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Daily Newsletter, Sunday, 10/06/2002

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The Option Investor Newsletter                   Sunday 10-06-2002
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: October Madness
Futures Market: October’s colors should be “Red” not Orange and Black
Index Trader Wrap: Still bearish, but signs of a market rebound 
 are present
Editor’s Plays: Locked Out!
Market Sentiment: Does a Flat Basketball Bounce?
Ask the Analyst: Patience Pays Off
Coming Events: Earnings, Splits, Economic Events

Updated on the site tonight:
Swing Trade Game Plan: Suck'em in and spit'em out


Posted online for subscribers at http://www.OptionInvestor.com
******************************************************************
MARKET WRAP  (view in courier font for table alignment)
******************************************************************
         WE 10-4         WE 9-27          WE 9-20          WE 9-13
DOW    7528.40 –63.58  7701.45 -284.57  7986.02 -326.67  8312.69 -124.51
Nasdaq  436.31 – 9.13  1199.08 - 22.00  1221.08 - 70.28  1291.36 -  3.94
S&P-100 403.22 – 4.03   413.22 - 10.68   423.90 - 20.34   444.24 -  2.43
S&P-500 800.28 –14.70   827.36 - 18.03   845.39 - 44.41   889.80 -  4.12
W5000  7598.62-175.00  7872.54 -150.63  8023.17 -417.71  8440.88 - 40.32
RUT     347.98 –14.29   361.77 -  5.51   367.28 - 22.70   389.98 - 40.32
TRAN   2137.68 –13.39  2185.17 +  1.15  2184.02 - 62.85  2246.87 - 10.20
VIX      46.28 + 3.14    43.14 -  1.41    44.55 +  5.24    39.31 -   .73
VXN      60.28 + 2.42    57.86 -  1.22    59.08 +  3.23    55.85 -   .69
TRIN      1.98            2.09             0.86             1.53
Put/Call  0.97            0.90             1.16             0.89
******************************************************************

October Madness 
By John Seckinger 
jseckinger@OptionInvestor.com 

An initially hard-to-interpret September payroll report tried to 
give bulls some hope during trading on Friday.  However, it was 
not long before the pattern of lower equity and higher Treasury 
prices took over once again. 

The Nikkei had closed above 9000 (9027), futures were mixed due 
to anticipated warnings from EMC and SGP, and November Federal 
Funds were showing a 100% chance of an ease by the Fed by the 
FOMC meeting on November 6th.  Then the much-anticipated 
payroll report was released.  . 

The Labor Department reported a decrease in payrolls by 43,000 
during the month of September, much worse than the 6,000 expected 
by economists.  However, August’s reading was revised much higher 
to 107k from the previous 39k increase.  Also encouraging for 
bulls was a decrease in the unemployment, falling to 5.6% from 
5.8, month prior.  Economists were expecting a 5.9% unemployment 
rate, and it was only April when unemployment reached six 
percent. 

Since the jobs report household survey during 2002 has been 
extremely volatile, traders’ initial nervousness following the 
release was understandable.  Therefore, did it make sense to 
simply follow the bond markets’ lead (higher yields) and send 
equities higher?  Some equity traders apparently thought so.  The 
December 30-year Bond (USZ2), at 9:30 a.m., was trading at 112-14 
and lower by 1 full point (32/32).  Furthermore, it seemed as 
though fixed-income traders were also rushing out of five-year 
notes, freeing up cash for more productive assets, possibly 
including equities.  

With the initial bid in stocks was unable to reach 7800 level 
(intra-day high of 7784) during the first few minutes of trading, 
traders evidently began to become nervous.  This nervousness 
spread to the bond pits, as short covering quickly began to 
materialize.  First 7000 in the Dow was taken out, then 7683, 
7600, and then 7553.  Selling pressure took place in the Nasdaq 
as well, with the index hitting new multi-year lows and solidly 
falling under the psychologically-important 1200 level.  

By sessions end, the Dow had lost 188.79 points to close at 7528 
on volume of 1.8 billion.  This was the lowest close in the blue 
chips since mid-November 1997.  Down volume beat up volume by a 
6:1 margin, while decliners easily outpaced advancers by a ratio 
of nearly 3:1.  Also noteworthy was that 364 stocks hit new lows 
as only 35 managed to set a new high.  Turning to the tech-laden 
Nasdaq, the Index shaved 25.67 points to close at 1139 on 
impressive volume of 1.6 billion.  Down volume handily beat up 
volume by a 4:1 margin, and only 16 stocks set new highs while 
365 companies recorded a new low.  The S&P 500 Index closed lower 
by 18-points, or 2.2 percent, but did manage to remain above the 
psychologically important 800 level (closed at 800.58).  

With the Dow losing 2.5 percent during trading on Friday, sectors 
that underperformed the blue chips included Healthcare (-4.50%), 
Biotech (4.30), Utility (4.00), Airline (3.25), Semiconductor 
(2.90), and Banking (2.67) issues.  Sectors showing strength 
included the Gold and Silver Index (+0.56%) and Treasury Bonds 
(0.16).  

As far as specific companies are concerned, EMC was halted after 
the close on Thursday and initially took the storage sector down 
with it (QLGC, BRCD, and NTAP).  On Friday, shares closed down 
23.55% at 3.83 on volume of almost 70 million.  Other companies 
that entered the spotlight on Friday included SAP, FDC, AMAT, CI, 
UPS, and MO.  

Beginning with SAP AG, Lehman believes that the company should 
lower their annual guidance as overcapacity remains an issue 
while pricing in Europe continues to decline.  Shares of this IT 
service provider fell 4.19% to 10.28.  It was in mid-March when 
shares were near 40.  First Data (FDC) made headlines when shares 
were downgraded to “underweight” from Morgan Stanley.  Reasons 
included a material slowdown from Western Union within the next 
12 months.  Shares of FDC rallied on Friday from a low of 23.75 
to close at 26.40 and higher on the session by 0.45 percent.  

Morgan Stanley was also responsible for getting AMAT into the 
spotlight, since the investment house cut estimates for semi 
equipment stocks due to weak seasonality readings, lower 
utilization rates, and reductions to capital expenditure plans.  
AMAT, after having estimates cut for 2002-2004, fell 1.47% on 
Friday to close at 11.33.  

Shares of Cigna (CI) lost over 10% to 62.18 after being 
downgraded by Salomon Smith Barney to “underperform”.  Company’s 
2003 estimates were cut to 8.10 from 8.90, while the price target 
on CI fell to 81 from 89.  Salomon also cut 2003 estimates for 
United Parcel Service (UPS), worried about a weak retail sector 
and delayed profitability within their logistics unit.  Shares of 
UPS fell 3.75% to 61.60.  

With a few hours left in Friday’s trading session, news hit the 
wire that a jury in the Los Angeles Superior Court ordered Philip 
Morris to pay 28 billion dollars as punishment for causing lung 
cancer of a California woman.  At the announcement, shares were 
trading near 40.  By the close, shares of MO had fallen 7.36% to 
36.59 on massive late-day sell orders.  

One other noteworthy event occurred late in trading as well, 
centering on the West Port strike apparently costing the US at 
least 1 billion dollars a day.  The news was actually a rumor 
that dockworkers were nearing a settlement.  Before the rumor, 
the Dow was near 7500; however, word of a possible settlement 
sent equities higher and blue chips to 7636 within 25 minutes.  
It would have been interesting to see the Dow’s reaction to the 
rumor if stocks were significantly higher at the time.  

Speaking of the Dow, a look at a monthly chart shows prices 
actually outside a regression line beginning in January 2000.  
This should signal to bears that oversold conditions exist; 
however, it certainly does not mean that a “third standard 
deviation” lower cannot materialize.  The nice thing for traders 
is that there is a proverbial line in the sand: 7442 (give or 
take a few points, since stops could be just underneath).  

Chart of Dow Jones Industrials, Monthly 


 

It would be nice to have an RSI Bullish Divergence (RSI remaining 
high as prices set a relative low); nonetheless, the current 
30.71 reading should have bears analyzing risk/reward going 
forward.  If 7442 is taken out, there is a good chance this area 
will become strong resistance and market pundits, including 
myself, will expect an explosive move to 7000.  Note:  To get 
back inside the Regression line, the Dow would have to rise above 
7689 (a downward sloping trend line, so this level will continue 
to fall).  Once back inside this channel, shorts should be forced 
to cover en masse.  

Turning to the tech-laden Nasdaq, new multi-year lows place the 
index solidly under 1200 and forcing technicians to use 
regression analysis for downside objectives (yes, the H&S 
formation on a daily chart can be used as well).  Least 
resistance clearly remains lower for this tech index; however, 
the new relative low was accompanied by a relatively high RSI 
reading.  This bullish divergence only means that shorts could 
potentially cover at any time.  What level could be the catalyst 
for such a rally?  I would look first at 1153 and then 1192.  If 
such a rally fails to materialize and shorts remain aggressive, 
the downside objective according to the regression line comes in 
at 1000.  Note:  This 1000 level will decrease daily, since the 
regression line is downward sloping.  

Chart of the Nasdaq Composite, Weekly


 

With earnings light next week and no real economic events due out 
until Friday, the catalyst during the second week of October may 
come from the Gold Index (XAU).  Currently at a pivotal juncture, 
Gold is close to testing it 50% retracement from 54.67 to 77.34 
(66) and currently under an intermediate support/resistance 
(read: pivotal) level of 67.48.  On Friday, the XAU index rose 
0.56% to 67.05.  If 67.48 can be closed above during trading next 
week, enthusiasm in the commodity might pick up and a test of 72 
(blue line) would become the near term objective.  With the 22, 
50, and 200 DMA’s all converging near 70, there is a good chance 
an explosive move will take place (could theoretically be higher 
or lower).  Therefore, before entering a trade, take a look at 
this commodity (which trades inversely to the dollar) in order to 
gauge risk.  

Chart of Gold and Silver Index (XAU), Daily 


 

Speaking of earnings and a light economic docket, notable 
earnings next week includes PEP before the open on Tuesday, while 
RMBS, RBAK, and most-importantly YHOO is set to release earnings 
after the close on Wednesday.  On Friday, GE is scheduled to 
report before the market opens.  Estimates for GE’s 3Q Net Income 
is at 0.40 versus 0.33, year ago.  Turning to the economic 
releases, the August Consumer Credit report is due out at 3:00 
p.m. on Monday, and then there are no more releases until 
Thursday morning (only Initial Claims seems noteworthy).  
Friday’s economic releases should take center stage, as Retail 
Sales, PPI, and Preliminary Michigan Sentiment numbers will be 
released at 8:30 and 8:45 a.m., respectively.    

With the term “new multi-year low” becoming commonplace within 
financial publications, traders can continue to play the trend of 
lower equity prices; however, risk is certainly becoming high and 
tight stops have to be used effectively.  Easier said than done, 
especially with the volatility index at 46.28 and bonds trading 
in a two-point range on Friday alone; nevertheless, as a trader, 
support/resistance lines have to be respected and used regardless 
of nervousness between market participants.  Moreover, now could 
be the time to begin paying close attention to Intermarket 
relationships, especially bonds and gold issues.  It only takes a 
second to pull up a chart of the December Bond (USZ2) or Gold 
Index (XAU) before pulling the trigger.  This extra step could be 
the difference between capturing a sizable move or being caught 
in a vicious bear trap.  Good luck.  


**************
FUTURES MARKET
**************

October’s colors should be “Red” not Orange and Black

Dow  7528 – 188 
Comp 1139 -  25
SPX   800 -  18 
OEX   403 -   9
QQQ    20 -   .39

NYSE: 
Decliners 2415 to 820 Advancers
New Lows of 375, New Highs 39
Down Volume of 1535 Million shares
Up Volume of 261M

NASDAQ: 
Decliners 2319 to 980 Advancers
New Lows 365, New Highs 16 
Down volume 1294M
Up Volume of 280M

This was the 5th week in a row of negative Index closes.
New Yearly and Multi-year lows formed across the board this week.
Market continues the trend of "Sell the Bad News, and Short the 
rally on any Good News".  This was the lowest weekly close this 
year on : DOW, SPX, NDX, etc etc

Recap of Last 24 hours (Thursday's close to Friday close)
I am going to make a feeble attempt to cover the "Whyness" of the 
last 24 hours in this Recap. If you were gone Friday, or a 
portion of it; looking at a Dow or SPX chart will tell where 
prices traded, but not "Why" they traded there. Obviously, a 
great deal more happened, and this is simply my view. 

Thursday 4pm Market Close | Storage Stock EMC warns saying very 
bearish comments on business IT Spending; hurting IBM, CSCO, 
QLGC, BRCD, NTAP on Friday. SP Futures (SPoos) at 818-819 (its 
triple bottom on Thursday, and 50% retracement of Thursday’s 
low/high.

Thursday 11pm | Drug stock SGP pulls a late-night  "sneak warn" 
hurting the two Dow drug stocks JNJ and MRK on Friday, also 
causing Friday weakness in the BBH biotech index.

Thursday evening:  Japan’s Nikkei opens at 8850 to a new 19-year 
intraday low; however it does close at 9000 by day’s end off 
short-covering.

Thursday 12am:  SP Futures (SPoos) at 823 off the Nikkei rally

Friday Oct 4th early morning: Nikkei’s rally is forgotten as 
Europe markets opened Flat, but sell all day, closing Red, and at 
day lows. Germany’s DAX index closes at new 5 year lows.

7am:  SPoos at 818, following Europe lower, and at morning lows, 
closing the gap back to Thursday’s 4pm level.

8am: Dow component Alcoa (AA) reports non-impressive earnings

830am: Somewhat confusing, but important, Job Numbers are 
reported. 

834am: The bullish portion of the Jobs Data very quickly rallies 
SP Futures 10 points to the 828-830 area (this is the same level 
that Thursday’s late-day rallied failed at). Not a typo, SPoos 
rallied 10 points in under 5 minutes. This 828-30 area will also 
become the day’s High; and a double-top when including Thursday’s 
3pm rally at the same 828-830 level.

930am: Futures at open: SP 825, NDX 847, Dow 7750 (a gap up from 
Thursday’s close) off the bullish portion of the 830am Jobs Data.
Trend from open was  "fade the gap up" and once SPoos lost the 
823 support, it quickly retested the 818 support but on this 5th 
test of that number in 2 days, it failed sending SPoos thru 
supports at 815, and 812 down to 809 support by 10:15am

10:15am:  Dow cash 7650 support area, SPoos 809 : Short Cover 
bounce occurs off those known supports

10:45am:  SPoos hits 815 from 809 but stalls at 815 as this now 
will act as resistance. Lots of chop between 812 and 815; and 
when it appeared the 815 wall remained, SPoos continued lower 
following the existing Trend; heading for the next lower supports 
of 809, 803, 798

11:am – 2pm:  11am News of a surprise speech by President Bush 
regarding Iraq on Monday night seemed to be the final catalyst to  
"sell stock" on War concerns straight through the lunch hour into 
the 2pm time frame. Taking the market lower are the usual 
suspects: Banks, Brokers, Insurance, SOX semi stocks, Networkers, 
Drugs, Biotech

145pm to 2pm:  DOW Cash 7470, SP futures 793 (which is 5pts under 
Mon’s Low), NDX futures 812 (15 points under Mon’s low), 
OEX 400 : These levels will become Friday’s Lows; and Shorts 
taking profit caused the start of a Fridayday 2pm rally we’ve 
seen many times before. 

2pm: Phillip Morris (MO) (a Dow stock) : received some bad news  
on what seems like an insane settlement. Bloomberg reports that a 
jury in the L.A. Superior Court ordered MO to pay $28 bln as 
punishment for causing the lung cancer of a California woman. 
[That's Billion with a B folks for one person, not a class-
action]

Approx 230pm:  a rumor came from Lehman Bros (LEH) that the 
Westport dock strike would be ended this weekend. This week-long 
West Coast dock strike had very serious impact on everyone: car 
makers (GM), Retail stocks, Manufacturing sector, etc. This rumor 
added fuel to what had already been the start of a end-of-week 
Short Profit Taking trend.

3pm:  SPoos 812, Dow cash 7630, NDX futures 835
The above 2 factors provided 60 min long rallies of : SPoos +15 
pts, Dow +150 pts, NDX +20 pts. Retail stocks rallied the hardest 
(look at RLX retail index). Home Depot (HD), a Dow stock, rallied 
1pt in just a few minutes.

305pm:  Mirror copy of Thursday’s 305pm action (Down trend)
SPoos 50% retracement of Friday’s low/high of 794/829=811.50. The 
SPoos rally failed at 812 at 305pm, and right at the above 
retracement level.  Market rolled over when SPoos couldn’t get 
close to the 815-818 next-higher resistance area matching it’s 
price from 1030am

305pm-330pm: Hard selling took SPoos down 16pts in 25 minutes to 
796. (Dow cash 7510). Shorts appeared to try and push SPoos under 
it’s lows of 793s to target a new daily low, but were not able 
to. This would match a Short attempt to get the Dow under 7500, 
but that attempt failed as well.

330pm to 4pm:  Shorts covered again – taking SPoos from 796 up to 
the pivot resistance of 805, then back to 800, Dow cash 7510 to 
7570 to 7528. NDX futures were much weaker: 817 to 824 to 819. 
The close seemed to be a great battle at the Dow cash 7500 level, 
SPX Cash 800, OEX 400 numbers. That is, would the close be above 
or below those psychological numbers.

353pm:  A Rumor came out that Amgen (AMGN) would warn after-hours 
Friday or Mon. AMGN is the largest stock in the BBH bio-tech 
index, and a some-what large NDX component. AMGN traded 44.05 to 
43.0 afterhours to finally close 43.50

Futures Close: from 4:00pm to their 4:15pm Close:
SPoos rallied 6pts from 800 to their close at 806; DOW futures 
rallied about 50 points from 7515 to 7565, NDX futures upticked 
from 818 to 821 (weakest of the 3).

I wouldn't read too much into the SP Futures going up 6 points 
into their 415pm close as I suspect some SPoos shorts stayed 
short to the bitter end, wondering if SPoos would lose that key 
800 level and close down near 790 area; and when it got to be 
4pm, cover buys came in sending it to 806. Also, it's possible 
some shorts had left for the day with an order to cover em on a 
buy-stop at the 805 privot which printed about 413pm. On the 
other hand, many double and triple bottoms were made Fridayday.

Friday Afterhours News: 5pm Only item of note: AIG $52.70 – 1.92 
(key Insurance stock) announces $4 billion Shelf Registration. 
While the amount is not that large given AIG’s revenues, it is 
interesting and possibly bearish.

SUMMARY

The banks BKX index (638.23) simply looks terrible. Over the last 
3 days, they appear to have formed a bearish 'three black crows' 
formation.

SOX SemiIndex (226.96) Having lost it’s 235 support, now makes a 
new yearly and multi-year low close. Bravo to whatever analyst 
came out with a 220 target on it over a month ago.

CSCO $9.43 Seems no one was rushing in to buy the once beloved 
Cisco under 10 bucks. I’ve seen arguments made that based on its 
PE ratio, a price of $5 to $8 is fair value.

When a key Index such as the Dow loses their yearly lows, it 
becomes more difficult to find the next lower support levels. I 
am not suggesting the Dow gets here, merely FYI on some numbers: 
September 1998 Dow low at 7400; October 1997 Dow low 6971; 
however, back then, MSFT INTC HD was not in the DOW.

Thoughts for Monday

As written in Thursday night’s wrap: the question still remains 
"As all the earnings news seems mostly rather bad to terrible, 
why be Long Stock during early October?" ....other than catching 
Short-Cover buying off Key Index Pivot points...About the only 
positive thing one could say about today's close was SPX Cash was 
over 800 (at 800.58); and DOW Cash closed over 7500.  There's no 
important earnings until Thursday and Friday; but it's a very 
light earnings weak; the largest earnings report being General 
Electric (GE) next Friday pre-open.

Japan’s Nikkei Cash on Friday closed at 9000 before the US market 
opened, the Nikkei futures trading during the US market day sold 
off all day to close about -200 at 8820; so it appears Nikkei 
Sunday night will open very weak, and we should watch to see if 
they get a 2nd day of Short cover buying.

The US Monday open (assuming no early morning warns) will likely 
focus on two issues: 1) What happened, if anything, regarding the 
West Coast dock strike, and 2) Pres. Bush’s Monday 8pm speech 
from Cincinnati Ohio


http://www.whitehouse.gov/news/releases/2002/10/20021004-6.html

The above URL contains the full text of the 11:13am Friday daily 
Press briefing by the President’s Press Secretary Ari Fleischer. 
It’s an interesting read, just like how they do it on the TV show 
'West Wing' (grins).

I was surprised to discover Bush’s speech is not from the Oval 
Office, and according to the press briefing, they are not 
formally requesting TV time from the networks. It’s at 8pm, so I 
guess they didn’t wish to cut into American’s love for Monday 
Night Football (grin). So it appears President Bush will say 
'something' regarding Iraq, but not likely to declare war for a 
speech of that nature would require a formal venue of the Oval 
Office. In other words, this speech may be no big deal market-
wise as we’ve heard it all before; but read the above URL and 
form your own views.

Numbers to watch for Monday:
Dow 7500, SPX 800, OEX 400 all seem to be serious supports.
Would suggest watching those levels to dictate new trades, either 
longs or shorts.

Resistance areas Higher: 
Dow: 7650-7700, 7800, 7900-8000
SPX Cash and SPoos (SP Futures): 812, 818, 823, 828-30, 835, 843, 
852
NDX Cash and Nasdaq futures: 835, 850, 880, 905

A technical note: SPX remains the only key index to NOT re-test 
it’s July 24th gap at 775. The lowest it as traded since then was 
Friday’s 793. Both the Dow and NDX, Compx, QQQs have either re-
tested their July lows, or are trading UNDER them.

Bottomline: Charts are very badly damaged. Tone remains very 
bearish as we head into October earnings. However, all traders 
realize from sometimes out of no where comes Buying – 

Motto of "Don't be Bearish, Don't be Bullish, just Trade the 
Tape" works every day.

Alan Hewko


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

Still bearish, but signs of a market rebound are present

This morning's "conflicting" jobs data set the stage for a 
volatile session and that's exactly what traders got.  If a bear 
"panicked" or a bull "flinched" and didn't show some discipline, 
then frustration was found by session's end.

Who or what can a trader believe anymore?  I the job market 
stable?  Is the job market weak?  Today's economic reports on the 
labor front revealed that what was reported as the preliminary 
August jobless data wasn't as "weak" as everyone thought (based 
on the preliminary report) as August's nonfarm payroll was 
revised higher to 107K from 39K.  Traders that were bearish in 
equities found the upward revision having a positive effect on 
the September jobless rate, which then fell to 5.7%, instead of 
the 5.9% forecast and perhaps a real economic bear's hope for a 
6% level of unemployment.

But wait a minute!  The September preliminary nonfarm payroll 
number was weaker than expected!  Sell, sell, sell!!!!

An index trader has to be thinking.  Hold on.  If the August 
payroll numbers were so skewed and such a large revision is was 
seen, what makes me want to put a lot of faith in the September 
number and accuracy of this preliminary data?

My personal view on what happened today was that bearish traders 
had implemented a scenario based on preliminary August data that 
lead them to believe that it was a "sure thing" that the jobless 
rate would come in at 5.9% if not higher and pierce the 6% level.  
When that didn't happen, it was buy, buy, buy.

Then, I think some committed bears said "hey, so what if August's 
data wasn't as weak as first reported, the September data was 
weak and that sets the stage for further equity weakness in 
October.  When that thought occurred it was sell, sell, sell.

I don't know about you, but when I look at the 60-minute charts 
that I discussed lat night, all I see is that some downside 
trading targets were achieved, but not one level of resistance 
was met to have a trader closing any positions from this 
morning's brief upside move at the open.

Conversely, there wasn't one level of resistance broken to the 
upside that should have had a bull jumping to get long or add to 
any already open positions.

I say this only because I got a few e-mails from "sick" bearish 
traders that did stop out this morning, only to watch the indexes 
trade lower into the close.

DON'T get frustrated and now try and get even!  One emotional 
"mistake" is enough.  What you should do now is simply try and 
figure out what went wrong, and try not to duplicate the mistake 
again.

Review points from last nights wrap would be...  was I over 
leveraged and when the trade went against me at the open, I kind 
of panicked and had to close out the trade?  

Let's review once again the 60-minute charts as some levels were 
broken to the downside, that led to declines, where targets from 
retracement were achieved.  What's evident in the 60-minute 
charts is that the retracement levels we identified WEEKS AGO 
were levels where computer buy programs were found today.  The 
60-minute bar charts do a very good job of actually showing you 
and I why it can be important to use retracement with the 
"fitting" technique we use.  Yes, it seems "unconventional," but 
it is often times the only way an institution actually makes 
buy/sell decisions.  It all starts with risk, and managing their 
inventory.  For you and I, it's about managing risk, and the 
"inventory" that resides in our account and trades we have open.

Let's start with the S&P 500 Index (SPX.X) 800.58 -2.24% as this 
is the "cash" market that trades against the S&P futures (sp02z) 
where our morning buy/sell premium levels are triggered against.  
Interesting how it comes right at/near our 19.1% retracement 
level, which coincidently marked the psychological 800 SPX.

S&P 500 Index Chart - 60-minute interval


 

A quick revisit of recent updates had traders looking bearish the 
SPX, OEX and NDX Wednesday afternoon in the 03:15 EST Update.  
Thursday saw a move lower and Friday morning's action found some 
volatility after the confusing jobs data.  However, not one of 
our shorter-term SMA's (60-minute chart is shorter-term in my 
book) and selling took over.  It wasn't until the SPX reached 
both the "psychologically round" 800 level and our 19.1% 
retracement that we started to see some "buy program" premium 
alerts get triggered.  It's interesting that an offsetting "sell 
program" was triggered right near the mid-point of our "longer-
term" regression.

On Monday, what I'd look for from an "upside move" is or the SPX 
to find some early morning resistance at our mid-point of 
regression, maybe a couple of hours, then look for a break higher 
(just like that found in the middle of the chart) and potential 
rally to the 830 level.

Traders still holding bearish positions, will want the mid-point 
of regression to continue to hold, get a break going below 793 to 
then target 762 sometime this week.

HOWEVER!!!! Be careful of a "trap."  For those that followed our 
discussion of "traps" from the 10/01/02 Index Wrap, the daily 
interval chart of the SPX shows a trap could be in play.  As 
such, manage any new bearish entries accordingly on a break lower 
Monday morning.

S&P 500 Index Chart - Daily Interval


 

This is the EXACT chart shown above, but on daily intervals.  It 
makes so much sense that there would be some buying near our 
19.1% retracement as I'm guessing many institutions are using 
similar retracement and their computer programs to balance their 
stock inventory.  It's the quick sell program right back near 811 
that hints to me there's another leg lower to try and test the 
lows, if not slightly undercut them.  I've marked the 775 level, 
on the above chart, which marks the old low.  Traders using the 
past break of the neckline in the head and shoulders top have a 
target of 770 from that pattern calculation.  On a break below 
Friday's low of 794, a bear can put the SPX with target range of 
775-763, stop 812.  If you're thinking about OVERLEVERAGING in a 
trade, then look to the left of the chart, understand the "trap" 
and how a beard SHOULD HAVE protected himself!

Imagine you're a bear in the woods, slowly and methodically 
searching for food.  Then you see a BIG side of beef just laying 
there in the clearing.  The first thing a "smart" bear would do 
is stand up on his/her hind haunches, sniff around for danger and 
look for any "traps," then very carefully, begin easing into the 
clearing toward the food source, but still on the alert for 
danger.  It's the "dumb" bears that just charge into the clearing 
and end up on some hunters den floor.  As it relates to trading, 
is the "dumb" trader that OVERLEVERAGES, doesn't have an exit 
strategy, that sees the bottom line of his/her account dropping 
to the floor.  I see some bearish SPX food at 775-770, but also 
have identified a potential "trap" and know what to look for.

For bulls, make that "bear hunters".... understand there's some 
shorts in this market and how a break back above 812 could have 
bears scrambling and rally potential back into the 834-856 range.

Later in the wrap, I'll discuss why I think it is entirely 
possible that we see some type of spike lower this week, but a 
quick reversal higher.  

An OEX trader SHOULD be using the SPX chart (SPX trader using OEX 
chart) and the retracement bracket and levels defined along with 
his/her OEX chart with "rolled lower" retracement to have an 
ADVANTAGE.  

S&P 100 Index Chart - Daily Interval


 

OEX looks bearish.  As I've said before, even after I "roll 
lower" a retracement bracket, I still keep another chart with my 
prior retracement still intact.  The SPX chart we looked at had 
our old retracement on it, not the "rolled lower" one.  The OEX 
chart above has our "rolled lower" retracement on it.  Are you 
surprised that it too has a retracement racket level at 38.2% 
where we found some computer generated buy programs triggered?  
You shouldn't be.  Why?  Because this is how institutions trade.  
They trade levels.  I simply LOVE the way our "rolled" lower OEX 
retracement fits in with our calculation from the head and 
shoulders top calculation of 380.  A test of that 380 level would 
be a perfect "undercutting" of the July lows, with some nice 
rally potential after that.  Just like the potential "trap" from 
the SPX chart, an OEX bear would protect a trade with a stop just 
above the 405 level on a break below 398 (the 09/30/02 low).  I 
can envision stochastics reaching "oversold" and MACD falling to 
-20 (currently MACD -11.3) if the OEX falls to 380 where a bearish 
trader would be covering.

Dow Industrials Chart - 60-minute interval


 

Not to lecture, but I'm not sure why an index trader prefers to 
try and be bearish the Dow over the other indexes?  Even when I 
look at the short-term 60-minute charts, its the Dow Industrials 
chart that tends to at least be able to reach its moving averages 
and test them as resistance.  Sure... the Dow traded down and 
equal 2.4% on Friday when compared to the other indexes, but as a 
bear will eventually find out and witnessed Friday morning, its 
these 30-stocks that tend to find the bulk of institutional 
buying even under short-term "uncertainty."  Over the years, I've 
see ENOUGH bearish targets from head and shoulders and point and 
figure bearish counts get traded that the potential REWARD to 
those targets aren't worth the RISK.  Some will continue to 
argue, "but what if the stock/index I'm trading bearish DOES 
exceed the bearish counts?"  My reply will always be... "but, 
what if those correlative targets ARE being traded?"

Stick with weakness that has some DOWNSIDE targets that haven't 
been traded yet.  If you're a trader that is trading the Dow 
short/put and got stopped out this morning, just try and 
understand "why" you did.  Were you emotional?  If so ... "why?"  
The most common answer is... "I simply had risked more in the 
trade than what I was really comfortable risking."  Be honest 
with yourself.  I'm willing to guess if you were trading the 
above technicals, and were NOT over leveraged, then you'd 
probably still be in the trade.

For options traders.  A $5,000 bet in an OEX/SPX/QQQ put option 
is the SAME amount of RISK as a $5,000 bet in a Dow Industrials 
put if done "at the money."  However, measured against the 
potentials DOWNSIDE reward from targets calculated, the potential 
REWARD is less in a Dow Industrials trade.  At least by my 
calculations.

If the economy is going to heck in a hand basket, sure the Dow 
stocks are going to suffer, but think about all the other stocks, 
many of them technology, that DEPEND on many of the Dow 
components to SPEND MONEY on products and services that many of 
the technology companies provide.  For a bear, it's the RISK that 
the economy isn't going to heck in a hand basket.

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


 

The QQQ and SPX broke there right shoulders at about the same 
time (09:52 AM EST).  Then the OEX broke its right shoulder at 
10:08 PM EST, and finally the Dow Industrials at 10:10 PM EST.  
Some say I'm a little "retentive," but one way I can check 
previous comments as it relates to "weakness leads lower" and how 
that weakness will pull "strength" along for the ride.

In Friday's market monitor at 13:20:33, the QQQ was "darting to a 
session low" and nearing our target of $20.20 and 19.1% 
retracement.  There were plenty of buyers in the QQQ Oct. $21 
puts and traders were able to close out some positions at the 
offer for $1.25.  I did, and so did some other happy QQQ bears.

I'm still holding a partial position in the QQQ puts and with 
some gains taken off the table, I'd follow with a stop just above 
$20.75.  The afternoon "buy program" had the QQQ trading $20.72.  

On a break to new lows, a trader can short/put the Q's again, 
stop $20.75 and begin a target of $19.40, which is just above the 
lower-end of our downward regression.

On a rally, I'd check the Dow Industrials and see how they're 
trading at resistance levels.  If resistance in the STRONGER Dow 
looks to hold, then I'd look to short/put the Q's again back near 
$21 and again select the Oct. $21 puts.

Looking for any signs of a reversal?

For the past couple of years, the first place to look for a 
potential reversal when ONLY looking at the INDU, SPX, OEX and 
NDX/QQQ is for some type of "firming" in the NDX/QQQ (when 
breaking to 52-week lows, not seeing that yet) or a lead higher 
in the Dow Industrials (holding its lows and close to bearish 
count targets).

The other place is the bond market.  As many well know, I'm a 
supply/demand trader and its CASH coming out of the bond market 
that might "switch" into bonds.  

For the first time in 8-weeks our weekly index and sector 
measurements show the benchmark 10-year Treasury YIELD ($TNX.X) 
3.685% showing a slight move higher in YIELD (YIELD moves higher 
as price moves lower).

There may be an explanation for this action after Tuesday's news 
from Fannie Mae (NYSE:FNM) that it had narrowed its duration gap 
(duration is a measure interest rate sensitivity) to 10-months by 
hedging, shortening their liability portfolio duration (selling 
off some newer mortgages in their portfolio to banks), and 
lengthening their asset portfolio duration.  

That news from FNM may have had bond bulls doing some selling if 
they had tried to "front run" potential hedging strategies by 
FNM.  However, the marginal selling found in our weekly 
statistics (Friday close to Friday close) needs to be watched and 
understood by equity traders.

In simplistic terms, it has been my thought for the past two 
years that when the bond market sees buying, that means cash is 
rotating to safety and can leave stocks starved for cash.  As it 
relates to bonds seeing some selling, then the inverse is 
potentially true and cash can rotate back toward stocks that may 
be deemed "more attractive based on valuation."

Weekly Index/Sector Changes


 

For the first time in 8 weeks, the 10-year YIELD shows a slight 
increase.  This is a hint of DIVERGENCE that I will want to 
monitor this coming week.  Note that the week ended 08/23/02, the 
10-year YIELD fell, but the market averages still put in a 
positive gain that week.  However, that "lower YIELD" from 
08/23/02 may have been the "heads up" that money was rotating 
back to safety and that stocks might suffer the consequences.  
How have the major indexes performed the last 7 weeks?

Every bear, no matter how big his claws or teeth is now an the 
ALERT that there has been some selling in Treasuries.  Is this 
the "heads up" for a rally in equities?  We're never sure, but 
know what to be looking for.

I've also outlined in green, the Gold/Silver Index.  Do you see 
how the XAU.X between 08/30-09/13 DIVERGED from Treasuries?  This 
makes "no sense" in terms of gold being a hedge against 
inflation.  After all, under the scenario of inflation, bonds 
would have suffered.  Yet during that time, Treasuries found 
continued buying.  That combination (between gold/treasuries) was 
a VERY DEFENSIVE sign!  This is why I mentioned the XAU.X this 
week.

Despite some bearishness in the broader markets however, we 
didn't really see gold stocks do that well did we?  This too may 
be sign that the MARKET isn't worried at this point.

Again... an index bears would LOVE to see gold stocks bid and 
YIELD fall.  This weeks action doesn't show either happening, so 
a bear in on the alert!

I've also drawn a blue line that "goes out" of the 10-year and 
"goes into" the better performing Dow Industrials and various 
sectors.  This perhaps shows where some money that came out of 
Treasuries may have actually flowed into.

On a weekly basis, how is a Dow bear feeling?  Did he/she get the 
most "bang" for his buck considering the $5,000 put option he/she 
bought?  Remember, a $5,000 put option is the SAME amount of risk 
as a $5,000 put option in the SPX, OEX, QQQ.  Yes, the NDX/QQQ is 
more volatile and that has to be considered when picking an index 
to trade, but even then, a bearish Dow trader would have been 
able to escape some NDX/QQQ volatility and be more bearish the 
SPX and OEX than the Industrials.

Personally, I'm "not buying" the Wireless or Telecom move at this 
point.  I do think these groups benefited from this weeks bullish 
call out of Goldman Sachs.  I also think that the ability for 
this group to actually show gains from 3rd quarter's 20% decline 
and 60% year-to-date decline is hint that short covering is 
always a possibility in any sector.  To try and pick a bottom in 
two sectors that are down 60% for the year takes some guts.  Just 
as much "guts" as it did to try and pick the bottom in these two 
sectors on December 31st, 2001!!!!!

I do find in interesting that two stocks I've mentioned as 
"bullish" in recent weeks in Forest Labs (NYSE:FRX) and Johnson & 
Johnson (NYSE:JNJ) are "drug stocks."  Friday morning we talked 
about bullishness in FDX and UPS.  Both of these stocks are 
"transports."  UPS got hit with a downgrade Friday morning.  I 
didn't know that at the time.  Before I knew about the UPS 
downgrade, I did profile a bullish trader in FedEx (NYSE:FDX) 
$51.06 -1.84% in the market monitor at 11:13:02 at the $50.46 
level.

This week, index bears would LOVE to see YIELDS reverse back 
lower and Gold/Silver bid.  Bulls would LOVE to see YIELDS 
continue higher and Gold/Silver fall apart and begin seeing INDU, 
SPX, OEX, NDX/QQQ levels of resistance start being broken.

Jeff Bailey


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**************
Editor's Plays
**************

Locked Out!

Last week Jim highlighted Choicepoint Inc (NYSE:CPS) as a 
recovery candidate.  Yet looking at the chart one might think 
this stock needs to be rushed to the recovery room now that 
investors have done a little surgery on the stock price!  Jim did 
point out that his preferred entry point would be a dip to the 
$30 level and this is exactly what the stock is presenting today.  
Of course a crucial part of the strategy was to buy a short-term 
put at the $30 strike to "protect" the longer-term April call.  
Fortunately, CPS now has a November $30 put CPS-WF with the Ask 
at $2.20.  I'm guessing it is brand new as volume was zero on 
Friday and there is only one option in the open interest.

The news on CPS is still strangely quiet regarding the falling 
stock price.  What we did notice was the company and its 
shareholders have approved an increase in authorized shares from 
100 million to 400 million shares.  Initially one tends to think 
of an increase in the number of authorized shares a company can 
issue is a prelude to a stock split announcement but given the 
current stock price this is probably premature for CPS.  The 
stock does have a history of splitting but usually when the share 
price is north of $50.

I would encourage anyone interested in this play to revisit last 
week's Editor's Plays for more details on the CPS strategy.  The 
short-term put is important and given the new bearish breakdown 
through the stock's ascending bullish support on the Point-and-
figure chart this Friday.  CPS is expected to announce earnings 
on October 17th, 2002.

------------------------------------------------------------------

Per our usual Friday-night research marathon the 
OptionInvestor.com staff looked over hundreds if not thousands of 
charts.  Given the state of the U.S. markets it was a tough call 
on what to highlight for the editor's plays this weekend.  I've 
chosen two stocks that are actually ADRs (or in Nokia's case an 
ADS) so there will be somewhat of a disconnect between how these 
stocks trade and the normal fluctuations in the U.S. indices.

Our first play is Sony Corp (NYSE:SNE).  They key to playing SNE 
will be watching a couple of different variables that influence 
the stock price and letting the price movement dictate which 
direction we play.  As you are aware, the U.S. economy is slowing 
being starved of goods by the West Coast port lockout.  One of 
the major overseas conglomerates that is being hit hard by the 
lockout is SNE.  According to the reports, over 50% of all 
consumer technology products that come into the U.S. come through 
these ports.  The timing for the lockout could not be worse.  
After a dismal back-to-school shopping season retailers are 
hoping for some sort of rebound in the upcoming holiday shopping 
season.  Consumer electronics, like gaming consoles, DVD players, 
digital TVs and stereos had been one of the stronger sectors in 
the retailing group.  This shipping delay could seriously hamper 
the available goods that need to be delivered across the U.S.

Fortunately for SNE many of their products could be air-shipped 
through companies like UPS and FDX.  We don't know if they have 
taken this route but it would be a lot easier to ship a crate of 
Play-Stations than a bunch of heavy automotive parts (think 
Toyota).  Part of the problem with using air-delivery to get 
goods to the U.S. is the significantly higher transportation 
costs.  In some cases it is 15 times more expensive than normal 
means.  A weary U.S. consumer is not going to be happy if 
companies decide to pass these costs onto the end-user so it is 
reasonable to believe that SNE's profit margins could be squeezed 
this year if the lockout doesn't end soon.

So far this sounds like a pretty bearish scenario shaping up for 
SNE.  To make matters worse, the Japanese markets have been in 
free fall (much like our own) with the NIKKEI average hit 19-year 
lows earlier this week before bouncing into the weekend.  If the 
Japanese markets are tanking and the U.S. markets are tanking, 
why are shares of SNE holding sideways above significant support 
at $40.00?  My best guess is that the rebound in the Japanese Yen 
is propping up the stock.  Investors know that if the Dollar 
continues to gain strength against the Yen, then Japanese 
products get cheaper to buy and Japanese companies will be able 
to sell more products here in the U.S.  Looking at the chart of 
the Yen/U.S.$ one can see that the Yen bounced at support between 
115-116 and is now approaching over head resistance near 126-127.  
Friday's close was $123.09 (or $1.00 U.S. buys $123.09 Yen).

My strategy to play SNE would be the following: if the West Coast 
port lockout is solved by Monday (or early next week) as many 
were guessing it would be on Friday, then shares of SNE should 
rally on the news.  My trigger to go long would be a move over 
the 50-dma currently at $43.25, which should break the short-term 
down trend.  Keep an eye on the $45 and $46.50 levels, which 
represent overhead resistance.  My target would be the 200-dma 
currently about $48.75.  Considering the upcoming holiday 
shopping season I would probably favor the January calls over 
Novembers giving me more time to see how the season develops.

Should the lockout continue or the Yen began to fail against the 
dollar then SNE is likely to fall below current support at 
$40.00.  If this breakdown occurs the next serious support level 
is the October 2001 lows near $33.00.  If the situation does turn 
more bearish and the lockout remains in effect, traders will need 
to use a stop loss.  This is mandatory because the lockout will 
not last forever and the stock could rally sharply on the news.

There were some additional observations that had me leaning to 
the bearish side but I would still not enter a trade until shares 
of SNE broke the $40 level.  What I did notice was the PnF chart 
is still working on a bearish vertical count of $36.00.  Plus, 
there was some negative news by Nintendo recently.  The game-
console rival said that their profits would be much lower than 
expected.  It is very possible that Nintendo's GameCube is losing 
market share to Sony's Playstation but both Sony and Nintendo 
have to compete with Microsoft's X-Box which appears to be 
gaining some momentum.  Nintendo did report that one of the 
negative factors impacting their fiscal year in profits was the 
previous decline of the Yen against the dollar.  This is 
something that SNE can not avoid and it could hurt their year-end 
numbers.

Locked Out!


 


****************
MARKET SENTIMENT
****************

Does a Flat Basketball Bounce?
by Steven Price

We got an up close and personal look at support levels in the 
Dow, Nasdaq, S&P 500 and S&P 100.  There may be a difference of 
opinion as to whether or not the Dow held at support (I think it 
did), but the S&P 500 and S&P 100 clearly did hold those levels.  
The Nasdaq, however, failed its test miserably.

This morning's jobs data was a little confusing, as August 
numbers were revised, skewing the September results.  The 
unemployment rate actually fell to 5.6%, which was quite a bit 
under the 5.9% expectations.  However, non-farm payrolls fell by 
43,000 jobs.  After market participants sifted through the 
conflicting data, more weight was given to the payroll number and 
the sell-off commenced. 

After an earnings warning last night from EMC, which said that 
the IT spending environment was "brutal" and that the spending 
environment had worsened at the end of September, a test of 
support at 1160 in the Nasdaq seemed almost a foregone 
conclusion.  That level failed in the first half hour of trading, 
and acted as resistance shortly thereafter.  By the end of the 
day, the index finished down 25.66, to close at 1139.90.  The 
Nasdaq found intraday support at 1135, so that appears to be the 
next level for the time being.  

One of the groups to lead the Nasdaq down was the chip sector.  
The Semiconductor Sector Index (SOX.X) set yet another 4 year 
low, blowing through support at 231 to close at 227.00.  If IT 
spending is worsening, then the chip stocks will be one of the 
main sectors to feel the pinch. 

The Dow actually started up on the day, jumping 67.62 to start 
the day, after hearing the initial unemployment rate data.  It 
didn't take long, however, for the giddiness to wear off, and the 
banks led the broader markets down once again.  There is a great 
deal of concern that if Brazilian leftist presidential candidate 
Luiz Inacio Lula Da Silva wins the presidency (he is the current 
front-runner), he will attempt to default on the country's $260 
billion in debt.  While it is not certain just how much exposure 
U.S. banks have to Brazil, estimates are high for large 
institutions, such as J.P. Morgan, Citibank, Goldman Sachs and 
several others. After more warnings this week regarding non-
performing assets from Comerica and bank of New York, this was 
just the push the group needed to keep rolling downhill.

The Dow once again re-tested its lows in the 7500 range.  It 
actually closed at new recent lows, which I'm sure has the bears 
roaring louder than ever.  As a most-of-the-time member of this 
club, I'd like to roar along with them.  However, the index 
actually bounced right around the same point it did on September 
30.  On September 30, it bounced at 7460; today it bounced at 
7472.  The July 24 bounce was 7532, so we are without a doubt 
below the July lows.  However, we continue to bounce in this 
range, and until we get a real breakthrough, I find myself 
getting out of the way of an intermediate rally and closing short 
positions at this level.   A look at the S&P 500 confirms this 
possibility, as it closed at 800.58, which is a significant 
support level.  Ditto the OEX at 400 (closed at 403.22). In 
addition, as you can see from our Arms Index data, the readings 
are indicating an oversold condition, which also points to the 
possibility of a bounce. While I have been leaning short 
throughout the recent move, we are once again at a pivotal point.  
All of the recent news looks negative, and if the Brazilian 
elections turn out for the worst, these levels may fall quickly 
on Monday. However, I will trade what I see, and right now I see 
the potential for a short-term bounce.


-----------------------------------------------------------------

Market Averages

DJIA ($INDU)

52-week High: 10679
52-week Low :  7528
Current     :  7528

Moving Averages:
(Simple)

 10-dma: 7762
 50-dma: 8392
200-dma: 9484



S&P 500 ($SPX)

52-week High: 1176
52-week Low :  775
Current     :  800

Moving Averages:
(Simple)

 10-dma:  828
 50-dma:  885
200-dma: 1031



Nasdaq-100 ($NDX)

52-week High: 1734
52-week Low :  815
Current     :  815

Moving Averages:
(Simple)

 10-dma:  850
 50-dma:  923
200-dma: 1231



-----------------------------------------------------------------

The Semiconductor Index (SOX.X): The SOX has left no doubt today 
that previous support has been breached.  Although Thursday set a 
new 4 year closing low, the intraday low of 231 still hung below 
it, giving the impression of support.  Today the group crashed 
through 231, after last night's warning from EMC emphasized that 
the horrible IT spending environment was still getting worse.  
The SOX finished the day at 227.00, after finding a new intraday 
low of 223.57.  Every time it looks like we have found a bottom 
in this sector, it shows us that there is still more room to 
fall.  Today's big loser in the sector was OI put play QLogic 
(QLGC), which lost $3.71 to close at $20.89.  I am targeting 200 
as the next logical level of support.  Even I had to wonder if it 
ever traded at that level since it was created.  The answer is 
yes, and it did serve as support back in the fall of 1998. 

52-week High: 657
52-week Low : 227
Current     : 227

Moving Averages:
(Simple)

 10-dma: 242
 50-dma: 294
200-dma: 456


-----------------------------------------------------------------

Market Volatility

The VIX actually increased less than I would have expected as the 
major market indices either broke or tested recent support 
levels.  While it did tack on 1.32 to close at 46.28, its highest 
level since August 5, there were plenty of weekend premium 
sellers keeping it in check, as the Dow held support at 7500.  If 
that level had been  broken on a closing basis, we probably would 
have seen the VIX closer to 50.  The VXN also added some points, 
but also was less than expected with the Nasdaq breaking through 
and closing below recent support.  There will always be a few 
more sellers on a Friday, trying to capture weekend time decay, 
and I suspect both of these numbers would have been higher if the 
same market activity had occurred in the middle of the week.

CBOE Market Volatility Index (VIX) = 46.28 +1.32
Nasdaq-100 Volatility Index  (VXN) = 60.28 +2.07

-----------------------------------------------------------------

          Put/Call Ratio  Call Volume   Put Volume

Total          0.97        580,683       562,623
Equity Only    1.75        152,346       266,033
OEX            1.41         36,501        51,510
QQQ            0.46         49,978        23,149

-----------------------------------------------------------------

Bullish Percent Data

           Current   Change   Status
NYSE          30      - 2     Bull Correction
NASDAQ-100    17      - 3     Bear Confirmed
Dow Indust.    7      - 3     Bull Correction
S&P 500       24      - 3     Bear Confirmed
S&P 100       20      - 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   1.54
10-Day Arms Index  1.54
21-Day Arms Index  1.47
55-Day Arms Index  1.37

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        633          2109
NASDAQ      932          2265

        New Highs      New Lows
NYSE         27             299
NASDAQ       12             356

        Volume (in millions)
NYSE     2,082
NASDAQ   1,575


-----------------------------------------------------------------

Commitments Of Traders Report: 10/01/02

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

There has not been much change in the positions of Commercials, 
who reduced both longs and shorts by about 2,000 contracts each. 
Small traders are also relatively unchanged, with reductions of 
about 1,000 contracts to both the long and short sides.


Commercials   Long      Short      Net     % Of OI 
09/10/02      426,230   470,537   (44,307)   (5.0%)
09/17/02      476,224   503,268   (27,044)   (2.7%)
09/24/02      425,276   442,661   (17,385)   (2.0%)
10/01/02      423,661   440,133   (16,472)   (1.9%)

Most bearish reading of the year: (111,956) -   3/6/02
Most bullish reading of the year: ( 16,472) - 10/01/02

Small Traders Long      Short      Net     % of OI
09/10/02      166,696    85,259    81,437     32.3%
09/17/02      182,243   116,377    64,866     21.7%
09/24/02      124,232    73,506    50,726     25.7%
10/01/02      123,371    74,704    48,667     24.5%

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 reduced both longs and shorts, but by a relatively 
small percentage, giving up 600 long contracts and 1,700 shorts.  
Small Traders also made few changes to their overall positions, 
getting slightly longer overall, by about 600 contracts.


Commercials   Long      Short      Net     % of OI 
09/10/02       53,309     58,745    (5,436) ( 4.9%)
09/17/02       72,522     75,815    (3,293) ( 2.2%)
09/24/02       46,637     54,613    (7,976) ( 7.9%)
10/01/02       46,000     52,976    (6,976) ( 7.0%)

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
09/10/02       14,024    10,494     3,530    14.4%
09/17/02       15,288    14,142     1,146     3.9%
09/24/02       11,163     9,421     1,742     8.5%
10/01/02       11,896     9,575     2,321    10.8%

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 left long positions unchanged, while reducing shorts 
by 10%.  Small traders reduced longs by 1,000 contracts, while 
adding the same amount to the short side. 


Commercials   Long      Short      Net     % of OI
09/10/02       22,946    14,936    8,010      21.1%
09/17/02       26,863    21,187    5,676      11.8%
09/24/02       18,951    10,074    8,877      30.6%
10/01/02       18,969     8,903   10,066      36.1%

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

Small Traders  Long      Short     Net     % of OI
09/10/02        7,568    10,129    (2,561)   (14.5%)
09/17/02       13,393    11,637     1,756      7.0%
09/24/02        7,939     9,453    (1,514)   ( 8.7%)
10/01/02        6,809    10,503    (3,694)   (21.3%)

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

-----------------------------------------------------------------


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***************
ASK THE ANALYST
***************

Patience Pays Off
by Steven Price

Guys,

First of all, Thanks for the really good work - keep it up ! I 
have a stock I'd like you to take a look at :

WLP : call play, is there upside to 86 ?
WLP -  Wellpoint Health Network  - $77.62

Wellpoint has enjoyed some recent strength, along with other 
HMOs, as the health related stocks have been somewhat recession 
proof.  While they have certainly taken an enrollment hit, with 
higher unemployment and more employers unable to swing the cost 
of benefits, profits for the nation's health insurers were up 25% 
in 2001.  As many HMOs have shed members to save costs, companies 
such as WLP and ATH, which have Blue Cross Blue/Shield plans, 
have seen an increase in revenue from those plans of 12.8% in 
2002 over the first half of 2001.  

Wellpoint does look to have some upside to $86, IF it can break 
$80.  In fact a look at the charts appears as though a break back 
over $80 could wind up much higher than that. The stock has 
bumped up against $80 on several occasions recently, but been 
turned back each time. However, since falling below $80, to a low 
of $66 on August 5, the stock has put together a series of higher 
highs and higher lows, which looks bullish. The next higher high 
would correspond to the $80 resistance mark.  A break above $80 
would get the stock above resistance, along with achieving a new 
higher high. The oscillators are currently both on buy signals, 
but the stochastics have begun to rollover, in contrast to the 
MACD, which still looks strong.  On the daily chart below, I have 
highlighted the recent swings.  

Daily Chart of WLP


 

While $86 is the recent resistance mark, a look at the monthly 
chart shows an even greater significance at $80.  The jump to $86 
is simply a blip on the radar and the consolidation between $70 
and $80 looks like the stock is getting ready for a bigger move.  
Based on a rectangle consolidation pattern, if the stock breaks 
above $80, the minimum measuring objective is $90.

Monthly Chart of WLP


 

The point and figure bullish vertical count is all the way up at 
$100.  That is an eventual price target, but it is interesting 
that it is a round number and a $10 increment, which has worked 
well for WLP in the past.  While the stock will need to achieve 
$80 before we can begin making lofty projections, it is just 
another piece of information in the puzzle.  A trade of $80 will 
be a new point and figure buy signal, as well as the point at 
which a previous breakthrough of bearish resistance occurred.   
All of these signals add up to a strong buy signal at $80.  While 
that may cost a trader $2.38 of potential upside, it is not much 
to pay for confirmation of a trend that could result in a $10 or 
$20 payday.  The downside of the current formation is $70, so it 
is also not much to give up to avoid a potential loss of $7.62.  
Look for that break, and confirmation of a bounce in the broader 
markets (so as not to fight a sinking tide), for your signal to 
go long WLP.
Please send your questions and suggestions to: 
Contact Support


*************
COMING EVENTS
*************

========================================
Market Watch for the week of October 7th
========================================

------------------------
Major Earnings This Week
------------------------

Symbol  Company               Date           Comment      EPS Est

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

AMB    AMB Property          Mon, Oct 07  After the Bell      0.58


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

APOL   Apollo Group          Tue, Oct 08  Before the Bell     0.22
PEP    Pepsico               Tue, Oct 08  Before the Bell     0.55
RPM    RPM                   Tue, Oct 08  After the Bell      0.37
RI     Ruby Tuesday          Tue, Oct 08  -----N/A-----       0.31
SDX    Sodexho Alliance S.A. Tue, Oct 08  -----N/A-----        N/A
UOPX   Un of Phoenix Online  Tue, Oct 08  Before the Bell     0.14


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

ABT    Abbott Laboratories   Wed, Oct 09  -----N/A-----       0.48
BRO    Brown & Brown         Wed, Oct 09  After the Bell      0.28
CBH    Commerce Bancorp      Wed, Oct 09  -----N/A-----       0.52
DNA    Genentech             Wed, Oct 09  After the Bell      0.23
INFY   Infosys Tech Limited  Wed, Oct 09  After the Bell      0.34
MTB    M&T Bank              Wed, Oct 09  -----N/A-----       1.27
STI    SunTrust              Wed, Oct 09  Before the Bell     1.21
WIN    Winn-Dixie Stores     Wed, Oct 09  After the Bell      0.24
YHOO   Yahoo!                Wed, Oct 09  After the Bell      0.04
YUM    Yum! Brands, Inc.     Wed, Oct 09  After the Bell      0.47


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

CMH    Clayton Homes         Thu, Oct 10  Before the Bell     0.22
COST   Costco Wholesale Corp Thu, Oct 10  Before the Bell     0.49
DORL   Doral Financial       Thu, Oct 10  4:00 pm ET          0.67
DJ     Dow Jones             Thu, Oct 10  Before the Bell     0.08
SSP    E.W. Scripps          Thu, Oct 10  -----N/A-----       0.60
FDC    First Data            Thu, Oct 10  Before the Bell     0.45
ISCA   International Spdwy   Thu, Oct 10  Before the Bell     0.56
IFIN   Investors Finl Srvc   Thu, Oct 10  Before the Bell     0.26
JNPR   Juniper Networks      Thu, Oct 10  After the Bell     -0.02
MTG    MGIC Investment Corp. Thu, Oct 10  Before the Bell     1.42
NET    Network Associates    Thu, Oct 10  Before the Bell     0.12
BPOP   Popular, Inc.         Thu, Oct 10  After the Bell      0.65


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

BBT    BB&T                  Fri, Oct 11  Before the Bell     0.70
BLK    BlackRock             Fri, Oct 11  Before the Bell     0.51
FAST   Fastenal              Fri, Oct 11  -----N/A-----       0.28
GE     General Electric      Fri, Oct 11  Before the Bell     0.40
MI     Marshall & Ilsley     Fri, Oct 11  09:00 am ET         0.55
SPOT   PanAmSat              Fri, Oct 11  Before the Bell     0.11


----------------------------------------------
Upcoming Stock Splits In The Next Two Weeks...
----------------------------------------------

Symbol  Company Name              Ratio    Payable     Executable

RMCI    Right Management          3:2      10/14       10/15
RLI     RLI Corp.                 2:1      10/15       10/16


--------------------------
Economic Reports This Week
--------------------------

TEASER HERE

==============================================================
                       -For-           

Monday, 10/07/02
----------------
Consumer Credit (DM)    Aug  Forecast: $10.5B  Previous:   $10.8B


Tuesday, 10/08/02
-----------------
None


Wednesday, 10/09/02
-------------------
None


Thursday, 10/10/02
------------------
Initial Claims (BB)   10/05  Forecast:    N/A  Previous:     417K
Export Prices ex-ag.(BB)Sep  Forecast:    N/A  Previous:     0.0%
Import Prices ex-oil(BB)Sep  Forecast:    N/A  Previous:     0.1%
Wholesale Invntories(DM)Aug  Forecast:   0.2%  Previous:     0.6%


Friday, 10/11/02
----------------
Retail Sales (BB)       Sep  Forecast:  -0.9%  Previous:     0.8%
Retail Sales ex-auto(BB)Sep  Forecast:   0.2%  Previous:     0.4%
PPI (BB)                Sep  Forecast:   0.2%  Previous:     0.0%
Core PPI (BB)           Sep  Forecast:   0.1%  Previous:    -0.1%
Mich Sentiment-Prel.(DM)Oct  Forecast:   85.3  Previous:     86.1

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


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*********************
SWING TRADE GAME PLAN
*********************

Suck'em in and spit'em out

After a quick pop at the open Friday on some "confusing" jobs 
data, some traders bought stocks after an upward revision to 
August's nonfarm payroll numbers, while another batch of traders 
sold stocks on the weaker than forecasted September nonfarm 
payroll numbers.


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**********

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**************************************************************
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or any Premier Investor Network newsletter please contact:

Contact Support
The Option Investor Newsletter                   Sunday 10-06-2002
Sunday                                                      2 of 5


In Section Two:

Stock Pick: AMLN - Amylin Pharmaceuticals
Daily Results
Call Play of the Day: GSK
Put Play of the Day: PHM
Dropped Calls: None
Dropped Puts: QLGC, BAX, CI

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**********
Stock Pick
**********

Vote of Confidence
AMLN - Amylin Pharmaceuticals - $15.80
Strategy: Long stock with put insurance

Amylin Pharmaceuticals, a biotech company based out of San Diego, 
has yet to show a profit. However, the company has begun to show 
some signs of life, and recently got a big vote of confidence.  
Ely Lilly recently invested $110 million to get in on Amilyn's new 
drug, AC2993.  The experimental diabetes drug lowers levels of 
fructosamine in Type 2 diabetes patients.  It affects about 90% of 
the 17 million diabetes patients in the U.S.  Of the $110 million, 
$80 million is in cash, and $30 million in the form of a purchase 
of AMLN stock at a price of $18.69 per share.  That is almost $3 
higher than where the stock is currently trading.

The drug will be packaged in cartridges that patients can plug 
into a pen, which is then used to inject the medicine at the 
waistline. Some current drugs carry side affects such as weight 
gain, which doctors try to avoid, since high weight contributes to 
diabetes. So far AC2993 has not put on weight in studies.  It is 
also considered a "smart drug," which shuts itself down once it 
lowers the patient's blood sugar to normal levels.  This also 
avoids the problem of low blood sugar, which can cause fainting 
spells. 

The deal with Lilly not only provides cash, but allows AMLN to 
keep 50% of all U.S. profit.  Lilly pays for 80% of overseas drug 
testing costs, plus all non-U.S. marketing costs.  Lilly will sell 
the drug overseas. The $110 million is just the start of Lilly's 
contribution, as it will be contributing up to a total of $325 
million to Amilyn if the drug meets specific milestones.  

Amilyn entered a similar deal with Johnson and Johnson in 1998.  
J&J contributed $173 million to co-promote Symlin, another 
diabetes drug.  The deal eventually fell apart, but Amilyn got to 
keep the $173 million.   J&J never gave a reason for pulling out, 
but according to AMLN Chief Executive Joseph Cook, "I believe it 
was a portfolio decision within J&J. They gave us 100% of the 
rights, and we thanked them for their $173 million."  Now, Amilyn 
has received an approval letter for Symlin from the FDA and could 
receive final approval in the second half of 2003, pending results 
of a current clinical trial. The Lilly deal will also help Amilyn 
develop a sales force ahead of the Symlin launch.

Amilyn has a great deal of potential, as evidenced by Lilly's 
stock purchase at $18.69.  The company, however, has yet to turn a 
profit and because of this, we highly recommend the purchase of a 
protective put along with the stock.  The stock has found support 
at higher levels after each run, and this appears to be the case 
once again.  The stock has been climbing steadily since the summer 
and has found support from its 50 and 200 day moving averages.  
There is some impressive support around $12, however, we don't 
want to let it re-test that level without some protection.  

The stock experienced a triple top point and figure breakout back 
in July, when it crossed the $12 mark, pulled back to support, and 
took off again.  That pattern was followed by two double top 
breakouts, even as the broader markets have dropped.  Because of 
the current extension, conservative traders may want to wait for a 
pullback to around $15, the point of the last double top breakout.

Option 1: Purchase AMLN, along with 1 April $12.50 put (AQM-PV) 
for each 100 shares purchased.  The April 12.50 puts are currently 
offered at $1.50 and will provide approximately 6 months of 
protection, which should give AMLN additional time to progress 
with trials of both Symlin and AC2993.  As progress is made on 
AC2993, more cash should come their way from Lilly, boosting the 
stock further.

Option 2: Purchase AMLN and April 15.00 for $2.65.  This option 
gives the purchaser more immediate protection if there is a 
pullback, but at a higher cost.

Option 3: Wait for a pullback to $15.00 and then purchase the 
stock and option listed in the above scenarios.

Point and Figure Chart of AMLN


 
Daily Chart of AMLN


 



***********************************************************
DAILY RESULTS
***********************************************************

For Best Alignment view in Courier Ten Font
*******************************************

CALLS              Mon    Tue    Wed   Thu   Week

GSK      40.65   -0.04   2.06   0.52  0.61   2.18 pullback
ITMN     31.00    0.73   1.17  -0.73 –1.36  -1.09 200-dma


PUTS               

BAX      26.89   -0.87  -0.93  -3.24 –1.23  -4.53  Drop, news out
CI       62.18   -0.75   2.74  -1.74 –2.45  -9.32  Drop, profits
FLIR     32.75   -2.77  -0.44  -1.03 –0.12  -4.91  still falling
GM       36.42   -0.10   1.74  -1.92 –0.95  -2.58  On its lows
MRK      44.26   -0.55   0.08   0.00 –0.56  -2.00  New, sector warnings
PHM      39.14   -0.17   0.82  -0.43 –1.70  -3.66  New, sector breaking
QLGC     20.89   -0.95  -0.79   1.07 –1.67  -5.61  Drop, profits
TECD     25.53   -0.81   1.51  -0.77 –0.21  -1.68  $25 next break
WHR      43.72   -0.59   1.95  -2.07 –0.97  -2.73  PnF breakdown


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

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


********************
THE PLAYS OF THE DAY
********************

Call Play of the Day:
*********************

GSK - GlaxoSmithKline - $40.65 -0.97 (+1.79 for the week)

See details in play list




Put Play of the Day:
********************

PHM - Pulte Homes, Inc. $39.14 (-4.32 last week)

See details in play list





**************************
PICKS WE DROPPED THIS WEEK
**************************

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.


CALLS
^^^^^

None


PUTS
^^^^

QLGC $20.89 -3.71 (-6.07 for the week) QLGC dove as storage giant 
EMC warned about the "brutal" IT spending environment. QLogic, 
which designs and supplies storage network infrastructure 
components and software for server and storage subsystem 
manufacturers, is likely looking at an environment similar to 
EMC, which said that the spending environment, which looked as 
though it could not get much worse, did exactly that at the end 
of the quarter.  EMC said it expects IT spending to remain weak 
for the rest of the year, and does not expect a return to 
profitability in the fourth quarter.  QLGC releases earnings on 
October 16 and it is hard to imagine why any investor would want 
to buy the stock ahead of that date.  However, we will probably 
see support at $20 and with the Dow, S&P 500, and OEX all at 
support, there is a possibility of a bounce on Monday.  The 
Semiconductor Index (SOX.X) did roll over to a new 52-week low, 
so there are still plenty of negative signs for QLogic.  However, 
after entering the play at $25.25, we are going to close the play 
for a significant profit and move on. For traders who wish to 
keep the play on, I would suggest a new stop loss of $23.50.  

---

BAX $26.89 (-4.52) Since initiating coverage of BAX near the
$30 level, we've gotten a nice downward move that was punctuated
by the company's reduced guidance on Thursday.  Just prior to that
news release, the stock was trading just below $25, and buyers
swooped in following the news, lifting the stock well off those
lows.  Since then, the stock has consolidated in an
ever-tightening range, coming to rest on Friday just below $27.
Given the stock's failure to sell off with the rest of the market
on Friday, this seems a prudent time to lock in gains and close
out the play.  While it could drop again next week, any broad
market rally could inject new life into the stock and we don't
want to get caught in a short-covering rally.  

---

CI $62.18 (-9.78) Wow!  What a ride!  CI performed perfectly for
us since we picked it north of $70.  After a couple failed rallies
near the $74 level, the bottom fell out in the past 2 days, with
CI getting slammed for a 10% loss on Friday on very heavy volume.
Driving Friday's decline was a Salomon Smith Barney downgrade and
investors apparently couldn't get out fast enough.  Recall that
the PnF price target was $62, and since that level has been
reached, we want to harvest gains and move on to the next winning
play.  CI could continue to fall, but there is a chance that
bargain-hunters will start to buy near current levels.  With a
nearly $10 gain since we picked it, there's no sense in risking
those gains while trying to squeeze out a bit more.


***********
DEFINITIONS
***********

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

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

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

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

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

RISKS of SELLING PUTS:
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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**************************************************************


**********
DISCLAIMER
**********

Please read our disclaimer at:
http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html


**************************************************************
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Contact Support
The Option Investor Newsletter                   Sunday 10-06-2002
Sunday                                                      3 of 5


In Section Three:

New Calls: None
Current Calls: ITMN, GSK
New Puts: MRK, PHM


************************Advertisement*************************
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stop loss online option orders offers contingent option 
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**************
NEW CALL PLAYS
**************

None


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

“7 Steps to Success – Trading Options Online”.

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

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


******************
CURRENT CALL PLAYS
******************

ITMN - InterMune - $31.00 -0.88 (-0.73 for the week)

Company Summary:
InterMune is a commercially driven biopharmaceutical company 
focused on the marketing, development and applied research of 
life-saving therapies for pulmonary disease, infectious disease 
and cancer.

Why We Like It:
InterMune gave up some ground today, as it was a tough day for 
most long plays. In our initial write-up, we suggested new 
entries wait for a pullback above the 200-dma.  We thought we got 
that pullback on Thursday, but were a little premature.  The drop 
today, however, did find support above the 200-dma of $30.42, 
which is encouraging, considering the slew of recent warnings 
from the drug sector.  The most recent warning came from Schering 
Plough on Thursday, and sent many of the drug and biotech stocks 
reeling. ITMN actually held up well and has outperformed the 
sectors the last couple of days. A look at the point and figure 
shows a possible bull flag forming, which would allow for a trade 
of $30 without breaking the formation. A trade of $29 would 
indicate a break in that formation, which coincides with our 
current stop loss on the play.  ITMN recently announced 
collaboration with Array BioPharma to create small molecule 
therapeutics targeting hepatitis.  This announcement added to the 
intrigue created by ITMN's Actimmune, which is so far the only 
drug that has shown life extension benefits for idiopathic 
pulmonary fibrosis treatment, a fatal disorder that causes lungs 
to fill with scar tissue.  According to Dr. Robert Strieter, 
chief of pulmonary and critical care medicine at UCLA Medical 
Center, " if the Actimmune data holds true, the results will be 
very profound... We'll be medically obligated to treat all IPF 
patients with (Actimmune)." New entries should look to the 
broader markets for evidence of a bounce, before initiating a 
long play

*** October contracts expire in 2 weeks ***

BUY CALL OCT-30*IQY-JF OI= 3668 at $2.90 SL=1.50
BUY CALL OCT-35 IQY-JG OI= 1567 at $0.65 SL=0.00
BUY CALL NOV-30 IQY-KF OI=   24 at $4.00 SL=2.00
BUY CALL NOV-35 IQY-KG OI=   70 at $1.65 SL=0.00

Average Daily Volume = 1.46 mil


---

GSK - GlaxoSmithKline - $40.65 -0.97 (+1.79 for the week)

Company Summary:
GlaxoSmithKline, with U.S. operations in Philadelphia and 
Research Triangle Park, NC, is one of the world's leading 
research-based pharmaceutical and healthcare companies committed 
to improving the quality of human life by enabling people to do 
more, feel better and live longer. (source: company release)

Why We Like It:
It was a tough day for calls, but GSK actually held up pretty 
well.  After warnings this week from Schering Plough and Baxter, 
other drug/healthcare stocks gave up quite a bit of ground.  In a 
show of great relative strength, however, GSK held above the $40 
mark, after breaking through bearish PnF resistance at $41 on 
Thursday.  $40 was the level at which GSK gave its most recent 
buy signal, and can now be viewed as a crucial support level.  
With the Dow, S&P and OEX all at pivotal support levels, which 
held up today, it is possible we could get a big bounce on 
Monday.  If that is the case, we expect a strong stock, like GSK, 
to lead the rally. Last night GSK announced the results of a 
study, which showed that its herbal supplement, RemiFemin, could 
be used for menopausal symptom relief in women with a history of 
breast cancer.  Unlike estrogen, RemiFemin didn't stimulate 
cancerous cell growth in the human-breast cell system studies. 
GSK has also recently announced results for two promising 
pipeline drugs, used in the treatment of HIV and Herpes.  It also 
entered into a new collaboration to develop vaccines and 
antibiotics for use in the $4 billion per year fight against 
drug-resistant staphylococcal bacteria. New entries should look 
to the broader markets for evidence of a rebound, rather than 
fight a sinking tide.  If this week's sell-off continues on 
Monday, then we suggest waiting for evidence of a bounce to enter 
new call plays.

*** October contracts expire in 2 weeks ***

BUY CALL OCT-40   *GSK-JH OI= 1260 at $1.80 SL=1.00
BUY CALL OCT-42.50 GSK-JV OI=  578 at $0.65 SL=0.00
BUY CALL NOV-40    GSK-KH OI= 2482 at $2.70 SL=1.40
BUY CALL NOV-42.50 GSK-KV OI= 1164 at $1.50 SL=0.00

Average Daily Volume = 1.15 mil



*************
NEW PUT PLAYS
*************

MRK – Merck & Company, Inc. $44.26 (-2.00 last week)

Company Summary:
MRK is a global, research-driven pharmaceutical company that
discovers, develops, manufactures and markets a broad range of
human and animal health products, directly and through its joint
ventures.  Additionally, the company provides pharmaceutical
benefit services through Merck-Medco Managed Care, LLC.  The
company's operations are managed principally on a products and
services basis and are comprised of two business segments.  Merck
Pharmaceutical is involved in marketing products, while Merck
Pharmaceuticals is focused on 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 through programs to manage patient
health and drug utilization.

Why We Like It:
Earnings warnings have become a daily event as we enter the
perilous month of October, and it seems that no sector has been
immune.  The big shocker on Friday came from LH, one of the
principal laboratory testing companies.  That warning knocked
down most of the Health Care related stocks, with the
Pharmaceutical index (DRG.X) losing more than 3% and the Health
Care Payor index (HMO.X) sliding lower to the tune of 4.5%.  For
the most part, the DRG index has held up pretty well in recent
weeks, but the selloff on Friday bodes ill for the sector.  The
$290 level has proved to be formidable resistance and if this
rollover runs to conclusion, the DRG could very easily lose the
$275 support level and tumble significantly lower next week.  MRK
is showing significant weakness relative to the DRG index and the
breakdown under $44.50 on Friday opens the door for a decline
down near the July lows.  MRK is set to announce earnings on
October 18th, which puts a 2-week fuse on the play.  Another
warning in the Drug sector could be all it takes to yank the
legs out from under the stock.  After reversing from the $54
level back in late August, MRK generated a fresh Sell signal on
the PnF chart and the current vertical count hints at downside
potential all the way to $35.  Should that come to fruition, it
would undercut the July lows near $38.  Look for any short-term
rebound to find firm resistance overhead in the $46-47 area, and
a rollover near there would make for a great entry before the next
leg down.  Given the technical breakdown on Friday on solid
volume, we may not be so fortunate.  Look to initiate
momentum-based positions on a drop under $43.75 (just below
Friday's intraday low).  Initial stops are set at $47.

*** October contracts expire in 2 weeks ***

BUY PUT OCT-45 MRK-VI OI=6603 at $2.25 SL=1.25
BUY PUT OCT-42 MRK-VV OI=4400 at $1.10 SL=0.50
BUY PUT NOV-42*MRK-WV OI= 708 at $2.25 SL=1.25

Average Daily Volume = 7.36 mln


---

PHM - Pulte Homes, Inc. $39.14 (-4.32 last week)

Company Summary:
Pulte Homes is a holding company whose subsidiaries engage in
the homebuilding and financial services businesses.  The
company's direct subsidiaries include Pulte Diversified
Companies, Inc. (PDCI) Del Webb Corporation and others that are
engaged in the homebuilding business.  PDCI's operating
subsidiaries include Pulte Home Corporation (PHC), Pulte
International Corporation and other subsidiaries that are
engaged in the homebuilding business.  The company also has a
mortgage banking company, Pulte Mortgage Corporation, which
is a subsidiary of PHC.

Why We Like It:
There has been a lot of discussion in the press about whether or
not the Housing market is in a bubble.  Despite frequent denials
of this possibility by economists and analysts, price action
seems to indicate that investors are thinking it is a bubble and
it is getting close to bursting.  The Home Builders index
($DJUSHB) held up pretty well until fairly recently, but the
price action this week was pretty discouraging for the bulls.
Wednesday's aborted rally ran out of steam right at the converged
20-dma and 50-dma near the $317 level and plunged significantly
at the end of the week, losing more than 11% between Wednesday's
high and Friday's low.  That brought the DJUSHB right down to
major support at $280.  If it gives way next week, then the bears
will be altering their focus and targeting the next level of major
support down near $240.  Looking for weak stocks within this
sector reveals PHM as one of the weakest, due to its significant
breakdown on Friday.  Rather than holding near the July low
($40.50), the stock plunged right through on heavy selling
volume.  That dropped PHM right to significant support near $39,
which is even stronger at $38.  That support could very well lead
to an oversold rebound early next week, but given the picture
portrayed by the PnF chart, that rebound is likely to fail,
providing us with an attractive put entry opportunity.  Look for
a rollover near the $41 level to initiate new positions, rather
than attempting to trade a breakdown from current levels.  The
bearish target generated by the PnF chart is $32, making for an
attractive risk/reward ratio, as long as we manage the play with
a judicious stop.  We're initially placing our stop at $42.

*** October contracts expire in 2 weeks ***

BUY PUT OCT-40 PHM-VH OI=1899 at $2.55 SL=1.25
BUY PUT NOV-40*PHM-WH OI= 211 at $3.80 SL=2.25

Average Daily Volume = 826 K



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The Option Investor Newsletter                   Sunday 10-06-2002
Sunday                                                      4 of 5


In Section Four:

Current Put Plays: WHR, FLIR, GM, TECD
Leaps: VIX Points The Way
Traders Corner: If You Can’t Beat Them, Join Them 
Traders Corner: Volume: Confirming or diverging from price trends

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*****************
CURRENT PUT PLAYS
*****************

WHR - Whirlpool - $3.72 -1.09 (-2.14 for the week)

Company Summary:
Whirlpool Corporation is the world's leading manufacturer and 
marketer of major home appliances. Headquartered in Benton 
Harbor, Michigan, the company manufactures in 13 countries and 
markets products under 11 major brand names in more than 170 
countries. (source: company release)

Why We Like It: 
Whirlpool gave in with the broader markets today, losing $1.09 on 
the day.  In spite of the unemployment rate showing improvement, 
the non-farm payroll number was actually lower, indicating that 
the employment picture, although better than originally expected 
in August, is still deteriorating.  This does not bode well for 
large consumer purchases, such as stoves and refrigerators.  
Investors agreed, sending Whirlpool down through two significant 
levels on the point and figure chart.  The break through $44 
created a new sell signal, and the trade of $43 added another "O" 
to the breakdown.  The stock did bounce from its low of $42.64, 
but this does not appear to be a significant technical level, 
with the next obvious support at $40. After three straight days 
of significant losses for the company, as well as a technical 
breakdown, some bounce can be expected.  The key is how high the 
bounce might be for possible new entries.  I would look for a 
failure below $45 as a signal that new resistance is in place.  
One other concern is the Dow holding its 7500 level once again.  
If this support level remains in place, we may see a slowing of 
the recent downtrend, and be forced to reconsider shorts.  New 
entries should look for failure below $45 if we get a broad 
market bounce on Monday.  If the Dow continues its downward 
momentum, then look for a break below $42.50 to initiate short 
positions.  Lower stops to $46.50, just above Thursday's high.

*** October contracts expire in 2 weeks ***

BUY PUT OCT-45 WHR-VI OI=227 at $2.90 SL=1.50
BUY PUT NOV-45*WHR-WI OI=201 at $4.00 SL=2.00

Average Daily Volume = 703 K


---

FLIR – FLIR Systems $32.73 (-4.92 last 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.

Why We Like It:
There hasn't been much good news for the bulls lately, and it is
a rare stock that hasn't broken to new lows in recent weeks.
Shares of FLIR fell below the important $35 support level early
last week and since then the weakness in the broad markets has
driven the price ever lower.  Friday's 2% loss knocked FLIR back
to a fresh 52-week low.  While there is some mild support near
the $32 level, if the broad market continues to be weak, FLIR
should continue to fall until finding more significant support
near $29.  One thing we need to be careful of is the fact that
the stock is falling slower than the broad market and this could
be hinting at a weakening of the downward trend.  For this reason,
we don't want to chase the stock lower.  Those currently in the
trade need to manage their positions by ratcheting their stop
lower.  We're lowering the coverage stop down to $35.25, as that
level should provide strong resistance in the event of a
short-covering rally.  Look for a failed rally near $34, or
possibly as high as $35 to initiate new positions on the
rollover.  Use a drop below $30 early next week as an opportunity
to harvest gains on open positions, as a strong rebound from the
$29 level could bring the play to an abrupt end.

*** October contracts expire in 2 weeks ***

BUY PUT OCT-35 FFQ-VG OI=248 at $3.30 SL=1.75
BUY PUT OCT-30 FFQ-VF OI=308 at $1.15 SL=0.50
BUY PUT NOV-30*FFQ-WF OI= 31 at $2.00 SL=1.00

Average Daily Volume = 309 K


---

GM – General Motors $36.42 (-3.37 last week)

Company Summary:
Maintaining its position as the world's #1 maker of cars and
trucks, GM has managed to diversify its business so that it is
more than just a car company.  Its automotive business
encompasses the Buick, Cadillac, Chevrolet, GMC, Oldsmobile,
Pontiac and Saturn brands, as well as others through its
affiliations with Suzuki, Saab, and Isuzu.  Non-automotive
operations include Hughes Electronics (satellites,
communications), Allison Transmission (medium and heavy-duty
transmissions), and GM Locomotive (locomotives, diesel engines).
GM has successfully spun off Delphi Automotive Systems, the
world's #1 auto parts maker.

Why We Like It:
With the DOW posting its 6th consecutive weekly loss and ending
at its lowest level since November 1997, it should come as no
surprise that our GM play is looking better day by day.  The
bulls attempted a rebound early in the week, but that was simply
good for the next attractive entry point into the play, as the
stock rolled over just above the $40 level at the 10-dma
(currently $39.31).  Earnings warnings are still coming fast and
furious and few stocks have been spared the resultant selling.
GM broke to a new multi-year low on Friday, and may be finding
support from the lows from 1993-1994.  But once the $36 support
level gives way, the bears will be setting their sights on the
bearish PnF price target, which has now fallen to $23.  This
reflects investors pessimism about the future of the automotive
industry, which has just come under greater pressure with the
West Coast dock shutdown that is already closing some plants due
to a lack of parts.  Look for the stock to remain under pressure
ahead of the company's earnings report, currently set for October
15th.  Conservative investors may want to consider harvesting
some gains near current levels, as the stock could be due for a
short-covering rally next week.  We really don't want to consider
entering new positions on a breakdown here, but want to wait for
the next failed rally in order to get in.  Resistance is now
building in the $38-39 area, and a rollover there would make
for a decent entry.  Lower stops to $39.50.

*** October contracts expire in 2 weeks ***

BUY PUT OCT-37 GM-VU OI=3764 at $2.75 SL=1.50
BUY PUT OCT-35 GM-VG OI=4049 at $1.60 SL=0.75
BUY PUT NOV-35*GM-WG OI= 737 at $2.90 SL=1.50

Average Daily Volume = 5.37 mln


---

TECD – Tech Data Corporation $25.53 (-1.72 last week)

Company Summary:
Tech Data Corporation is a provider and distributor of
information technology products, logistics management and other
value-added services.  The company distributes microcomputer
hardware and software products to value-added resellers, direct
marketers, retailers corporate resellers and Internet resellers.
TECD and its subsidiaries distribute to more than 80 countries
and serve over 100,000 resellers in the United States, Canada,
the Caribbean, Latin America, Europe and the Middle East.  The
company's broad assortment of vendors and products meets the
customers' need for a cost-effective link to those products
through a single source.

Why We Like It:
Another day, another multi-year low.  While that comment applies
to the NASDAQ, it also applies to a plethora of Technology-related
stocks, and our TECD play is just one of the many.  Bargain
hunters tried to nibble on the stock early in the week, but the
resulting rebound only resulted in giving us another attractive
entry point as TECD rolled over obediently from the declining
10-dma (then at $28.71) on Wednesday.  Since then, the action has
been down.  TECD is approaching major support at $25, and this
level could either produce an oversold rebound or another
breakdown.  The resolution of this question will likely be driven
by what happens in the broad market.  Given its oversold status, a
rally in the broader NASDAQ could stimulate some short-covering.
Unless there is some significant follow-through (which we haven't
seen for quite some time), that bounce will just set up the next
entry opportunity for puts.  Since the 10-dma has consistently
provided resistance over the past several weeks, we're looking for
it to continue to do so.  Should price test the $25 level early
next week, consider harvesting gains in open plays and look to
re-enter at a higher level.  That higher level is likely to
coincide with the 10-dma (currently $27.89).  Lower stops to $28
this weekend.

*** October contracts expire in 2 weeks ***

BUY PUT OCT-25 TDQ-VE OI=201 at $1.55 SL=0.75
BUY PUT NOV-25*TDQ-WE OI=350 at $2.55 SL=1.25

Average Daily Volume = 742 K



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*****
LEAPS
*****

VIX Points The Way
By Mark Phillips
mphillips@OptionInvestor.com

I doubt there's a trader who is active in the market that won't
tell you these are some tough markets to trade!  I've personally
traded very light lately due to conflicting signals to a degree I
haven't seen in quite some time, if ever.  Oscillators are
virtually useless when the trend is measured in hours, not days.
And dueling program trades whip the markets back and forth a
couple times a day, sometimes without apparent reason.  Rumors,
innuendo, asset allocation shifts.  These are the things that
seem to be moving our market.  The one over-riding concept that
we must keep in mind throughout is "It's a Bear Market".

Strange things happen in a bear market.  And for some reason, the
ugly underbelly of the market, as well as Corporate America gets
revealed for all to see.  The sight of that gruesome beast just
whets the appetite of many a bear, as they know how the investing
public will recoil in shock and fear.  Scandals beget mistrust,
which begets fear, which leads to selling, which leads to panic,
which is inevitably followed by short covering.  Once the
short-covering runs its course, the cycle repeats itself.  Right
now, we are vacillating between panic and short-covering..
sometimes both are seen in the same day, and investors can't seem
to make up their minds whether to panic or buy.  Thursday was a
perfect example of that as short-covering hit promptly at 10am,
as Bear Stearns covered their inadvertent short position of the
day before.  But as soon as that rally failed to hold its lofty
heights, the whole mess came crashing down and by the end of the
day on Friday, you sense just a tinge of panic in the air.  Not
much, but there was a bit of it.  How do I know this?  The VIX
gave me the clue.

If you read my Options 101 article on Wednesday, you'll recall
that I've been watching for the VIX to move out of its
consolidation zone that has been defining its range for some
weeks now.  If you missed that article, here is the link:

Looking for Odd Clues

Towards the end of that article, I showed a Point & Figure (PnF)
chart of the VIX, pointing out that the next directional market
move would likely coincide with the VIX either dropping below
40 (actually it would need to print 39) or breaking out over 48.
Well don't look now, but Friday's action led to the VIX actually
moving as high as 47.17.  Close, but no cigar.  Watch those two
levels on the VIX: 39 and 48, as I think the next significant
directional move in the broad markets will be accompanied by one
of those levels on the VIX being breached.  

While my gut feel is that we're due for another big downward move
as I've pointed out in recent commentaries, I can't ignore the
depth to which the Bullish Percent figures have plunged again.
Just for reference, here's where they are, relative to how far
they fell in July.

Index        Status             Bullish %     July Bullish % Low
Dow          Bull Correction       6%                4%
S&P 500      Bear Confirmed       24%               12%
S&P 100      Bear Confirmed       20%                8%
NASDAQ 100   Bear Confirmed       17%                8%
NASDAQ Comp  Bear Confirmed       28                22%

As you can see, all of the major indices' Bullish Percent
readings are now in oversold, although still above the extreme
readings posted back in July.  There could still be some
significant downside seen in the near future, but bears need to
be very careful due to the degree to which this spring has been
coiled.  Remember July 24th?  Remember that 650 point rally off
the lows?  That's what happens when the spring is released.  The
tighter it is coiled, the more energy will be released.  So if we
end up seeing the VIX top the levels seen in July in conjunction
with the Bullish Percent readings being at or near the levels
seen in July, we could be in for another powerful rally.  There's
no guarantee that it will play out this way, but if it does, it
could make for some nice trading profits as we head into the end
of the year.

As to what happens next week, I must say I really have no idea.
In all seriousness, I expect the broad markets to continue to
weaken throughout most of the earnings reporting season, and
then at some point investors will start ignoring the bad news.
If I know what that point would be, I'd be a very wealthy man.
Our job is to try to read the signs as they become visible, and
the VIX and Bullish Percent readings are two of the biggies that
have my attention right now.  Of course there are support levels
to contend with and depending on how you draw things, you could
make a case for the DOW right at major support, or (using the
descending channel I've written about in the past) you could make
a case for the SPX needing to fall all the way to the 720-730
area before it will be ready for the next solid rebound.  My gut
feel is that the truth lies somewhere in between, as the market
will do its best to confound as many of us as possible.
Fortunately, I don't have to nail the turning point in the broad
markets, because I'm focused on the technicals of a small group
of stocks, in which hopefully I can judiciously pick solid entry
points.

Speaking of the plays, let's take a look at what's on the menu
this week.

Portfolio:

SMH - That brief short-covering rally last week took the
Semiconductor index (SOX.X) up to important resistance, and
fortunately the bulls didn't have enough conviction to power
through.  With the warnings from AMD and EMC, the SOX traded to
new multi-year lows on Friday and despite a couple of rebound
attempts, closed very near its lows.  Wednesday's intraday high
on the SMH was just over our prior $21.25 stop, but the quick
retracement down to new lows was enough to keep our play alive.
Note that the SMH is now trading below the $19 level, and still
looking weak.  What is getting my attention though is the SOX
approaching the $200 level, which I think could provide the basis
for a decent rally.  Since that doesn't provide much more downside
in the play, I want to get really aggressive with the stop to keep
the risk balanced against the additional reward potential.  I
would not advocate new positions at this juncture -- now we're
just managing a play that is near its end.  Conservative traders
can use the currently depressed price to harvest gains.  We're
lowering the stop to $19 this weekend and any kind of rally that
sticks next week ought to bring the play to a successful end.

Watch List:

MO - Proving that MO is now under some serious distribution, the
bulls were thwarted in their attempt to push the stock back over
the $40 level.  After struggling back to that point (which is now
significant resistance), they got handed a huge serving of bad
news on Friday with the $28 billion judgment against the company
from a California court.  This environment is eerily reminiscent
of what we saw with the Tobacco stocks in late 1999 and early
2000 when litigation risk was around every corner.  Clearly, I'm
early to this play, and that is why it remains on HOLD for the
time being.  But I expect the court decision to be overturned or
at least substantially reduced in the future.  That will likely
coincide with the stock finding major support and rebounding
strongly.  While there is significant support near $35, the PNF
chart isn't nearly so optimistic, with its target of $23.  Bottom
line is that I'm unwilling to remove MO from the Watch List at
this point, but I also don't want to even consider new positions
until the air begins to clear.

BA - Finally!  An earnings warning finally cratered BA down
to our $32 target (actually $31.95) on Friday before the late-day
short-covering bounce lifted the markets off their lows.  This
satisfies the PnF bearish vertical count of $32 and now we just
need to see some technical strengthening in the chart to justify
a new long position.  The warning was significant, with the
aircraft manufacturer taking a 3Q charge that will amount to the
company falling 20 cents short when it reports earnings.  That's
a big blow, considering consensus estimates were for 66 cents
per share.  I considered adding BA into the Portfolio this
weekend, but the rebound off the lows just looked a bit too weak
for my tastes.  Let's watch it for another week and look for a
solid rebound off the $32 level before entering new positions.

MSFT - We didn't get much movement in MSFT last week...that is
until Friday's brutal selloff that drove the stock back under the
$44 level.  While we clearly aren't ready for new positions until
we get closer to my $38-40 target, the weakness on Friday is
encouraging to me.  A few more points and we'll have an attractive
opportunity setting up.  MSFT is still looking strong relative to
the broader market and when the next rally comes along (hopefully
with MSFT trading near our target), the stock should be a leader
to the upside due both to its relative strength and its prominent
position in all the major indices.

NEM - Despite the weakness in the broad markets, Gold really
didn't move much last week, and that left gold stocks to trade in
tandem with the equity markets.  As such, NEM drifted lower
throughout the week, coming to rest near the $26 level.  We're
getting closer to that major support near $24-25, and we need to
wait for that level to be reached and then provide support.  The
primary reason that I'm not in a hurry here, is due to the Weekly
Stochastics, which are only about halfway down to oversold.  We
have our target, and now we need to wait and see if it will
indeed provide support for the next leg of the rally.

As I said last week (and up above) I think this market is getting
ready to make a large move, but I don't know if it will be up or
down.  Based on the signals I'm looking at, I expect it will be
up, but I don't think there will be enough fuel to get that job
done until we navigate this treacherous earnings season.  Until
then, keep those positions small and the stops tight.

Have a great week!

Mark


LEAPS Portfolio

Current Open Plays

SYMBOL OPENED     LEAPS    SYMBOL  ENTRY   CURRENT  CHANGE  STOP

Calls:
None


Puts:
SMH    09/11/02  '04 $ 20  KBS-MD  $ 3.40  $ 5.60  +64.71%  $19
                 '05 $ 20  ZTO-MD  $ 4.70  $ 6.50  +38.30%  $19
LEN    10/02/02  '04 $ 50  KJM-MJ  $ 8.60  $10.00  +16.28%  $60
                 '05 $ 50  XFF-MJ  $11.20  $13.50  +20.54%  $60


LEAPS Watchlist

Current Possibles

SYMBOL  SINCE    TARGET PRICE  TARGETED LEAP  SYMBOL

CALLS:
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  HOLD          JAN-2004 $ 45  LMO-AI
                            CC JAN-2004 $ 40  LMO-AH
                               JAN-2005 $ 50  ZMO-AJ
                            CC JAN-2005 $ 40  ZMO-AH
MSFT   09/29/02  $38-40        JAN-2004 $ 45  LMF-AI
                            CC JAN-2004 $ 40  LMF-AH
                               JAN-2005 $ 50  ZMF-AJ
                            CC JAN-2005 $ 40  ZMF-AH
NEM    09/29/02  $24-25        JAN-2004 $ 30  LIE-AF
                            CC JAN-2004 $ 25  LIE-AE
                               JAN-2005 $ 30  ZIE-AF
                            CC JAN-2005 $ 25  ZIE-AE


PUTS:


New Portfolio Plays

LEN - Lennar Corporation $56.71  **Put Play**

While I didn't expect it to materialize quite so soon, LEN gave
us a nice entry point on Wednesday on the failed broad market
rally.  The stock pushed up to just below $59 and then reversed
right at that level of resistance from September.  As the broad
market rally failed, so did the rally attempt in the Housing
stocks, with the $DJUSHB index pulling back from its 20-dma and
50-dma, converged near $318.  That reversal turned out to be
important as the index sold off sharply through the remainder of
the week, breaking mild support near $290 and then coming to rest
on major support at $280 as the week drew to a close.  Despite
its recent strength relative to its peers, LEN followed the group
lower, falling below $54 and closing fractionally below its
200-dma ($53.69).  We can't quite call this a breakdown yet, as
LEN still needs to violate its 50-dma ($53.13) and more
importantly trade below $52.  A trade below $52 will generate a
double-bottom breakdown on the PnF chart and start tilting the
scales more in favor of the bears.  Our entry point was triggered
on the failed rally on Wednesday, making the Portfolio play live.
We are starting with a stop at $60, just above the $59 resistance.
Traders still looking to enter the play will want to do so on the
next failed rally, ideally in the $56-57 area.  But with both the
daily and weekly Stochastics in full bearish decline, it looks
like down is the direction of least resistance.

BUY LEAP JAN-2004 $ 50 KJM-MJ $ 8.60
BUY LEAP JAN-2005 $ 50 XFF-MJ $11.20


New Watchlist Plays

JNJ - Johnson & Johnson $56.95  **Call Play**

It may come as a surprise to see a DOW stock on the Call list
this weekend, with the Dow Jones Industrials breaking to their
lowest closing level since November 1997, but a quick look at
the JNJ chart should alleviate most of those concerns.  Rather
than heading down to retest its July lows with the rest of the
market, the stock has been trading sideways for the past 2
months.  It is interesting to note how the Pharmaceutical index
(DRG.X) has failed to sell off with the rest of the market, as it
consolidates above the $275 level.  The latest bout of selling in
JNJ ran its course near the $52 level, where buyers started to
appear and pushed the stock right back to the $56 resistance level
early last week.  That set the stage for a bit of excitement when
we got some important news out of the 'stent' market.  JNJ, GDT
and BSX are the 3 main players in this area of the market and a
negative ruling for GDT was to the benefit of JNJ and BSX.  That
news propelled JNJ as high as $59.11 on Thursday, and that is
important.  Turning to the PnF chart, the trade at $57 created a
Triple-top breakout and the additional 2 X's (up to $59) removes
the risk of a bull trap.  The current vertical count now points
to $74 as a tentative upside target.  As we head into the heart
of earnings season, there is still the risk of more warnings, so
we want to be patient about initiating new positions.  With the
daily Stochastics just starting to roll over, it looks like we
could get an attractive entry into the play over the next week
or two.  Another measurement of the stock's relative strength is
that the weekly Stochastics have just started to reverse upward
without falling into oversold.  There should be some mild support
near $56, with that support building in strength by the time the
$54 level is reached.  Look to open new positions near the $54-55
level, and we'll set our stop initially at $51, which is just
below the intraday low in late September.

BUY LEAP JAN-2004 $60 LJN-AL
BUY LEAP JAN-2004 $55 LJN-AK **Covered Call**
BUY LEAP JAN-2005 $60 ZJN-AL
BUY LEAP JAN-2005 $50 ZJN-AJ **Covered Call**


Drops

QQQ - $20.72 After a couple of attempts, the bears finally pushed
the QQQ under our $21 stop on Monday, paving the way for further
weakness.  It took until Friday to really get the ball rolling,
but by the end of the week, we could really see the NASDAQ
starting to crumble.  Sure, there was a short-covering rally at
the end of the day, but I don't see this as a turning point just
yet.  There have just been too many warnings and a complete lack
of good news in the marketplace.  In hindsight, we might have
done well to have a tighter stop, but from a technical
standpoint, $21 certainly made sense.  We may try another bullish
play on the QQQ in the fairly near future, but for now, we need
to let the bears have their way.  Aggressive traders that want to
give the play one more chance might look to re-enter on a dip near
$20, with a tight stop at $19.  But for now, the LEAPS column is
idle the QQQ.


**************
TRADERS CORNER
**************

If You Can’t Beat Them, Join Them
By Mike Parnos, Investing With Attitude

It’s amazing how many traders are sitting with a stash of cash, 
bonds, and T-bills.  They’re waiting for a sign from above that 
it’s OK to get back into the market.  When will that happen?  
When pigs fly.

Well, let’s see if we, at the Couch Potato Trading Institute 
(CPTI), can get some of these porkers airborne and make some 
money.  

At this writing, the OEX index is trading at $409.20.  We believe 
that the downtrend is still intact.  How can we take advantage of 
continued downward movement – and reduce our risk to almost 
nothing?

Impossible you say?  At the CPTI, almost anything is possible.  
If we can put a man on the moon, Hannibal Lecter into another 
movie, and Anna Nicole Smith into Spandex, we can move mountains 
(that may be redundant).

The Position
We like the OEX index because it’s a cash settlement.  It’s not a 
stock.  That means there is no risk of early assignment 
regardless of how deep in the money an option becomes.

As usual, we will use a 10-contract position for our example.  
You should obviously adjust your position to accommodate your 
risk tolerance and account size.  
Sell a Nov. OEX $410 call 	@ $21.00
Buy a Nov. OEX $425 call 	@ $14.20
			Credit:	   $6.80
			Risk:		   $8.20

To make the math easier, let’s assume for a moment that you’re a 
shrewd trader and manage to shave an additional $.20 off the 
spread.  That would make your credit an even $7.00 and your risk 
an even $8.00.  I like round numbers better.  I like a lot of 
round things . . . twinkies, bagels, pizza, Jennifer Lopez . . . 
The list goes on and on.

This strategy requires a substantial sized account.  There may be 
large margin requirements when placing the adjustments. The 
initial maintenance requirement on a 10-contract position is 
$8,000 (difference between the strikes -- $15 -- less the credit 
received -- $7.00 -- for the 10 contracts.  Notice that, it’s the 
same as the initial risk.  

The Plan
Now, I said that the risk would be reduced to almost zero.  We’re 
going to accomplish this by having a plan (What a unique 
concept!) – a way to adjust the position should it go in the 
wrong direction.  Here’s the plan:

If the OEX cooperates and stays below $410, we’re in Fat City (I 
personally , live in Cholesterol City – which is conveniently 
located between McDonalds, KFC and Dunkin Donuts).  No 
adjustments would be necessary and we all live happily ever after 
– with fries and a hot apple pie.

If the OEX becomes a PIA and starts to trend in the other 
direction: 
1. We wait until it gets to a point where it costs $14 to buy 
back the short call.  At that point, we buy back the 10 short 
$410 call contracts for $14.  We wait for that large of a 
movement because we hope, if the short strike is violated, that a 
new trend is starting.  We don’t want to be whipsawed back and 
forth.
2. We were wrong about the initial direction.  So what?  It’s not 
the first time and certainly won’t be the last. It broke, the 
chart lied, but it’s fixable.  If we can’t beat them, we’ll join 
them.

Let’s look over to the put side of the option chain.  We are now 
going to find a bull put spread, at or below the current OEX 
value, that will enable us to take in a credit of $7.00 – and 
sell 20 contracts – that will effectively replenish the $14 we 
just spent to buy back the short $410 calls. 

In order to achieve the $7.00 credit in the new bull put spread, 
it might be necessary to widen it a bit – thereby increasing your 
maintenance requirement.  For example, instead of a $15 
difference between strikes, it might require a $20 difference 
between strikes.  If you took in $700 per spread, your risk would 
be $1,300 per spread.  Ten contracts would require $26,000 in 
maintenance. Sounds like a lot, but it’s not really at risk – if 
you follow the plan.  It’s just to give the broker some peace of 
mind.

When we discuss maintenance, remember that maintenance does not 
have to be in the form of cash.  If you have bonds, mutual funds, 
stocks or other securities, the maintenance can be applied 
against their marginable value.  Make sure your bungee cord is 
attached before you jump – and confirm length of the cord, too.  
Call your broker and check out their margin policies.

Note that, after our little flurry of trades, our original $7.00 
($7,000) credit is still intact – less a few commissions.  Now, 
if the OEX continues trending up, everything is just dandy.  
However, if it reverses, we have to repeat the process – by going 
in the other direction.

We’re hoping for a trend, and it doesn’t really matter what 
direction.  It doesn’t have to last forever – four or five weeks 
is plenty.  We’re willing to go with the flow and that’s how we 
position ourselves.  You’ll never look more forward to option 
expiration.

I guess we got those pigs to fly after all.  At least we got them 
up in the air.  If you don’t follow the plan, they may crash land 
– and that would be messy.  Keep some white bread and mayo handy 
just in case.
_________________________________________________________________

The Land of “What If . . .”
When analyzing strategies and potential trades, it’s often 
difficult to take everything into consideration.  At first, a 
strategy may seem foolproof, but there “ain’t no such thing.” 

If it looks too good to be true, someone (maybe even you) is 
pulling your chain.  It requires a side trip – to the land of 
“What If . . .”  Explore all potential scenarios and evaluate 
each one before entering a trade.  Below is a reader question 
that shows the process.  Do the work!  It may save you a big 
surprise and possibly an even bigger loss.

Hi Mike,
First, I really appreciate your commentaryand that of all the OI crew. 
Please comment on this strategy.  I have an IRA in which I am limited to 
writing covered calls and buying protective puts.
Buy 100 shares of DIA 	@ $77.23
Sell October $64 Call	@ $13.30
Buy January 04 $84 Put	@ $14.20
Total Cost:		        $78.13

I’m thinking that, if DIA closes under $64, its profit is $19.17.  
The break even is $83.17, and the maximum loss is $.83 if it 
closes over $84.
I would plan to repeat the process in succeeding months with the 
same Put.
I guess I'm looking for verification that I'm approaching this 
correctly or if I'm all wet and where I'm going wrong.
Thanks.

Response:
Thanks for the kind words.  OK, let's travel into the land of "What 
If..." to see if this strategy works.
 
Your cost is $78.13 ($77.23 + $14.20 = $91.43 - $13.30 = $78.13)
Example 1:
What if --- DIA is at $72 at October expiration?
1. DIA is called away at $64.00
2. Cost of DIA stock purchase was $77.23 -- resulting in a debit 
of $13.23
3. Value of Jan. 04 Put = $17.00. ($84.00 - $72.00) 
4. Value of position:  $64.00 + $17.00 = $81.00
5. Position ($81.00) less cost of establishing position ($78.13) 
= $2.87 Profit
 
Example 2:
What if -- DIA is at $84 at October expiration?
1. DIA is called away at $64.00
2. Cost of DIA stock purchase was $77.23 -- resulting in a debit 
of $13.23
3. Value of Jan. 04 84 Put = $13.00. (Appx. At-The-Money Value)
4. Value of position:  $64.00 + $13.00 = $77.00
5. Position ($76.00) less cost of establishing position ($78.13) 
= $2.13 Loss
 
Example 3:
What if -- DIA is at $62 at October expiration?
1. Short Oct. $64 call expires worthless.
2. Cost of DIA stock purchase was $77.23 -- resulting in a debit 
of $13.23
3. Value of Jan. 04 84 Put = $24.50. (Est.)
4. Value of position:  $62.00 + $24.50= $86.50
5. Position ($86.50) less cost of establishing position ($78.13) 
= $8.37 Profit
 
You can only profit from this trade if: 
a) DIA tanks severely in the first option month (Example 3) and 
you close out the position for a small profit; or 
b) DIA gets called away in the first month (Example 1), then you 
re-establish the position for November, using the same long put.  
The problem is that, if you don't cash in your put, you take the 
chance of DIA moving back up.  If DIA moves up, the value of the 
long put will go down.  You can only make money if DIA continues 
down every month.  Every month you continue to put on the 
position using the same long put, you are risking the total value 
of the long put.
______________________________________________________________

Iron Condor Update:
BBH finished this week at $76.80.  We got bounced around plenty 
this week on the BBH roller coaster.  Maybe this time the silly 
index will stay below $80 and, preferably, really tank below $75 
so we can make some serious money.  Once again we’re short the 
1,000 shares.  Our profit is intact (less a few more 
commissions).  “And the beat goes on . . .” 
______________________________________________________________

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.  
mparnos@OptionInvestor.com  


**************
TRADERS CORNER
**************

Volume: Confirming or diverging from price trends 
By Leigh Stevens
lstevens@OptionInvestor.com

The chart below, which is a daily bar chart of Cisco Systems 
(CSCO) for a period last year, shows the usual method of 
displaying volume along the bottom.  Each day’s volume figure is 
directly under the bar, line (close) or candlestick that 
represents the same day’s price history.  

The display of volume bars, a type of histogram, is such that the 
top edge represents and is drawn at the level where that day’s 
total shares falls on the right hand volume scale.  Weekly volume 
is the cumulative total for the week. 



   

Charles Dow made an observation that volume expands in the 
direction of the trend.  That is, for volume to “confirm” the 
direction of the trend, daily trading volume should be increasing 
on up days when the trend is up and increasing on down days when 
the trend is down.  

The period above on the left side of the chart was a situation 
where the daily volume trend was increasing (noted by the dashed 
upward sloping on the volume bars) when the trend was declining – 
we can say then that volume is “confirming” (the trend).  

However, the period shown on the right in the chart above had 
daily volume DECLINING, on balance, when prices were trending 
higher.  Volume was NOT confirming a new up trend and in fact, 
the volume “divergence” was suggesting to short/buy puts on the 
stock – of course today we have Cisco trading under $10 per the 
current chart below. This chart can be used to make some current 
points on the recent trend in this stock.  



 

While there were some periods when volume was expanding on an 
upswing, this situation did not generally last long and the last 
part of the rallies, noted by the up trendlines, started to see 
daily volume subsiding or contracting.  

For the most part we see volume increasing in the direction of 
the dominant trend, which is down.  When there were divergences 
in volume relative to the tail end of the rallies shown, we could 
say that these instances were volume divergent sell indications 
or signals. 

ON BALANCE VOLUME (OBV)-

There is another volume study that is important to study of the 
trend – sometimes this Indicator will best highlight a divergence 
in volume versus price. On Balance Volume or OBV is another way 
of measuring what is happening to the volume trend. 

OBV also uses daily stock trading volume for its construction and 
was devised by Joe Granville, a legendary market analyst who was 
especially well known in 60’s through the 1980’s.  Granville is a 
very colorful trader/analyst who, at times, seemed to be more of 
a showman than an analyst and market advisor.  However, his 
market knowledge was through and his market insights often very 
accurate.  One such insight furthered Dow’s concept that volume 
should increase in the direction of the dominant trend.  On 
balance volume provided some further assessment of this principle 
and enhanced volume analysis.  

To construct the OBV indicator, a running total of volume is 
kept.  Assume we started with a stock that traded a million 
shares on day 1.  This is a neutral starting point, as we have to 
start somewhere.  If the stock closes higher the next day and 
trades 750,000 shares, day 2’s volume figure is added to the 
first day and assigned a positive number because our running 
total is a positive number; OBV is now a +1,750,000.  [NOTE:  OBV 
would be a negative number if our example stock closed lower on 
day 2, on 1,500,000 shares: OBV would be a minus 500,000.]  On 
day 3 the stock closes lower on 500,000 shares and we subtract 
that day’s volume from our cumulative OBV total: on day 3, OBV is 
+1,250,000.  When the stock is unchanged in price on day 4, we 
leave OBV unchanged at +1,250,000.  This kind of calculation 
continues on into the future.  

If we graph the points, the resulting line will start moving 
upward or downward following the direction of the price trend of 
the stock for which OBV is being calculated.  

An example of OBV is provided in the chart below (VeriSign Inc – 
VRSN), with its corresponding on-balance volume (OBV) indicator.  
This example is useful in that it shows OBV when its cumulative 
total is both a negative and positive number.  We are primarily 
concerned with the direction of OBV, or is the line moving up or 
down.  



 

If the direction is up, the OBV line is bullish, as there is more 
volume on up days than on days when the stock price is down.  A 
falling on-balance volume line is bearish, as more stock is being 
traded on down days than on up days.  If both price and OBV are 
moving up together, it is a bullish sign suggesting higher prices 
ahead. If both price and OBV are moving down together, this is a 
bearish indication for still lower prices.  

However, if prices move higher during a period of time when OBV 
lags or moves lower, this is a bearish divergence indicating 
diminishing buying activity and warns of a possible top or trend 
reversal – an upside reversal is forewarned by OBV above.  

A divergence in technical analysis of course being what occurs 
when one component to market activity goes in one direction and 
another related component goes in an opposite direction.  The 
above chart has prices going in one direction (down) before the 
trend reversed and OBV going in an opposite direction (up).  

The bullish OBV divergence occurring in this downtrend indicates 
that the sellers are becoming less active.  This concept also 
goes to the idea that volume activity can precede a change in 
price direction.  

I do not suggest taking action BEFORE price activity also 
confirms what volume activity has suggested.  You can be on the 
alert however - ready to take appropriate action.  The chart 
above, an example of an upturn in OBV preceding a reversal of a 
downtrend in VeriSign during the period shown, still looks to be 
a secondary uptrend, within a primary downtrend.  But for a 
trader in the stock or its options, the OBV/price divergence 
prompted a profitable exit on puts and a trade in the calls.  

It could also have been the beginning of a reversal in the major 
trend in the stock but that would have to have been confirmed by 
subsequent PRICE action – a rally would have to exceed a prior 
significant upswing high and so on.     

The idea I mentioned that “volume ‘precedes’ price” might be 
better said as volume may sometimes move ahead of price trends.  
This goes back to what Dow talked about when some group with good 
insight into the probably end of bull or bear market start doing 
the opposite of the crowd.  At first this activity will not cause 
much of a change in the trend. Over time this “smart money” group 
will do enough buying or selling that their buying or selling 
volume will cause prices to start to move opposite the major 
trend.  As volume picks up and prices move according, this 
activity attracts more interest and attention and trading 
activity starts to snowball.  In this sense, volume precedes 
price. 

We don’t see volume picking up on any key stocks on rallies on 
key bellwether stocks on any sustained basis currently. We did 
see a volume spike on at the July bottom in GE per it’s chart 
below, but notice what happened to the divergent volume trend 
after that low.  With the lack of volume “confirmation” on pretty 
much the entire rally, a technical trader would have been licking 
their chops at the prospect of shorting the stock as soon as the 
rally stalled at the top or on the confirming trendline break. 



 

Notice that when GE started declining again in recent weeks, the 
tendency for increasing daily volume went back to “confirming” 
the primary price trend as both price and volume were going in 
the same direction.  Volume analysis is obviously not a 1-2 day 
affair – the bear market we’re in there are many instances where 
volume spiked up, accompanying an apparent trend reversal. 

However, in the case of such a dominant downtrend, a continued 
rally in most stocks has not seen volume also increasing on any 
sustained basis. Rallies mostly influenced by short-covering can 
be easily spotted - prices go up as shorts buy back their 
positions and sellers hold off waiting for higher prices. Hence 
volume is lackluster due to the absence of substantial NEW 
buyers.

In a bull market the declines will tend to have declining volume 
as early buyers take profits but sellers do not press the short 
side and potential buyers wait to buy a dip – when some news or 
event then sparks a rally, buyers jump in again and a next rally 
phase sees increasing volume. 

Note the divergent volume sell points (red arrows) on MO below, 
as volume either on a daily or on-balance basis, was not 
confirming the moves to new highs on the rallies highlighted. 



 
 
There was also a noteworthy volume or selling “climax” on the 
stock in late-June. This turned out merely to be an indication to 
cover shorts or buy back puts.  The rally that followed in July-
August was a short/put buy waiting to happen as suggested by the 
fact that volume was not also trending higher.

Volume it should always be noted is a secondary indicator to 
price.  Price is the dominant measure of trend in a stock or 
index.  Volume will typically (or, “should”) confirm the 
direction of the price trend by larger volume activity on 
upswings in a bull market and larger volume in downswings in a 
bear trend. Traders need to respect the trend and not go against 
the trend just because of a volume divergence - until price 
action shows that the time is right to act.  

Dow considered the confirming volume rule to apply to the primary 
or major trends only and also indicated that volume does not 
“have to” confirm price activity, as price is the chief 
determinate of trend.    

I find validity in the rule of thumb about volume expansion as 
applied to intermediate or secondary trends or even minor trends 
also, but agree that the biggest volume will be in the direction 
of the primary trend. We should see the current bear market start 
to end when volume starts to taper off again on the further 
declines.  The amount of liquidation we’re seeing as volume has 
picked up on declines, especially in the S&P stocks now that the 
S&P 500 P/E ratio is again a more “normal” 16 (down from 40 at 
the top), could suggest that the market is in a bottoming 
process. 


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The Option Investor Newsletter                   Sunday 10-06-2002
Sunday                                                      5 of 5


In Section Five:

Covered Calls: Trading Basics: Overcoming The Effects Of Human 
   Nature
Naked Puts: Investing 101: Market Cycles Revisited
Spreads/Straddles/Combos: Stocks Tumble To New Lows!

Updated In The Site Tonight:
Market Watch
Market Posture


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*************
COVERED CALLS
*************

Trading Basics: Overcoming The Effects Of Human Nature
By Mark Wnetrzak

When it comes to money and investing, people are irrational.  In
fact, the notion of the irrational investor is the basis for many
of the market strategies used by professionals.

In trading more than any other vocation, we rely heavily on our
instincts, either through unrealistic goals or expectations, based
on our previous experiences.  Rather than reasoning in the present,
we often rely on acquired associations (the past) or idealistic
perceptions (the future) to help make difficult judgments.  With
that in mind, it's easy to see why the ability to remain focused
on the present, evaluating each play based on its current merits
and assessing the trade as it unfolds, is one of the most difficult
skills for a person to develop.

Before a trader can learn to make timely and effective adjustments,
he must understand his personality and know his individual faults
and limitations.  The stock market has a unique way of reflecting
the fundamental emotions and character of humans and in addition
to offering great financial rewards, it can also help us to know
ourselves better.  Before entering a position, you must recognize
the anxiety it might produce and be prepared to base your trading
decisions on sound ideas rather than impulses or "gut" reactions.
Taking the emotion out of trading can be very difficult, however
it is achievable if you have the discipline to develop and follow
a trading plan.

Just as a business plan describes in detail the establishment and
development of a potential venture, a trading plan outlines the
proposed structure for participation in the financial markets.
In most venues, there are two primary requirements of a trading
plan: a method of price prediction which signals if and when to
initiate a position and a money management system which prescribes
the maximum amount of portfolio capital to risk on any one trade.
Strategies that involve stocks or options must also specify when
to take profits and cut losses, and include a means to correctly
position trading stops.  Since the optimal management of winning
plays is the key to success in any probabilities-based strategy,
special attention must be given to techniques that protect gains
once they are achieved.  While adhering to the parameters of the
trading plan is paramount to consistent profits, the system must
also remain flexible in the sense that it should be constantly
evaluated so as to improve its overall performance.

Some of the most common suggestions for developing a successful
approach to the market include:

1) Develop a clear profile of your unique personality, emotional
   traits and personal limitations.  Realize that success will
   come when you create a favorable balance between hard work,
   sound judgment and patience.  Too many traders give up after
   a few losing plays, long before they have time to learn and
   absorb the various methods required for profitable trading.

2) Learn fundamental and technical analysis methods that will
   help you understand the trends and cycles of the stock market.
   Know your strategy, its advantages and weaknesses and only use
   techniques that fit your trading style and portfolio outlook.
   Also, if the strategy is not appropriate for your financial
   condition, it must be avoided, regardless of how attractive
   it appears.

3) Trade a fully diversified portfolio and do not devote more
   capital to a specific position than is warranted by the size of
   your portfolio.  Trade liquid markets as those with less than
   adequate volume can create excessive slippage when entering and
   exiting positions.

4) Devise a personalized system that is appropriate solely to
   your specific situation.  Paper trade to safely gain valuable
   experience and avoid the tendency to jump from one scheme to
   another, particularly following a losing period, without
   thoroughly testing the new plan before adopting it.  Remember,
   in all cases, the key to success is to limit losses, exploit
   winning positions and maintain a conservative outlook with
   regard to portfolio risk.

Trade Wisely!


SUMMARY OF PREVIOUS CANDIDATES
*****
Note:  Margin not used in calculations.

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

CRY     2.94   2.43   OCT   2.50  0.75   $  0.24  11.9%
NWRE   13.75  12.61   OCT  12.50  1.90  *$  0.65   7.9%
PLMD   26.25  27.24   OCT  25.00  2.35  *$  1.10   6.7%
ISIS    9.15   9.03   OCT   7.50  1.95  *$  0.30   6.0%
UTSI   16.25  16.20   OCT  15.00  1.80  *$  0.55   5.5%
CVC     9.48   7.49   OCT   7.50  2.50   $  0.51   5.3%
QCOM   28.08  29.26   OCT  25.00  4.20  *$  1.12   5.1%
RTIX    8.00   7.90   OCT   7.50  0.75  *$  0.25   5.0%
BSTE   29.40  27.29   OCT  25.00  5.70  *$  1.30   4.8%
NOK    13.95  13.03   OCT  12.50  2.20  *$  0.75   4.6%
NWRE   15.97  12.61   OCT  12.50  4.10  *$  0.63   4.6%
PPD    21.80  18.20   OCT  17.50  5.00  *$  0.70   4.5%
SYMC   34.30  30.05   OCT  30.00  5.20  *$  0.90   4.5%
KDE    23.39  23.77   OCT  22.50  1.55  *$  0.66   4.4%
FLE     6.02   6.40   OCT   5.00  1.30  *$  0.28   4.3%
CMLS   16.85  17.00   OCT  15.00  2.55  *$  0.70   4.3%
UDI    22.58  22.75   OCT  20.00  3.30  *$  0.72   4.1%
PRX    28.20  24.47   OCT  25.00  4.30   $  0.57   2.1%
GNSS    8.73   7.26   OCT   7.50  1.60   $  0.13   2.0%
MACR    8.49   7.05   OCT   7.50  1.45   $  0.01   0.1%
RSTO    5.70   4.50   OCT   5.00  1.20   $  0.00   0.0%
AES     2.92   1.98   OCT   2.50  0.75   $ -0.19   0.0%
OSTE    9.45   5.52   OCT   7.50  2.50   $ -0.50+  0.0%
LMNX    7.53   6.15   OCT   7.50  0.60   $ -0.78   0.0%

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

Comments:

The grind lower continues as the major averages fail to follow
through on any rallies.  Many of the positions in the covered-
call portfolio are acting a bit weaker than expected or are
at key moments.  This week, Osteotech (NASDAQ:OSTE) was hammered
after the company had to halt operations.  Nimble traders could
have exited the position for a break-even exit on the "dead-cat"
bounce.  Next week, we will also show Luminex (NASDAQ:LMNX) and
Restoration Hardware (NASDAQ:RSTO) closed.  As for AES Corp.
(NYSE:AES), if the stock can hold around $2.00, the ability to
sell new calls next month (or further out) seems viable relative
the risk.  $2.00 at risk verses say $30.00 - think Transkaryotic
Therapies (NASDAQ:TKTX).  With two weeks until expiration, money
management remains imperative.  The following stocks are acting
a bit worrisome and should be monitored closely as they are on
the CC early exit watch list: NWRE, ISIS, CVC, BSTE, PPD, SYMC, 
CMLS, and PRX.  When everyone quits trying to find the bottom, 
we'll find it! 



NEW CANDIDATES
*********

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

AMZN   16.55  OCT 15.00   ZQN JC  1.90 13453 14.65   14    5.2%
BCGI   10.30  NOV 10.00   QGB KB  1.10 0      9.20   42    6.3%
FDRY    6.02  NOV  5.00   OUJ KA  1.35 62     4.67   42    5.1%
IMCL    7.77  OCT  7.50   QCI JU  0.75 1801   7.02   14   14.9%
ISSX   13.65  OCT 12.50   ISU JV  1.70 445   11.95   14   10.0%
MENT    6.17  OCT  5.00   MGQ JA  1.35 114    4.82   14    8.1%
WWCA    2.71  NOV  2.50   WRQ KZ  0.50 17     2.21   42    9.5%

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

IMCL    7.77  OCT  7.50   QCI JU  0.75 1801   7.02   14   14.9%
ISSX   13.65  OCT 12.50   ISU JV  1.70 445   11.95   14   10.0%
WWCA    2.71  NOV  2.50   WRQ KZ  0.50 17     2.21   42    9.5%
MENT    6.17  OCT  5.00   MGQ JA  1.35 114    4.82   14    8.1%
BCGI   10.30  NOV 10.00   QGB KB  1.10 0      9.20   42    6.3%
AMZN   16.55  OCT 15.00   ZQN JC  1.90 13453 14.65   14    5.2%
FDRY    6.02  NOV  5.00   OUJ KA  1.35 62     4.67   42    5.1%


Company Descriptions

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

*****
AMZN - Amazon.com  $16.55  *** Internet Retail Giant ***

Amazon.com (NASDAQ:AMZN) is a website where customers can find
and discover anything they may want to buy online.  The company
lists millions of items in categories such as books, music, DVDs,
videos, consumer electronics, toys, camera and photo items, PC
software, computer and video games, tools and hardware, outdoor
living items, kitchen and house-wares products, toys, baby and
baby registry, travel services and magazine subscriptions.  At
its Amazon Marketplace, Auctions and zShops services, businesses
and individuals can sell virtually any product to millions of
customers, and with Amazon.com Payments, sellers are able to
accept credit card transactions in addition to other methods of
payment.  The company operates a U.S.-based Website: amazon.com,
and four internationally focused Websites: www.amazon.co.uk,
www.amazon.de, www.amazon.fr and www.amazon.co.jp.  Amazon.com
in July posted a second quarter net loss of $94 million, or $0.25
per share, but boosted its full-year sales outlook.  Last month,
Moody's Investors Service raised one of AMZN's ratings, saying
the Internet retailer has improved its ability to generate cash.
Investors who wouldn't mind owning the Internet's retail leader
near a cost basis of $14.50 should consider this position.

OCT 15.00 ZQN JC LB=1.90 OI=13453 CB=14.65 DE=14 TY=5.2%


*****
BCGI - Boston Communications  $10.30  *** Own This One! ***
 
Boston Communications Group (NASDAQ:BCGI), an S&P Small Cap 600
Index company and Russell 2000 Index company, is a leader in
transaction processing solutions for real-time wireless subscriber
management and payment services, delivering prepaid wireless,
mobile commerce, ATM Recharge, and other billing services.  In
1988, BCGI began providing solutions to carriers through a unique
combination of industry-leading proprietary software applications,
a scalable transaction processing platform, and its Intelligent
Voice Services Network (IVSN).  Through this nationwide real-time
infrastructure, BCGI provides one or more of its services to over
70 wireless carriers and resellers, including four of the top six
national carriers.  The firm's software, transaction processing
platform, and IVSN make up the company's Prepaid Wireless service
offering, a market leader in one of the highest growth segments of
the wireless communications industry.  Shares of BCGI have been on
the move in recent sessions and investors who like the outlook for
the company can establish a low risk cost basis in the issue with
this position.

NOV 10.00 QGB KB LB=1.10 OI=0 CB=9.20 DE=42 TY=6.3%


*****
FDRY - Foundry Networks  $6.02  *** Bottom Fishing! ***

Foundry Networks (NASDAQ:FDRY) is a provider of next-generation
networking products.  The firm offers high performance, end-to-end
switching and routing devices for enterprises and network service
providers.  Foundry designs, develops, manufactures and markets
solutions to meet the unique needs of high-performance network
infrastructures for Layer 2-7 switching and routing and for LANs,
Metropolitan Area Networks (MAN), Wide Area Networks (WAN) and
the Web.  Foundry offers global end-to-end solutions within and
throughout a customer's networking infrastructure regardless of
the geographically dispersed nature of the entire organization.
Foundry shares enjoyed new buying interest last week after the
firm indicated that its third-quarter results will be better than
expected.  The company CEO said that demand for Foundry's services
does not seem to be falling off and that "Backlog going into the
fourth quarter remains healthy as we concluded the third quarter
with a book-to-bill ratio greater than one."  That's good news for
this downtrodden issue and traders who believe the recovery will
continue can speculate on that outcome with this position.

NOV 5.00 OUJ KA LB=1.35 OI=62 CB=4.67 DE=42 TY=5.1%


*****
IMCL - ImClone  $7.77  *** Martha's Bane In A Trading Range ***

ImClone Systems (NASDAQ:IMCL) is a biopharmaceutical company 
whose mission is to advance oncology care by developing a 
portfolio of targeted biologic treatments designed to address
the medical needs of patients with a variety of cancers.  The 
company's lead product candidate, Erbitux (cetuximab), is a 
therapeutic monoclonal antibody that inhibits stimulation of 
epidermal growth factor receptor upon which certain solid 
tumors depend in order to grow. ImClone's next most advanced
product candidate, BEC2, is a cancer vaccine.  In addition to 
the development of its lead product candidates, the company 
conducts research, both independently and in collaboration 
with academic and corporate partners, in a number of areas 
related to its core focus of growth factor blockers, cancer 
vaccines and angiogenesis inhibitors.  IMCL has also developed
diagnostic products and vaccines for certain infectious diseases.
On Friday, ImClone announced that they and Bristol-Myers Squibb
(NYSE:BMY) are beginning a new round of clinical tests of Erbitux.
With all the "bad" news surrounding ImClone, traders have been
speculating on a near-term recovery in the stock.  This position
takes advantage of the over-priced options and the short-term
trading range of an issue that shows support at our cost basis.

OCT 7.50 QCI JU LB=0.75 OI=1801 CB=7.02 DE=14 TY=14.9%


*****
ISSX - Internet Security  $13.65  *** Computer Protection ***

Internet Security Systems (NASDAQ:ISSX) is a security software
company engaged in information protection solutions dedicated 
to protecting online assets.  The company's security management
solutions include software products, managed security services
and professional services that are made up of both consulting
and training services.  The company offers a comprehensive line
of products and services for enterprise, smaller enterprise,
consumer and service provider customers.  A Risk Impact Summary
Report (IRIS) released by ISSX on Wednesday for the 3rd-quarter
of 2002, revealed a 65% increase in computer system and program
vulnerabilities compared to last year.  That may prompt users
to buy more of their products and we like the long-term technical
support near the cost basis in this position.  Investors who are
interested in internet security stocks should consider this issue.
  
OCT 12.50 ISU JV LB=1.70 OI=445 CB=11.95 DE=14 TY=10.0%


*****
MENT - Mentor Graphics  $6.17  *** Raised Estimates ***

Mentor Graphics (NASDAQ:MENT) is engaged in electronic design
automation (EDA), providing software and hardware design tools
that enable companies to send better electronic products to
market faster and more cost-effectively.  Mentor manufactures,
markets and supports EDA products and provides related services.
Customers use the company's products in the design of automotive
electronics, video game consoles, telephone-switching systems,
cellular handsets, etc.  Mentor exploded on Friday after the 
company said it expected 3rd-quarter revenue and earnings to
exceed Wall Street expectations, helped by strong bookings in
North America and the Pacific Rim.  Mentor said bookings were
up more than 25% and they plan to announce earnings on 11/29.
Our outlook is also bullish, due to the technical break-out and
this position offers a low risk cost basis in the issue.  Try
target-shooting a lower net debit on any pullback to lower the
cost basis and raise the potential yield in the position.

OCT 5.00 MGQ JA LB=1.35 OI=114 CB=4.82 DE=14 TY=8.1%


*****
WWCA - Western Wireless  $2.71  *** Cheap Speculation ***

Western Wireless (NASDAQ:WWCA) is a leading provider of wireless
communications services in the western United States and abroad.
The company currently offers cellular service marketed under the
Cellular OneŽ and Western Wireless name in 19 western states. 
Through its subsidiaries, Western Wireless is licensed to offer 
service in 10 foreign countries.  Western Wireless has been
trading in a narrow range around $2.50 after rallying in August
on an upgrade by J.P. Morgan.  Analysts believe the company won't
falter on its lending agreements as its new roaming revenue from
Verizon Wireless and Cingular would offset the rate impact of a
three-year deal with AT&T Wirless (NYSE:AWE).  We simply favor
the basing formation which offers speculative traders a favorable
risk-reward potential.

NOV 2.50 WRQ KZ LB=0.50 OI=17 CB=2.21 DE=42 TY=9.5%


*****

*****************
SUPPLEMENTAL COVERED CALL CANDIDATES
*****************

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

TDY    17.62  OCT 17.50   TDY JW  0.75 178   16.87   14    8.1%
ESPD   10.38  OCT 10.00   ENU JB  0.70 328    9.68   14    7.2%
LGTO    2.78  NOV  2.50   EQN KZ  0.50 0      2.28   42    7.0%
V      11.95  NOV 10.00     V KB  2.80 34     9.15   42    6.7%
AG     23.28  OCT 22.50    AG JX  1.40 204   21.88   14    6.2%
SKM    22.50  OCT 22.50   SKM JX  0.60 285   21.90   14    6.0%
RFMD    6.36  NOV  5.00   RFZ KA  1.70 375    4.66   42    5.3%
AZN    32.30  OCT 30.00   AZN JF  3.00 10262 29.30   14    5.2%
XOMA    5.68  NOV  5.00   MBU KA  1.00 935    4.68   42    5.0%
UTHR   16.14  OCT 15.00   FUH JC  1.40 200   14.74   14    3.8%
LPNT   33.04  OCT 30.00   PUN JF  3.50 52    29.54   14    3.4%


*****************
NAKED PUT SECTION
*****************

Investing 101: Market Cycles Revisited
By Ray Cummins

With analysts clamoring for any historical trend or pattern that
might help identify a market bottom, it is interesting that very
few comments have been made about the possible effects of the
upcoming pre-election year.

Presidential elections have always been a part of the wavelike
advances and retreats of the equity markets and understanding how
they affect the long-term ebb and flow of aggregate stock prices
is an essential component of successful investing.  Historically,
the four-year presidential term has perpetuated a well defined
stock market cycle.  Most bearish trends occur in the first or
second year after elections.  Then the market improves because
each new administration usually does everything in its power to
boost the economy so that voters are in a positive mood for the
next election.  History suggests the winning streak will continue
and the market in pre-presidential election 2003 will gain ground
long before year's end.  Prospects improve considerably when the
market has spent a long period moving sideways or experienced a
correction, as it has in the past two years.  It's also no small
coincidence that the last two years (the pre-election year and
election year) of the 42 administrations since 1832 produced a
total net market gain of over 700%, well above the 235% gain for
the first two years of these administrations.  As well, the time
spent in office coincides with many significant historical events.
Wars, recessions and bear markets tend to start or occur in the
first half of the term while prosperous times and bull markets
usually follow in the latter half.

The current period offers an excellent opportunity to compare
present cycles with past trends and despite the prolonged bearish
activity in stocks, many historians believe that equity values
will flourish in 2003 as there hasn't been a down year in the
third year of a presidential term since the war-torn era of 1939.
In addition, the only severe loss in a pre-presidential election
year (since 1914) occurred just after the Depression in 1931.
Since 1914, the Dow's performance from a mid-term election year
low to a pre-election year high, on average, is an amazing 50%
gain.  The smallest advance was 14.5% seen during the period from
October 9, 1946 to July 24 1947, with the strongest advance of
87.6% posted between July 30, 1914 and December 8, 1915.  Many of
the mid-term lows also marked the end of bear markets.  Of the 22
periods since 1914, 13 included long-term stock market bottoms,
the last of which ended October 11, 1990.

Given the current environment, it is difficult to imagine the Dow
rising 50% in the next 12 months but that same rational was used
by investors in previous bear markets that ended during mid-term
election years.  They failed to seize the opportunity and missed
a chance to accumulate substantial wealth.  One thing we know is
that the complex facets of our economy that determine the overall
financial health of the nation as well as key events that affect
our country are anticipated by the emotion of the stock market.
Any study that compares these historical events with the movement
of the major indices will demonstrate how war, recession, and the
election of a new president influence the current cycle.  These
activities have a profound impact on the economy and the market
and that's why it is important to become familiar with repetitive
cycles in stocks and apply this knowledge as a practical part of
your long-term investment strategy.

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.


SUMMARY OF PREVIOUS CANDIDATES 
*****

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

CVC     9.94   7.49   OCT   7.50  0.25   $  0.24  15.5%
RGLD   18.70  19.37   OCT  15.00  0.45  *$  0.45  11.6%
PPD    21.41  18.20   OCT  15.00  0.60  *$  0.60  10.7%
ABFS   27.53  29.61   OCT  25.00  0.90  *$  0.90  10.4%
ULAB   18.83  19.67   OCT  15.00  0.40  *$  0.40  10.4%
AG     22.63  23.28   OCT  20.00  0.45  *$  0.45   9.5%
RGLD   18.05  19.37   OCT  15.00  0.50  *$  0.50   9.3%
UTHR   16.50  16.14   OCT  15.00  0.55  *$  0.55   8.5%
GILD   33.56  30.85   OCT  25.00  0.55  *$  0.55   8.2%
MMSI   20.14  21.42   OCT  18.00  0.35  *$  0.35   8.1%
UDI    24.25  22.75   OCT  20.00  0.30  *$  0.30   7.6%
BSX    30.18  35.14   OCT  27.50  0.85  *$  0.85   7.2%
AMZN   16.61  16.55   OCT  12.50  0.30  *$  0.30   7.2%
TTWO   29.45  27.95   OCT  25.00  0.35  *$  0.35   6.6%
UTHR   17.01  16.14   OCT  15.00  0.30  *$  0.30   6.4%
COF    38.92  30.38   OCT  27.50  0.60  *$  0.60   6.2%
PRX    28.20  24.47   OCT  22.50  0.25  *$  0.25   6.1%
SYMC   34.30  30.05   OCT  25.00  0.30  *$  0.30   6.1%
TTWO   26.20  27.95   OCT  20.00  0.30  *$  0.30   5.9%
FDS    25.95  22.57   OCT  22.50  0.35  *$  0.35   5.2%
INVN   35.76  30.51   OCT  25.00  0.45  *$  0.45   5.1%
STN    14.15  16.92   OCT  12.50  0.25  *$  0.25   5.1%
RMCI   25.80  22.23   OCT  22.50  0.60   $  0.33   4.7%
MDG    20.40  17.20   OCT  17.50  0.55   $  0.25   3.7%
BYD    18.61  16.99   OCT  17.50  0.40   $ -0.11   0.0%

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

Comments:

With Friday's precipitous declines, all eyes are now on the
S&P 500 index as it approaches the July 2002 lows near 775.
Despite the oversold conditions, it is unlikely that renewed
buying support will bring an end to the bearish activity.  In
fact, most experts now see a test of the low 700s, possibly
even a dip to 695 in the near future.  If further downside
movement occurs, traders should consider closing positions in
Boyd Gaming (NYSE:BYD), Factset Research Systems (NYSE:FDS),
Capital One (NYSE:COF), Cablevision (NYSE:CVC), Meridian Gold
(NYSE:MDG), and Right Management Consultants (NASDAQ:RMCI).

Positions Closed: 

Integrated Defense Technology (NYSE:IDE)



NEW CANDIDATES
*********

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

AMLN   15.80  NOV 12.50   AQM WV  0.40 13    12.10   42    8.1%
CYH    27.10  OCT 25.00   CYH VE  0.25 15    24.75   14    6.0%
HLYW   17.20  NOV 15.00   HWQ WC  0.60 10    14.40   42    8.2%
HOLX   11.74  NOV 10.00   QHX WB  0.50 0      9.50   42   10.5%
KDE    23.77  NOV 20.00   KDE WD  0.70 762   19.30   42    7.9%
OVER   23.40  OCT 20.00   GUO VD  0.30 457   19.70   14   10.4%
QCOM   29.26  OCT 25.00   AAW VE  0.30 17222 24.70   14    8.4%
UDI    22.75  OCT 20.00   UDI VD  0.25 296   19.75   14    8.2%

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

HOLX   11.74  NOV 10.00   QHX WB  0.50 0      9.50   42   10.5%
OVER   23.40  OCT 20.00   GUO VD  0.30 457   19.70   14   10.4%
QCOM   29.26  OCT 25.00   AAW VE  0.30 17222 24.70   14    8.4%
HLYW   17.20  NOV 15.00   HWQ WC  0.60 10    14.40   42    8.2%
UDI    22.75  OCT 20.00   UDI VD  0.25 296   19.75   14    8.2%
AMLN   15.80  NOV 12.50   AQM WV  0.40 13    12.10   42    8.1%
KDE    23.77  NOV 20.00   KDE WD  0.70 762   19.30   42    7.9%
CYH    27.10  OCT 25.00   CYH VE  0.25 15    24.75   14    6.0%


Company Descriptions

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

*****
AMLN - Amylin Pharmaceuticals  $15.80  *** New Drug Deal! ***

Amylin Pharmaceuticals (NASDAQ:AMLN) is a biopharmaceutical firm
engaged in the discovery, development and commercialization of
drug candidates for the treatment of diabetes and other metabolic
disorders.  The firm has exclusive rights to two drug candidates
that are in late-stage development for the treatment of diabetes,
SYMLIN (pramlintide acetate) and AC2993 (synthetic exendin-4).
The company has a third drug candidate, AC3056, in early stage
clinical trials, and maintains a focused research and development
program to discover and in-license additional drug candidates for
metabolic diseases.  Amylin recently announced a deal with drug
giant Eli Lilly that analysts say is rare in this market.  In
exchange for a big piece of future profit of its experimental
diabetes drug, AC2993, the biotech firm will receive $110 million
upfront from Lilly.  That amount could triple if Amylin reaches
all the deal's milestones.  Not only is Amylin getting a big cash
infusion, but it also will keep 50% of all U.S. profit and 20% of
foreign profit.  Investors who like the outlook for Amylin can
establish a low risk cost basis in the issue with this position.

NOV 12.50 AQM WV LB=0.40 OI=13 CB=12.10 DE=42 TY=8.1%


*****
CYH - Community Health Systems  $27.10  *** Health Services ***

Community Health Systems (NYSE:CYH) is a non-urban provider of
general hospital healthcare services.  In over 85% of its markets,
the company is the sole provider of these services.  In all but
one of its other markets, the company is one of two providers of
these services.  Community Health Systems receives payment for
healthcare services provided by its hospitals from the federal
Medicare program; state Medicaid programs; healthcare insurance
carriers, health maintenance organizations, preferred provider
organizations and other managed care programs, as well as patients
directly.  The company owns, leases or operates over 50 hospitals,
geographically diversified across 20 states, with an aggregate of
5,391 licensed beds.  Stocks in the Health Services sector are
performing well and this position offers a conservative basis in
one of the more bullish issues in the group.

OCT 25.00 CYH VE LB=0.25 OI=15 CB=24.75 DE=14 TY=6.0%


*****
HLYW - Hollywood Entertainment  $17.20  *** Solid Earnings! ***

Hollywood Entertainment (NASDAQ:HLYW) is a specialty retailer of
rentable home videocassettes, DVDs and video games in the United
States.  The company operates approximately 1,800 Hollywood Video
superstores in 47 states and the District of Columbia.  Most of
Hollywood's revenue was derived from the rental of movies in the
VHS and DVD format, as well as games.  The remainder of the firm's
revenue was generated from the sale of new and previously viewed
movies and games and concessions.  Unlike many video retailers
that have grown through acquisitions, the company has focused on
organic growth.  Of Hollywood's 1,535 video superstores opened
since 1995, nearly 95% of these superstores have been opened as
new stores.  The company seeks to open approximately 50 new stores
during 2002, and to increase its store base by approximately 10%
per year thereafter.  Hollywood Entertainment recently announced
that third-quarter same-store sales rose 7%, beating an internal
projection for 3% growth, and the video store chain raised its
earnings estimate for the quarter.  The company also said it's
expanding its game rental business amid strong results in that
segment.

NOV 15.00 HWQ WC LB=0.60 OI=10 CB=14.40 DE=42 TY=8.2%


*****
HOLX - Hologic  $11.74  *** FDA Approves New Cancer Screener ***

Hologic (NASDAQ:HLGC) is a developer, manufacturer and supplier
of diagnostic and medical imaging systems primarily serving the
healthcare needs of women.  Hologic focuses its resources on
developing systems and subsystems offering superior image quality
and diagnostic accuracy.  The company's core women's healthcare
business units are focused on bone densitometry, mammography and
breast biopsy, and on developing a unique, direct-to-digital X-ray
mammography system.  In addition, the firm develops, manufactures
and supplies other X-ray based imaging systems, such as general
purpose direct-to-digital X-ray equipment and mini c-arm imaging
products.  The company's customers include hospitals, imaging
clinics, private practices and other healthcare organizations
worldwide.  The firm's customers also include major pharmaceutical
companies that use it products in conducting clinical trials.
This week, Hologic received final approval from the Food and Drug
Administration for its DirectRay amorphous-selenium image receptor
for its LORAD Selenia Full Field Digital Mammography System.  The
Selenia generates digital mammographic images that can be used
for screening and diagnosis of breast cancer and is intended for
use in the same clinical applications as traditional screen-film
mammography systems.  Hologic said that with the final FDA approval,
it will begin marketing activities in the U.S. immediately, adding
that initial shipments of Selenia will begin this quarter.

NOV 10.00 QHX WB LB=0.50 OI=0 CB=9.50 DE=42 TY=10.5%


*****
KDE - 4Kids Entertainment  $23.77 *** On The Move! ***

4Kids Entertainment (NYSE:KDE) is a children's entertainment 
company.  The company acquires, with representation agreements,
intellectual property rights to children's properties from 
around the world.  Through its subsidiaries, the company seeks
to maximize the economic returns on the properties through TV
production and distribution and merchandise licensing.  4Kids
also provides media buying/planning, toy design/development,
and Website development.  The company operates through five
wholly owned subsidiaries: 4Kids Entertainment Licensing, 4Kids
Entertainment International, The Summit Media Group, 4Kids 
Productions, and Websites 4Kids.  4Kids' share price rallied
recently on speculation that a new show, "Yu-Gi-Oh" from Japan,
could offer property rights bigger than Pokemon.  On Thursday,
4Kids announced that it has signed an agreement with DreamWorks
Records to release an album based on the music in the Yu-Gi-Oh!
animated television series.  Technically, the issue has moved
up and out of a year-long trading range and the support near
the cost basis in this position offers a reasonable margin of
safety for traders who are bullish on the issue.

NOV 20.00 KDE WD LB=0.70 OI=762 CB=19.30 DE=42 TY=7.9%


*****
OVER - Overture Services  $23.40  *** Trading Range! ***

Overture Services (NASDAQ:OVER) is engaged in the provision of
pay-for-performance search services on the Internet.  Overture
operates an online marketplace that introduces consumers and
businesses that search the Internet to advertisers that provide
products, services and information.  Advertisers participating
in the company's marketplace include retail merchants, wholesale
and service businesses and manufacturers.  Overture facilitates
these introductions through its search service, which enables
advertisers to bid in an ongoing auction for priority placement
in the company's search results after editorial approval.  The
company's marketplace offers consumers and businesses quick,
easy and relevant search results for products, services and
information, while providing advertisers with a cost-effective
way to target them.  Overture is comfortably established in a
6-month long trading range and traders who think the company's
upcoming earnings report will be favorable can speculate on
that outcome in a conservative manner with this position.

OCT 20.00 GUO VD LB=0.30 OI=457 CB=19.70 DE=14 TY=10.4%


*****
QCOM - Qualcomm  $29.26  *** Entry Point! ***

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 recently announced that strong demand for
next-generation chips for wireless phones prompted it to raise
its shipment guidance for the fiscal fourth quarter.  The news
helped the issue move back to the top of an intermediate-term
trading range and this position offers investors reasonable
reward potential at the risk of owning the company at a cost
basis near $25.

OCT 25.00 AAW VE LB=0.30 OI=17222 CB=24.70 DE=14 TY=8.4%


*****
UDI - United Defense  $22.75  *** Defense Sector Hedge ***

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 recently started with a "buy" rating
by J.P. Morgan and industry analysts say the company's prospects
are favorable as the firm has signed a number of new contracts.
Defense stocks are likely to rally if the U.S. starts a war with
Iraq and this position offers a favorable way to hedge against a
sell-off in the broader markets if war erupts in the near future.

OCT 20.00 UDI VD LB=0.25 OI=296 CB=19.75 DE=14 TY=8.2%


*****

*****************
SUPPLEMENTAL NAKED PUT CANDIDATES
*****************

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

NPSP   22.33  OCT 20.00   QKK VD  0.40 73    19.60   14   12.4%
MGAM   20.48  OCT 17.50   QMG VW  0.30 33    17.20   14   11.8%
ADTN   19.63  OCT 17.50   RQA VW  0.30 15    17.20   14   10.8%
EW     25.85  OCT 25.00    EW VE  0.45 0     24.55   14    9.8%
FSH    30.78  OCT 30.00   FSH VF  0.50 0     29.50   14    9.0%
MOVI   17.03  NOV 15.00   QLV WC  0.55 0     14.45   42    7.5%
HMA    20.62  OCT 20.00   HMA VD  0.25 276   19.75   14    6.9%


SEE DISCLAIMER IN SECTION ONE
*****************************


************************
SPREADS/STRADDLES/COMBOS
************************

Stocks Tumble To New Lows!
By Ray Cummins

The major equity averages continued their recent decline Friday,
falling to multi-year lows amid concerns over waning corporate
profits, a sluggish labor market and an impending war with Iraq.

The Dow Jones Industrial Average fell 188 points to 7,528 on
weakness in Alcoa (NYSE:AA), Disney (NYSE:DIS), Philip Morris
(NYSE:MO), Boeing (NYSE:BA), Honeywell (NYSE:HON), J.P. Morgan
(NYSE:JPM) and International Business Machines (NYSE:IBM).  In
the technology segment, virtually every sector was plagued by
selling pressure and hardware stocks were among biggest losers
after EMC (NYSE:EMC) issued an unexpected profit warning.  The
NASDAQ Composite dropped 25 points to 1,139.  Among the broader
market groups, utility, financial and drug shares were sold off
while retail stocks saw limited buying interest.  The S&P 500
Index ended 18 points lower at 800.  Trading volume was average
at 1.82 billion on the NYSE and at 1.59 billion on the NASDAQ.
Market breadth was poor with falling issues outnumbering rising
issues 3 to 1 on the Big Board and over 2 to 1 on the technology
exchange.  Treasury instruments rebounded as stocks fell with the
10-year note adding 1/8 to yield 3.67% while the long bond rose
7/32 to yield 4.72%.  On the fund flow front, Trim Tabs estimated
that all equity funds had inflows of over $2 billion during the
week ending 10/3, compared with outflows of $7.3 billion in the
prior week.  Equity funds that invest primarily in U.S. stocks
had outflows of $500 million versus outflows of $6.7 billion in
the prior week.  Not surprisingly, bond funds enjoyed inflows
of almost $2 billion compared with inflows of $900 million the
previous week.

With the recent exodus from stocks, analysts continue to look
for indications of true capitulation and unconditional surrender
among retail investors.  Unfortunately, conditions such as heavy
volume during the big sell-offs and extreme fear in the sentiment
gauges have yet to emerge, thus the end of the bear market is
nowhere in sight.

*****************
PORTFOLIO SUMMARY
*****************

(As of 10-04-02)

PUT CREDIT SPREADS
******************

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

BLL     53.75  48.54  OCT   45  50  0.70   49.30 ($0.76)  Open?
OEX    446.00 403.22  OCT  395 400  0.45  399.55  $0.45   Open?
OHP     42.62  38.02  OCT   33  35  0.30   34.70  $0.30   Open
NOC    124.54 119.30  OCT  105 110  0.35  109.65  $0.35   Open
UOPX    32.11  29.85  OCT   25  30  0.55   29.45  $0.40   Open?

As noted last week, Ball Corporation (NYSE:BLL) and the bullish
portion of the OEX credit-spread strangle are candidates for
early exit.  University of Phoenix Online (NASDAQ:UOPX) has also
turned south amid bad news from DeVry (NYSE:DV), which was hit
for large losses after saying that fiscal first-quarter earnings
would come in below the consensus estimate due to the negative
impact of the technology recession on enrollment.  Conservative
traders should consider closing the position to limit losses.


CALL CREDIT SPREADS
*******************

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

OEX    446.00 403.22  OCT  500 495  0.45  495.45  $0.45  Open
SLAB    19.66  17.66  OCT   30  25  0.40   25.40  $0.40  Open
BRL     63.65  59.60  OCT   75  70  0.50   70.50  $0.50  Open
LXK     43.49  46.95  OCT   55  50  0.50   50.50  $0.50  Open
MMM    119.46 114.50  OCT  135 130  0.40  130.40  $0.40  Open
WFC     46.89  44.86  OCT   55  50  0.55   50.55  $0.55  Open
ASD     64.56  61.33  OCT   75  70  0.65   70.65  $0.65  Open
S       40.62  37.64  OCT   50  45  0.30   45.30  $0.30  Open


SYNTHETIC (BULLISH)
*******************

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

BYD    17.71  16.99   DEC  20  15  (0.15)  0.90   0.75  Closed
CVC     9.48   7.49   DEC  15   5  (0.10)  0.60   0.50  Closed
TARO   32.55  32.53   OCT  37  27   0.10   0.40   0.50  Closed
DIAN   46.10  42.05   NOV  60  35  (0.10)  0.10   0.00   Open
ERTS   67.73  62.96   NOV  75  60   0.40   0.00   0.40   Open?

Bullish synthetic positions in Boyd Gaming Group (NYSE:BYD) and
Cablevision (NYSE:CVC) have yielded favorable short-term profits.


SYNTHETIC (BEARISH)
*******************

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

MET    25.25  20.89   JAN  20  30   0.05   1.45   1.50   Open
PFE    30.75  28.55   JAN  25  35   0.15   0.80   0.95   Open
BRCD   12.33   5.82   JAN  10  15  (0.05)  8.90   8.85   Open?
MRK    45.74  44.26   OCT  40  50   0.10   0.45   0.55   Open
PGR    50.96  49.85   NOV  45  56  (0.10)  0.60   0.50   Open

Brocade Communications (NASDAQ:BRCD) was the big winner this
month with a closing credit of up to $8.90 as the issue traded
at a new 2002 low.


BULL CALL SPREADS
*****************

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

LUME    5.80   4.00   JAN    5   7   1.00   0.90  6.00   Open?


CALENDAR SPREADS
****************

Symbol  Pick   Last   Long-Opt  Short-Opt  Debit  M/V   Status

SGP    23.67  17.30   JAN-27C   OCT-27C    0.80   0.75  Closed
LEH    49.69  44.92   JAN-40P   OCT-40P    1.90   2.70   Open

Despite a lack of public news, Schering-Plough shares began to
decline early in the week on heavy volume and the activity left
investors and analysts scratching their heads for an explanation.
The reason came on Thursday when the company said its earnings in
2003 and 2004 would be far below consensus forecasts due to the
loss of patent protection for its top allergy drug Claritin.  The
announcement sent SGP's share value to depths not seen since late
1996, and if you did not exit the position during the initial
stages of the decline (along with the "inside" traders), there
was little value left in the long (call) option at Friday's close.


SHORT-PUT COMBOS
****************

Symbol  Pick   Last  Short-Opt  Long-Opt  Credit  M/V   Status

AES     2.92   1.98   J04-7.5   J03-2.5    4.50   4.25   Open


CREDIT STRANGLES
****************

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

ADRX   24.65  18.07   OCT  40  15   1.10   0.95   0.15   Open?
ISIS   8.97    9.03   OCT  15   7   1.50   0.50   1.00   Open
QCOM   28.58  29.26   OCT  32  22   1.50   0.50   1.00   Open
TKTX   34.41  12.71   OCT  45  25   1.55 (12.50)(10.95) Closed
PPD    21.80  18.20   OCT  25  17   1.95   1.30   0.65   Open?
STJ    36.29  35.20   OCT  40  30   1.00   0.55   0.45   Open
OMC    55.86  52.10   OCT  65  40   0.95   0.85   0.10   Open

Transkaryotic Therapies (NASDAQ:TKTX) was in the news this week
after the company said the Food and Drug Administration is not
satisfied that the drug, Replagal, significantly reduces pain
associated with Fabry Disease.  However, that was not the only
problem with TKTX as rumors circulated that company officials had
failed to disclose the FDA's concerns earlier, after reviewing
briefing documents sent to the company ahead of the advisory
panel meeting.  With the potential for another ImClone debacle,
investors were quick to punish the issue and the retribution was
far more excessive than anyone expected.  Even with our timely
exit on Thursday morning, the resultant 50% loss in share value
demonstrated why you should never sell puts on a stock you don't
want to own.

Questions & comments on spreads/combos to Contact Support
*****************************
READER'S WRITE E-MAIL REPLIES
*****************************

With the recent volatility in stocks, it was not surprising that
two readers commented on the use of indexes with credit spreads
this week.  Indeed, it is considered beneficial for the credit
spread trader to use index options rather than equity options as
a gap in one component of an index will not unduly affect that
index.  At the same time, a stock that gaps sharply in the wrong
direction (such as frequently occurs after an unexpected earnings
warning or a quarterly report) limits the ability to manage risk
in equity-option positions.  Here are some excerpts from a recent
commentary on the subject of index credit spreads.


Index Credit Spreads

To be successful with index credit spreads, traders must master a
number of skills:  First, one must correctly assess the direction
of movement and magnitude of the underlying stock or index.  For
credit spreads, the only objective is for the sold option to stay
"out-of-the-money."  This means you can be far less precise in
your forecast for the underlying, but it does not relieve you of
sound judgment about the overall character of the market and the
potential for volatility.  Considering the current outlook, it is
fortunate that index credit spreads can be profitable in a bearish
environment.  If you are trading bullish positions, make sure there
is technical support above the sold put (such as a moving average,
the bottom of an established chart pattern or a commonly recognized
trend-line) to increase the probability that both options finish
"out-of-the-money."  Of course, the opposite would be the case for
a bearish credit spread utilizing calls; overhead resistance or
supply or a technical "top" formation below the strike price of the
sold option.  Second, it is important to establish spreads that are
sufficiently distant from the current price of the underlying, so
the position can withstand a substantial (unexpected) movement in
the underlying market without undue risk.  If excess volatility is
a concern, you should consider establishing a larger cushion than
normal (a greater margin for error) to avoid getting "whip-sawed"
out of the position.  Successful credit-spread traders learn to
identify periods of extreme volatility and avoid those periods
unless they can be used to one's advantage in a position's set-up
(which is based on a longer-term timeframe and confirming technical
indications).
  
The basic questions related to position (strike) selection are: How
much downside are you willing to risk in return for the (relatively
small) profit achieved, and are you the type that manages his plays
more aggressively, with a focus on limiting losses before they
become substantial?  In addition to defining the fundamental style
of your trading, the first question also relates directly to option
pricing theory because we know that option prices are determined
from historical and statistical data, and that in all but the most
extreme cases, the market trades inside the 2nd standard deviation
of a normal distribution.  That area is generally equivalent to the
3%-5% monthly (annualized) return offered in conservative strategies
such as deep-OTM credit spreads.  Thus, if you want to have a high
probability of making a low profit (one way, but not necessarily the
best method of option trading), target positions that are in that
range.  The second part of the question is probably more important
since it relates to the fact that success with a low profit, high
probability approach to the options market is based on limiting
losses to a minimum.  There are never any big winners to offset the
big losers, so there simply can't be any big losers.  All option
trading strategies, including OTM credit spreads, need to have some
type of exit (or adjustment) point or signal in case the market,
stock, or sector turns in the opposite direction from that which is
expected.  Obviously, a gapping issue will occasionally wipe out a
portion of previous gains and there is nothing you can do about it.
At the same time, traders must endeavor to manage the remaining
positions effectively or there will be no profits to offset the
rare catastrophic losers.  The key to success with a strategy such
as OTM credit spreads is the position management that follows the
initial trade and in all cases, remember the adage: Traders become
successful when they learn to take small profits regularly and they
don't let losing plays significantly erode capital.

The basic approach to analysis of these broader instruments is much
the same as with any financial issue: Define the primary trend, the
support and resistance areas, the historical volatility (which leads
to a probability assessment) and any potential news or events that
could affect the future price of the underlying issue.  Regarding
the target time frame with index spreads, most experienced traders
use expiration dates within three months, as there is simply too
much potential for a major change in character in the underlying
market in longer-term positions and the premiums are generally not
as favorable on a relative basis.  As far as position management
and adjustment strategies, they are similar to those utilized in
equity-based credit spreads: close, cover or roll-out; all of which
have been covered at length in the strategy narratives on the OIN
website (look in the newsletter archives on the left side of the
home page).


One more thought...

Traders who employ index-based credit spreads often hedge their
portfolios through the use of simultaneous bearish and bullish
spreads (known as "Condors" to experienced players) and in some
cases, traders can benefit from the reduced collateral requirements
of a neutral-outlook position.  The best research material on this
subject comes from professional traders who utilize the technique
frequently (Don Fishback and Jay Kaeppel come to mind) and these
experts suggest that traders who are new to index credit spreads
should focus on the probability aspect of the strategy, as well as
the technical indications of the underlying instrument, to help make
accurate price forecasts and volatility projections.

Good Luck!

*************
NEW POSITIONS
*************

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

*****************
SPECULATION PLAYS
*****************

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.

*****
IMCL - ImClone  $7.77  *** Erbitux Lives Again! ***

ImClone Systems (NASDAQ:IMCL) is a biopharmaceutical company 
whose mission is to advance oncology care by developing a 
portfolio of targeted biologic treatments designed to address
the medical needs of patients with a variety of cancers.  The 
company's lead product candidate, Erbitux (cetuximab), is a 
therapeutic monoclonal antibody that inhibits stimulation of 
epidermal growth factor receptor upon which certain solid 
tumors depend in order to grow. ImClone's next most advanced
product candidate, BEC2, is a cancer vaccine.  In addition to 
the development of its lead product candidates, the company 
conducts research, both independently and in collaboration 
with academic and corporate partners, in a number of areas 
related to its core focus of growth factor blockers, cancer 
vaccines and angiogenesis inhibitors.  IMCL has also developed
diagnostic products and vaccines for certain infectious diseases.

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
play, if bullish activity does not begin in the next few months.

More information on this unique strategy can be found at:

http://members.OptionInvestor.com/editorplays/042201_1.asp


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

SELL PUT  JAN04-15.00  KFC-MC  OI=268  B=$8.80
BUY  PUT  JAN03-5.00   QCI-MA  OI=83   A=$0.85
INITIAL NET-CREDIT TARGET=$7.90-$8.00  TARGET PROFIT=$1.75-???

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.


****************
CALENDAR SPREADS
****************

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

*****
BAC - Bank of America  $58.00  *** Big Bank Breakdown! ***

Bank of America (NYSE:BAC) is a bank holding company.  Through
its banking subsidiaries (the Banks) and various non-banking
subsidiaries, the firm provides a diversified range of banking
and non-banking financial services and products, throughout the
Mid-Atlantic (Maryland, Virginia and the District of Columbia),
the Midwest (Illinois, Iowa, Kansas and Missouri), the Southeast
(Florida, Georgia, North Carolina, South Carolina and Tennessee),
the Southwest (Arizona, Arkansas, New Mexico, Oklahoma and Texas),
the Northwest (Oregon and Washington) and the West (California,
Idaho and Nevada) regions of the United States and in selected
international markets.  As part of its operations, the company
regularly evaluates the potential acquisition of, and often holds
discussions with, financial institutions and other businesses of
a type eligible for financial holding company ownership or control.

PLAY (speculative - bearish/calendar spread):

BUY  PUT  JAN-50  BAC-MJ  OI=17329  A=$2.50
SELL PUT  OCT-50  BAC-VJ  OI=401    B=$0.55
INITIAL NET-DEBIT TARGET=$1.85-$1.90  TARGET PROFIT=0.70-$0.95


**************
LPNT - Lifepoint Hospitals  $33.04  *** Sector Upgrade! ***

Lifepoint Hospitals (NASDAQ:LPNT), operates a number of general,
acute care hospitals with in non-urban communities.  The company
was originally formed as a division of HCA Incorporated (NYSE:HCA),
a healthcare services company that operates in the United States,
England and Switzerland.  Lifepoint's hospitals are located in
Alabama, Florida, Kansas, Kentucky, Louisiana, Tennessee, Utah and
Wyoming.  The firm's general, acute care hospitals usually provide
the range of medical and surgical services commonly available in
hospitals in non-urban markets.  These hospitals also provide a
range of diagnostic and emergency services, as well as outpatient
and ancillary services, including outpatient surgery, laboratory,
rehabilitation, radiology, respiratory therapy and physical therapy.

PLAY (conservative - bullish/calendar spread):

BUY  CALL  FEB-35  PUN-BG  OI=29  A=$3.10
SELL CALL  OCT-35  PUN-JG  OI=38  B=$0.55
INITIAL NET-DEBIT TARGET=$2.45-$2.50  TARGET PROFIT=0.90-$1.25


**************
CREDIT SPREADS
**************

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

*****
AZO - Autozone  $81.27  *** 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
alldatadiy.com.

PLAY (conservative - bullish/credit spread):

BUY  PUT  OCT-70  AZO-VN  OI=2458  A=$0.45
SELL PUT  OCT-75  AZO-VO  OI=1109  B=$0.85
INITIAL NET-CREDIT TARGET=$0.45-$0.50
POTENTIAL PROFIT(max)=9%  B/E=$74.55
PROBABILITY OF PROFIT (100-day HV)=87%


*****
VZ - Verizon  $33.60  *** Baby Bell Rally! ***

Verizon Communications (NYSE:VZ) is one of the world's leading
providers of communications services.  Verizon companies are the
largest providers of wireline and wireless communications in the
United States, with 135.1 million access line equivalents and 30.3
million Verizon Wireless customers.  Verizon is also the largest
directory publisher in the world.  With more than $67 billion in
annual revenues and approximately 241,000 employees, Verizon's
global presence extends to more than 40 countries in the Americas,
Europe, Asia and the Pacific.

PLAY (conservative - bullish/credit spread):

BUY  PUT  OCT-27.50  VZ-VY  OI=178    A=$0.20
SELL PUT  OCT-30.00  VZ-VF  OI=40880  B=$0.45
INITIAL NET-CREDIT TARGET=$0.25-$0.35
POTENTIAL PROFIT(max)=11%  B/E=$29.75
PROBABILITY OF PROFIT (100-day HV)=88%


*****
FITB - Fifth Third Bancorp  $57.47  *** Sector Downgrade! ***

Fifth Third Bancorp (NASDAQ:FITB) is a diversified financial
services company headquartered in Cincinnati, Ohio.  The company
has $75 billion in assets, operates 16 affiliates with 917 full
service Banking Centers, including 133 Bank-Mart locations open
seven days a week inside select grocery stores and 1,856 Jeanie
ATMs in Ohio, Kentucky, Indiana, Michigan, Illinois, Florida and
West Virginia.  The financial strength of Fifth Third's affiliate
banks continues to be recognized by rating agencies with deposit
ratings of AA- and Aa1 from Standard & Poor's and Moody's Rating
Service, respectively.  Also, Fifth Third Bancorp continues to
maintain the highest short-term ratings available at A-1+ and
Prime-1, and was recently recognized by Moody's with one of the
highest senior debt ratings for any U.S. bank holding company of
Aa2.  Fifth Third operates four primary businesses: Commercial,
Retail, Investment Advisors and Midwest Payment Systems, the
Bank's electronic payment processing subsidiary.

PLAY (conservative - bearish/credit spread):

BUY  CALL  NOV-70  FTQ-KN  OI=3745  A=$0.25
SELL CALL  NOV-65  FTQ-KM  OI=2040  B=$0.85
INITIAL NET-CREDIT TARGET=$0.65-$0.75
POTENTIAL PROFIT(max)=15%  B/E=$65.65
PROBABILITY OF PROFIT (100-day HV)=89%


*****
LEN - Lennar  $53.67  *** Housing Industry Bubble? ***

Lennar Corporation (NYSE:LEN) is a homebuilder and a provider of
residential financial services.  Their homebuilding operations
include the sale and construction of single-family attached and
detached homes, as well as the purchase, development and sale of
residential land directly and through its partnerships.  Lennar's
financial services operations provide mortgage financing, title
insurance and closing services for both its homebuyers and others,
resell the residential mortgage loans originated in the secondary
mortgage market and also provide high-speed Internet access, cable
television and alarm monitoring services to residents of its many
communities and others.  In 2002, Lennar acquired Patriot Homes,
a homebuilder in the Baltimore marketplace, and expanded into the
Carolinas with the acquisition of Don Galloway Homes and the
assets and operations of Sunstar Communities.

PLAY (less conservative - bearish/credit spread):

BUY  CALL  NOV-65  LEN-KM  OI=2264  A=$0.60
SELL CALL  NOV-60  LEN-KL  OI=3249  B=$1.45
INITIAL NET-CREDIT TARGET=$0.90-$1.00
POTENTIAL PROFIT(max)=22%  B/E=$60.90
PROBABILITY OF PROFIT (100-day HV)=78%


*******************
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.

*****
CTSH - Cognizant Technology  $51.76  *** Rolling Over! ***

Cognizant Technology Solutions (NASDAQ:CTSH) delivers full life
cycle solutions to complex software development and maintenance
problems that companies face as they transition to e-business.
These information technology (IT) services are delivered through
the use of a seamless on-site and offshore consulting project
team.  The company's solutions include application development
and integration, application management and re-engineering
services.  The company's customers include ACNielsen Corporation,
ADP, Incorporated, Brinker International, Incorporated, Computer
Sciences Corporation, The Dun & Bradstreet Corporation, First
Data Corporation, IMS Health Incorporated, Metropolitan Life
Insurance Company, Nielsen Media Research, Incorporated, PNC Bank
and Royal & SunAlliance USA.

PLAY (very speculative - bearish/synthetic position):

BUY  PUT   OCT-40  UPU-VH  OI=138  A=$0.60
SELL CALL  OCT-60  UPU-JL  OI=378  B=$0.45
INITIAL NET-CREDIT TARGET=$0.00-$0.10  TARGET PROFIT=$0.30-$0.50

Note:  Using options, the position is similar to being short the
stock.  The initial collateral requirement for the sold call is
approximately $1,295 per contract.


*****
C - Citigroup  $27.98  *** Banking Sector Slump! ***

Citigroup (NYSE:C) is a diversified worldwide financial services
holding company whose businesses provide a wide range of financial
services to consumer and corporate customers.  The firm has over
192 million customer accounts in 100 countries and territories.
The company's activities are conducted through Global Consumer,
which delivers a wide array of banking, lending, insurance and
investment services; Global Corporate, which provides businesses,
corporations, governments, institutions and investors with a broad
range of financial services; Global Investment Management, which
offers a variety of life insurance, annuities and asset management
products; Private Banking, which consists of traditional banking
activities, and Investment Activities, which consists of the firm's
venture capital activities.

PLAY (speculative - bearish/synthetic position):

BUY  PUT   NOV-22.50  C-WX  OI=483   A=$0.75
SELL CALL  NOV-32.50  C-KZ  OI=5173  B=$0.55
INITIAL NET-DEBIT TARGET=$0.00-$0.10  TARGET PROFIT=$0.40-$0.70

Note:  Using options, the position is similar to being short the
stock.  The initial collateral requirement for the sold call is
approximately $725 per contract.


*****


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