Option Investor

Daily Newsletter, Thursday, 10/24/2002

Printer friendly version
The Option Investor Newsletter                Thursday 10-24-2002
Copyright 2002, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Dazed Bulls Consider Options
Futures Markets: NQ Futures 1000 and Iraq
Index Trader Wrap:
Market Sentiment: Which Way is Up?
Weekly Manager Microscope: John S. Orrico: The Arbitrage Fund (ARBFX)

Updated on the site tonight:
Swing Trader Game Plan: Reality Bite Bulls

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
      10-24-2002           High     Low     Volume Advance/Decline
DJIA     8317.34 -176.90  8558.63  8277.87 2.44 bln   1408/1760
NASDAQ   1298.69 - 21.50  1330.99  1296.54 1.89 bln   1547/1764
S&P 100   447.88 -  6.85   458.24   445.89   Totals   2955/3524
S&P 500   882.50 - 13.64   902.94   879.00
RUS 2000  366.02 -  2.93   371.27   365.61
DJ TRANS 2304.62 - 36.90  2375.08  2300.20
VIX        39.90 +  0.52    40.24    37.90
VXN        54.58 +  2.21    55.17    51.65
Total Vol   4,159M
Total UpVol 1,692M
Total DnVol 2,413M
52wk Highs    90
52wk Lows    216
TRIN        1.05
PUT/CALL    0.81

Dazed Bulls Consider Options

So near but yet so far. The markets touched almost a two-month
high at the open but failed to hold the high ground and ended
significantly down for the day. Dow 8558 was the double top high
for the week and a number not seen since Sept-12th. The Nasdaq
also hit a post September high of 1331 only to close under the
1300 level at the close.

Dow Chart

Nasdaq Chart

Everything started out on a positive note with a smaller than
expected Jobless Claims number of 389,000, which was below the
consensus of 403,000. This may have been encouraging on the
surface but it will take a string of lower numbers for several
weeks to make a difference. Continuing claims fell -115,000 from
decade high levels but this is just a blip in the data flow.
Several big name companies announced more layoffs today, which
indicates the bad conditions still exist. However, the number
of mass layoffs for September fell to only 1,060 involving
122,277 workers. This is down from the 128,080 in August.

The good jobs news offset a downgrade of Dow component IP by
Prudential before the open. PRU downgraded it to a SELL from
HOLD. They quoted the drop in GAAP net worth to $2.05 billion
and the increase in debt-equivalent liabilities to $16.2
billion. They think IP will need to issue about $2 billion in
more stock to raise capital.

Microsoft was down after the LA Times reported that the Justice
Dept is investigating allegations that MSFT is still hiding
Windows code from rivals in violation of its court settlement.
If true it could cause serious problems for MSFT but the company
said it was old news and they had nothing to hide. They were
also blasting the airwaves with a half-billion dollar attack
on AOL with MSN-8. Bill Gates was on CNBC pounding AOL and the
benefits of MSN-8. If MSFT is successful in seducing millions
of subscribers to switch it would be a real windfall for them.
The conversion would help cement future MSFT product loyalty
from those subscribers for things like Windows, Windows Media,
and any number of add on products. Look out AOL, the gorilla is
on the prowl.

After the bell today AMZN said it lost money again, -$35 million,
but broke even on a pro forma profit of $400,000. Yes, $400K on
$851 million in sales. This was a +33% increase in sales due in
part to their free shipping program. Buy for $8, sell for $10,
eat $4 in free shipping! I got it! You make it up in volume!
Just kidding, I buy something at AMZN a couple times a month
but they need to start making a real profit like Ebay soon or
the stock will end up in the penny stock arena. AMZN is trading
down -$1 in after hours. They did raise estimates for the 4Q.

FLEX also announced earnings after the bell of 8 cents and
inline with analysts estimates. They affirmed estimates going
forward and said that although market conditions remained
tough they were gaining market share. They also traded down
about -$1 in after hours. JDSU missed analyst's estimates
slightly after the close and said projected revenue could drop
-20% for the next quarter.

TQNT also announced inline earnings but guided lower for the
current quarter. MSTR also missed estimates by 2 cents and warned
about the coming quarter. Cigna lowered guidance to $1.47 for
the coming quarter vs estimates of $1.99.

Good news came from ERTS after the close, which posted earnings
of 34 cents compared to analyst's estimates of 17 cents. This
was the second quarter in a row that it blew away estimates.
The stock was trading up +2 in after hours. The company affirmed
estimates for the next quarter due to strong game sales. Analysts
commented after the announcement that maybe ERTS had come too
far too fast and the sales were due to slow with saturation.
Another win came from BMC, which beat estimates of 4 cents with
an 8 cent gain. They affirmed estimates for the next quarter at
the high end of the current range.

The worst big name earnings for today was SBC which missed
earnings by 3 cents but admitted they had lost -751,000 retail
lines to AT&T and WorldCom. SBC also said it was cutting capital
spending to $7.5 billion from earlier targets of $9.2 billion.
This is down from $11.2 billion last year. This is bad news
for the feeder group like Lucent and NT.

Despite all the bad earnings news this was not really what tanked
the markets. The lackluster earnings did nothing to give the bulls
confidence that they could muster another charge and after moving
sideways most of the day the bulls got nervous. Helping them was
rumors that IRAQ was going to kick all the reporters out of the
country and that stepped up war fears. Many analysts have said
that they expect him to go preemptive and try to strike us first
if he feels the walls closing in on him. This was strike one.

The FBI said they had specific and credible evidence that an
attack on rail lines, bridges, nuclear power plants, oil refineries
and assorted infrastructure targets could come at any time. Great!
They said they had discovered pictures of railroad bridges, power
plants and other targets in Al Qaeda documents and terrorists in
captivity had knowledge of planned attacks. The key here was that
the attacks could come at any time based on new intelligence. Strike
two for the markets.

The semiconductor sector had been soaring for over a week and was
leaping from bad new to bad news with new gains. Investors watched
in disbelief as stocks like KLAC gained strongly after warnings.
Today everything changed. The SOX had risen from 210 to almost 300
since Oct 10th for a +42% gain in 14 days. Overbought anyone? Well
the SOX hit 299.18 at exactly 11:30 today and the selling began.
That 300 level was the same level where the SOX had failed on
September 12th. Strong resistance and you can see that sellers
were waiting for it to be hit. Strike three, batter out.

SOX Chart

Adding to the overhead weight was the economic reports for tomorrow.
The Consumer Sentiment report is due out at 9:45 and it has not been
kind as of late. Also Durable Goods at 8:30 and Home Sales at 10:00.
The fear factor may have come into play as the momentum players
became frustrated with the double top failure at 8550. After two
attempts to rally through that level in the same week, the positive
earnings news dwindling, war fears growing and new terrorist threats
the best course of action was to take profits. This profit taking
could continue tomorrow on negative economic news.

The real question is what happens next Monday. The mutual fund year
comes to an end on Thursday. Tax selling should be over and end of
year replacement buying may have dried up. There may be some lingering
hang over but we only have five days left. We also have the big
gains to digest. Even at today's close we are up +1100 points in
fourteen days. During that 14 days funds saw out flows, $4.1
billion in the last week alone. If traders were rushing to buy
the new bull market then why have the last two weeks both shown
outflows? There are many unanswered questions.

One article I read this week was extolling the fears of lost
performance. With mutual funds closing weekly the rest are racing
to grab performance at any price. When this year is over and those
final fund statements are received there is going to be a massive
shift of cash from fund families. Fears of lost fees and jobs is
outweighing the fears of more market losses. This grabbing for
momentum stocks is increasing the volatility. Some funds are not
holding and are trying to trade themselves back into profitability,
is a scary thought. What this means is that stocks in fund
portfolios may not be in strong hands as many have thought. Strong
hands imply no need to sell, plenty of cash on hand and a long
term outlook. When considering many funds in the current market
they are being forced to raise cash on a daily basis and selling
is the only way they can get it. Their outlook is as long as the
next dip.

That means Monday is still a tossup. We know where resistance is
waiting. Dow 8350, 8400, 8500, 8555. Support is 8300, 8250, 8200
8138 and then 8000. A drop to 8036 would only be a -38% retracement
of the gains from the Oct 10th low. First we have to get through
Friday and that should depend on the economic reports and the urge
by investors to protect profits. Futures are down in after hours
despite the earnings being somewhat positive. Plenty of dark before
morning but I would be surprised to see another attempt at 8550 on

Enter Very Passively, Exit Very Aggressively!

Jim Brown


NQ Futures 1000 and Iraq
by Alan Hewko


4:00 PM Cash Market Close     ES 882-883, YM 8292, NQ 969
4:15 PM Future's Market Close ES 880,     YM 8279, NQ 968
5:00 PM YM Dow Futures close: YM 8275
5:30 PM ES 879s,  NQ 968

Dow   8317 - 176
SP500  882 -  13
COMPX 1298 -  21

Advance/Decline by Volume was bullish all morning, turned on a
dime at 1:40 PM and ended the day bearish.

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


Wednesday afternoon saw the very bearish Beige Book out at 2 PM
with ES in the 878-880 level, during the very unusual CME outage
at some future's clearing firms, and for "unknown" reasons, other
than the continuation of "Buy expected bad news", caused a two
hour rally into Wednesday's close.

In Wednesday overnight futures, ES was over 900, YM 8500, and NQ
an inch within 1000 at 997.

Futures gave back these "unusual" gains in the overnight session
even though Europe was strong all night; but Japan was red,
falling well below the Nikkei's resistance at 9000 to fall back
to the 8500 level.

Near the time of Thursday morning's Jobs data, ES had retraced 10
points to the 892 level.

See the overnights chart below
ES02Z (E-mini SP500 futures) Wednesday 1 PM thru Thursday 11 AM
including Wednesday's overnights.

9:30 AM ES 903, YM 8545, NQ 995
9:33 AM ES 905, YM 8555, NQ 996

9:33 AM levels were * Day and Month Highs for ES and YM
NQ traded slightly different than ES and Dow, as NQ retraced from
the open but made a higher high near 11:45 AM as on the 4th
attempt today, it pierced the psychological level of 1000 to also
create a new high for the week and month. ES and Dow both tried
to bounce but failed at the ES 904 and Dow Cash 8535 levels.

NQ has seemingly been leading ES and Dow a bit over the last day
and this morning, and when it formed an exhaustion top at
1001.50; matching the $SOX attempt to stall right under the
psychological 300 level; the markets drifted lower.

12:30 PM saw a bounce attempt off Dow 8450.

As the charts will show, the basic tone was "sideways" with
extremely low volume past 11 AM as buyers were quick to buy, and
shorts were quick to cover for a few points.

My thoughts as the reason for this was the pause the market took.

Perhaps other traders had formed the same opinion I had written
last night:

Dow either breaks out over 8500-8500 and heads to 8600/8750
Dow breaks down at 8500 and heads to 8250-8300

When neither really occurred by 11 AM, and with NQ printing near
1000; the Advance/Decline by volume was indeed bullish confirming
there still were more buyers than sellers.

The market simply continued drifting sideways for 3 hours,
neither strong or weak.


CNN report at 1:37 PM changed all of that when they reported that
Iraq was ordering all foreign journalists to leave Iraq by next

The market, which had been simply drifting sideways almost
"waiting" for a reason to do SOMETHING - perhaps used this news
as a reason to sell Long stock and take profits as War concerns

I was very surprised to see at 5:30 PM that this story was not on
the front page at www.cnn.com and indeed I needed to do a search
on 'Iraq' to find it. The link is below:


After reading it, it sure seems a less big-deal that one might
have thought watching the market sell off hard for 90 minutes.

By the same token, the 'reason' the market went UP yesterday
afternoon was also not very clear. If you would have just read
the above CNN newslink, without knowing what the market did
today, would you think that article's news would cause the Dow to
sell off 200 + points from its time of release?

Here's the Charts:

Chart: ES02Z (E-mini SP500 futures) Thursday

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

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

Thursday's charts above show this sideways action all day, until
the CNN Iraq news came out about 1:40 PM. This begs the question
what would the market have done if this news had not happened?
A moot question obviously as it did.

There was a lot of chart damage done in the afternoon. It will
take a minimum of ES back of 885-887 to maintain a bullish tone.
By the same token, if ES on Friday firmly loses 877-880, it could
create another Dow -200 type day.

Tomorrow is Friday:
Was today the start of FINALLY paying attention to all the
bearish news we've had for well over a week?
Are dip buyers still lurking and this Iraq news simply created a
situation of a lack of buyers vs. real sellers.

I would like to re-post a comment I made in Market Monitor
regarding two closely watched stocks: AIG and TYC

  Are AIG and TYC telling "us" something
  2 classic examples of this market's tone of 'Buy Bad News"
  AIG is the largest insurance company in US and a Key financial
  sector   stock. 3 months ago, on their July earnings they missed
  badly, but the stock (which usually trades in the 70 to 85 range
  for year 2001) was already so beaten up ahead of it at $48, that
  earnings miss 3 months ago was a "buy AIG on the missed
  earnings-it's  priced in at $48-52" (a sentiment I would agree
  with) AIG has been drifting sideways $62 to 65 the last 2 weeks,
  and had earnings this morning.

  They missed again (by 3 cents this time), stock opened at 62 and
  was bought all day with it now at 65. On pure fundies
  (fundamentals), AIG missing by 3 cents "should have" sent it back
  to the 52-55 support area from the 62 open, BUT it did not.
  Tyco (TYC): got the Trifecta this morning : Earnings miss,
  Warning going forward, and re-statement of prior financials
  (could TYC news be any worse?) Result of this news: Opens at $13,
  and upticks to current $15

* Please note the above comment was made at noon, and before this
Iraq situation developed.

Taking a view of this week. The last two weeks have closed green,
as you can see on below chart, we are approximately right where
we opened on Monday currently. Last Friday's close looks to be
about the 882 area. ES closed today between 880 and 882.

Chart: Six-day Chart of SP500 Cash index ($SPX.X)



Does one red day change this bullish tone we've seen since
October 10th? I do not know.

We've lived with Iraq 'war' possibilities for a few months it
seems, but today a simple statement of them kicking out
journalists became important.

How the market moves from the ES 800 and Dow 8300 level should
provide an answer for Friday.

How many times this past week+ have "we" gone to bed expecting
the market to do "X" and it winds up doing "Y"? [grin]

So for tonight, the morning tone should be bearish considering
the very week 3:30 PM short cover bounce we saw, and we'll have
to wait and see if the dip buyers truly have gone away, and if
they have, the selling could easily escalate back to the Dow
8100-8150 level.

On the side of the bulls - shorts have been burned so many times
the last 2 weeks - IF there is strong dip buying at some price
support level Friday, I doubt they will hesitate very long to
take their Short profits from this morning. If ES gets to 872
level on Friday, that might be an area to look for a bounce.

Bottomline is this: Was today just some over-due Long profit
taking after a directionless morning/early afternoon, or is this
the 'big-picture' sentiment 100% shift to Selling Stock?

Alan Hewko


Pack your bags and get out!

Stocks took a turn lower late in the day after Iraq officials
told foreign journals that they were being expelled with a
deadline of next week.  The Iraqi government did say they would
admit back a contained number sometime in the future, but under
stringent new rules.

While that news probably found more than a few foreign
journalists scrambling to pack their bags, it had the same impact
on investors as the major indexes fell from unchanged levels to
finish just off their session lows.

The knee-jerk reaction was to sell, not buy.  Just after the news
hit the wires, I quickly turned to the Defense Index (DFX.X)
159.98 -1.72%, which found similar selling as the broader

Only the "defensive" Gold/Silver Index (XAU.X) 62.20 +1.05%,
which had been trading in negative territory for the bulk of the
session found buyers, while Treasuries, which have also been a
safe haven in times of uncertainty saw buying into their 03:00 PM EST

Even the December Light Sweet Crude Oil futures (cl02z) $28.07
-0.46% found little bullish reaction, when past concerns with a
U.S. war with Iraq had found spike higher.

While the news out of Iraq squashed a rather mixed session, this
weeks jobless claims decline of 25,000 to 389,000, was much less
than the 406,000 expected.  While economists concede that the
Columbus Day holiday may have distorted the outcome of the data,
most were encouraged by the news.  The four-week average level of
claims dropped to a seven-week low of 404,000 and hints that the
summer's spike in layoffs is fading.  In recent months, levels
above 400,000 have been concerning to economists, while levels
below have had a calming effect.

Tonight, I'm going to turn a little more cautious near-term from
a bullish perspective.  There are some things that "trouble" me
as it relates to the lack of bullishness form the deep cyclicals
as depicted by the Morgan Stanley Cyclical Index (CYC.X) 429.90

Morgan Stanley Cyclical Index (CYC.X) - Daily Interval

If there's one "sector" that is troubling the bullish side of me,
it is the lagging of the deep cyclicals.  Both IP and DD recently
beat estimates, but found selling on the news.  I would sure have
thought if IT spending were to pick up, that it would be the deep
cyclicals doing the spending as earnings hit the bottom line.
However, the technicals in the CYC.X don't depict that of a
MARKET being bullish in the group.  Either my scenario is
incorrect, or other sectors and therefore broader markets become
vulnerable to the downside.  In past "bear market rallies" the
CYC.X has been a rather strong performer, but they don't seem to
be "confirming" any broader market bullishness.  Note that I'm
using the same type of retracement in the CYC.X with upper and
lower ends anchored from the August highs to recent lows.  Just
like we're doing in the indexes we cover.

Dow Industrials Chart - Daily Interval

I've never "liked" stochastics by themselves as they've kept me
out of some great shorts when oversold, and great longs when
overbought.  However, when combined with MACD, stochastics can
give better "heads up" to shorter-term action.  I see some
similarity in MACD and Stochastics that has the bullish side of
me very cautious at the end of today's session.  A bull would
become concerned should the Dow Industrials break back below the
"old" downward trend.  With the 50-day SMA at 8,248 as a guide, a
break back below that level immediately has a bull assessing
downside risk to 8,170 and 7,962 and weighing that potential risk
against a bullish target of 8,700-8,717 near-term.

Another stock in the Dow I was monitoring for some bullish
leadership to the upside was shares of 3M (NYSE:MMM) $129.80
-2.8%.  I wanted to see a confirming bullish move above $130.
Even this morning after the positive jobless data, the stock
opened at $129.75, then ticked up at $129.80 and found selling.
Who are these guys willing to sell just prior to a potentially
MASSIVE upside breakout where there's no overhead supply to keep
things in check?  I'm thinking its some bears that have no fear
of economic recovery and willing to put their money on it!

The Dow Industrials Bullish % ($BPINDU) saw no change in its
bullish % and stands at "bull confirmed" status at 53.33%.
August's relative high reading was 60%.  Think of this in the
same context as what we did in today's 01:00 PM update with the
very broad NASDAQ Composite Bullish % and NASDAQ Composite

On a point and figure chart, the first sell signal in the Dow
Industrials (INDU) 8,317 would not come until a trade at 8,250 on
conventional $50 box scale.  For the Dow Diamonds (AMEX:DIA)
$83.03, the first sell signal would come at $72 on conventional
$1 box.  A note here would be to look for DIA support near $80-
$81.  At $81, that's when the DIA gave a "triple-top buy signal."

S&P 500 Index Chart - Daily Interval

I count 1,2,3,4 levels of support near the 875 level.  One is
from the mid-point of our "cloned" regression channel.  I can't
put a lot of faith in that trend as it was cloned, but I use it
anyway as it help me assess potential downside to the base of
that channel.  Second is the 50-day SMA at 876, third is
retracement of 61.8% at 878, and fourth is potential support from
"old" bearish trend.  Suffice it to say, if 4 levels of support
are broken to the downside, a bull isn't sitting around if "full
positions" and whistling Dixie!  Was that a little "bull trap"
today with that tick above Monday's high of 900.69?  There sure
as heck wasn't enough bullish conviction behind it to make much
headway was there?  If looking bearish, stay patient and
disciplined with your stops.

The S&P 500 Bullish % ($BPSPX) saw a net gain of 10 stocks to
point and figure buy signals today.  This has the bullish %
growing to 48.2%.  August's relative high reading was 58%.

S&P 100 Index Chart - Daily Interval

The S&P 100 Index (OEX.X) was the STRONGEST index during the
August-early October decline.  As such, this is my LEADER and
STRONGEST index.  Therefore, it is the LAST PLACE I would want to
see weakness.  If I do see weakness below 440, then I'm ON THE
ALERT that sellers are getting more aggressive and SELLING THEIR
WINNER.  A BEAR that is thinking of shorting, then take it VERY
VERY EASY!!!!  Study the past to understand the potential future.
A BEAR does NOT want to get caught SHORT/PUT full position on a
reversal higher in a STRONG index.

The S&P 100 Index (OEX.X) saw a net gain of 3 stocks to point and
figure buy signals today, which has the bullish % growing to 54%
and still "bull alert" status.  This is getting close to August's
58% reading.  A reading of 60% would have this index "bull
confirmed."  As such, a good level of RISK for bulls to be
tightening up some stops, but still some upside to be had.  If
Treasuries were to see selling and more cash free up, could well
see a "bull confirmed reading" and challenge of March's high
bullish % levels above 70%.  Keep this in mind if thinking "full
BEARISH positions."

NASDAQ-100 Index Chart (NDX.X) - Daily Interval

I've shown the QQQ's in recent sessions and here is the NASDAQ-
100 Index (NDX.X) itself, with conventional retracement set from
the August highs to recent lows.  It is suspicious at the least
to say that 1,000 is a psychological number that would be a bulls
target and perhaps a level where bears will be lurking.  One
could also envision how when the NDX took out the lows and traded
into the lower band of retracement, that the rally back would
fall just short of the upper band.  This index has had the
strongest % rally off the bottom, but it was also the most
heavily shorted and perhaps benefited most from short covering.

If we were to see some buying come back into Treasuries, bears
may move aside and stop covering.  In the recent week, it's been
the telecom and telecom equipment sectors that have seen some
sharp rises.  While that action may indeed be the sign of a
trough bottom for those sectors, we've seen a lot of broker
downgrades in the past couple of sessions for VZ, SBC and QCOM.

This index violated its past lows by a greater degree and when
compared to the 50-day and 21-day SMA's with the other indexes,
has some air underneath.  If market makers are looking to get
short, expect some volatility in the various stocks within the
NDX as they try and build some liquidity traps.

However, if bonds start seeing buying, and liquidity dries up,
that's when the NDX becomes more vulnerable.  If the cyclicals
decline further, then watch for the NDX to catch up to the
downside in quick fashion.

The NASDAQ-100 Bullish % ($BPNDX) saw a net gain of 2 stocks to
point and figure buy signals today.  This has the bullish %
growing to 55% and still remains "bull alert."  In August, the
bullish % reached a high reading of 60%.  It would take a reading
of 62% to have this index reaching "bull confirmed" status, and a
reversal lower reading of 48% to have this index back in "bear
confirmed" status.

This is the quicker and more volatile bullish % that one would
first look to see internal weakening.  Not seeing it at this
point, so BEARS are very cautious and limiting trades to 1/4

Jeff Bailey

Tired of waiting on trades to execute?
Does your broker offer Stop Losses on Options?

Trade instantly with Stop Losses at PreferredTrade Inc.
Stop Losses based on the option price or the stock price.
Move your trading into the next millennium with PreferredTrade.

Anything else is too slow!



Which Way is Up?
by Steven Price

The market schizophrenia continued today, with the broader
averages eventually settling for significant losses by the end of
the day.  While a look at the end of day numbers may seem very
bearish, there were some positives imbedded in the results, as
well.  The Dow once again tested 8300 and found buyers, closing
at 8317.  It did trade as low as 8277, but never cracked the 50-
dma of 8248.  The Nasdaq tested 1300 and couldn't hold, closing
at 1298, but I wouldn't call it a major breakdown.  Still we saw
the third straight day of a lower low in the Dow, and the
semiconductor stocks may have finally run out of steam.  After
gaining 35% in the last two weeks, the Semiconductor Index
(SOX.X) topped out at 299.18, before falling negative on the day.
The 300 level has provided previous resistance and would seem the
logical point for exhaustion to set in.  of, course, the recent
rally has been anything but logical, as numerous chipmakers and
chip equipment makers have been guiding revenue lower during the
recent earnings season, with very little good news to offset the

The markets began to sink after news hit the wires that Iraq was
tossing out all foreign journalists.  If the country really
intends to open itself up for inspection, there would be no need
to take such action.  In recent days, it has seemed the U.S. was
backing away from an invasion, instead giving Saddam Hussein a
chance to make nice by complying with U.N. inspection
requirements.  However, it now appears the U.S. plan was designed
simply to give Saddam enough rope to hang himself with.

The retail stocks have been surging, following positive comments
from Wal-Mart, which reaffirmed its 2002 earnings guidance.
However, tomorrow's university of Michigan Consumer Sentiment
report should give us a look at consumers' attitudes as we get
closer to the holiday shopping season.  Many retailers have
blamed slow mall traffic for falling sales.  However, it is more
likely that the problem is that consumers simply don't want to
spend as much with an uncertain economy and almost daily
announcements of layoffs coming from a wide range of industries.
The Retail Index (RLX.X) also found resistance at the 300 level
after a rally of almost 20% since October 9. The area between 300
and 310 has been impenetrable for the group on the last two
rallies and tomorrow's Sentiment numbers should give us an
indication as to whether we were simply given a better entry
point for short plays in the sector.  The alternative is to get
out of the way and let the index run to the 200-dma of 322, but
I'm leaning to the short side on this group.

Another group which rallied right to resistance is the software
stocks.  The Software Index has tacked on 28% from its low of
77.63 on October 7, to yesterday's close over 99.  It was unable
to crack triple digits after reports surfaced that Microsoft was
not entirely compliant with its antitrust settlement and was
still hiding technical information about Windows from its
competitors. Bill Gates' comments about gaining market share from
AOL for its MSN internet service were unable to rescue the stock
from a loss of $1.97, which managed to erase most of the activity
of the last three days.

The Market Volatility Index (VIX) remains close to 40, closing
today at 39.90.  This is generally an indication of fear in the
marketplace, as traders don't want to sell anything too cheap for
fear a big move to the downside will erase gains from premium
decay. The put/call ratio is also on the rise (.81), reflecting
similar fears, as the number of puts traded is increasing on the
re-test of support levels to the downside.

We are not yet out of the woods, and while the recent rally has
put bears back into hibernation, they have not hit R.E.M. sleep
just yet.  If we see intraday resistance on a Dow break under
8300, it may be enough to bring out the shorts in force. The SPX
also has not yet been able to hold over 900, reaching 902 briefly
today, only to be turned back.  Until that happens, look for the
Dow and Nasdaq to struggle to hold onto gains. If we continue to
bounce from 8300, then step aside until we see support over SPX
900, before stepping in long.  If we breakdown below 8300 again,
then I'll be looking for short opportunities, as key sectors seem
to have run out of steam.


Market Averages


52-week High: 10679
52-week Low :  7286
Current     :  8317

Moving Averages:

 10-dma: 8241
 50-dma: 8248
200-dma: 9338

S&P 500 ($SPX)

52-week High: 1176
52-week Low :  775
Current     :  882

Moving Averages:

 10-dma:  875
 50-dma:  876
200-dma: 1009

Nasdaq-100 ($NDX)

52-week High: 1734
52-week Low :  795
Current     :  964

Moving Averages:

 10-dma:  945
 50-dma:  918
200-dma: 1182


The Semiconductor Index (SOX.X): There have been numerous times
over the last couple of weeks that this sector looked like a
shorting opportunity.  4Q warnings were given with almost every
earnings release.  Stocks that announced after hours were
hammered in after market trading.  Revenue forecasts were lowered
into 2003.  Yet still the SOX kept going up.  Stocks that had
traded down after hours miraculously rebounded the next morning,
and kept going.  Now that we have hit the 300 level, or more
precisely, failed the 300 level, with an intraday high of 299.18,
we may finally get that shorting opportunity. The SOX finally
closed down for the day after the rally failed, settling in at
278.50, just above the 50-dma of 276.92.  We'll be looking for a
break below the 50-dma and then searching for some of the
weaklings that rode the coattails of the broader market.

52-week High: 657
52-week Low : 263
Current     : 278

Moving Averages:

 10-dma: 265
 50-dma: 276
200-dma: 435


Market Volatility

The VIX remains close to 40, reflecting a level of downside fear.
If the Dow breaks support of 8300 on a closing basis, we expect
the VIX to head back into the 40s, and a break under 8000 should
put us around 45.  For the moment, however, we are at 39.90 and
could see some premium sellers capturing weekend time decay
tomorrow if we remain above 8300. Watch for the VIX to fall into
Friday's close if we don't get a sell-off. The VXN continues to
bounce from its 200-dma of 50.93 and it will be interesting to
see if a market rally can finally crack that level.  It hasn't
been below the 200-dma since the end of August.

CBOE Market Volatility Index (VIX) = 39.90 +0.52
Nasdaq-100 Volatility Index  (VXN) = 54.58 +2.21


          Put/Call Ratio  Call Volume   Put Volume

Total          0.81        575,268       468,575
Equity Only    0.70        473,446       332,315
OEX            1.05         14,403        15,142
QQQ            1.60         43,575        69,627


Bullish Percent Data

           Current   Change   Status
NYSE          36      + 2     Bull Confirmed
NASDAQ-100    55      + 6     Bull Alert
Dow Indust.   53      + 0     Bull Confirmed
S&P 500       48      + 3     Bull Alert
S&P 100       54      + 5     Bull Alert

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   0.85
10-Day Arms Index  0.85
21-Day Arms Index  1.11
55-Day Arms Index  1.26

Extreme readings above 1.5 are bullish, and readings below .85
are bearish.  These signals don't occur often and tend be early,
but when they do, they can signal significant market turning


Market Internals

        Advancers     Decliners
NYSE       1148          1565
NASDAQ     1454          1679

        New Highs      New Lows
NYSE         24              32
NASDAQ       59              79

        Volume (in millions)
NYSE     2,035
NASDAQ   1,931


Commitments Of Traders Report: 10/15/02

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

Not much change for the commercials, who added 2,000 long
contracts and 4,000 shorts, for a net increase of 1600 short
contracts, but not much % change. Small traders increased both
positions for a net overall increase of only 300 long contracts.

Commercials   Long      Short      Net     % Of OI
09/24/02      425,276   442,661   (17,385)   (2.0%)
10/01/02      423,661   440,133   (16,472)   (1.9%)
10/08/02      427,070   445,135   (18,065)   (2.1%)
10/15/02      429,448   449,138   (19,690)   (2.2%)

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
09/24/02      124,232    73,506    50,726     25.7%
10/01/02      123,371    74,704    48,667     24.5%
10/08/02      131,486    81,010    50,476     23.7%
10/15/02      134,507    83,714    50,793     23.37%

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


Commercials made little change to the long side, but reduced
shorts by almost 4,000 contracts.  Small traders, on the other
hand, left long positions virtually unchanged, while more than
doubling their short contract positions; adding a total of almost
7,000 short contracts.

Commercials   Long      Short      Net     % of OI
09/24/02       46,637     54,613    (7,976) ( 7.9%)
10/01/02       46,000     52,976    (6,976) ( 7.0%)
10/08/02       45,384     55,504   (10,120) (10.0%)
10/15/02       45,578     51,969    (6,391) ( 6.6%)

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
09/24/02       11,163     9,421     1,742     8.5%
10/01/02       11,896     9,575     2,321    10.8%
10/08/02       10,735     5,721     5,014    30.4%
10/15/02       10,185    12,478     2,293    10.1%

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


Commercials increased long positions by 1,400 contracts, reducing
shorts by 2,000.  Small traders reduced the long side by 1,800
contracts, while slightly increasing shorts.

Commercials   Long      Short      Net     % of OI
09/24/02       18,951    10,074    8,877      30.6%
10/01/02       18,969     8,903   10,066      36.1%
10/08/02       19,550    11,823    7,727      24.6%
10/15/02       20,914     9,630   11,284      36.9%

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
09/24/02        7,939     9,453    (1,514)   ( 8.7%)
10/01/02        6,809    10,503    (3,694)   (21.3%)
10/08/02        7,890     9,645    (1,755)   (10.0%)
10/15/02        6,040    10,329    (4.289)   (26.2%)

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


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

“7 Steps to Success – Trading Options Online”.

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



John S. Orrico: The Arbitrage Fund (ARBFX)

John Orrico is president and portfolio manager with Water Island
Capital LLC of New York City, which serves as investment advisor
for the Arbitrage Fund (ARBFX), a relatively new fund that seeks
to achieve capital growth by engaging in merger arbitrage.

This non-diversified status mutual fund invests in both common
stocks and preferred stocks, and typically invests at least 65%
of assets in equity securities of companies that concentrate in
mergers, takeovers, tender offers, leveraged buyouts, spin-offs
and liquidations, and other corporate reorganizations.

Prior to Water Island, Orrico managed private hedge funds with
Lindemann Capital Partners, LP during 1999.  From 1994 to 1998,
he engaged in mergers and acquisition arbitrage while managing
the Gruss Family Trust for Gruss & Company.  Orrico has earned
the right to use the Chartered Financial Analyst designation.

The Arbitrage Fund began operations on September 18, 2000, and
has $22 million in net assets today.  It is available directly
(call 800-295-4485) or through a dozen brokerage fund networks,
including Charles Schwab, Fidelity, and TD Waterhouse.  Retail
investors can buy the fund on a no-load and no-transaction fee
(NTF) basis through Schwab's and TD Waterhouse's NTF programs.
The Arbitrage Fund's minimum initial investment is $2,000 both
for regular and IRA accounts.

If you go to the fund's website at www.thearbfund.com, you can
get complete fund information and download the fund prospectus,
which contains detailed information on the Arb Fund's strategy,
risk factors, and expenses.  At 1.94%, the fund's expense ratio
is about a half percentage point above that of the average U.S.
stock fund, and includes a 1.50% management fee and 0.25% 12b-1

Investment Overview

The Arbitrage Fund (ARBFX) uses a merger arbitrage strategy that
invests in announced takeover deals and corporate restructurings.
The fund's adviser, Water Island Capital LLC views themselves as
a market-neutral strategy and also a "hedge fund" in mutual fund
clothing.  The merger arbitrage strategy that Orrico employs has
been mainly the domain of wealthy investors through hedge funds
and allows all investors to reduce their risk in "flat to down"
markets and enhance their performance in "up" markets.  As such,
their general feeling is that the Arbitrage Fund belongs in all

Merger arbitrage seeks to capitalize on the market's reaction to
a public announcement of a merger, acquisition, leverage buyout,
tender offer, spin-off or corporate reorganization.  It seeks to
generate returns for investors by riding both sides of imminent
M&A deals.  For instance, Orrico will buy the stock of a company
that's an acquisition target while at the same time shorting the
stock of the acquiring company.

Orrico looks at the current price of the target company’s shares
against what they expect the share price will be when the deal is
finalized.  The difference between the current price and expected
terminal share price is the "spread," or the profit that they can
capture.  As time passes (and the deal nears closing), the spread
or profit opportunity typically declines.

In shorting the shares of the acquiring company, Orrico employs a
market neutral strategy that disregards the overall direction of
the equity markets.  Orrico does this to hedge against a decline
in the value of the acquiring company's securities before the M&A
transaction is complete.  The result is a neutral bias in regards
to market exposure.  The gain in share price of the long position
is offset by the loss from the corresponding short position (vica

The only time Orrico won't short shares of the acquiring company
is when the merger or acquisition is structured as an "all cash"

Note that merger arbitrage funds require flexibility to move in
and out of deals quickly.  Regulatory or legal developments, for
example, can change the risk profile of the deal, making it less
appropriate for the portfolio.  Orrico may take a stake and then
sell that stake, only at a later date to buy into the deal again.
He is not afraid to unwind positions and then move back into M&A
deals as they progress, if doing so is justified.

The Arbitrage Fund has "non-diversified" status but still takes
35-55 positions at any one time, with no more than 5% of assets
invested in any one issuer.  The fund limits its investments in
any one sector to 20% of assets.  Orrico may do other things to
limit the fund's downside risk as well such as avoiding hostile
takeovers where the acquirer has not indicated a willingness to
maximize shareholder value.  The end result is a relatively low
risk profile compared with the average diversified equity fund.

While much of the merger activity today involves big companies
buying up little ones, Orrico also looks at M&A deals between
smaller players looking to build enough weight or influence to
remain independent or move up the food chain.  Being small and
nimble Orrico contends has been a benefit in the recent equity
market environment.

According to Morningstar's latest fund report, the Arb Fund's
average market capitalization was $1.3 billion and its average
P/E was 20.9, landing it in the small-growth style box.  Still,
it may be better to think of the fund as having a mid-cap core
(blend) style.  Both Morningstar and Lipper categorize it that
way.  In the next section, we take a look at the fund's return

Investment Performance

Because the fund employs a merger arbitrage strategy, Orrico's
performance is not comparable to the average diversified stock
fund, which takes only long positions in stocks.  The strategy
employed seeks to generate absolute positive returns in up and
down markets, and produces fixed income-like returns utilizing
the stock markets.  Accordingly, the fund's index benchmark is
the "risk-free" rate of return (best represented by the T-Bill
rate).  Orrico strives to generate returns that are four times
that of the Risk Free Rate.

What does that mean in terms of expected annual returns?  That
translates into expected returns in the area of 8%-10% in bear
and flat markets, and 10%-15% in bull markets.  Since inception
(September 18, 2000), the Arbitrage Fund has produced an annual
equivalent return of approximately 8.2% through October 22, per
company sources.

In the fund's first full year of operation (2001), the Arb Fund
generated a total return of 9.0%, in line with expectation.  As
of October 23, 2002, the fund had a positive YTD return of 7.3%
and a trailing 1-year return of 12.1%, according to Morningstar,
ranking it in the top 1% of the mid-cap blend category.

Orrico's 12.1% return over the past 12 months represents a 28.1%
return advantage to the S&P 500 index and 14.9% return advantage
to the S&P Midcap 400 index.  And, it's roughly in line with the
T-bill index target (four times the 3% T-bill rate).  So, Orrico
has achieved the fund's desired return objective.

Compared to the $866 million Merger Fund (MERFX), which utilizes
a similar merger arbitrage strategy, the Arbitrage Fund has done
very well in its brief history.  In 2001, the Arb Fund rose 9.0%
compared with only a 2.0% gain by the Merger Fund.  In 2002, the
Merger Fund has lost 8.8% on YTD basis compared with a 7.3% gain
from the Arbitrage Fund.  So while the Merger Fund has slipped a
notch recently, Orrico's performance has shined.

The Merger Fund's long-term performance, however, offers a sense
of what the Arbitrage Fund is capable of over the long run.  The
Merger Fund's trailing 10-year annualized return as of September
30, 2002 was 9.0%, matching the return of the S&P 500 index with
significantly less risk (i.e. bond fund-like risk).

In Morningstar's system, the Merger Fund is categorized as U.S.
hybrid, and is graded as having produced "low" risk versus the
average domestic hybrid fund.  Considering the average domestic
hybrid fund has less risk than the average U.S. stock fund, the
Merger Fund's risk profile is very low.  So, in terms of "risk"
the Arbitrage Fund should have a low risk profile that is more
comparable to a fixed income fund than a partial or full equity


The only knock I have on the Arbitrage Fund is its 1.94% expense
ratio which is a little high relative to the average mutual fund.
However, considering the Arb Fund's solid performance so far and
its expected low risk profile, it's unique and worth considering
in my opinion.  Orrico has certainly overcome the fund's expense
ratio to generate strong total returns for investors in what has
otherwise been a poor environment for the broad equity market.

With interest rates at historic lows, you may also view the Arb
Fund as a viable alternative to bond mutual funds, which likely
will decline in price if/when interest rates rise again.  While
bond funds have enjoyed a great run, many pundits feel the bull
market for bonds is in the late innings and may disappoint new
investors.  Because of its low market correlation, the Arb Fund
like fixed income investments may help provide diversification
against a portfolio consisting only of pure equity investments.

For more information or a fund prospectus, call 800-295-4485 or
go online at www.thearbfund.com.

Steve Wagner
Editor, Mutual Investor

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

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



Reality Bite Bulls

Finally a script play out the way it should have. Strong
resistance held and profit taking began in the face of slowing
momentum. The SOX failed at resistance and bigcaps, which had been
savings accounts for stashing cash begin to fade.

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

If you like the results you have been receiving we
would welcome you as a permanent subscriber.

The monthly subscription price is 39.95. The quarterly
price is 99.95 which is $20 off the monthly rate.

We would like to have you as a subscriber. You may
subscribe at any time but your subscription will not
start until your free trial is over.

To subscribe you may go to our website at


and click on "subscribe" to use our secure credit
card server or you may simply send an email to

 "Contact Support"

with your credit card information,(number, exp date, name)
or you may call us at 303-797-0200 and give us the
information over the phone.

You may also fax the information to: 303-797-1333


Please read our disclaimer at:


For more information on advertising in OptionInvestor Newsletter,
or any Premier Investor Network newsletter please contact:

Contact Support
The Option Investor Newsletter                 Thursday 10-24-2002
Copyright 2002, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.

In Section Two:

Stock Picks: Ahead of Schedule
Dropped Calls: FNM
Dropped Puts: GM, HD, KSS
Daily Results
Call Play Updates: PNRA, TRMS, UNH, QCOM
New Calls Plays: JNJ
Put Play Updates: None
New Put Plays: CTAS, IBM, NTRS


Ahead of Schedule

CTXS - Citrix Systems - $7.18
Strategy: Long Stock with Put Insurance

Citrix Systems, which focuses on software that creates a virtual
workplace, is positioned to continue growing as businesses spend
less on travel and cut overhead costs by allowing remote input
from workers. The company has seen its revenues fall, as business
spending has been severely reduced in the last several years.
however, during this period, Citrix has continued to expand its
platforms and add customers worldwide that won't be going out of
business anytime soon.  It has recently added the Shanghai Port
Authority, the National Institutes of Health, Boston Medical
Center, ABN AMRO Bank, SBB Swiss Railway, Ministry of Finance of
the State of North Rhine Westphalia, Computercenter of Ministry
of Finance in Slovakia, ITEGRO, Apria Healthcare, Conseco Finance
and Health Services Advisory Group. Some of the early users of
CTXS's new NFuse Elite technology include General Electric,
National Institutes of Health, ASRC Aerospace and Kingfisher PLC.

The company released earnings on Tuesday of $0.10 per share,
which beat estimates by $0.04.  It posted revenues of $118.9
million, which was above previous guidance of $110-$115 million.
While these numbers were down from the previous year, they
reflected the fact that the company appears to be stabilizing.
The company made improvements in several areas, including the
time it takes to collect money from its customers and the
turnaround time its resellers have held onto its products. The
company reiterated its fourth quarter guidance, which in and of
itself is a positive, since many software makers are shying away
from predictions. That guidance includes an increase in earnings
to $0.11-$0.13 and revenue between $115-$120 million.

Citrix CEO mark Templeton said, "Specifically, we achieved higher
than expected revenue due to strength in packaged product sales.
We increased adjusted operating margins to 17% from 11%,
sequentially, by focusing on expense reduction. And our
distributors further reduced their inventory in anticipation of
our new 'open-style' licensing program called Citrix Easy
Licensing.  With a healthy pipeline, lower operating expenses and
improved go-to-market programs, we feel well positioned to take
on the fourth quarter."

This is a far cry from what we've been hearing elsewhere in the
industry, which is that revenues are declining and firms are not
sure when it will turn around. CTXS put its money where its mouth
is as well, repurchasing 7 million shares of common stock during
the quarter.

CTXS has seen its stock fall, along with the rest of the techs,
from a high of over $108 in February 2000, to a low of $5 in
July.  Since bottoming out in July, the stock has been on a slow
but sure creep upward, and Tuesday's comments and results seem to
indicate that the turnaround will continue. The stock recently
broke through its 50-dma, now at $6.21 and has added 19% since
that time.

After such a large percentage gain, some pullback can be
expected.  While any support over the 50-dma can be viewed as
bullish, today's bounce around $7 can be seen as a possible entry
point. The stock broke out of its recent ascending channel, and
the pullback to the top trend line looks as though it may now be
finding a higher level of support over $7. We would still look
for the purchase of a protective put, in case we see another tech
slide, which may take even the promising companies with it. We
like the June 5 put (XSQ-RA), currently offered at $0.70, as
protection.  This will give CTXS time to reap from revenue from
its new products and clients, and post a couple of more earnings
releases. The stock managed to get through previous resistance at
$6 and the next resistance level appears to be $10.  If the stock
breaks through the $10 level prior to June expiration, then we
would sell the put and either roll up to a higher strike (7.50 or
10) or allow the stock to run without protection until it hits
resistance, at which time the stock holder can invest in the put
a the next out of the money strike to the downside.

If the stock drops below $5, then traders can sell the put to
offset losses on the stock.  If the stock increases, then the
loss on the long put will be small and profits on the long stock
should far outstrip the insurance cost.

Option 1: Purchase CTXS stock and purchase 1 June 5 put for each
100 shares of stock held long.  If the stock falls below $5 by
June, sell the put and reassess stock at that time.

Option 2: Purchase CTXS stock and purchase 1 June 5 put for each
100 shares of stock held long.  If stock falls below $5 by June,
sell put and sell stock and close the position.

Option 3: Purchase CTXS stock and purchase 1 June 5 put for each
100 shares of stock held long.  If stock breaks $10, then sell
the put and either roll up to a higher strike put (7.50 or 10),
or simply let the stock run until it hits resistance and then
look for a protective put below that level.


When we drop a pick it doesn't mean we are recommending a sell
on that play. Many dropped picks go on to be very profitable.
We drop a pick because something happened to change its
profile. News, price, direction, etc. We drop it because we
don't want anyone else starting a new play at that time.
We have hundreds of new readers with each issue who are
unfamiliar with the previous history for that pick and we
want them to look at any current pick as a valid play.


FNM $68.10 -1.95 (-3.79) After Wednesday's rally off the $68
support level, FNM looked like it was consolidating for another
leg higher this morning.  Price was holding around $70, and then
the bottom fell out of the broad market, taking FNM down with it.
In less than an hour, the stock fell more than $2, and selling
volume really picked up in the final hour, taking the stock out
right on that critical $68 support level.  There is a clear Head
& Shoulders top on the hourly chart, and it looks like the stock
is going to break down from that pattern tomorrow.  We'll take a
pre-emptive exit from the play, focusing our attention on
stronger bullish candidates.  Use any sort of bounce in the
morning to exit the play.


GM $35.63 -0.87 (+1.32) It seems that no amount of bad news is
sufficient to blunt the bullish sentiment in the Auto sector.  GM
hasn't had a positive news story in what seems like weeks, yet
the stock stubbornly holds above the $35 level.  If the play isn't
going with us, then it's going against us. Use this afternoon's
weakness to exit the play at a favorable level before the bulls
bid it up to challenge that $37 resistance level again.  GM may
yet break down, but there appear to be plenty of plays offering
better opportunities.


HD $29.89 -0.55 (-0.52) So much for our bearish thesis on HD.
Tagging along on the positive sentiment in the Retail sector this
morning engendered by WMT's positive comments about sales trends,
HD actually pushed through the $31 level before succumbing to the
broad market selling pressure in the afternoon.  If HD was going
to perform for us, then the stock should have been down more
sharply with the DOW losing nearly 200 points on the day.  We're
going to view the late-day weakness as a gift of an exit point.
Use any negative reaction to tomorrow morning's economic reports
to exit the play at a more favorable level.


KSS $57.50 +2.02 (+2.35) Retail stocks got a boost on Thursday,
following some positive comments from sector bellwether WMT, and
that positive sentiment lent a bid to shares of KSS all day.  At
one point, the stock traded above $59, before falling in the
afternoon with the rest of the broad market.  We had lowered our
stop to $57.50 earlier in the week, so when the stock charged
through that level early in the day, any open plays should have
been exited.  Reluctant bears are getting another chance tonight
though, with KSS going out right at that $57.50 level.  Look to
exit any remaining open positions on downside follow through in
the morning.


Please view this in COURIER 10 font for alignment

CALLS              Mon    Tue    Wed   Thu   Week

FNM      68.10   -2.04   0.14   0.05 -1.95  Drop, under performer
JNJ      57.71    1.61  -0.98  -0.87 –0.24  New, bounce point
PNRA     28.81   -1.36  -0.39  -0.48  0.55  dough still rising
QCOM     35.39    0.95   0.07   0.02 –1.13  hanging over $35
TRMS     50.26    1.51  -0.03  -0.13 –1.00  support at $50
UNH      98.28   -0.58  -0.38   1.39 –2.09  WLP disappoints


CTAS     48.75    1.70  -0.11   1.38  1.79  New, rolling over
IBM      72.10    1.90  -0.01   0.20 –2.50  New, overdone
GM       29.89    2.82  -1.20   0.85 –0.55  Drop, sideways
HD       35.63   -0.53  -1.20   0.70 –0.87  Drop,retail resilient
KSS      57.50    0.15  -0.80   1.08  2.02  Drop, barely stopped
NTRS     36.19    0.71   0.04   0.52 –0.98  New, pattern repeats

Tired of waiting on trades to execute?
Does your broker offer Stop Losses on Options?

Trade instantly with Stop Losses at PreferredTrade Inc.
Stop Losses based on the option price or the stock price.
Move your trading into the next millennium with PreferredTrade.

Anything else is too slow!



PNRA  $32.30 +0.55 (+1.29 for the week) Panera once again showed
great relative strength, with a gain of 0.55 on a day when the
Dow gave up 176.65.  Since the surge through the 200-dma of
$30.47 on Monday, the stock pulled back slightly and appears to
have found a new level of support at $31.50.  The stock traded as
high as $33.10 and a hold over $33.00 will be the next challenge.
The stock tested the same level on Tuesday.  PNRA announced this
morning that same store sales were up 5.5% for the four-week
period ending October 5.  This was an increase over the 4.4% gain
the company reported last month.  The stock has tested $33 on two
of the last three days and if it can break that level, $35 still
looks like a good possibility.  The sinking tide dragged it down
into the close today, but the hold above $32 looks bullish. New
entries may want to wait for pullback to $31.50, and a show of
continued support at that level to maximize profits to $35.  A
close over $33 would also be bullish, but entry at that point may
not provide good risk/reward potential with resistance at $35. If
the stock continues higher without a pullback, we like the long
position for current holders.


TRMS $50.26 -1.00 (+0.21 for the week) Trimeris experienced a
pull back, along with the Biotech Index (BTK.X) today.  The
pullback, however, held at $50, which was the level of the recent
breakout on the daily chart.  While TRMS is subject to industry
pullbacks, it recently received priority review status from the
FDA for its new drug, Fuzeon, which is the first in a new class
of HIV drugs, which prevents the disease from entering healthy
cells. The drug can be used on its own, or in conjunction with
other "cocktail" therapies, in patients who have become resistant
to current medications. Revenue is estimated between $600 million
and  $1 billion annually.  Right now TRMS, and its partner Roche,
will need to increase production capacity to satisfy pent up
demand for Fuzeon, which should receive FDA clearance by March 16
- the end of the priority review period. The company also has
another drug, T-1249, in its pipeline, that may hold even more
promise than Fuzeon. The support at the previous $50 resistance
level appears to be an ideal point to initiate new long
positions.  However, if the stock breaks below $50, new entries
should stay on the sidelines until a new level of support is
reached.  The stock broke through the PnF bearish resistance line
at $48.00 and this remains our stop loss on the play. The current
bullish vertical count is $74, which underscores our bullish
sentiment.  However, this target would be an eventual count and
our initial target on the play remains $55. If the stock breaks
$55, then we will likely raise our stop and let it run.


UNH $98.28 -2.09 (-1.40 for the week) Unitedhealth finally
managed a close over $100 on Wednesday for the first time.  The
trip into triple digits was short lived, however, as results from
fellow HMO Wellpoint (WLP) were not as impressive as had been
expected.  While WLP beat previous forecasts by $0.04 per share,
the market was apparently looking for numbers similar to UNH's,
which beat the street by $0.08.  While the HMOs sold off, UNH
managed to hold above $97 support. We had originally looked for a
pullback for entry on the play, and while we dialed up our
expectations, we like the show of strength on what was a bad day
for the sector and broader market.  UNH recently posted a 53%
increase in earnings and raised its guidance for 2002 and 2003.
Although WLP's  numbers were not as good as hoped for, the
company still beat forecasts and showed an increase of 68% from
the year ago period. It appears that the industry has weathered
the economic storm well, as the managed care companies have
simply raised premiums faster than the rate of medical cost
inflation.  UNH was recently listed on S&P analyst Phillip
Seligman's list of five star picks in the industry. We will
maintain our long position in UNH and would view the current
pullback level as an entry point.  If the stock breaks below $97,
then we would suggest no new entries at that point.  Conservative
traders can wait for a trade above the recent high of $101.00 to
initiate long positions.


QCOM $35.39 -1.13 (-0.81) What started out as a very quiet,
rangebound session turned into a rout for the bulls as they gave
up all their early gains (and then some), even in the Technology
sector.  QCOM held up better than many stocks, largely due to
the bullish tint that was painted on the Wireless sector by
strong earnings from AWE and NXTL.  That mitigated the damage
inflicted on QCOM by the CSFB downgrade.  The firm downgraded
QCOM on expectations that the good news is already priced into
the stock and that it would Underperform its peers over the next
6-12 months.  Definitely not a glowing report, so it is
impressive that QCOM managed to hold above its morning lows, even
as the rest of the market fell sharply in the final 2 hours of
the day.  Support is apparently solidifying in the $35 area (also
the site of the 10-dma), followed by more support down at $34.
We were looking for a bit of a pullback to give us a better entry
point, and it appears we are getting it.  An intraday dip and
bounce (accompanied by solid volume) from either of these levels
should make for a solid entry into the play.  Recall that our
stop is set at $33.50, just below the top of the gap up from last


JNJ – Johnson & Johnson $57.71 -0.24 (-1.64 this week)

Company Summary:
Johnson & Johnson is engaged in the manufacture and sale of a
broad range of products in the healthcare field.  The company
conducts business in virtually every corner of the globe.
JNJ's activities are divided into three primary business
segments; Consumer, Pharmaceutical and Professional.  The
Consumer division is focused on personal care and hygiene
products, while the Professional segment provides a wide range
of products used by the healthcare profession.  The
Pharmaceutical group provides a broad range of over-the-counter
and prescription medications for the treatment of afflictions
ranging from antifungal to dermatological to pain management
conditions.  In June of 2001, the company merged with ALZA Corp,
a research-based pharmaceutical company which became a direct,
wholly owned subsidiary of JNJ.

Why We Like It:
Strong stocks tend to attract buyers, and short-term pullbacks
present great entry points for traders that can focus on the
overall trend.  There are few stocks that didn't fall all the way
back to test their July lows earlier this month, and those that
can make that claim are likely to continue to see bullish action.
Despite the sharp broad market decline in September and early
October, shares of JNJ stubbornly held the $52 support level, and
when the stock broke through the $57 resistance level in late
September, it put the PnF chart on a fresh Buy signal.  Since
then, the stock has been rather volatile, responding to the ups
and downs of the broad market.  But the big picture shows a stock
that continues to post higher lows and higher highs, where each
dip is met by solid buying interest.  Last week, the company
reported solid earnings, and positive reception by the market
drove the stock through the $60 resistance level for the first
time since the breakdown in early June.  CIBC downgraded the
stock yesterday, and that (along with broad market selling
pressure today) pushed JNJ down to close just below $58, right
on the converged 200-dma ($57.76) and 20-dma ($57.80).  The
ascending trendline that connects the lows since late September
rests at $57 and provided intraday support the past 2 days.
While this looks like a solid entry point, we want to allow for
a bit more weakness before the next upward leg commences.  The
$56 level is very strong support and a dip and rebound from there
would make for an even better entry opportunity.  More
conservative traders may want to wait for a rally back through
the $59 level (just above today's intraday resistance) before
entering the play.  We are initially placing our stop at $54.50,
just below the October 10th intraday low.

BUY CALL NOV-55 JNJ-KK OI= 6297 at $3.90 SL=2.50
BUY CALL NOV-60 JNJ-KL OI=17235 at $1.05 SL=0.50
BUY CALL DEC-55 JNJ-LK OI=  161 at $5.00 SL=3.00
BUY CALL DEC-60 JNJ-LL OI= 2315 at $1.85 SL=1.00

Average Daily Volume = 9.08 mln

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

“7 Steps to Success – Trading Options Online”.

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





CTAS - Cintas - $48.75 -1.79 (+0.77 for the week)

Company Summary:
Headquartered in Cincinnati, Cintas Corporation is the leader in
the corporate identity uniform industry, providing uniforms to a
wide variety of industries nationwide. The company also provides
a range of outsourcing services including entrance mats,
sanitation supplies, cleanroom services and first aid and safety
products and services. Cintas is a publicly held company traded
over the Nasdaq National Market under the symbol CTAS, and is a
Nasdaq100 company and component of the Standard & Poor's 500
Index. The company, which has achieved 33 consecutive years of
growth in sales and earnings, to date, was named one of the top
outsourcing services providers in Fortune Magazine's 2002
"America's Most Admired Companies" survey.

Why We Like It:
We profiled CTAS in last weekend's Ask the Analyst column.  At
that time a reader asked for our opinion as a short candidate.
We suggesting waiting until it tested point and figure resistance
at $50, and we finally got that test, and a failure. Cintas
primarily rents corporate identity uniforms to everyone from
small businesses to large corporations.  An economic slowdown
industry-wide affects the company, as smaller businesses shut
their doors and large businesses downsize.  The company recently
met earnings expectations, however guided revenue lower for the
year, reducing estimates by $100-200 million.  The CEO said,
"Although our sales force continues to be very successful in
adding new customers, we continue to experience lower sales
volume with our existing customers as they shrink their work
forces, eliminate shifts and departments and even close
operations."  The CFO added, ""Our lowered guidance reflects a
more pessimistic view for the economy."  While the company said
it expects to achieve earnings once again next quarter, that will
be awfully tough to do in the described environment.  The recent
rally in the stock came not after the earning's release, but on
the heels of the Dow rally that began October 10.

A look at the point and figure chart shows a stock that looks
very extended and has rolled over right at previous resistance.
$50 had acted as resistance on 5 separate columns since the
beginning of the year, with one additional column reaching $51. A
trade of $47 would be needed for a three-box reversal down, which
would also constitute a break of the 200-dma of $47.46.
Conservative traders can wait for a break below the 200-dma for
entry. There is a risk that the stock is simply experiencing a
pullback on the way up, however the reaction to its revenue
projections on September 19 put the stock just above $40, and if
not for the broad market rally, it would likely still be at that
level.  We will look for continuing downside in the Dow as
confirmation to go short CTAS, as it has followed the major
indices through the recent run. We don't want to get caught
standing in front of a speeding train, no matter how weak a
company's future might look.   We will look for intraday
resistance below $50 in CTAS and Dow resistance below 8300 as a
signal to initiate a short position. Place stops at $52, which
would signal a breakout above PnF resistance.  While we believe

CTAS has plenty of room to fall, we want to be very careful on
the entry point.

BUY PUT NOV-50*NQQ-WJ OI= 519 at $2.55 SL=1.25
BUY PUT DEC-50 NQQ-XJ OI= 519 at $3.60 SL=1.80

Average Daily Volume = 1.45 mil


IBM - International Bus. Machines $72.10 -2.50 (-2.15 this week)

Company Summary:
International Business Machines uses advanced information
technology to provide customer solutions.  The company provides
value to its customers through a variety of solutions including
technologies, systems, products, services, software and
financing.  IBM's three hardware product segments are comprised
of Technology, Personal Systems and Enterprise Systems.  Other
major operations consist of a Global Services segment, a
Software segment, a Global Financing segment and an Enterprise
Investments segment.

Why We Like It:
The broad markets have had a tremendous run up the charts in the
past two weeks, as investors have voted with their wallets that
the earnings reports coming in from Corporate America are not as
bad as they had originally feared.  Good earnings, bad earnings,
they have all had the effect of stimulating both the bulls and
bears to hit that 'Buy' button.  But judging by the weakness in
the market on Thursday, more than a few of these recent buyers
are having second thoughts.  After breaking down to new multi-year
lows ahead of its earnings report, IBM rocketed higher with the
broad market. The stock then extended those gains when the
company's earnings report was well received by investors, leading
to upgrades from Merrill Lynch and Bear Stearns.  Momentum players
and shorts rushing to cover drove IBM right up to heavy resistance
at $76 earlier this week, and since then the stock has been
putting in what looks like a solid top.  The bulls failed to push
IBM through that level again this morning, and the sharp
afternoon selloff helped to push the daily Stochastics over the
edge, and they are now in a sharp bearish decline.  There are
several gaps below IBM's current level that are just asking to be
filled in, and it appears reasonable that we could see a decline
back down to the $65-66 area over the near term.  Aggressive
traders can look to initiate positions on another failed rally in
the $73-74 area, while those that want to see confirmation first
will want to see IBM drop back under $71 (under recent intraday
support) before taking a position.  With strong resistance at
$75-76, we're initially setting our stop at $76.

BUY PUT NOV-75 IBM-WO OI= 4000 at $4.80 SL=3.00
BUY PUT NOV-70*IBM-WN OI=15719 at $2.25 SL=1.00
BUY PUT NOV-65 IBM-WM OI=13078 at $1.20 SL=0.50

Average Daily Volume = 9.95 mln


NTRS – Northern Trust Corp. $36.19 -0.98 (-1.90 this week)

Company Summary:
Northern Trust Corporation is the holding company of The Northern
Trust Company (Bank).  The company also owns national bank
subsidiaries with offices in Arizona, California, Colorado,
Florida and Texas; a federal savings bank with offices in
Michigan, Missouri, Nevada, Ohio, Washington and Wisconsin; a
trust company in New York.  Additionally, NTRS has various other
non-bank subsidiaries, including an investment management
company, a securities brokerage firm, an international
investment consulting firm and a retirement services company.

Why We Like It:
One of the primary catalysts that cratered the Banking sector
(BKX.X) just prior to the market bottom of a couple weeks ago,
were numerous banks coming out and admitting they had an
extraordinarily large exposure to loan losses.  The BKX caught
a strong bounce off the site of the July lows and has had an
impressive 25% rally up to the $765 level.  While on the surface
that is bullish, the concerns about loan losses haven't yet gone
away.  On October 4th, NTRS was just one of the offenders
contributing to the problem, when it pre-announced its Q3 results.
Citing higher provisions for credit losses and lower trust fees,
the company reported that earnings would come in at 43 cents vs.
consensus of 55 cents.  While that news sent the stock down to
just above the $30 level, it came roaring back with the broad
market rally.  NTRS' good fortunes came to an end near the $39
resistance level though, as the buyers just couldn't push through
the 50-dma.  Since then, the stock has been drifting lower,
capped off with today's 2.6% decline.  NTRS is still on the PnF
Sell signal generated back in September, and the vertical count
is pointing to an eventual bearish target of $19.  If the BKX
continues rolling over, that is just going to add to the bearish
pressure on the stock.  A breakdown under $35.75, just below
recent intraday support and the site of the 20-dma ($35.79)
should make for a solid entry into the play.  Of course, another
failed rally near the $38 level would give us an even better
entry, where we can keep our risk to a minimum, setting initial
stops at $39.  While there is some support in the $34.50-36.00
area, once below there, NTRS should fall fairly quickly back to
the $31-32 area, which will be our initial target for the play.

BUY PUT NOV-40 NRQ-WH OI=110 at $4.40 SL=2.75
BUY PUT NOV-35*NRQ-WG OI=646 at $1.15 SL=0.50

Average Daily Volume = 1.77 mln

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

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



Please read our disclaimer at:


For more information on advertising in OptionInvestor Newsletter,
or any Premier Investor Network newsletter please contact:

Contact Support
The Option Investor Newsletter                 Thursday 10-24-2002
Copyright 2002, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.

In Section Three:

Play of the Day: PUT - IBM
Traders Corner: Take Off Your Shoes, We Got Some Calculatin’ To Do
Traders Corner: Moving Averages: types, use and time periods (length)
Traders Corner: Game Seven
Options 101: High Volatility as Opportunity


IBM - International Bus. Machines $72.10 -2.50 (-2.15 this week)

Company Summary:
International Business Machines uses advanced information
technology to provide customer solutions.  The company provides
value to its customers through a variety of solutions including
technologies, systems, products, services, software and
financing.  IBM's three hardware product segments are comprised
of Technology, Personal Systems and Enterprise Systems.  Other
major operations consist of a Global Services segment, a
Software segment, a Global Financing segment and an Enterprise
Investments segment.

Why We Like It:
The broad markets have had a tremendous run up the charts in the
past two weeks, as investors have voted with their wallets that
the earnings reports coming in from Corporate America are not as
bad as they had originally feared.  Good earnings, bad earnings,
they have all had the effect of stimulating both the bulls and
bears to hit that 'Buy' button.  But judging by the weakness in
the market on Thursday, more than a few of these recent buyers
are having second thoughts.  After breaking down to new multi-year
lows ahead of its earnings report, IBM rocketed higher with the
broad market. The stock then extended those gains when the
company's earnings report was well received by investors, leading
to upgrades from Merrill Lynch and Bear Stearns.  Momentum players
and shorts rushing to cover drove IBM right up to heavy resistance
at $76 earlier this week, and since then the stock has been
putting in what looks like a solid top.  The bulls failed to push
IBM through that level again this morning, and the sharp
afternoon selloff helped to push the daily Stochastics over the
edge, and they are now in a sharp bearish decline.  There are
several gaps below IBM's current level that are just asking to be
filled in, and it appears reasonable that we could see a decline
back down to the $65-66 area over the near term.  Aggressive
traders can look to initiate positions on another failed rally in
the $73-74 area, while those that want to see confirmation first
will want to see IBM drop back under $71 (under recent intraday
support) before taking a position.  With strong resistance at
$75-76, we're initially setting our stop at $76.

BUY PUT NOV-75 IBM-WO OI= 4000 at $4.80 SL=3.00
BUY PUT NOV-70*IBM-WN OI=15719 at $2.25 SL=1.00
BUY PUT NOV-65 IBM-WM OI=13078 at $1.20 SL=0.50

Average Daily Volume = 9.95 mln

Tired of waiting on trades to execute?
Does your broker offer Stop Losses on Options?

Trade instantly with Stop Losses at PreferredTrade Inc.
Stop Losses based on the option price or the stock price.
Move your trading into the next millennium with PreferredTrade.

Anything else is too slow!



Take Off Your Shoes, We Got Some Calculatin’ To Do
By Mike Parnos, Investing With Attitude

Although I’m not an advocate of selling uncovered options (except
for the most advanced CPTI students), it’s important that we take
the time to review the method of calculating margin requirements.

With the market threatening to make at least a near term low,
aggressive traders are slowly coming out of the woodwork.  In
their infinite wisdom, they have consulted their crystal ball and
determined that it’s safe to go back into the water.
Disregarding the fact that even Jaws had two sequels, they have
selected a stock and are planning to sell puts.

There are a few reasons to sell puts: a) to potentially get a
discount on the purchase of shares; and b) to generate a cash
flow on stock that you don’t particularly want to own, but will
if you have to.

How much margin requirement will your brokerage firm want?  Let’s
figure it out using QLGC as the example.

Set The Scene
There are about three weeks left before November expiration.
QLGC has bounced over the $30 level and is trading at $31.00.  A
“glass is half full” optimist might think it will finish above
$30 at November expiration.

The out-of-the-money Nov. $30 puts can be sold for $2.50.  If
QLGC finishes above $30, you keep the $2.50.

There are two formulas that are used to figure out margin
Formula #1
a) The minimum margin requirement is 10% of the value of the
underlying stock plus the option premium received.

10% of the value of the underlying ($31.00) = $3.10 x 100 = $310
Add premium received from Nov. $30 put = +$2.50 x 100 =     $250
Total Margin Requirement: $5.60 x 100 =   $560

Formula #2
b) The initial margin requirement for the transaction is 20% of
the underlying stock plus the credit received, less the amount
out of the money.
20% of the value of the underlying ($31.00) = $6.20 x 100 = $620
Add premium received from Nov. $30 put = +$2.50 x 100 =    ($250)
Subtract OTM amount ($1.00) =	-$1.00 x 100 =                $100
			Total Margin Requirement: $7.70 x 100 =   $770

The LARGER number of the two formulas is used.  In this case, the
margin requirement would be $770 per contract.

Return on Margin
To figure out the return on margin use this simple formula:
Premium Received divided by Margin Requirement = Return on Margin
In the above example: $2.50 / $770 = 32%

This hefty three-week return makes the put selling strategy very
appealing.  But the risk is substantial.  Although you’re only
exposed for three weeks, you can still catch a bad cold.  The
past two years should have had a sobering affect on punch-drunk
put sellers.

Note that the margin requirement is substantially less than more
conservative traders need when selling a “cash secured” put. (in
which case you need to have sufficient cash in your account to
purchase the shares if/when the short put is exercised).

More Marginal Notes
Margin, at most brokerages, can be in the form of cash,
marginable stocks, bonds, mutual funds, treasuries, etc. All
brokers are NOT created equal. Contact your broker to find out
their policies.

There are aggressive traders who, find a stock (or preferably an
index) trading in a range, want to trade short strangles.  In our
QLGC example, a trader might believe that QLGC will stay between
$25 and $35.  They will sell (unhedged, naked, in the buff, etc.)
both the $25 put and the $35 call, and take in the premium
credit.  They are exposed on both the upside and the downside.
However, even though there are actually two positions, some
brokerages will only hold a margin requirement on one of the two
positions.  Their computer software can recognize a short
strangle (or straddle) position – if the root symbols are the
same.  The assumption is that you can only be wrong in one
direction.  That’s true 99.9% of the time.

It’s interesting that most broker’s software is not sophisticated
enough to recognize a condor spread on an underlying – a
simultaneous bull put spread and a bear call spread.  While you
may only be responsible for maintenance on one side of a short
straddle or strangle, you’re going to have maintenance on both
sides of a condor position.

Again, always double check with your broker on their requirement
policies – before you initiate a position.  Get the name of the
person you speak with. You’ll find that, when you take a person’s
name, they’re more likely to make sure they’re giving you the
right information. Then, after you’ve initiated the position,
check that the result showing in your account is consistent with
what you were told on the phone.

Margin Quiz
IBM is trading at $74.50.   You are bearish on this stock.  You
believe IBM will finish below $75 at November expiration.  You
can sell the November $75 call for $3.30.
1. The maintenance required for this position per contact is
2. The return on margin for this position is ____________.
(See answer at end of column)

Delayed Stock Openings Are Not Just Fashionably Late?
You may have noticed that all stocks do not open at once.  Some
are delayed for a while.  Why?  Because market makers are
scrambling to deal with an imbalance – dramatically more buyers
than sellers (if there was good news) or, more likely, more
sellers than buyers (if there was bad news).

This will happen after an earnings announcement, a stock split
announcement, or news that someone has been dipping into Martha
Stewart’s sandwich spread.  When someone yells fire in a movie
theater, there are hundreds of people rushing for only a few
exits.  The same thing happens with stocks and the market maker
has to make sense of it.  If he can’t work it out, trading on the
stock may be temporarily halted.

The Gap –
And we’re not talking about jeans and sweaters.  When the stock
does open, it will be significantly up or down, depending upon
the news.  Just because a stock finished at $22.50, it rarely
opens the next day at $22.50.  It might open at $18 or at $25.

Side Note:  This is also where those who have put in buy or sell
stop orders are going to feel the pain.  When a stock gaps down
on the open from $22.50 down to $18, it will trigger all the buy
stops set anywhere from $18 on up.  It’s not unusual for these
orders to get filled at, what ultimately becomes, the low (or high)
for the day.  That’s why puts, though they may cost a few bucks, are
a more secure and efficient method of protecting a short put or long
call position.

A Risky Business
This is where market makers have fun.  In the opening minutes of
trading, when there is a large imbalance, they will add a huge
amount of implied volatility to the premiums.  The call buyers or
put buyers, who have orders to buy at the open, will drastically
overpay for the options.  Then, later in the day, once the news
has been digested, the option will revert back to its mean
volatility.  That means that you may pay $6.50 for an option on a
stock trading at $50 in the first half hour of trading.  Later
that day, with the stock still trading at $50 (or even higher),
the option may only be worth $4.75.

If you have absolutely no self-control whatsoever, and must buy a
stock that has a news announcement, do so with a limit order.  If
you get the stock, it will be on your terms.  If not, well, as
Doris Day said, “Que Sera, Sera.”

Margin Quiz Answer
The maintenance required for this position per contact is: $14.90
+ $3.30 - $.50 = $17.70 x 100 = $1770.00
The return on margin for this position is: $3.30 / $17.70 =

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.


Moving Averages: types, use and time periods (length)
By Leigh Stevens

Some e-mails I received regarding my last Trader’s Corner article
on the use of moving averages as support and resistance “lines”
(not unlike trendlines) has led me here to back up and discuss
some of the basics of moving averages.

The last article is found at
An updated chart of the S&P 500 (SPX) shows the most recent
occurrence when a pullback rebounded off a key moving average, in
this case the 50-day average – what was resistance, now appears
to have “become” support:

The simple moving average is the most common type of moving
average – one that I use almost exclusively – and the type that
most traders use. Perhaps due to the fact that this type moving
average calculation is often the only online option for a moving
average study (indicator) on web sites that allow the application
of moving averages to price charts.  This is not the case of
charting applications like Q-Charts.

With Q-charts or TradeStation and other such technical analysis
software packages, there are options provided to give more weight
to the most recent price activity.  A weighted moving average
assigns a greater percentage value to the closes for X number of
recent bars, whether that bar represents an intraday period
(e.g., hourly), a day, a week or a month, thereby giving a
REDUCED weighting to older prices.  (The practical effect is to
make the weighted moving average line follow current prices more
closely, with less of a lag than a regular simple moving

Such front-loading is the most popular method of calculating a
weighted moving average but is not the only possibility.  A
variation called linear step-weighting, assigns a fixed increment
weighting to each day that is dependent on the duration of the
average.  For example, in such a 5-day weighted average the most
recent day’s close is 5 times the weight of the first day of the
5-day period; the prior day is 4 times the weight of the first
day; the third day is 3 times the weight of the first day of the
period and so on.

The exponentially smoothed average is a type of weighted moving
average that is a popular moving average variation – probably
best known through its use in the Moving Average Convergence
Divergence (MACD) Indicator.  This method allows recent price
activity to generate a more rapid change in an average price. A
type of “smoothing” is applied, one that assigns a percent value
(for example, .15), to the last bar and this value will be added
to a percentage of the previous day’s close.  The percentage of
the previous day’s close will be the inverse of the weighted
percentage; e.g., 15 subtracted from 100, which is 85% (100 – 15)
in this example.

Because of this method of calculation, all daily moving average
values are modified once the first exponential weighting occurs.
The higher the percentage weighting given to the most recent
close, the more sensitive will be the resulting moving average to
the most recent price change.  All data previously used is always
part of the new result, although with diminished significance
over time.

Because of the inclusion of old data in an exponentially smoothed
moving average, a 50% smoothing appears slower than a 2-day
simple moving average and a 10% smoothing calculation will cause
the resulting average to be slower than a 10-day simple moving
average. As a trend continues further in its direction, the
exponentially smoothed moving average will lag the trend more
than the weighted moving average due to this inclusion of all
prior closes; i.e., the “smoothing” factor.  The longer moving
average of the simple, equal-weighted moving average type will
lag even more, as the most recent price changes will be averaged
with many prior closes.

In the stock chart below, a 50-day simple, weighted and
exponentially smoothed average are all applied – for this period
of time, the lag is greatest with the simple moving average and
least with the weighted moving average:

You’ll notice in this chart of Wal-Mart that the Weighted moving
average acts best as a kind of curved “trendline” on the advance
and that the lows in late-99/early-2000 tended to rebound from
the Weighted average most often.

Both weighted moving averages – “Weighted” & Exponential - in the
chart above react more quickly to a change in the trend than the
simple moving average.

For shorter time durations, as in the chart below, which uses a
10-day period or moving average length, there is little apparent
difference between the three moving average variations – all the
moving averages trace out a double or “W” bottom along with

Taking a close up view of a 30-day period when there was a minor
trend change as shown in our next chart, it becomes apparent that
the first moving average to turn up was the exponential –

The Exponential average along with the Weighted average can be
made more, or less, sensitive to the most recent price changes by
what “weighting” factors are used. For sure, both types will turn
up or down significantly quicker than a simple moving average
unless all are of a very short duration, like a 3-day average.

At 10-days or longer, the gain in a crossover “signal” can be a
few days, so use of front weighted averages, will appeal to
traders who can deal with the periods of getting “false” or pre-
mature turns in the weighted moving averages as they are more
sensitive to recent large price moves.

I usually assume that the weighted moving averages are most
appropriate for shorter-term trading, where the average
transaction is completed in 1-day to 1-week.  Simple moving
averages, especially in the 50-200 length range, are appropriate
for an investment oriented time frame of longer duration, which
is many weeks to months, or even years – as long as a major trend

The importance of the exponentially smoothed average will
principally be of interest to most users of basic technical
indicators because the popular Moving Average Convergence-
Divergence indicator or MACD (“macdee”), uses the exponentially
smoothed method of calculating a price average, which I went into
in depth in a prior Trader’s Corner article on use of an
Exponential Average in the MACD “oscillator” indicator – see

There have been many questions that I received in the past such
as from readers of my CNBC.com or Option Investor columns, as to
what moving average length is “better”.  The answer is that it
depends on your trading or investing horizon.

A 5 – 21 bar length will track the very short-term or minor
trends – 9 (or 10), 14 and 20 are fairly common. You will often
see the “default” number in moving average studies as 9. I
prefer a 21-day moving average as a means of tracking the week-
to-week trends and 5 and 21-hour moving averages on hourly
charts. The result of using 21, versus the more common 20, is
virtually indistinguishable.

Use of 21 would be explained by my fondness for using 8, 13 or 21
as a “fibonacci” number; i.e., the number series 1, 2, 3, 5, 8,
13, 21, 34, 55, 89, 144, etc., where each number is the sum of
the prior two numbers. I tend to use 8 as my length for moving
averages on weekly and monthly stock and index charts and a 21-
day (or hour) moving average on daily (and hourly) charts.

For the intermediate or secondary stock trends, there is little
question that the 50-day moving average or 10 weeks (5 trading
days in a week: 10 X 5 = 50), is a “convention” for length that
is very common for stocks. The reason for this particular length,
versus some other, is partly convention - however, I also think
that it is because 50 is 1/2 of 100 in terms of days, and 1/10 of
100 in terms of weeks – 100, its fractions and multiples, is a
significant number in our decimal system and in trading.  I
suspect also that 10 weeks is simply long enough to “capture” the
trends in the market that are of intermediate or secondary

For displaying or capturing the long-term (major) trend, the 200-
day moving average wins hands down as the favorite simple moving
average - which is the most common type of moving average - it is
used or noted daily or weekly by many, if not most, investment-
oriented stock market participants.  Some chart books and
commentators refer to equivalent average in weekly terns, as the
40-week moving average.

Examples of these common moving average lengths are seen in the
next 3 charts.

The 21-bar simple moving average based on the close –

The 50-bar simple closing moving average –

And, the 200-day average –

The last chart is an example of a 40-week moving average on a
longer-term weekly chart and equivalent to a 200-day moving
average. When changing time periods from daily to weekly, you
need to remember to change the moving average length setting to
view the equivalent trends on the longer-term charts –

Leaving the values and just switching time frames may be of
interest also, but then you are comparing “apples and oranges”,
so to speak.  A 50-week moving average encompasses almost a full
year rather than the 10 trading-weeks measured by the 50-day
moving average.

Many analysts, traders and money managers define the long-term
trend by whether a stock or an Index is trading above or below
its 200-day (40-week) moving average. The secondary (stock
market) trend can be defined by a similar use of the 50-day (10-
week) moving average.

If you were buying a stock for a longer range “buy & hold” that
had been in a down or sideways trend, a “minimum” requirement
should be a close above the 50-day moving average – more
conclusive is a close above the 200-day moving average.  I
suggest also exploring the use a combination of these two moving
averages.  For example, buying a stock on an initial upside
penetration of the 21 or 50-day moving average, especially if
there are other bullish chart considerations (e.g., a breakout
above a rectangle), but only taking one-half of the number of
shares of a usual purchase.  A further purchase could be made on
an advance above the 200-day moving average.


Game Seven
By John Seckinger

There are pivotal moments within the marketplace, and then there
are times when all traders need to pay attention.  Game Seven.
However, have you ever found yourself rationalizing that every
trading day could be a Game Seven?

To me, trading is not playing the lottery.  Every trade I put on
realistically does not have potential to allow me to retire.
Trading takes a ton of hard work, discipline, and most
importantly the ability to control one's emotions.  Sure, there
are a few times when it feels as though the market is at "a most
critical juncture": however, I feel that it makes sense to wait a
few "innings" until probabilities increase.  Some times that
thinking is flawed as well.

Case-in-point: October 7th, and the Dow has just closed under
both 7532 and the relative low of 7460 set just a few days
earlier.  To me, this had all the ingredients of a Game Seven.
The pivotal level that could send the Dow to 7000, and the risk
would be that the Dow would rise back above 7532.

October 7th, 2002

Well, the Dow did just that the next day, only to fall to 7197 in
a relatively rational manner.  And, on the same day that the Dow
hit 7197, the blue chips also rose to 7560 and closed one point
above the aforementioned 7532 level.  So, this was the real Game
Seven, right?  Well, most traders including myself would like
some sort of confirmation before betting the house on a one point
buy signal.

October 10th, Daily

Sometimes the word "confirmation" is synonymous with "If only I
had just bought/sold the day earlier. .".  October 11th was
exactly that; a strong rise without ever testing 7532.  So, was
the rally on the 11th the critical turning point and is now the
time to buy?  Well, the Dow closed just above the 22 DMA, and
this moving average had been a solid resistance (read: pivotal)
level in the past.  So, it might make sense to wait.

October 11th, Daily

In fact, the Dow did fall back under the 22 DMA the following
session, before rebounding and managing to eck out a slight gain.
Yes, another pivotal moment.  Must be time for more confirmation.

October 15th.  The real pivotal session, right?  The Dow rose
from its 22 DMA to above its 50 DMA (8178) almost without
pausing. Hmm...above the 50 DMA, this has to be the final battle
between bears and bulls.  During 2002, bulls have always been
caught in a trap once the Dow rose above its 50 DMA.  Being
caught in a trap is not a good thing, and there is a good chance
that the market is now at a critical juncture.

October 15th, Daily

In fact, prices the following day fell back underneath the 50 DMA
and signal the strong likelihood such a trap may in fact exist.
However, the low on October 16th was 8013, and this level
coincided with highs from late-September, as well as being near a
low in early August and opening and close of a few "critical"
sessions back in July.  So, the pullback on the 15th really only
tested a pivot and it probably makes sense to wait for

October 17th.  Don't tell me, another critical day.  Well, the
market did confirm support near 8013 and rise above the 8255
close on October 15th.  The intra-day high was 8318 and the Dow
closed underneath 8300.  Yes, time to wait for confirmation.

October 18th.  Is this the confirmation we were looking for?
Prices are now at horizontal and vertical resistance levels, and
the MACD is almost back at the zero level.  Resistance, right?
Well, if this level is taken out, this resistance will become
support and create an even more important pivotal level.

October 18th, Daily

Here is the most ironic chart of them all.  The 8309 area (blue
horizontal line) did act as a pivotal area, but doesn’t the chart
look bullish here.  MACD has some room to run, and thoughts of
8800 clearly have to be running wild.  There is one problem:  The
Dow is in the middle of two pivotal levels, so it would be an
aggressive trade (since risk is for a move over 200 points

October 21st, Daily

Well, prices certainly did come back down to near 8309.  However,
guess what, we are at another extremely pivotal area in the Dow.

October 24, Daily

How in the world can a trader not look at these technical levels?
I don’t believe that the expression, "Can't see the forest for
the trees" is relevant here, because the fundamental picture is
more opaque than ever.  The problem is, with the market usually
moving hundreds of points a day, it is hard not to look at things
on a day-to-day basis, micro managing and analyzing every move.
Who doesn’t want to catch a few hundred point move, especially
when it seems so obvious in hindsight.

Ok, what is the solution?  Relax and be patient?  Maybe not.
Maybe we should start putting on small trades at the close of
trading and hope the pivot was called correctly.  Well, if that
truly is the case, traders should be going long heading into
Friday.  Secondly, is it really ok to not trade until
probabilities are well in your favor?  That could mean not
trading for days, even weeks.  And, as we just saw, there is a
good chance that such an “obvious” signal will actually backfire.
So, maybe that doesn’t make sense either.

How about this answer:  Wait only one minute into the trading
session and then go with the trend towards the next pivot.  If
the 50 DMA is only a few points lower and the market opens lower,
maybe take that day off.  However, if there is a few hundred
points to the next pivot and the market opens up 100 points, be
aggressive and look for either indices or securities that seem to
lag the Dow only fractionally.  If you do capture a profitable
move, albeit small, I think you will begin thinking about
yourself more of a full-time trader.  You may not retire on
each trade, but you will at least know you are doing the right
thing towards early retirement.  Good Luck.


High Volatility as Opportunity
Buzz Lynn

I LOVE this market!  Volatility remains incredibly high!  That's
good?  You bet.  Remember the old business saw about two shoe
salesmen who go deep into the jungle on sales call?  The first one
returns demoralized and reports prospects are slim because nobody
wears shoes.  The second one returns waxing about unlimited
possibilities.  Why?  Because nobody YET wears shoes!  Same thing
with volatility.

What's volatility?  It's the measure of a stocks willingness,
based on history, to experience fluctuation in price.  The higher
the volatility, the greater the magnitude of price fluctuation
over a given period of time.

The volatility value isn't necessarily important.  What is
important for today's chat is the measure of volatility for the
overall market - in this case, the VIX (INDEX:VIX.X), or OEX
market volatility index.

In a market where confidence in market direction is high, the VIX
should be falling.  Isn't everyone convinced this is the beginning
of a new bull market?  Who in their right mind is still thinking,
"bear market"?   Didn't Dick Hoey, a frequent CNBC
guest, tell viewers recently with steely-eyed confidence that we
would be in a secular bull market by November 1st?

Our readers already know that this will be just another rally in a
secular bear market.  Option writers know this too, and what they
are telling us through their actions, as indicated by a
persistently high VIX is that they have no confidence in picking
the market's direction right now.  It could go either way.  Thus,
the premiums remain high - bad news if we want to buy options.

So do we then sit on the sidelines and wait for the VIX and
premiums to fall?  Heck no!  We don't want to buy it.  We want to
SELL that juicy premium just like a regular option writer should!

I hope that doesn't sound scary to you.  I'm not taking about
religious trading by selling naked premium and praying to God it
goes my way.  I'm talking about one of my favorite things to do
with options - selling expensive time premium, and letting it
evaporate on the other guy with the passage of time.  Time decay
is as sure as the knowledge that the sun will rise in the East
tomorrow - it's guaranteed to happen.

(Note:  That is a guaranty that time value will decay; not that
selling time premium will always be profitable)

But we can't just sell an option and walk away.  It's safer and we
have limited downside protection if we spread off the risk.  In
other words, for every short position we have a concurrent long
option position to match just in case things go wrong.

"OK, that makes sense, Smarty Pants.  But you can't just do that
indiscriminately on any stock."  No, I can't. . .which is why I'm
interested in setting my entry parameters the same as if I wanted
to enter a directional trade.  I want technicals rolling out of an
extreme oscillator position, and I want that to happen at points
of support/resistance on the charts too.  Let's take IBM as an

IBM chart - (daily/60/10):

Here's today's closing chart of IBM shown in daily/60 min/30 min
form.  Notice that the daily stochastic is rolling over having
topped out at just over $75.  We can see the candles topped at $75
on the 60 and 10 charts too.  We can also see some secondary
resistance at $73 too.  However, the 60/10 stochastics are in
oversold and looking to cycle up for a part of, if not the whole
day tomorrow.  Support comes in around $65.  Are you getting the
feeling that this might not make a good call entry?  Support
broken?  Rolling stochastics on the daily chart?  OK, this would
make an attractive short.  And it just so happens it's on the put
play list starting tonight!  Clearly, IBM has the earmarks of a
stock that has peaked.

I might add that within the last 2 weeks, IBM received an upgrade
from Lehman to Overweight; B of A upgraded to Buy; Merrill
upgraded to Buy; Bear Stearns upgraded to Outperform; UBS Warburg
reiterated a Strong Buy; and Solly reiterated its Outperform.
That's it - bull up the stock after earnings so the brokerages can
sell their shares into strength to their "preferred" clients.  So
as Fred Schwed wrote decades ago, "Where are the customers'
yachts?"  No worries.  I'll save that for a rant some other day!

Back to IBM. . .yes, we could buy puts.  But there's a large
volatility premium in the price.  What to do?  How about a bear
call spread?

Here's how it works.  We sell a hugely inflated in-the-money (ITM)
call option and simultaneously buy one slightly out-of-the-money
(OTM) call for protection.  Putting numbers to it, IBM closed
today at $72.10.  Knowing resistance is at $75, and knowing that
if it ever breaks above that, it might mean a breakout to higher
highs.  We don't want to be short an even lower strike price call
there.  Thus, we would buy a $75 strike price call, say November,
since time decay will work the fastest on inflated NOV strikes.
Concurrently, in anticipation of IBM moving lower like the chart
says, we'll short the $65 call, which currently has $7.10 of real
intrinsic value ($72.10 - $65).

So here's the position:

IBM-KM NOV 65 = $8.10 bid - short
IBM-KO NOV 75 = $1.80 ask - long

Net credit  = $6.30 in our pocket.  That's the reward.

What happens to the price of those calls as the price of IBM
sinks?  They sink right along with it.  Ideally, if IBM sinks to
under $65 on or by expiration day, we keep the whole $6.30.  Why?
The buyer of the 65 strike will not exercise his option since he
could buy the stock cheaper on the open market.  By the same
logic, we would not exercise our option to buy at $75 either.
Both legs of the spread expire worthless.

Knowing that we have $6.30 in credit to our account, our break
even would thus be at $71.30.  We figure that by knowing that the
65 strike holder will exercise at any price above $65.  To that we
add our net credit of $6.30, which makes $71.30.

Any close under $71.30 on expiration day is profit.  So if IBM
closes at say $68, our profit would be as follows:

$65 - price at which shares are called
$68 - then current market price

Loss = $3

But remember, we took in a net credit of $6.30.  When we apply the
loss that happens upon the holder's exercise ($3), we still have a
net credit at the end of the trade of $3.30!  Still a nice reward!

We can't very well evaluate reward though without evaluating risk
with at the same time.

What's the risk?  Let's figure it out.  We know that the breakeven
is $71.30.  Any amount over that at expiration starts costing us
money.  Specifically, every penny over $71.30 costs us a penny.

However, remember we have a long $75 call that gives us the right
to buy IBM at $75.  Every penny gain over $75.00 earns us a penny
in option price.  Our loss is maximized when IBM is at exactly $75
closing price on expiration.  $75.00 - $71.30 = $3.70, which is
our maximum loss.

The bottom line is that we risk $3.70 in order to gain $6.30.  I
like that ratio!  And the charts are lining up in our favor.

But it gets even better.  Not having yet entered the bear call
spread in anticipation of an ultimate price decline, we have a
chance to see if the 60/10-min stochastics can rise tomorrow back
to overbought, which would, by definition might carry the price of
IBM higher for a better bear call spread entry.  That would have
the effect of actually increasing our net credit on the spread the
closer to $75 IBM gets.

That little secret is derived in knowing that the short ITM strike
is gaining value dollar for dollar (delta = 100), while the long
OTM strike won't rise as quickly until it becomes at-the-money
(ATM).  It's all about delta (and partially gamma).  Ideally, if
IBM was at exactly $75 today, we'd take in a $9.50 credit by
shorting the NOV 65 call at $10.50 (guesstimate) and buying the
NOV 75 call for $1.00 ($10.50 - $1.00 = $9.50).

Risk $0.50 to make $9.50?  Absolutely!

So the next time the high volatility cost of buying a put gets you
down, put the volatility to work in a bear call spread instead.
For the veteran option traders, bull put spreads work well too
when volatility is high.  Just be sure the market is in a cyclical
bullish phase (hint: check the weekly/daily stochastic).

Make a great weekend for yourselves!


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

“7 Steps to Success – Trading Options Online”.

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



Please read our disclaimer at:


For more information on advertising in OptionInvestor Newsletter,
or any Premier Investor Network newsletter please contact:

Contact Support


Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

To ensure you continue to receive email from Option Investor please add "support@optioninvestor.com"

Option Investor Inc
PO Box 630350
Littleton, CO 80163

E-Mail Format Newsletter Archives