced an average total return of 6.4% for its 
shareholders, 17.4% better than the S&P 500 index's 11% annual 
average loss and ranking in the 26th percentile of the mid-cap 
value category per Morningstar.  The fund's 10-year annualized 
total return of 14.7% is 5.7% above that produced by the stock 
market (S&P 500 index), ranking it in the category's top 5%, a 
superior long-term performance achievement.

Longleaf Partners International Fund (LLINX), an international 
multi-cap value version of the flagship Longleaf Partners Fund, 
doesn't have a 5-year history, but it's 3-year return and risk 
ratings suggest the value-oriented strategy has worked well in 
international markets also.   

Even with some of the fund's gains given back in recent months, 
Longleaf Partners International Fund sports a 3-year annualized 
return of 3.9% through October 1, 2002, outperforming its index 
benchmark (MSCI EAFE) by an average of 19.5% a year.  Over the 
past three years, the MSCI EAFE index of developed markets has 
declined by 15.6% on an annual-equivalent basis.  According to 
Morningstar, the fund's 3-year performance ranked in the top 2% 
of all foreign stock funds.

While the long-term performance of Longleaf Partners Small Cap 
Fund (LLSCX) is still fine on a risk-adjusted basis versus its 
small-cap peer group, you have to acknowledge that the fund is 
currently closed to new investors, and that rising assets have 
possibly hurt the fund's short-term performance in relation to 
other small-cap value funds.  

Note that while Longleaf Partners Small Cap Fund's 3-year return 
of 2.9% on an annualized basis may be considered "subpar" within 
the small-cap value category (89th percentile), the fund's total 
return was 14.7% greater than the S&P 500 large-cap index, using 
Morningstar's numbers.  

Before assets swelled, this small-cap product was a top quartile 
performer, ranking in the 14th percentile of the small-cap value 
category for the trailing 3-year and 5-year periods according to 
Morningstar.  The fund's 3-year annualized return of 5.2% topped 
the S&P 500 large-cap index by 6.5%, while the fund's return for 
the last five years has averaged 13.4%, 4.4% better than the S&P 
index benchmark.  That is "significant" outperformance, what you 
would expect from a small-cap fund (greater return potential vs. 
large-cap funds).


There is a lot to like about Southeastern Asset Management and 
the Longleaf Partners Funds.  They remind of other great value 
money managers such as Capital Research & Management (American 
Funds) and Dodge & Cox (Dodge & Cox Funds).  Warren Buffet got 
wealthy following this conservative and disciplined value path.

Since value and growth outperform at different times, Longleaf 
Partners fund shareholders should recognize that their "value" 
oriented style may sometimes lag the market and other types of 
stock funds.  Same with large-cap and small-cap stocks (funds), 
which can outperform at different times.  Likewise for foreign 
stock funds, which have the potential to outperform U.S. stock 
funds but don't always, so it's best to have a long-term view.

With the interests of firm's employees aligned with those of 
mutual fund shareholders, you can count on Longleaf Partners 
Funds to apply prudent investment strategies in an efficient 
manner, limiting downside volatility and controlling expense.  
The end result is the potential for superior long-term total 
return performance for both fund employees and shareholders.

For more information or a fund prospectus, log on to Longleaf 
Partners' website at www.longleafpartners.com.

Steve Wagner
Editor, Mutual Investor


Looking for Odd Clues
by Mark Phillips

Plunge, Bounce, Zoom, Crash!  That pretty much defines the action
in the broad markets so far this week and it's only Wednesday.
Traders who are trying to put on a directional trade in this
volatile market have been frustrated by the lack of
directionality.  This week's strong moves in both directions are
simply a microcosm of what has been happening over the past few
months.  Most days start out with a gap, sometimes with the trend
and sometimes against it, but always difficult to trade.  Lest
you think you are missing something important, let me propose
that there are a lot of traders that just can't seem to make
sense out of the recent market action.

There are plenty of traders that are playing the expectation that
we are near an important market bottom, but there are just as many
that are acting like they expect the bottom to fall out, just like
we saw in late July.  One clue to this bifurcated expectation is
the CBOE Volatility index, which has been whipping around between
36-47 for the past month.  The VIX remains high like this when
there is a lot of uncertainty in the market, and that is
definitely the case right now.  Looking at a daily chart of the
VIX this afternoon, I noticed that the VIX hasn't been below 30
since the first week in July.  That's nearly 3 whole months where
the VIX has refused to dip into its historically normal range
between 20-30.  My VIX chart only goes back to 1994, but in that
timespan, late-1998 is the only period that presents a picture of
such sustained volatility.  Then we saw the VIX holding above 30
from late-August until the end of October, or roughly 8 weeks.

We've been at these elevated levels for about 50% longer than in
1998, and judging by the action in the markets this week, the
volatility doesn't appear likely to let up any time soon.  What I
find particularly interesting about this behavior is that while
the VIX has remained high, the Bullish Percent PnF charts on all
the major indices have cycled from Bear Confirmed in oversold to
Bull Confirmed back to Bear Confirmed in Oversold.  There are
some slight variations between the different indices, but let's
focus on the Dow Industrials for this discussion.  

In early July, the Bullish percent for the DOW was Bear Confirmed
near the 30% level, and then proceeded to fall as low as 4% as
the index fell as low as 7532 on July 24th, with the VIX printing
an intraday high of 56.74.  That was followed by an impressive
rally (albeit a volatile one) that took the DOW briefly above
9000 before the late August through September plunge that dropped
the DOW as low as 7460.  What was interesting about the rally off
the lows is that the VIX only dropped to just above 30, even while
the Bullish Percent Chart went from Bear Confirmed to Bull Alert,
all the way to Bull Confirmed with a high of 60%.

The most recent decline has dragged the Bullish Percent chart all
the way back down to 10%, although it is still in Bull Correction
mode.  The Bullish Percent would have to drop all the way to 2%
(due to the extremely low reading in July) in order to go back
into Bear Confirmed status.  Throughout these wild swings in the
market, the VIX has remained stubbornly high.

So what does all this mean?  I honestly don't know, but I'm trying
to piece it all together into an actionable plan.  According to my
analysis, all of the major indices have bearish price objectives
below their recent lows, but trying to game the downside right
here carries with it a higher level of risk (as seen in
yesterday's 346 point DOW rally) due to the depressed levels of
the Bullish Percent charts.  Here's where the Bullish Percent
readings currently reside:

DOW - Bull Correction at 13%
S&P 500 - Bear Confirmed at 28%
S&P 100 - Bear Confirmed at 23%
NASDAQ 100 - Bear Confirmed at 21%
NASDAQ Comp - Bear Confirmed at 29%

Based on these metrics, it is clear that the bulk of the risk in
the broad markets is to the upside, due to the fact that the
Bullish Percent charts have a lot more upside potential than
downside.  But the bears still appear to be in control as all but
the DOW are in Bear Confirmed.

From a purely technical standpoint, I note that the Weekly
oscillators (RSI, MACD and Stochastics) on the major indices are
all trying to round higher, but haven't been able to pull it off
just yet.  My gut feel says that we are near an important bottom,
but there is still some significant work to do before that
expectation becomes reality.  That thesis would play nicely in
conjunction with the historical pattern of the markets to put
in important bottoms in October, but that still leaves us with 4
weeks of continued volatile trade.

Coming back to the topic of volatility, I took a look at the PnF
chart of the VIX this afternoon and noticed an interesting
pattern.  Remember that the PnF chart format helps to remove a
lot of the noise that we normally see on the bar and candle
charts.  So let's take a look at that chart and see what it tells

Volatility Index (VIX) - Point and Figure Chart

I normally don't look to the VIX for trading signals, but
recognizing that we are clearly not in 'normal' market conditions,
I'm looking for all the help I can get.  The sideways
consolidation of the VIX on the PnF chart tells me that the
broad market is getting ready to make a big move and when it
occurs, I think the VIX will confirm that it is THE MOVE by
breaking out of its recent range.  It is interesting that the
low on the VIX on yesterday's huge rally was 39.77.  It will take
a print at 39 or below to put the VIX on a Sell signal, and
nullify the current bullish target of 61.

My gut feel is that we'll get one more push lower in the broad
markets (possibly setting new lows for the year), which will be
accompanied by one more blowoff in the VIX above 50.  That would
make sense given the still-gloomy fundamental picture as we head
into what is likely to be a dismal earnings season.  But then we
ought to see a confluence of factors lining up to give us a very
nice rally into the end of the year.

Here are the factors that I'm looking for to confirm my bullish
view between now and the end of October:

1. VIX pushing above 50 again with the broad markets slightly
   breaking their lows for the year.

2. Bullish Percent charts for the major indices reversing from
   oversold condition below current levels.

3. Successful upturn in multiple oscillators (MACD, RSI and
   Stochastics) on weekly charts of all the major indices.

While I know my musings today don't necessarily provide an
actionable trading plan over the near term, it does provide some
benchmarks that we can use to evaluate the progress of the markets
over the next few weeks.  As an added bonus for my bullish thesis
for the last 2 months of the year, I'd like to see the S&P 500
testing the bottom of that long-term descending channel (between
$700-725) that I spoke about in the LEAPS column last weekend.
That would give me added confidence that the bulls have enough
fuel (due to a deeply oversold market), so that they can stage a
solid rally off the lows like we saw at the end of July.  One
thing I think we can rely on, is that October is likely to be an
exciting month!

Have a great week!


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At 3:10 this afternoon the bottom fell out of the market as a broad 
based sell program dumped millions of shares of stock. The S&P and 
NDX futures were aggressively sold. Rumors were flying after the 
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The Option Investor Newsletter                Wednesday 10-02-2002
Copyright 2002, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.

In Section Two:
Stop Loss Updates: BAX, FLIR
Dropped Calls: none
Dropped Puts: none
Play of the Day: Put - FLIR
Big Cap Covered Calls & Naked Puts: Market Bears Regain Control!

Updated on the site tonight:
Market Posture: I Thought The Calender Changed
Market Watch: The Pull of Gravity

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Adjust from $33.50 down to $30.00

FLIR - put
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FLIR – FLIR Systems $34.55 -0.44 (-3.10 this week)

Company Summary:
FLIR is engaged in the design, manufacture and marketing of
thermal imaging and stabilized camera systems for a wide variety
of commercial, industrial and government applications.  The
company's products are divided into two categories, which
include the thermography products and imaging products.  In the
Thermography division, FLIR manufactures products that are sold
to commercial, industrial, research and machine vision customers.
For industrial customers, FLIR has developed thermography
systems that feature accurate temperature measurement, storage
and analysis.  The Imaging division caters to military, law
enforcement, surveillance and security customers.

Most Recent Write-Up:
Along with it being one of the worst months for equity bulls,
October also ushers in tax-loss selling season for many funds, as
they look to balance gains against losses in their portfolios.
Clearly there aren't a lot of stellar winners this year, and even
stocks that have failed to rally strongly may be candidates for
October sales.  FLIR is one such stock due to the fact that it
hasn't fallen apart over the past 12 months.  While it hasn't
fallen apart, neither has it been a strong stock, as it has been
trapped under a descending trendline since April of this year,
posting one lower high after another.  The $35 level has provided
consistent support throughout the past year, but today's intraday
plunge to just above $33 broke that support and generated a fresh
PnF Sell signal.  The vertical count is pointing to an eventual
target of $29, so clearly the downside appears to be limited.
Following the recent breakdown, (despite the intraday rebound),
resistance looks firm at $36 and impenetrable in the $38-39
range.  Due to the sharp recovery from today's low, we want to be
very careful about entering on a breakdown.  It is easier to
manage risk in this play by fading a failed rally.  A rollover
near $36 makes sense for initial positions, although a bullish
failure near $39 certainly looks attractive.  Not only is this
the site of significant resistance over the past month, but it
is also the location of the long-term descending trendline and
the 50-dma.  After taking a position, target $29 to the downside
and set stops initially at $39.

Why We Like It:
FLIR never experienced the rebound we were looking for as an 
entry point.  Instead it showed extreme weakness. The fact that 
it opened at $35 and was immediately hammered from that level 
shows an abundance of sellers there. The intraday chart shows its 
attempts to hold $34 were strong throughout the afternoon, but 
eventually gave in to selling pressure at that level as well.  
With a new level of resistance at $35 and possibly at $34 as 
well, we feel confident the ceiling has been lowered.  New 
entries can look for a failed rebound at $35 for entry, in order 
to maximize the play down toward our target of $29.

BUY PUT OCT-35*FFQ-VG OI=260 at $2.80 SL=1.40
BUY PUT OCT-30 FFQ-VF OI=154 at $0.80 SL=0.00

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Market Bears Regain Control!
By Ray Cummins

The major equity averages retreated today as investors adopted a
"wait-and-see" attitude with regard to the economy and corporate

The Dow was down 178 points to 7,760 on weakness in conglomerate,
financial and chemical issues.  Johnson & Johnson (NYSE:JNJ) was
the blue-chip standout after news of a rival drug company's legal
setback with the stock up $2.19 to $58.49.  In the hi-tech group,
early gains in the semiconductor and hardware segments faded as
selling resurfaced in all but a few select issues and networking
stocks were among the worst performers.  The NASDAQ Composite fell
26 points to 1,187.  In the broader market, banking and automobile
stocks slumped and oil shares consolidated while gold and utility
issues generally moved higher.  The S&P 500-stock index slid 19
points to 827.  Volume came in at 1.66 billion on the NYSE and at
1.74 billion on the NASDAQ.  Market breadth was negative as losers
outpaced winners by roughly 2 to 1 on both the Big Board and the
technology exchange.  Treasury instruments moved higher with the
decline in equities.  The 10-year Treasury note advanced 10/32 to
yield 3.68% and the 30-year bond was up 18/32 to yield 4.72%.



(As of 10-01-02)

Naked Puts

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

AMGN     OCT    35   33.15  44.56   $0.85    6.1%
CHTT     OCT    35   34.50  42.07   $0.50    4.3%
CCMP     OCT    30   28.90  37.86   $1.10    8.1%
INTU     OCT    40   38.60  47.42   $1.40    6.9%
COF      OCT    30   29.30  36.32   $0.70    6.5%
EASI     OCT    50   49.00  56.70   $1.00    5.1%
INVN     OCT    25   24.45  31.30   $0.55    6.3%
LLL      OCT    47   46.65  53.75   $0.85    4.7%
MIK      OCT    40   39.35  45.55   $0.65    4.6%
ROOM     OCT    40   39.25  50.39   $0.75    5.1%
BSTE     OCT    20   19.65  25.84   $0.35    5.6%
ESRX     OCT    45   44.50  51.28   $0.50    4.0%
GD       OCT    75   73.65  83.98   $1.35    5.3%
INVN     OCT    25   24.45  31.30   $0.55    7.8%
NOC      OCT   110  108.55 122.80   $1.45    4.0%
XAU      OCT    60   59.25  67.62   $0.75    4.6%
AZO      OCT    70   69.30  81.28   $0.70    4.0%
BSTE     OCT    22   22.10  25.84   $0.40    8.3%
ESRX     OCT    45   44.45  51.28   $0.55    5.6%
FRX      OCT    70   69.20  89.85   $0.80    4.7%
LLL      OCT    50   49.45  53.75   $0.55    4.5%
ROAD     OCT    30   29.65  37.42   $0.35    5.8%
SCHL     OCT    40   39.55  46.27   $0.45    4.6%

Cognizant Technology Group (NASDAQ:CTSH), although
currently positive, has been closed to protect gains
and/or limit losses.

Naked Calls

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

QLGC     OCT    40    41.20  25.25   $1.20    9.7%
INTU     OCT    50    51.50  47.42   $1.50    6.8%
EBAY     OCT    65    66.20  53.51   $1.20    5.5%
QLGC     OCT    45    45.45  25.25   $0.45    4.9%
XL       OCT    80    81.25  76.36   $1.25    4.6%
DIA      OCT    86    87.15  80.00   $1.15    4.0%
MUR      OCT    90    91.75  84.67   $1.75    6.2%
BZH      OCT    70    70.70  63.46   $0.70    5.5%
MUR      OCT    90    91.35  84.67   $1.35    6.7%

Beazer (NYSE:BZH) will likely test the sold strike ($70)
in coming sessions thus conservative traders may want to
take a small profit now rather than risk a potential loss.
A close above $86 in Murphy Oil (NYSE:MUR) will indicate
a renewed upward trend, thus suggesting an early exit in
the bearish position.

Put-Credit Spreads

Stock                                             Gain
Symbol  Pick   Last  Month L/P S/P Credit  C/B   (Loss) Status
PDCO    52.63  51.17  OCT   45  50  0.65  49.35  $0.65   Open?
MBG     32.46  35.09  OCT   27  30  0.30  29.70  $0.30   Open
APOL    43.48  45.30  OCT   35  40  0.50  39.50  $0.80   Open
ETM     48.45  49.25  OCT   40  45  0.65  44.35  $0.65   Open

Previously closed positions in Lowe's Companies (NYSE:LOW) and
Stryker (NYSE:SYK) remain positive while H&R Block (NYSE:HRB)
is slightly negative.  Patterson Dent remains on the early-exit
watch-list and a close below the sold strike at $50 will signal
our departure from the position.

Call-Credit Spreads

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

JNJ    55.48   56.30  OCT   65  60  0.50  60.50  $0.50   Open?
MSFT   48.58   46.23  OCT   60  55  0.55  55.55  $0.55   Open
PHM    48.46   43.45  OCT   60  55  0.60  55.60  $0.60   Open
WFT    39.37   38.74  OCT   50  45  0.60  45.60  $0.60   Open
APA    56.57   59.34  OCT   65  60  0.70  60.70  $0.70  Closed
WY     49.78   45.97  OCT   60  55  0.60  55.60  $0.60   Open
LEN    55.07   57.55  OCT   65  60  0.70  60.70  $0.70   Open?
PII    65.02   64.00  OCT   75  70  0.50  70.50  $0.50   Open
TOT    63.74   70.04  OCT   75  70  0.50  70.50  $0.46  Closed

With the current oversold conditions and Tuesday's sharp rally,
traders should monitor closely any positions which are near the
sold strike prices.  Apache (NYSE:APA) and Total Fina (NYSE:TOT)
benefited from the upside activity in oil industry shares and
conservative traders should consider closing these positions to
protect profits and/or limit losses.  Johnson & Johnson (NYSE:JNJ)
and Lennar (NYSE:LEN) are also on the list of potential early-exit
candidates as they have both moved to the top of recent trading
ranges on increasing volume.

Credit Strangles:

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

INTU     OCT     50C    51.50   47.42   $1.50    6.8%
INTU     OCT     40P    38.60   47.42   $1.40    6.9%
GILD     OCT     35C    36.45   34.77   $1.45    9.8%
GILD     OCT     30P    28.50   34.77   $1.50   10.4%
BBBY     OCT     27P    27.05   32.43   $0.45    6.2%
BBBY     OCT     37C    38.30   32.43   $0.80    7.1%
CAI      OCT     30P    29.55   36.31   $0.45    5.0%
CAI      OCT     40C    40.55   36.31   $0.55    5.3%
WFMI     OCT     40P    39.45   42.79   $0.55    4.2%
WFMI     OCT     50C    50.50   42.79   $0.50    3.6%
CCMP     OCT     50C    50.30   37.86   $0.30    4.7%
CCMP     OCT     30P    29.65   37.86   $0.35    5.5%
EBAY     OCT     60C    61.00   53.51   $1.00    6.5%
EBAY     OCT     50P    49.20   53.51   $0.80    6.3%

Questions & comments on spreads/combos to Contact Support


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


BULLISH PLAYS - Premium Selling

All of these issues have robust option premiums and relatively
favorable technical indications.  However, current news and market
sentiment will have an effect on these stocks, so review each play
thoroughly and make your own decision about its future outcome.

AZO - Autozone  $81.40  *** Solid Earnings Outlook! ***

AutoZone (NYSE:AZO) is a specialty retailer of automotive parts
and accessories, primarily focusing on do-it-yourself customers.
The company operated over 3,000 auto parts stores in the United
States and 21 in Mexico.  Each store carries an extensive product
line for cars, vans and light trucks, including new as well as
re-manufactured automotive hard parts, maintenance items and car
accessories.  The company also has a commercial sales program in
the United States that provides commercial credit and prompt local
delivery of parts and other products to repair garages, dealers
and service stations.  AutoZone does not sell tires or perform
automotive repair or installation.  In addition, the company sells
automotive diagnostic and repair information software through its
ALLDATA subsidiary, and diagnostic and repair information through

AZO - Autozone  $81.40

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

SELL PUT  OCT 70   AZO VN   2,309     0.40    69.60      3.5% "TS"
SELL PUT  OCT 75   AZO VO   1,061     0.95    74.05      6.7% ***
SELL PUT  OCT 80   AZO VP     620     2.15    77.85     12.3%

FRX - Forest Laboratories  $89.25  *** Rising Sales = Rally! ***

Forest Laboratories (NYSE:FRX) and its many subsidiaries develop,
manufacture and sell both branded and generic forms of ethical
drug products that require a physician's prescription, as well as
non-prescription pharmaceutical products sold over-the-counter.
Forest's most important United States products consist of branded
ethical drug specialties marketed directly, or detailed, to doctors
by the firm's Forest Pharmaceuticals, Forest Therapeutics, Forest
Healthcare and Forest Specialty Sales sales forces.  Such products
include Celexa, Forest's SSRI for the treatment of depression; the
respiratory products Aerobid and Aerochamber; Tiazac, Forest's once
daily diltiazem for the treatment of hypertension and angina, and
Infasurf, a lung surfactant for the treatment and prevention of
respiratory distress syndrome in premature infants.

FRX - Forest Laboratories  $89.25

PLAY (sell naked put):

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

SELL PUT  OCT 80   FHA VP   1,119     0.70    79.30      4.9% ***
SELL PUT  OCT 85   FHA VQ     743     1.40    83.60      8.1%

WLP - WellPoint Health  $76.59  *** Health Sector Rally! ***

WellPoint Health Networks (NYSE:WLP) is a managed healthcare firm.
As a result of the January 2002 completion of its merger with
RightCHOICE Managed Care, the company has over 12 million members.
The company offers a broad spectrum of network-based managed care
plans, including preferred provider organizations (PPOs) and health
maintenance organizations (HMOs), as well as point-of-service (POS)
and other hybrid plans and traditional indemnity plans.  In addition,
the Company offers managed care services, including underwriting,
actuarial services, network access, medical cost management and
claims processing.  The firm also provides an array of specialty and
other products, including pharmacy, dental, workers' compensation
managed care services, utilization management, life insurance,
preventive care, disability insurance, behavioral health, COBRA and
flexible benefits account administration.

WLP - WellPoint Health  $76.59

PLAY (sell naked put):

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

SELL PUT  OCT 72.5 WLP VV     793     0.70    71.80      4.9% ***
SELL PUT  OTC 75   WLP VO     945     1.50    73.50      9.3%


BULLISH PLAYS - Credit Spreads

UNH - UnitedHealth Group  $89.50  *** Bullish Sector! ***

UnitedHealth Group (NYSE:UNH) forms and operates markets for the
exchange of health and well being services.  Through its family
of businesses, the company helps people achieve optimal health
and well being through all stages of life.  The firm's revenues
are derived from premium revenues on insured (risk-based) products,
fees from management, administrative and consulting services and
investment and other income.  It conducts its business primarily
through operating divisions in the following business segments:
Uniprise; Healthcare Services, which includes the UnitedHealthcare
and Ovations businesses; Specialized Care Services, and Ingenix.

UNH - UnitedHealth Group  $89.50

PLAY (moderately aggressive - bullish/credit spread):

BUY  PUT  OCT-80.00  UHB-VP  OI=2497  A=$0.55
SELL PUT  OCT-85.00  UHB-VQ  OI=3546  B=$1.15
POTENTIAL PROFIT(max)=15% B/E=$84.30


Speculation Plays - Synthetic Positions

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.

THC - Tenet Health Care  $51.55  *** Awesome Earnings! ***

Tenet Healthcare Corporation (NYSE:THC) is an investor-owned
healthcare services company in the United States.  The firm's
subsidiaries and affiliates own or operate over 100 domestic
general hospitals with approximately 28,000 licensed beds and
related healthcare facilities, serving a range of communities in
17 states.  Tenet also owned one general hospital and related
healthcare facilities in Barcelona, Spain, and held investments
in other healthcare firms.  The related healthcare facilities
included a small number of rehabilitation hospitals, specialty
hospitals, long-term care facilities, a psychiatric facility
and medical office buildings located on the same campus as or
nearby its general hospitals, physician practices and various
ancillary healthcare businesses, including outpatient surgery
centers, home healthcare agencies, occupational and healthcare
clinics in rural areas and health maintenance organizations.

THC - Tenet Health Care  $51.55

PLAY (conservative - bullish/synthetic position):

BUY  CALL  NOV-55.00  THC-KK  OI=708  A=$0.80
SELL PUT   NOV-46.62  THG-WX  OI=857  B=$0.65

Note:  Using options, the position is similar to being long the
stock.  The initial collateral requirement for the sold (short)
put is approximately $1,650 per contract.

EXPE - Expedia  $46.06  *** Elevator Going Down! ***

Expedia (NASDAQ:EXPE) is a provider of travel-planning services.
The firm's global travel marketplace includes direct-to-consumer
Websites offering travel-planning services located at Expedia.com,
Expedia.co.uk, Expedia.de, Expedia.ca, Expedia.nl and Expedia.it.
The firm also provides travel-planning services through its site,
Voyages-sncf.com, as part of a joint venture with the state-owned
railway group in France.  In addition, the company provides travel
planning services through its telephone call centers and through
private label travel Websites through its WWTE business.  WWTE is
a division of Travelscape, one of the company's subsidiaries.  In
February 2002, a controlling stake in the company was acquired by
USA Networks.

EXPE - Expedia  $46.06

PLAY (aggressive - bearish/synthetic position):

BUY  PUT   NOV-35  UED-WG  OI=67  A=$1.50
SELL CALL  NOV-55  UED-KK  OI=92  B=$1.45

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


Neutral Plays - Credit Strangles

Here is another candidate for traders who favor neutral-outlook
premium-selling strategies.  The issue has a relatively stable
chart pattern and robust option prices, however current news and
market sentiment will have an effect on this position, so review
the play thoroughly and make your own decision about its outcome.

RNR - RenaissanceRe Holdings  $37.49  *** Trading Range? ***

RenaissanceRe Holdings (NYSE:RNR) offers reinsurance and insurance
coverage that is subject to the risk of natural as well as man-made
catastrophes.  The firm's principal business is property catastrophe
reinsurance, which it engaged in through its subsidiary, Renaissance
Reinsurance.  The firm provides reinsurance to insurance companies
and other reinsurers, primarily on an excess-of-loss basis, meaning
that it begins paying when its customers' claims from a catastrophe
exceed a certain retained amount.  Through these coverages, the firm
is subject to claims arising from large natural catastrophes, such
as earthquakes and hurricanes, and it is exposed to claims arising
from other natural and man-made catastrophes, such as winter storms,
freezes, floods, tornadoes, fires and explosions.  The company also
writes property catastrophe reinsurance on behalf of joint ventures,
including Top Layer Re and DaVinci Reinsurance.

RNR - RenaissanceRe Holdings  $37.49

PLAY (aggressive - neutral/credit strangle):

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

SELL CALL OCT 40    RNR JH    397     0.50    40.50       7.3%
SELL PUT  OCT 35    RNR VG  1,438     0.55    34.45       8.0%



Based on analysis of option pricing and the underlying stock's
technical background, these positions meet our fundamental
criteria for bearish "premium-selling" strategies.  Each issue
has robust option premiums, a well-defined resistance area and
a high probability of remaining below the target strike prices.
As with any recommendations, these positions should be carefully
evaluated for portfolio suitability and reviewed with regard to
your strategic approach and personal trading style.

SNPS - Synopsys  $34.60  *** Multi-Year Low! ***

Synopsys (NASDAQ:SNPS) is a supplier of unique electronic design
automation (EDA) software to the global electronics industry.  The
company's products are used by designers of integrated circuits,
including system-on-a-chip ICs, and the electronic products (such
as computers, cellular phones and Internet routers) that use such
ICs to automate significant portions of their chip design process.
ICs are distinguished by the speed at which they run, their area,
the amount of power they consume and the cost of production.  The
company's products offer its customers the opportunity to design
ICs that are optimized for speed, area, power consumption and
production cost, while reducing overall design time.  Synopsys
also provides consulting services to assist customers with their
IC designs, as well as training and support services.

SNPS - Synopsys  $34.60

PLAY (moderately aggressive - sell naked call):

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

SELL CALL  OCT 35   YPQ JG     94    2.40    37.40      28.8%
SELL CALL  OCT 40   YPQ JH    257    0.70    40.70      14.6% ***
SELL CALL  OCT 45   YPQ JI  1,255    0.20    45.20       5.3% "TS"


BEARISH PLAYS - Credit Spreads

All of these positions are favorable candidates for "bear-call"
credit spreads, based on the current price or trading range of
the underlying issue and its recent technical history or trend.
The probability of profit from these positions may be higher
than other plays in the same strategy, due to disparities in
option pricing.  However, current news and market sentiment will
have an effect on these issues, so review each play individually
and make your own decision about its future outcome.

ATK - Alliant Techsystems  $69.25  *** Premium Selling ***

Alliant Techsystems (NYSE:ATK) is a supplier of aerospace and
defense products to the U.S. government, America's allies and
major prime contractors.  ATK also is a supplier of ammunition
to federal and local law enforcement agencies and commercial
markets.  ATK designs, develops and produces rocket propulsion
systems for a wide variety of U.S. Government and commercial
applications.  The firm is also the sole supplier of the reusable
solid rocket motors used on NASA's Civil Manned Space Launch
Vehicles.  ATK designs, develops and manufactures small, medium
and large caliber conventional munitions for the U.S. and allied
governments as well as for commercial applications.  The company
manufactures and develops small-caliber ammunition for the U.S.
military and its allies, federal and local law enforcement, and
commercial markets.

ATK - Alliant Techsystems  $69.25

PLAY (conservative - bearish/credit spread):

BUY  CALL  OCT-80  ATK-JP  OI=66   A=$0.25
SELL CALL  OCT-75  ATK-JO  OI=461  B=$0.65
POTENTIAL PROFIT(max)=9% B/E=$75.45

FNM - Federal National Mortgage  $64.62  *** Interest Rate Hedge ***

Federal National Mortgage Association (NYSE:FNM), commonly known
as Fannie Mae, is a company that works to assure that mortgage
money is readily available for existing and potential homeowners
in the United States.  Fannie Mae does not directly lend money
to homebuyers, but works with lenders to ensure that there is no
shortage of funds available for mortgage loans.  The method in
which Fannie Mae accomplishes this is by purchasing mortgages
from a variety of institutions that make up the primary mortgage
market.  Primary market lenders include mortgage companies,
savings and loans, commercial banks, credit unions and state and
local housing finance agencies. These are the businesses where
the mortgages are originated and the funds are loaned directly
to the borrower.  Fannie Mae then purchases the mortgage, thus
allowing the primary market lender to replenish their funds and
lend more money to homebuyers.

FNM - Federal National Mortgage  $64.62

PLAY (conservative - bearish/credit spread):

BUY  CALL  OCT-75  FNM-JO  OI=3674  A=$0.10
SELL CALL  OCT-70  FNM-JN  OI=8644  B=$0.60
POTENTIAL PROFIT(max)=12% B/E=$70.55


I Thought The Calender Changed

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The Pull of Gravity

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