Option Investor

Daily Newsletter, Wednesday, 10/23/2002

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The Option Investor Newsletter                Wednesday 10-23-2002
Copyright 2002, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Better Than Expected
Futures Wrap: Full Moon Wednesday 
Index Trader Wrap: Ssssslurp! 
Options 101: What's Wrong With The VIX? 

Updated on the site tonight:
Swing Trader Game Plan: Not a Fun Day

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
10-23-2002                  High    Low     Volume Advance/Decl
DJIA     8494.27 +  44.11  8494.76 8294.38   1815 mln  1175/621
NASDAQ   1320.23 +  27.43  1320.25 1279.46   1587 mln  1279/289
S&P 100   454.73 +   2.14   454.74  443.36    totals   2454/910
S&P 500   896.14 +   5.98   896.14  873.82
RUS 2000  368.95 +   6.29   368.97  359.79
DJ TRANS 2341.55 +  29.12  2342.08 2281.47
VIX        39.38 +   0.04    41.99   38.87
VIXN       52.37 -   1.24    55.41   51.76
Put/Call Ratio 0.73

Better Than Expected
by Steven Price

Just as the Dow looked to be gaining steam with a series of 
higher lows, the usual suspects, in the form of Citigroup and 
J.P. Morgan jumped out of hiding, along with some help from 
healthcare and telecoms, pushing the index lower by 155 points, 
before a late day rally pushed us up 44 points on the day.  
However, even though we hit a lower low than yesterday, we got a 
better look at the 50-dma and previous head and shoulder support, 
which could be our new support levels in the Dow.   What was even 
more impressive was the fact that we rallied shortly after the 
release of the Fed's Beige Book report, which contained mostly 
bad news. 

The Beige Book showed a slowdown in consumer spending, evidenced 
by weak retail sales in September and October.  It also showed a 
slowdown in the furious pace of auto sales that had resulted from 
the zero-percent financing deals offered by major manufacturers.  
Manufacturing activity declined and was described as tough, 
stagnant, or sluggish in many districts.  There were also 
declines in commercial lending, commercial real estate and 
construction activity, as well as labor markets and energy 
exploration.  The increases were in homebuilding and residential 
real estate, which went hand in hand with increased activity in 
consumer lending.  The song remains the same - low interest rates 
are leading to a strong housing market, but everything else is 
suffering.  However, one important note on housing is that the 
report showed some softening in the higher end of the market. 

The speculation is now that the numbers in the Beige Book will 
give the Fed the excuse they need to lower rates. After a 
lackluster report, that would seem to be the reason for the 
afternoon rally following its release.  However, there were a few 
other developments before the report was released that indicated 
investors were ignoring the bad news and buying the dips.  

This reminds me a little of the 90s, when missing earnings by 
just a little was just another buying opportunity. I am looking 
at the semiconductor stocks once again and seeing amazing 
resilience to bad news.  Whether the rally is simply lemmings 
heading toward the cliff's edge, or institutions that were 
expecting even worse numbers, I'm not sure of; but one thing is 
certain - the bears are in hibernation for the moment. Leading 
the "Huh?" rally is Cymer. Last night, Cymer (CYMI), which makes 
lasers used in chip production, released earnings, along with 
comments that "The semiconductor industry has apparently entered 
the second decline of a double-dip downturn, which will have a 
negative impact on our fourth quarter operating results."  The 
company predicted a 20-25% decline in fourth quarter revenue.  
After trading $2 lower after hours yesterday, it not only made up 
the loss, but actually traded up $1.65 on the day.  KLA-Tencor 
(KLAC), another chip equipment maker which released after the 
bell on Tuesday, guided revenue lower for the fourth quarter, 
from $381 million to $330 million, a 13% drop in expectations.  
KLAC also lost about $2 in after market trading, but made up the 
loss, plus another $2.13 on the day.  Storage Tech (STK) also 
said it doesn't expect the IT spending environment to be any 
better next year than it is this year and is assuming IT spending 
will be flat based on its conversations with customers.  The 
stock was, of course, upgraded after those comments and gained 
24% on the day.  If the chance of a rate cut were really behind 
the rally, it would seem that there would be plenty of better 
places for investors to go long, other than three stocks which 
are seeing declining revenues. This morning also brought a 
downgrade from Thomas Weisel of eight chip equipment makers, 
including KLAC, Applied Materials (AMAT) and Novellus (NVLS).  
The firm said it believes that the industry is entering a period 
of bifurcation as the prolonged downturn has created a chasm 
between companies that are profitable, with strong balance sheets 
and little debt, and companies that are burning cash and are 
highly leveraged.  Wiesel said it expects this trend to continue.  
All eight stocks it downgraded finished the day significantly 
positive, with only one up less than 5%.   The Semiconductor 
Index (SOX.X) tested the 50-dma in August, and failed it after a 
massive rally, much like the one we are seeing now.  However, 
that rally did so within the descending channel that had 
contained the movement since March.  It also did so at a time 
when the index had been rebounding off the bottom of the channel.  
I have noted in recent wraps that the bounce pattern has changed, 
with the SOX finding support on recent bounces from the center of 
the channel.   These observations do not change the fact that 
revenues are still DECLINING, but apparently institutions must 
have been looking for numbers that were even worse than were 
reported.  The SOX has now broken out of its descending channel, 
taken out its 50-dma, pulled back and then surged above that 
level once more on bad news.  I'm still not going to put my money 
on a sector with declining revenues and no real plan for when 
that will turn around, not to mention a declining book-to-bill 
ratio, but I'm not going to stand in the way of a rally.  The 
only positive news I can see for the sector is today's report 
from IDC (the same group that predicted a slide to 200 in the 
SOX) that the growth rate for PCs is expected to pickup next year 
in China.  Some of largest PC sellers in China include IBM and 

Chart of the SOX

Looking back at the Dow again, today's bounce point looks as 
though the average is now finding support again right around 
8300.  This level also provided temporary support on the way 
down, as a head and shoulders formation evolved between July and 
September.  It now correlates with the current 50-dma of 8257.15, 
as well, and with a descending trendline from the May highs 
through the August peak.   That 50-day moving average is 
declining, due to activity in the last couple of months, but is 
starting to level out. The fact that we are bouncing in this area 
on the way up looks bullish and it may be difficult for bears to 
get through to the downside with so many converging factors.   
Additionally, a look at the bullish percentages shows that the 
NYSE bullish percentage has rebounded from a low of 26% and 
reversed up right around the time the Dow broke through the 8000 
level.  This is the third straight rebound from this level.  The 
reading is now 32% on the three-box reversal and appears as 
though it has room to run.  The last two rebounds have taken the 
percentage up to 64% and 46%.  

Chart of the Dow

Chart of Dow Consolidation Levels

Point and Figure Chart of NYSE Bullish Percentage

The S&P 500 (SPX.X) shows a slightly different story.  The index 
has been unable to crack 900 on a closing basis, and was rejected 
from an intraday high of 900.69 two days ago.  One of the reasons 
the S&P may be more important than the action in the Dow is the 
fact that the rally of the last two weeks actually started when 
the SPX finally broke its July 24 intraday low.  This is an 
indication that institutional trading may be playing a much 
bigger role in this rally than the individual investor, since 
it's programs are based on the S&P 500.  It may also indicate a 
sell program in place at 900.

Chart of the S&P 500

The original drop today came after Sanford Weill, chairman of 
Citigroup, said he would testify to the New York attorney 
general's office in their probe into research activities at 
Salomon Smith Barney. The fact that Citigroup's CEO may be the 
target of the investigation scared investors who initially sold 
off the stock, before the end of day rally brought it back to 
near even (-0.11 on the day). 

Johnson and Johnson (JNJ) was also downgraded, contributing to 
the drop in the Dow, even after the FDA gave approval for the 
company's drug coated stent, used in clearing blocked arteries.  
CIBC World markets cut their rating on the stock, stating that 
the earnings boost from the stents was already figured into the 
price and there was limited upside in the stock from this level.   
Eli Lilly (LLY) helped send the drug sector lower, as well, after 
it lowered its fourth quarter outlook, due to the need to put 
more money into its drug pipeline. It also cited marketing costs 
and slower sales of some of its products. 

AOL hit its earnings target, but announced that it would restate 
revenue by $190 million.  This was somewhat expected after it 
announced an internal review several weeks ago. However, the 
restatement was apparently not as bad as expected, as the stock 
rose $1 from its closing price in after hours trading.

Amgen also reported earnings, which showed a loss.  However, that 
loss reflected the effect of a one-time $3 billion write-off 
related to its purchase of Immunex. The company said third 
quarter revenue was up almost 50% and raised its sales forecast 
for chemotherapy drugs.  The stock traded up $1.20 from its close 
of $50.00. 

So now what?  Things look bullish, in spite of warnings on a 
seemingly daily basis. While I can't imagine buying shares of a 
stock that is showing revenue declines, apparently someone else 
has no problem with it.   Or make that a lot of someone else's.  
The trend looks like it is still heading north, and an S&P 500 
break of 900 would certainly add to that sentiment.  If we do 
break 900 in the S&P, then the next challenge in the Dow looks 
like 8750, and playing long on a break over 8500 to that level 
seems logical. The Market Volatility Index (VIX), remains close 
to 40, indicating there is still plenty of fear of the downside 
out there, as premium sellers, who normally come out en masse 
during market rallies, have not done so with any real conviction.  
Right now, I would be playing only 1/2 positions to the long 
side, until I see some good news that isn't simply "better than 


Full Moon Wednesday
by Alan Hewko


4:00 PM Cash Market Close     ES 896, YM 8483, NQ 991
4:15 PM Future's Market Close ES 898, YM 8491, NQ 993
5:00 PM YM Dow Futures close : 8515
8:30 PM ES 902,  NQ 997

Dow   8494 + 44
SP500  896 +  5
COMPX 1320 + 27

Advance/Decline by Volume was bearish all morning, turned at 2 PM 
and ended the day bullish.

Abbreviations used by the Futures Market:
ES     E-mini SP500 December futures      ES02Z
YM     E-mini Dow $5 December futures     YM02Z
NQ     E-mini NDX 100 December futures    NQ02Z


Tuesday night had a very bearish earnings outlook from the key Semi 
stock KLAC, who provided very negative views for Q4. Tuesday found 
afternoon selling until 3:30 PM when Shorts took profit near the 
Dow 8350 support level. As written in last night's wrap, the 
overnight futures "should have" sold off based off KLAC's 
conference call, but did not. 

That can be the message of this wrap. 
Trade the tape and not what the markets 'should be' doing. 

In the Market Monitor last night at 1:30-2:00 AM, had posted that 
futures were about 10 points higher than their 4 PM Tuesday Cash 
close levels, at ES 899, YM 8515, and NQ 979; perhaps from the 
Nikkei gaping down 200 points lower but being dip-bought all 
morning in Japan.

By the time Europe markets opened at 3 AM, they opened flat but 
sold off all day to close at day lows.

Chart below illustrates this rather well.
ES02Z (E-mini SP500 futures) Tuesday 3 PM thru Wednesday 4 PM 
including Tuesday's overnights.

For the 4th day in a row, the market gapped lower.

Today, for the first time in 4 days, the attempted morning dip 
buying was met with hard selling as it "leaked lower" all morning 
long until 12 Noon.

At 12 Noon, ES was inches above very strong support of 868-872, and 
Dow also touched its strong support of 8290-8300.

The only news event all day was the FOMC Beige Book at 2 PM.

From 12 Noon, the market drifted higher as perhaps some shorts took 
profits heading into the Beige Book and/or lunch.

The Beige Book contained very bearish Fed comments, such as:
Weak Biz Lending; Household Borrowing Strong
Retail Sales Weak, Including Dip In Car Sales 
Manufacturing Fell Off; Energy Sector Slowed

CME E-mini Technical Problems at 2:10PM

Prior to all of this, ES had tried 3 times to breakout back over 
the 880 level, and frankly we waited 2.5 hours from 12 noon for it 
to happen, and when it did, we were not able to execute the trade 
signal given this CME problem. I've seen situations where when some 
large technical glitch occurs that the Globex E-mini market is shut 
down for 15-20 minutes (with the Full Size SP pit remaining open, 
and the stock and options market not impacted at all). It was 
simply too much risk to put down a Market order and then perhaps 
being forced to hold it if the Globex E-mini market was shut down. 

ES had been chopping around 878-880 prior to its release, and a few 
minutes after it came out, the CME futures had a technical problem 
with some of their larger clearing firms resulting in situations 
where a great many online futures trader's trading platforms were 
providing lagged bid-ask data, many points under "real" prices. 
Confusion reigned for many minutes before it was discovered what 
was happening, which was that there was some outage over an AT&T 
internet line.

I am not able to capture with words the "weirdness" of this 
occurrence, and how it impacted futures trading straight into the 
close. Sometimes these technical glitches with the CME or CBOT 
futures exchange and only last 1-3 minutes; however, in this case 
it lasted straight into the close.

An example was a real-time chart saying ES was 881 and climbing, 
but your online trade platform (with their streaming real-time 
quotes and Level 2 book was indicating bid-ask is 878.00 x 878.25 
and was showing changing prices (and size). Everything looked 
normal with your trade platform, except the prices were lagging by 
10-15 minutes. 

I have learned after-hours that this problem was related to a few 
of the larger futures clearing firms and that not all traders were 

Some posts that I had made in the Market Monitor sum it up :

I'm looking at 3 different sources for futures quotes and getting 3 
different numbers, this is one of those technical glitches that 
happens sometimes the same way with stock or options quote 

All i can say for sure is: ES did break out over 880; and Dow Cash 
over 8350.

The rule of "when you can't trust your quotes from a data provider, 
and the quotes from your online broker, one must do 'nothing'" 
comes into play. Shall advise when Globex fixes this issue, and no 
trade signals until then.

2:28 PM
Passing along my futures broker's comment: "Problems with CME, 
trade CME at own risk; CBOT's YM Dow futures functioning properly" 

A * BIT * "upset-ing" to wait 2+ hours for Beige Book, have the ES 
Trade Signal to go Long once over 880, and then not being able to 
execute the trade due to a technical problem at the CME exchange, 
and then watch it run up 5 to 8 points without you being Long. 

2:37 PM
Jim, with a great many futures traders being locked out at the CME 
due to what now appears to be an outage with a ATT internet feed 
from the CME; 'things' like this happen sometimes when a large 
majority of ONLINE futures traders are locked out. It's almost as 
if when this happens, the futures PIT decides to play a game and do 
a large run. Call me a cynic, but 'this' has happened many other 
times. (and you thought only stock and option market makers played 
'games' [grins) 

2:57 PM

Jim, the "Oliver Stone" in me finds it AMAZINGLY odd that this CME 
outage occured moments after the Beige Book came out. It's my view 
this was indeed the SP500 PIT traders then buying em Long when it 
happened, running online traders' short stops, and then it simply 
escalated as the momo trend was established. And now, you still 
have ONLINE futures traders who refuse to trade as they can't trust 
their data and online broker quotes and are just "sitting here" 
waiting for the problem to be fixed. Meanwhile, the ORIGINAL momo 
of Long still remains well intact as you now have online traders 
doing PHONE orders to cover em during this CME problem if they were 
trapped short lower. And now you also have stock and option traders 
who don't trade futures, seeing their ES charts over 885, 887, 890, 
892 saying 'I don't know WHY its going UP, but it sure is, so I 
better cover/go long myself' 

Nonetheless, "this" CME problem resulted in the start of an odd 

I know the full moon technically was last night, but "Full Moon" 
seems as good a reason as any for the afternoon strong rally 

How do they say it on the sports re-cap shows? 
"Lets cut to the tape Frank?"

Here's the Charts:

ES02Z (E-mini SP500 futures) Wednesday

Below is a Chart of:
Dow Industrials (Dow 30) for Wednesday 9:30 AM to 4 PM

Here is a chart of:
NQ (NDX futures) from Wednesday 9:30 AM to 4:15 PM



Amgen (AMGN), the largest bio-tech stock in the BBH index, had 
earnings tonight, and traded at $51.00-$51.50 after-hours after 
closing the regular session at $50.00. I'm not even looking to see 
if they warned, beat, or missed - it's almost better not knowing 
and just watch the AMGN chart instead.

Likewise, the news of: "Equity Funds report net cash outflows of 
$4.1 Billion for the week ended 10/16/02 for all sectors; despite a 
$100 Billion + increase in assets due to market action.", didn't 
seem to bother any Longs either {grins}


Given the weight of all recent tech warnings from Intel, TXN, KLAC 
and the bearish comments from PC box makers, would it surprise you 
to discover the NQ (NDX 100 futures) are at MONTH HIGHS ? Yup, NQ 
as I type this is printing 997, an inch under 1000. One month highs 
for NQ.

Assuming nothing wild happens overnight or pre-open, ES is set to 
open at/near the psych 900 level, Dow Cash at 8500, and NQ near the 
1000 mark.

Bears must truly be wondering what to make of this market climate.

Tomorrow has the markets either exploding to the upside over those 
serious levels of resistance, - or - finds the resistance return at 
Dow 8550 (current week high) and ES 902-905.

ES currently: 902
Supports: 872, 877, 880, 883-885, 887, 892
Resistance: 902, 905, 912, 918, 928-930 (Sept. 11 open was 928)

All I can say is the market is totally, completely ignoring any and 
all bearish news.

Why? I have no idea. I'll leave that up to someone else.

But one doesn't have to know why, just trade the tape [grins].

Watch Dow 8500 - ES 900 - NQ 1000
for a sense of market direction.


Alan Hewko




In an earlier life, I think I may have been a gun fighter/bounty 
hunter that wandered the dusty streets of some western town, 
looking for a recognizable face that carried a high reward.

Hmmm... that's kind of similar to a stock/index trader.  Waiting 
around, looking for an opportunity to capitalize on some type of 
price movement, up or down, and ready to pull the trigger when 
its found.

While the life of a gun fighter might be perceived as being 
exciting, it is actually kind of dangerous if the one you're 
after is a quicker draw, or knows your weakness.

The life of a gun fighter is also rather boring.  Many an hour 
was spent standing against the supply store's hitching post, next 
to the horses sssssslruping water from the trough......

Trough!  Did somebody say "trough?"

If you're looking for any type of explanation to today's action 
then "trough" has to be the work on the lips of traders that 
would even come close to explaining today's action.

Just as a gun fighter might be awoken from an afternoon snooze, 
the slurping sound from horses standing at the trough seemed to 
be the wakeup call to have stocks reversing earlier losses.  

How can a semiconductor equipment stock like KLA-Tencor 
(NASDAQ:KLAC) $32.68 +6.97% report earnings, then guide lower on 
next quarter, see it's stock gap down 5.9% at the open, get 
downgraded by Street analyst's and then proceed higher throughout 
the session?  

Some analyst's argue that the semiconductor sector has achieved 
its "trough quarter" and that the sector is due for a rebound 
ahead of future good news!  The Semiconductor Index (SOX.X) 285 
+8.84 was just behind the Disk Drive Index (DDX.X) 62.23 +10.10% 
in today's sector action, on thoughts that a "trough" had been 
realized and recovery was just around the corner.

"Trough" had to be the thought as it relates to today's Beige 
Book report.  Word like "stagnant," "sluggish" and "lackluster" 
were words that riddled the Fed's report on the economy.  The 
markets turned higher after the Beige Book report, which had 
little positives in it, was released.  Maybe investors are 
looking for the economy to also be in its "trough" quarter.

However, it sure seemed to be the "slurping" from this perceived 
trough that had stocks reversing course and finishing near their 

Heck!  Even telecom equipment provider Lucent's (NYSE:LU) $0.76 
+5.5% CEO said she is seeing signs in its business and cost 
cutting efforts that this quarter will be Lucent's "trough 
quarter" and a turn for the company's fundamentals is at hand.

In last night's wrap, I talked about a bearish trade in the 
NASDAQ-100 Index (NDX.X) 989.32 +2.64% and QQQ $24.60 +1.90% on a 
break LOWER of an "inside day."  Neither the NDX or QQQ broke 
below Tuesday's low, so a BEARISH trade wouldn't have been taken.  
However, Tuesday's "inside day" was broken to the UPSIDE, and 
aggressive bulls may have gone long, following with a stop below 
Tuesday's low.

Conversely, the Dow Industrials (INDU) 8,494.27 +0.52%, S&P 500 
(SPX.X) 896.14 +0.67% and S&P 100 (OEX.X) 454.73 +0.47% did break 

Tonight I'll review what a bearish trader would now be doing if 
he/she traded bearish in any of these three indexes as it relates 
to the DISCIPLINED approach of trading the "inside day" 
technique.  I'll only review it with the Dow Industrials, but 
SPX, OEX traders will get jest.  If ever there was a "gun 
fighter's" technique for short-term trading, then this is it.  
Remember, gun fighting can be a "high risk profession" if you're 
outmatched by the competition, you know it, and don't cut and run 
when your discipline tells you to.

Dow Industrials Chart - Daily Interval

A bearish trader utilizing the "inside day" technique would have 
shorted the Dow Industrials on a break below Tuesday's low of 
8,376.15 and followed with a stop.  Downside technical targets 
would be either the 50-day SMA (8,257), 8,170 or further lower at 
8,000.  STOP for such a trade would be just above Tuesday's high 
of 8,525, but not more that Monday's high of 8,548 depending on a 
bear's tolerance for risk.  A break above 8,525 immediately has a 
bear assessing further upside to 8,717 as a MINIMUM, if not 
potentially higher.  

In past updates, I've talked about the period around the upper-
left corner of the Dow's chart (I'm thinking we're currently 
seeing something like this).  Today's action looks strikingly 
similar to that date, so a BEAR needs to be firm with his/her 
stops and NOT thinking.... "oh... it will only go up to 8,717 
then crash and make new lows."  

For a trader trading the inside day, that type of thinking is 
analogous to a gunfighter thinking, "I know he can draw quicker 
than me, but I think he'll miss his first shot and I can get him 
before he gets me."

No sir.. a gunfighter remember some old buddies of his that are 
no longer around.  At the same time, some bearish traders below 
Dow 8,000 still holding short may still be around, but the 
tapping sound from the undertakers shop is a not so subtle 
reminder of why disciplined stops are needed.

The Dow Industrials Bullish % ($BPIND) saw no net change today 
and remains "bull confirmed" at 53.33%.

S&P 500 Index - Daily Interval

Should the SPX break above 901 tomorrow, I'm looking for 
SIMILARITY to past trading from 8/12/02-8/22/02 based on similar 
bar chart technicals and oscillators (stochastics/MACD).  While 
"trough" might have been the word of the day today, the SPX found 
suspicious support at our "old" broken downward trend and 
flattening out 50-day SMA.  For bulls trading similarity, my 
ULTIMATE bullish target would have to be 925 and crisscrossing 
longer-term downward trend and upper channel of our "cloned" 
regression.  At that point, I could envision MACD rolling over, 
perhaps getting a pullback to 878-900 and depending on the 
bullish % charts and internal market conditions, further assess 
things.  For DIVERGENCE, bears that are short from the "inside 
day" shouldn't get stopped out above 901.

The S&P 500 Bullish % ($BPSPX) showed a net gain of 6 stocks to 
point and figure buy signals today as the bullish % grows to 
46.2%.  Tapering off a smidge from Tuesday's 1.8% gain, but still 
some internal strengthening taking place.

S&P 100 Index Chart - Daily Interval

While the SPX tested its 50-day SMA, we continue to see just a 
slight more technical strength in the OEX.  Financials shrugged 
off earlier losses to finish in positive territory, with the 
laggard being Insurance.  Intra-day, the BKX.X of which Citigroup 
(NYSE:C) $35.49 -0.1% is a component, traded relatively weaker in 
percentage terms than the more regional banks in the S&P Banks 
Index (BIX.X).  The only reason I point this out is to perhaps 
show just how "group think" the markets can be when all the news 
(positive or negative) is surrounding a "key" stock in the 

The S&P 100 Bullish % ($BPOEX) saw a net gain of 2 stocks to 
point and figure buy signals today, as the bullish % grows to 

NASDAQ-100 Index Tracking Stock (AMEX:QQQ) - Daily Interval

I had my left finger on the mouse button and ready for a short in 
the QQQ on a break at $23.64, and my jaw dropped when some offers 
were taken with some bullish enthusiasm.  With the QQQ breaking 
above $24.21, which was the 80.9% retracement of our "fitted" 
retracement, I'm turning to the conventional retracement on the 
Q's.  Note how 50% retracement here at $22.98 is very close to 
"fitted retracement" from last night's wrap of $22.97.  This is 
"ultimate" type of stop for a bull.  Meanwhile the conventional 
retracement gives us some upside levels to begin looking for 
potential resistance.

Market makers in these NASDAQ stocks now begin assessing further 
upside risk to the $24.97-$25.45 level and I'm not expecting them 
to be very heavy on the offer after today's reversal higher.  At 
08:00 PM EST, QQQ was ticking higher at $24.75.

The NASDAQ-100 Bullish % ($BPNDX) saw a net gain of 4 stocks to 
point and figure buy signals today, as the bullish % grows to 

Jeff Bailey

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According to the fund prospectus and supplement dated October 7, 
2002, there are presently 11 Potomac funds, including one money 
market fund (Potomac U.S. Government Money Market Fund).  There 
are 5 "plus" funds and 5 corresponding "short" funds as follows:

 Potomac "Plus" Funds (Investor Class):
 Potomac Dow 30 Plus (PDOWX)
 Potomac US Plus (PSPLX)
 Potomac OTC Plus (POTCX)
 Potomac Small Cap Plus (POSCX)
 Potomac Mid Cap Plus (not yet available)

 Potomac "Short" Funds (Investor Class):
 Potomac Dow 30/Short (not yet available)
 Potomac US/Short (PSPSX)
 Potomac OTC/Short (POTSX)
 Potomac Small Cap/Short (POSSX)
 Potomac Mid Cap/Short (not yet available)

Seven Potomac funds are in Morningstar's database, with the other 
three funds coming soon.  Expense ratios of the seven funds range 
from 1.39% to 1.65% compared to 1.39% for Morningstar's all-funds 
average.  Potomac Dow 30 Plus Fund seeks daily investment results 
that correspond to 125% of the performance of the DJIA (Dow Jones 
Industrial Average), while Potomac OTC Plus Fund (POTSX) seeks to 
provide investment results corresponding to 125% of the return of 
the NASDAQ 100 index.

Potomac's three other "plus" funds target the large-cap, mid-cap 
and small-cap sectors of the market.  The Potomac U.S. Plus Fund 
(PSPLX) seeks investment results equal to 150% of the returns of 
the S&P 500 large-cap index.  Potomac Mid Cap Plus Fund (N/a) is 
designed to generate daily investment results that correspond to 
125% of the S&P Midcap 400 index return, while small-cap sibling 
Potomac Small Cap Plus Fund (POSCX) seeks investment results that 
are equal to 125% of the return of Russell 2000 index.

All Potomac "plus" funds enter into long positions in stock index 
futures contracts, options on stock index futures contracts, and 
options on stocks and indices to produce economically leveraged 
results.  These funds hold U.S. Government securities and repo's 
to collateralize these derivatives.

Each Potomac "short" fund seeks investment results that inversely 
correlate to the performance of its target index.  They engage in 
various investment techniques including short sales and entering 
into short positions in stock index futures contracts, options on 
stock index futures contracts, etc.  The "short" funds will incur 
a loss if the price of the underlying security or index rises and 
will realize a gain if the underlying security or index declines.

Note that all the Potomac "short" funds pursue this 100% inverse 
relationship regardless of market conditions and don't intend to 
take a defensive position in the event of rising stock and index 

Fund Performance

If you go to Potomac's website, they tell you how you should try 
to evaluate their fund performance since their leveraged indexed 
strategies are unique.  Instead of trying to compare these funds 
to diversified stock funds like Fidelity Magellan or Dodge & Cox 
Stock, it may be better to evaluate them against "model returns" 
for each fund.

Model returns for each Potomac fund are produced by multiplying 
the daily returns for the target indexes by their relevant beta 
(1.25 for most Plus Funds and negative 1.00 for the Short Funds).  

By comparing the returns of each Potomac fund to its model, you 
can evaluate relative performance on a daily basis and grasp the 
impact of compounding of daily returns for longer periods.  The 
website states that a fund providing perfect daily results will 
provide returns identical to that of its model.  They recognize, 
and you should too, that the model returns don't account for any 
expenses whatsoever, so the returns of the Potomac Funds should 
be expected to lag their respective models due to fund expenses.  

Potomac's website provides a performance analysis of its funds 
for the YTD period through September 30, 2002 to show how they 
compare to their relative model returns.    

 Potomac Dow 30 Plus Fund (PDOWX):
 Index Return: -24.2% (DJIA)
 Model Return: -29.8% (125% of index return)
 PDOWX Return: -30.2%

 Potomac OTC Plus Fund (POTCX):
 Index Return: -47.2% (Nasdaq 100)
 Model Return: -56.0% (125% of index return)
 POSCX Return: -56.5%

 Potomac OTC/Short Fund (POTSX):
 Index Return: -47.2% (Nasdaq 100)
 Model Return: +64.1% (negative 100% of index return)
 PSPSX Return: +63.5%

 Potomac US Plus Fund (PSPLX):
 Index Return: -29.0% (S&P 500)
 Model Return: -41.3% (150% of index return)
 PSPLX Return: -30.2% 

 Potomac US/Short Fund (PSPSX):
 Index Return: -29.0% (S&P 500)
 Model Return: +34.1% (negative 100% of index return)
 PSPSX Return: +31.3%

 Potomac Small Cap Plus Fund (POSCX):
 Index Return: -25.8% (Russell 2000)
 Model Return: -31.7% (125% of index return)
 POSCX Return: -31.7%

 Potomac Small Cap/Short Fund (POSSX):
 Index Return: -25.8% (Russell 2000)
 Model Return: +29.1% (negative 100% of index return)
 PSPSX Return: +23.8%

You can see that Potomac's funds don't correlate or negatively 
correlate perfectly but they achieve their fund objectives for 
the most part.  Through the market downturn, Potomac's "short" 
funds have offered investors the opportunity to realize gains.  
However, if you bet wrong and invested in Potomac "plus" funds, 
then you would have sustained significant capital losses.  The 
use of these funds involves an element of market timing, taboo 
for many financial advisors and investors.  However, those that 
remained fully invested through the bear market learned a tough 
lesson about the pitfalls of a buy-and-hold strategy in falling 

Leverage involves risk and has a cost.  Anyone who is interested 
in the Potomac "plus" or "short" funds is strongly encouraged to 
read the prospectus carefully, and to understand the risks/costs 
associated with these leveraged index strategies before deciding 
to invest.  

Compared to diversified stock fund categories such as large-cap 
value, blend and growth funds, the Potomac Funds either hit the 
bulls-eye or miss their target.  Of the five Potomac funds with 
3-year histories of performance, two "short" portfolios rank in 
the top 1% of their respective Morningstar category.  Two "plus" 
funds rank at the bottom (100th percentile) their category peer 
group, however, while another "plus" fund ranks near the bottom 
(98th percentile) of its category.


Because of their high minimum initial investment of $10,000 and 
use of sophisticated, leveraged index strategies, Potomac Funds 
are not for everyone.  However, investors that have such assets 
and are comfortable with the risks and costs of leveraged index 
strategies may want to give these long and short funds a closer 

If you're looking for exposure to the Dow 30 index of blue chip 
stocks, Potomac Dow Plus Fund is one of the few funds investing 
in that particular index.

According to Morningstar, Potomac Dow Plus Fund (PDOWX) gained 
10.4% during the 5-day period through October 21, 2002, for one 
of the period's top performances.  It's suitable as a large-cap 
value investment.  

Steve Wagner
Editor, Mutual Investor


What's Wrong With The VIX?
by Mark Phillips

I've watched the VIX off and on for many years now, and I can say
with conviction that the indicator is acting stranger than at any
other time in my memory.  For those of you just joining us, let's
recap how the VIX normally works.

The VIX is a sentiment indicator that is calculated using the
implied volatility of the eight most heavily-traded front month
put and call options on the S&P 100 index (OEX).  Typically the
VIX moves contrary to stock prices.  As the market rises, the
VIX falls, and vice versa.  Over the past several years, the VIX
has traded in a fairly predictable range between 20-30.
Excursions above the 30 level have led to blow-off declines in
the market, which have been quickly followed by strong rallies.
Declines in the VIX below 20 have been great opportunities to
buy back-month puts and hold on for the eventual market decline.

Clearly we haven't seen a VIX reading below 20 in quite some
time, as the broad market has continued to post lower highs and
lower lows all year long.  The last time the VIX tested the lower
end of its 'normal range was back in late May, when the OEX
trading up near 550.  But it is the recent VIX behavior that
continues to have me perplexed.

In conjunction with the broad market drilling down to fresh
multi-year lows in late July, the VIX spiked into the high 50's.
That led to the broad markets launching higher into mid-August,
with the OEX pushing as high as 487 before rolling over with a
vengeance.  It was interesting then, that the VIX never fell
below the 30 level, as investor fear clearly remained at an
elevated level.  That inflection point in late August resulted
in the VIX pushing back up above 50, as the OEX fell back to test
its July lows.  Looking at a daily chart of the OEX shows the
potential for a solid double bottom near the 385-388 area.  But
once again, the VIX is failing to relax, as it is stubbornly
holding near the 40 level.  The chart below shows the
relationship between the VIX and the OEX over the past 5 months.

S&P 100 Index (OEX) vs. Volatility Index (VIX) - Daily Interval

While the VIX has definitely relaxed off the 50 level in the
past couple weeks, it is somewhat telling that it has not fallen
nearly as precipitously as it did following the market bottom
back in July.  The initial rally off those lows had the VIX
falling into the low 30's within the first week of that rally.
It looks like market participants are less sure of this rally
and that nervousness is keeping the VIX higher than we might
expect following a 17% rally off the lows of a couple weeks ago.
Perhaps that nervousness (higher VIX) is providing the wall of
worry necessary for the broad market to keep working higher over
the near to medium future.

If so, then maybe there really isn't anything wrong with the VIX.
We just have to modify our view of its behavior to fit with the
current market environment.  In an attempt to get our view to
match that of current market behavior, let's take another look
at the charts above.  The descending trendline shown on the OEX
chart began back in early March and capped the rally attempts
both in May and then more recently, in late August.  So it is
that much more significant that on this most recent rally, the
OEX has actually pushed through that trendline, while at the same
time the VIX is holding at a higher level.  Since we know that
the VIX 'wants' to return to its historical range, the fact that
we have cleared that descending trendline, we could make the
argument that the elevated VIX represents the 'rally potential'
currently present in the broad market.

Another interesting observation is that the OEX is currently
holding right near an important level of recent resistance.  Note
that the 458-460 level turned back the bulls both at the end of
July (on the way up) and in early September (on the way back
down).  So what we really need to see is the OEX push through
this level with conviction (read:volume), both to justify further
upside and confirm the breakout over that descending trendline.

So where does the VIX fit into all this?  I'm glad you asked.
Let's come back to the point I made earlier about the VIX
stubbornly holding above 39, and I think the action of the VIX
is integrally tied to how the OEX behaves around that 458-460
resistance level.  A breakout over 460 will likely have the VIX
falling pretty sharply, while a failure to clear this level
should have the VIX moving back up towards the top of its recent
39-50 range.

S&P 100 Index (OEX) vs. Volatility Index (VIX) - Daily Interval

I find it interesting that the market really hasn't suffered any
significant profit taking since rebounding from the lows a couple
weeks ago.  This is in sharp contrast to the behavior from late
July and early August.  At that time, the initial rebound went
through its first bout of profit-taking only a week after the
bottom was put in place.  But after that bout of profit taking,
the OEX rebounded right back up to that same 458-460 area, before
plowing higher.  Note that when the OEX pushed through this
level, it was accompanied by the VIX breaking from its
consolidation near 39, very quickly falling back near the 30
level, as the OEX rose to its eventual August peak.

From a purely logical and fundamental basis, the market has no
reason to go up from here, and on that basis alone, I would look
for a serious bout of selling, leading the VIX back towards the
top of its recent range.  But as we have seen so far this week,
logic is not the dominant force at work in the market.  Today's
nearly 8% rally in the SOX following KLAC's abysmal earnings
report last night is just the latest example.

While the VIX is by no means a leading indicator, I think in its
current state it is set up to potentially give us a great
confirmation if the broad market rally persists.  If the OEX does
continue to defy logic and break out, along with the VIX breaking
down, I would take that as a strong signal that this rally still
has some room to run.  One way or another the VIX needs to relax
from its elevated state.  Whether that comes about from a
breakdown from current levels or from one more push higher and
then a rollover isn't the real key.  Once it moves back under the
39 level, that should set the wheels in motion for a move down to
at least test the top of its historical range (20-30), and that
is only going to happen if the broad market extends its rally
significantly above where it sits tonight.

As a point of reference, the VIX has been above 30 now for 16
weeks, an inordinately long period of time.  Looking at
historical charts of the VIX, the next longest period of time
where the VIX remained above the 30 level was in the fall of
1998, when the VIX remained elevated for 9 weeks before tumbling
back to earth.  And when it did, it presaged a tremendous rally
into the end of the year.  Sure we're in the clutches of a
powerful bear market and many aspects of our current situation
are different.  But it is in looking for the historical
similarities, that we find the seeds of potential profit.
Hopefully I've helped you to see some seeds ready to sprout.

Best Trading Wishes!


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offers true direct access to each option exchange offers stop and 
stop loss online option orders offers contingent option orders 
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Not a Fun Day

I hate surprises. The rally after the Beige Book was totally out of 
left field. Crummy numbers, crummy outlook and +200 rally. I still 
think this was a pivotal day despite the surprising move. The Dow 
failed to recover to close over 8500 and I think that is the key.

To read the rest of the Swing Trader Game Plan Click here:

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

“7 Steps to Success – Trading Options Online”.

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Contact Support
The Option Investor Newsletter                Wednesday 10-23-2002
Copyright 2002, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.

In Section Two:
Stop Loss Updates: None
Dropped Calls: None
Dropped Puts: None
Play of the Day: Call - UNH
Big Cap Covered Calls & Naked Puts: A Remarkable Recovery!

Updated on the site tonight:
Market Watch
Market Posture

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traded 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.



UNH - United Healthcare - $99.73 +2.03 (+6.24 for the week)

Company Summary:
UnitedHealth Group is a diversified health and well-being company 
that provides a broad spectrum of resources and services to help 
people achieve improved health and well-being through all stages 
of life. UnitedHealth Group offers products and services through 
five primary operating companies: UnitedHealthcare, Ovations, 
Uniprise, Specialized Care Services and Ingenix. (source: company 

Most Recent Write Up: 

UNH, as well as other HMO stocks have been on a tear lately.  UNH 
released earnings on Thursday that rose 53% from a year ago.  The 
company reported its 16th consecutive quarter of double digit 
growth and also raised estimates for this year and next.  The 
company has diversified itself to keep ahead of rising medical 
costs by expanding into areas such as dental care and mental 
health coverage. The recent earnings came in at $1.12 cents per 
share, beating forecasts of $1.04. UNH has done a good job of 
estimating costs and raising premiums quickly enough to cover 
those costs. They have maintained a favorable medical cost ratio, 
a profitability measure which takes into account premium dollars 
spent on costs such as hospitals and doctors.  The results 
propelled the stock to just over $100 on Thursday, before the HMO 
sector experienced a pullback and landed the stock back to 
unchanged.  On Friday, however, UNH traded back over $100 again, 
finding a top for the second day in a row right around $100.50.  

UNH has put together a series of higher highs and higher lows 
since dropping to around $82 during the July market swoon.  It is 
currently working on the third higher high after the second 
higher low. The stock is far above its 50-dma and 200-dma, which 
are consistently rising. The stock's point and figure buy signal 
came down at $94 and the current column of "X"s does look a 
little extended.  However, the fact that even it's pullback 
stopped short of a three-box reversal indicates that we may not 
see a reversal above the breakout level.  There had been previous 
resistance at $97 on both the daily and PnF charts, which has now 
been broken.  Ideally, we would like a pullback to support, 
around that previous resistance level ($97), for a long entry.  
We favor the 95 call for that pullback. However, if the strength 
in UNH continues and does not give us that entry point, then a 
show of intraday support at $100 or above would be our trigger to 
enter long. In that case, the 100 strike would be preferred.  
Place stops at $95.

Why This is Our Play of The Day:

UNH has behaved pretty much according to script.  After racing 
$10 since the beginning of the month, it pulled back just above 
support and then powered its way to the first close over $100, 
finishing the day at $100.37. We have been looking for intraday 
support above $100 for a long entry and a close over that level 
will suffice.  The company not only beat earnings estimates, but 
has also raised its guidance and looks strong going forward. 
Conservative traders can look for a break above the recent 
intraday high of $101.00 for entry. The point and figure bullish 
vertical count is $110 and if we can get a continued rally in the 
broader market, our initial target of $105 may be conservative. 

BUY CALL NOV-95 *UHB-KS OI= 2793 at $7.10 SL=3.50
BUY CALL NOV-100 UHB-KT OI= 2312 at $3.60 SL=1.80
BUY CALL DEC-95  UHB-LS OI= 1285 at $8.80 SL=4.40
BUY CALL DEC-100 UHB-LT OI=  993 at $5.20 SL=2.60

Average Daily Volume = 2.44 mil

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A Remarkable Recovery!
By Ray Cummins

Stocks rebounded today after positive comments on productivity
from Alan Greenspan and optimistic inflation data from the Fed's
Beige book.

The Dow Jones Industrial Average finished up 44 points at 8,494,
rebounding from a session low of 8,294.  Intel (NASDAQ:INTC),
Microsoft (NASDAQ:MSFT), and Hewlett-Packard (NYSE:HPQ) were
among the leaders on the blue-chip index.  In the technology
segment, computer hardware, software and Internet issues paved
the way higher.  The NASDAQ Composite Index added 27 points to
end at 1,320.  In the broader market, banking and pharmaceutical
issues endured the greatest selling pressure while airline and
retail stocks saw renewed buying interest.  The S&P 500-Stock
Index gained 5 points to 896.  On the New York Stock Exchange,
advancing issues outpaced decliners by a 5 to 3 margin.  Trading
volume totaled 1.55 billion shares.  On the NASDAQ, gainers were
ahead of losers by almost 2 to 1 on volume of 1.7 billion shares.
In the bond market, the yield on the 10-year note fell 3 basis
points to 4.23%.  The yield on the 30-year long bond closed at




The following summary is a reasonable account of the positions
previously offered in this section.  However, no representation
is being made as to the actual performance of a position and in
fact, there are frequently large differences between the summary
results and those of actual traders, due to the variety of ways
in which each play can be opened, closed, and/or adjusted.  In
addition, the summary might not be completely representative of
the manner in which the average trader would react to changing
conditions in a position and to the options market in general.
The play commentary (when provided) is simply a service to help
new traders understand when positions might be opened and closed.
In most cases, actions taken based on the commentary would be far
too late to be effective, thus it is not intended as a substitute
for personal trade management nor does it replace your duty to
diligently monitor and manage the positions in your portfolio.

Naked Puts

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

GILD     NOV    25   24.35  35.09   $0.65    7.03%
TARO     NOV    27   26.90  34.21   $0.60    5.41%
AMGN     NOV    40   39.40  49.80   $0.60    5.34%
ATH      NOV    65   63.80  71.27   $1.20    5.16%
ERTS     NOV    55   54.30  66.60   $0.70    4.50%
FRX      NOV    90   88.20  99.57   $1.80    5.14%
INVN     NOV    22   22.10  34.75   $0.40    5.46%
OVER     NOV    22   22.10  29.84   $0.40    5.98%
TRMS     NOV    40   39.35  51.50   $0.65    5.61%
WMT      NOV    50   49.25  56.10   $0.75    4.27%

Naked Calls

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

KSS      NOV    65    65.90  54.35   $0.90   5.79%
SIAL     NOV    50    50.75  46.47   $0.75   5.07%
BZH      NOV    75    75.90  65.52   $0.90   6.61%
DHR      NOV    70    70.85  59.03   $0.85   6.73%

Beezer Homes (NYSE:BZH) gapped up on the morning after our new
position was offered, due to a positive report on the housing
sector.  The sharp upward spike allowed conservative traders
(and our target portfolio) to move immediately to the NOV-$75
call for a credit of $0.90.  The issue rallied higher later
in the session, but our portfolio price is based on the first
few minutes of trading.

Put-Credit Spreads

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

INTU    45.90  51.71  NOV   35  40  0.60  39.40  $0.60   Open
MME     38.08  42.00  NOV   30  35  0.55  34.45  $0.55   Open
HCA     51.18  51.00  NOV   45  48  0.30  47.20  $0.30   Open
UNH     97.98  98.94  NOV   85  90  0.65  89.35  $0.65   Open

Call-Credit Spreads

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

AHC     62.35  64.27  NOV   75  70  0.60  70.60  $0.60   Open
HET     44.70  42.73  NOV   55  50  0.50  50.50  $0.50   Open
HRB     37.45  46.22  NOV   50  45  0.60  45.60 ($0.62) Closed
TLM     35.81  34.15  NOV   45  40  0.50  40.50  $0.50   Open
TEVA    64.90  68.40  NOV   75  70  0.90  70.90  $0.90   Open?

H&R Block (NYSE:HRB) continues to be a troublesome position but
Tuesday's close at a recent high, despite the market-wide slump,
ended our speculation about the future of the issue.

Credit Strangles

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

CDWC     NOV     55C    56.10   49.40   $1.10    7.51%
CDWC     NOV     40P    38.85   49.40   $1.15    9.04%
GILD     NOV     40C    40.50   35.09   $0.50    5.77%
GILD     NOV     27P    26.90   35.09   $0.60    7.46%

Synthetic Positions:

Stock  Pick     Last    Position   Credit   C/B    M/V   Status

EXPE   46.06   54.98   NOV35P/55C   0.10   55.10   1.85  Closed
THC    51.55   50.00   NOV55C/46P   0.00   46.62   0.10   Open
ANSI   37.38   37.45   NOV40C/35P	0.10   34.90   0.80   Open?

Advanced Neuromodulation (NASDAQ:ANSI) provided an acceptable
early-exit profit on 10/11 when the issue rallied to a new high
at $39.01.

Questions & comments on spreads/combos to Contact Support


This following group of plays is simply a list of candidates to
supplement your search for profitable trading positions.  As
with any investment, you must decide if the selections meet your
criteria for potential plays.  Only you can know what strategies
are suitable for your skill level, risk-reward tolerance and
portfolio outlook.  In addition, we recommend that you avoid any
strategy or technique in which you are not completely comfortable
with the potential loss, the necessary adjustments and the common
entry-exit strategies.  The positions with *** will be included
in the weekly summary.  Those with "TS" (Target-Shoot) are below
our minimum monthly return but may offer a favorable entry price
with a limit order, due to the daily volatility of the underlying


BULLISH PLAYS - Premium Selling

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

AZO - Autozone  $87.77  *** Solid Earnings Outlook! ***

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

AZO - Autozone  $87.77

PLAY (sell naked put):

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

SELL PUT  NOV 75   AZO WO     993     0.75     74.25      4.3% ***
SELL PUT  NOV 80   AZO WP   1,287     1.25     78.75      5.8%
SELL PUT  NOV 85   AZO WQ     592     2.30     82.70      8.8%

CCMP - Cabot Microelectronics  $46.64  *** Earnings Due! ***

Cabot Microelectronics (NASDAQ:CCMP) is a global supplier of high
performance polishing slurries used in the manufacture of advanced
integrated circuit (IC) devices, within a process called chemical
mechanical planarization (CMP).  CMP is a polishing process used
by IC device manufacturers to planarize or flatten many of the
multiple layers of material that are built upon silicon wafers
and necessary in the production of advanced ICs.  Planarization is
a polishing process that levels, smoothes, and removes the excess
material from the surfaces of these layers.  CMP slurries are
liquid formulations that facilitate and enhance this polishing
process and generally contain engineered abrasives and proprietary
chemicals.  CMP enables IC device manufacturers to produce smaller,
faster and more complex IC devices with fewer defects.

CCMP - Cabot Microelectronics  $46.64

PLAY (sell naked put):

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

SELL PUT  NOV 30   UKR WF     413     0.30    29.70       4.1% "TS"
SELL PUT  NOV 35   UKR WG   2,201     0.90    34.10      11.6% ***
SELL PUT  NOV 40   UKR WH   1,040     1.75    38.25      16.8%
SELL PUT  NOV 45   UKR WI   2,285     3.00    42.00      19.8%

CEPH - Cephalon  $48.82  *** Positive Provogil Results! ***

Cephalon (NASDAQ:CEPH) is an international biopharmaceutical firm
dedicated to the discovery, development and marketing of products
to treat sleep disorders, neurological disorders, cancer and pain.
In addition to conducting a very active research and development
program, the company markets three products in the United States
and a number of products in various countries throughout Europe.
Cephalon's United States products are comprised of Provigil, for
the treatment of excessive daytime sleepiness associated with
narcolepsy, Actiq for cancer pain management, and Gabitril for
the treatment of partial seizures associated with epilepsy.

CEPH - Cephalon  $48.82

PLAY (sell naked put):

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

SELL PUT  NOV 35   CQE WG   4,096     0.35    34.65      4.6%
SELL PUT  NOV 40   CQE WH   5,372     0.60    39.40      7.0% ***
SELL PUT  NOV 45   CQE WI   2,438     1.60    43.40     12.2%

CTSH - Cognizant  $68.20  *** Solid Quarterly Earnings! ***

Cognizant Technology Solutions Corporation (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 services are delivered
through the use of a seamless on-site and offshore consulting
project team.  The firm's solutions include application development
and integration, application management and re-engineering services.
The company's customers include ACNielsen, ADP, Brinker, Computer
Sciences, Dun & Bradstreet, First Data, IMS Health, Metropolitan
Life Insurance, Nielsen Media Research, PNC Bank, and Royal &
SunAlliance USA.

CTSH - Cognizant  $68.20

PLAY (sell naked put):

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

SELL PUT  NOV 55   UPU WK     462     0.60    54.40      5.4% ***
SELL PUT  NOV 60   UPU WL     222     1.20    58.80      7.8%
SELL PUT  NOV 65   UPU WM     269     2.75    62.25     13.6%

INVN - InVision Technologies  $35.37  *** Aviation Security ***

InVision Technologies (NASDAQ:INVN) is a provider of Federal
Aviation Administration (FAA)-certified explosives detection
systems (EDSs) used at airports for screening checked passenger
baggage.  The company has delivered over 160 EDS units to U.S.
airports and over 100 EDS units for installation in airports
outside of the United States.  The company's products are based
on advanced computed tomography, which is the only technology for
explosives detection that has met the FAA certification standards.
InVision Technologies was the first manufacturer, and is one of
only two manufacturers, whose EDS products have been certified by
the FAA for screening checked baggage.

INVN - InVision Technologies  $35.37

PLAY (sell naked put):

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

SELL PUT  NOV 25   FQQ WE   1,539     0.30    24.70      5.4% ***
SELL PUT  NOV 30   FQQ WF   1,072     0.95    29.05     12.9%
SELL PUT  NOV 35   FQQ WG   1,782     2.55    32.45     20.7%

SLM - SLM Corporation  $106.90  *** A New High For Sally Mae! ***
SLM Corporation (NYSE:SLM), formerly USA Education, is a private
source of funding, delivery and servicing support for higher
education loans for students and their parents in the United
States.  SLM provides a range of financial services, processing
capabilities and information technology to meet the needs of
educational institutions, lenders, students and guarantee
agencies.  The company's managed portfolio of student loans,
including loans owned and loans securitized, totals over $70
billion, of which the majority is federally insured.  The firm
also has commitments to buy billions of dollars of additional
student loans.  Primarily a provider of education credit, the
company serves a diverse range of clients, including over 6,000
educational and financial institutions and guarantee agencies.
The company serves in excess of seven million borrowers through
its ownership or management of student loans.

SLM - SLM Corporation  $106.90

PLAY (sell naked put):

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

SELL PUT  NOV 95   SLM WS     456     0.95    94.05      3.9% "TS"
SELL PUT  NOV 100  SLM WT   1,140     1.75    98.25      6.2%
SELL PUT  NOV 105  SLM WA     249     2.75   102.25      8.3%

SRCL - Stericycle  $36.43  *** An Old Favorite! ***

Stericycle (NASDAQ:SRCL) is a leading provider of waste management
services in the United States.  Stericycle operates on a regional
basis and internationally, providing waste collection, treatment,
and disposal services.  The company also has a fully integrated,
national medical waste management network.  Stericycle's network
includes 36 treatment/collection centers and 94 additional transfer
and collection sites.  The firm uses the network to provide medical
waste collection, transportation and treatment and many related
consulting, training and education services and products.  The
firm's Stericycle's treatment technologies include its proprietary
electro-thermal-deactivation system (ETD), as well as traditional
methods, such as autoclaving and incineration.

SRCL - Stericycle  $36.43

PLAY (sell naked put):

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

SELL PUT  NOV 30   URL WF   1,074     0.30    29.70      4.7% ***
SELL PUT  NOV 32.5 URL WZ   1,491     0.50    32.00      5.9%
SELL PUT  NOV 35   URL WG     693     1.05    33.95      9.8%


BULLISH PLAYS - Credit Spreads

EBAY - eBay Inc.  $63.61  *** A New Trading Range? ***

eBay (NASDAQ:EBAY) is a Web-based community in which buyers and
sellers are brought together to browse, buy and sell items such
as collectibles, automobiles, high-end or premium art items,
jewelry, consumer electronics and a host of practical and other
miscellaneous items.  The eBay trading platform is an automated,
topically arranged service that supports an auction format in
which sellers list items for sale and buyers bid on items of
interest, and a fixed-price format in which sellers and buyers
trade items at a fixed price established by sellers.  Through
its wholly owned and partially owned subsidiaries and affiliates,
the Company operated online trading platforms directed towards
the United States, Australia, Austria, Belgium, Canada, France,
Germany, Ireland, Italy, Japan, the Netherlands, New Zealand,
Singapore, South Korea, Spain, Sweden, Switzerland and also the
United Kingdom.

EBAY - eBay Inc.  $63.61

PLAY (conservative - bullish/credit spread):

BUY  PUT  NOV-50.00  QXB-WJ  OI=10625  A=$0.40
SELL PUT  NOV-55.00  QXB-WK  OI=10483  B=$0.70
POTENTIAL PROFIT(max)=8% B/E=$54.60

FPL - FPL Group  $57.52  *** Utility Sector Hedge! ***

FPL Group (NYSE:FPL) is a public utility holding company.  FPL
Group's principal subsidiary, FPL, is engaged in the generation,
transmission, distribution and sale of electric energy.  FPL Group
Capital, a wholly owned subsidiary of FPL Group, holds the capital
stock and provides funding for the operating subsidiaries other
than FPL.  The business activities of these operating subsidiaries
consist mainly of FPL Energy's non-rate regulated power projects.
FPL supplies electric service to a population of nearly 8 million
throughout most of the east and lower west coasts of Florida.
During 2001, FPL served approximately 4 million customer accounts.
FPL owns and operates four nuclear units: two at Turkey Point and
two at St. Lucie, Florida.

FPL - FPL Group  $57.52

PLAY (conservative - bullish/credit spread):

BUY  PUT  NOV-45.00  FPL-WI  OI=142   A=$0.50
SELL PUT  NOV-50.00  FPL-WJ  OI=1413  B=$0.80
POTENTIAL PROFIT(max)=8% B/E=$49.60

RKY - Adolph Coors Company  $69.30  *** New 52-Week High! ***

Adolph Coors Company (NYSE:RKY) is a producer of beer, with a
portfolio of brands designed to appeal to a range of consumer
taste, style and price preferences.  Its principal subsidiary,
Coors Brewing Company, is a brewer in the United States.  The
company also owns a brewer in the United Kingdom, Coors Brewers
Limited, and has brewing and packaging facilities in Elkton,
Virginia, and Memphis, Tennessee.  Coors owns major facilities
in Colorado to manufacture aluminum cans and ends, as well as
bottles, and is a partner in ventures that operate these plants.
Historically, the company's beverages have been sold throughout
the United States and in select international markets.  The Coors
Brewers brand portfolio consists of 20 United Kingdom beer brands
and four FAB brands with strong offerings in each of its target
segments.  Major United Kingdom brands include Carling and Grolsch.

Editors Note: Conservative traders should wait for a reaction to
RKY's earnings report, due on Thursday at 12:00 PM EST, before
initiating this position.

RKY - Adolph Coors Company  $69.30
PLAY (moderately aggressive - bullish/credit spread):

BUY  PUT  NOV-60.00  RKY-WL  OI=37   A=$0.45
SELL PUT  NOV-65.00  RKY-WM  OI=101  B=$1.25
POTENTIAL PROFIT(max)=19% B/E=$64.15


Neutral Plays - Credit Strangles

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

CCR - Countrywide Credit Industries  $50.38  *** Earnings Due! ***

Countrywide Credit Industries (NYSE:CCR) is a holding company
that originates, purchases, sells and services mortgage loans
through its principal subsidiary, Countrywide Home Loans (CHL).
The firm's mortgage loans are primarily prime credit first-lien
mortgage loans secured by single one- to four-family residences
(prime credit first mortgages).  The company also offers home
equity loans and sub-prime credit loans.  CCI, through its other
wholly owned subsidiaries, offers products and services that are
largely complementary to its mortgage banking business, including
the underwriting of lender-placed mortgage insurance, insurance
brokerage, mortgage-backed securities brokerage and underwriting,
brokerage of bulk servicing transactions, loan processing and
servicing in foreign countries, and retail banking.  The company
conducts its business through four segments: Insurance Segment,
Capital Markets Segment, Global Segment and Banking Segment.

Editors Note: Conservative traders should wait for a reaction to
CCR's earnings report, due on Thursday at 11:00 AM EST, before
initiating this position.

CCR - Countrywide Credit Industries  $50.38

PLAY (aggressive - neutral/credit strangle):

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

SELL CALL  NOV 55   CCR KK   1,045    0.75    55.75      6.1% ***
SELL PUT   NOV 40   CCR WH   2,426    0.50    39.50      6.3% ***



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

SPW - SPX Corporation  $87.50  *** Multiple Downgrades! ***

SPX Corporation (NYSE:SPX) is a worldwide provider of technical
products and systems, industrial products and services, flow
technology and service solutions.  SPX offers networking and
switching products, fire detection and building life-safety
products, television and radio broadcast antennas and towers,
life science products and services, transformers, compaction
equipment, high-integrity castings, dock products and systems,
cooling towers, air filtration products, valves, back-flow
protection and fluid handling devices, and metering and mixing
solutions.  The company's products and services also include
specialty service tools, diagnostic systems, service equipment
and technical information services.  The company's products
are used by a broad array of customers in various industries,
including chemical processing, pharmaceuticals, infrastructure,
mineral processing, petrochemical, telecommunications, financial
services, transportation and power generation.

SPW - SPX Corporation  $87.50

PLAY (moderately aggressive - sell naked call):

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

SELL CALL  NOV 105  SPW KA    388    0.70    105.70      5.1% ***
SELL CALL  NOV 100  SPW KT     90    1.25    101.25      7.0%
SELL CALL  NOV 95   SPW KR     45    4.40     99.40     18.2%


BEARISH PLAYS - Credit Spreads

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

CB - Chubb Corporation  $58.53  *** Downtrend Intact! ***

Chubb Corporation (NYSE:CB) is a holding company with subsidiaries
primarily engaged in the property and casualty insurance business.
The company's property and casualty insurance subsidiaries provide
insurance coverages principally in the United States, Canada,
Europe, Australia and parts of Latin America and the Far East.
Chubb also operates Chubb Financial Solutions, which is engaged in
developing and providing risk-financing services in the capital
and insurance markets, and a Real Estate Group, composed of the
Bellemead Development Corporation and its subsidiaries, which are
involved in commercial development activities, primarily in New
Jersey, and residential development activities, mainly in central
Florida.  The company's quarterly earnings are due 10/30/02.

CB - Chubb Corporation  $58.53

PLAY (conservative - bearish/credit spread):

BUY  CALL  NOV-70.00  CB-KN  OI=1098  A=$0.35
SELL CALL  NOV-65.00  CB-KM  OI=669   B=$0.95
POTENTIAL PROFIT(max)=15% B/E=$65.65

RCII - Rent-A-Center  $44.16  *** Sell-Off In Progress! ***

Rent-A-Center (NASDAQ:RCII) is a store operator in the rent-to-own
industry.  Rent-A-Center operates over 2,200 company-owned stores
in 50 states, the District of Columbia and Puerto Rico.  The firm's
subsidiary, ColorTyme, is a national franchisor of rent-to-own
stores.  ColorTyme has approximately 342 franchised stores in 42
states, 330 of which operated with the ColorTyme name and 12 other
stores which are operated under the Rent-A-Center name.  The firm's
stores offer consumer products including electronics, appliances,
computers and furniture, and accessories under rental purchase
agreements that typically allow the customer to obtain ownership of
the merchandise at the conclusion of an agreed-upon rental period.
These agreements cater to customers who only have a temporary need,
or who simply desire to rent rather than purchase, the merchandise.
The company's quarterly earnings are due 10/28/02.

RCII - Rent-A-Center  $44.16

PLAY (conservative - bearish/credit spread):

BUY  CALL  NOV-55.00  RQG-KK  OI=162  A=$0.30
SELL CALL  NOV-50.00  RQG-KJ  OI=179  B=$0.80
POTENTIAL PROFIT(max)=12% B/E=$50.55


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