Option Investor

Daily Newsletter, Sunday, 11/03/2002

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The Option Investor Newsletter                   Sunday 11-03-2002
Copyright 2002, All rights reserved.                        1 of 5
Redistribution in any form strictly prohibited.

Entire newsletter best viewed in COURIER 10 font for alignment

In Section One:

Wrap: Betting On The Fed
Futures Market: Ready for Takeoff!
Index Trader Wrap: Russell?  Is that you?
Editor’s Plays: Free Money
Market Sentiment: Who Needs Logic?
Ask the Analyst: An Expanded View
Coming Events: Earnings, Splits, Economic Events

Updated on the site tonight:
Swing Trade Game Plan: Trend Change!

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
       WE 11-01        WE 10-25        WE 10-18        WE 10-11   
DOW     8517.64 + 73.65 8443.99 +121.59 8322.40 +472.11 +321.89   
Nasdaq  1360.70 + 29.57 1331.13 + 43.27 1287.86 + 77.39 +774.16   
S&P-100  458.16 +  2.51  455.65 +  6.63  449.02 + 26.34 + 19.46   
S&P-500  900.96 +  3.31  897.65 + 13.26  884.39 + 49.07 + 35.04   
W5000   8502.20 + 51.56 8450.64 +126.86 8323.78 +450.75 +274.41   
RUT      383.45 + 10.81  372.64 +  9.27  363.37 + 18.44 -  3.05   
TRAN    2315.68 +  2.37 2313.31 + 34.22 2279.09 +124.42 + 16.99   
VIX       33.98 -  2.29   36.27 -  3.55   39.82 -  3.62 -  2.84   
VXN       49.86 -  0.53   50.39 -  4.94   55.33 -  3.54 -  1.41   
TRIN       0.95            0.89            0.80            0.41   
Put/Call   0.71            0.77            0.68            0.93     

Betting On The Fed
by Jim Brown

After dropping to 8309 on terrible economic news the Dow
rebounded on numerous buy programs to close just below key 
resistance at 8550. They say bull markets are created by 
bulls trampling over bears. There was some serious road kill 
on Friday with bewildered bears running about in utter 

Dow Chart


Nasdaq Chart


The morning reports and end of year unwinding by some funds
knocked the markets back to support at the open. Leading those 
reports was a benign Jobs report which showed another loss of
jobs in October as expected but was revised up from a -43,000
loss in September to only a -13,000 loss. When most were 
expecting whisper numbers in the -30,000 range for this month
this report, while still negative, was not the end of the world.
Manufacturing losses increased to -49,000 from -39,000 for Sept.
There were several areas including short term employment where
October showed declines that predict worse numbers in the 
November report. Business services lost -44,000 jobs in October.
This entire report shows an economy that is on hold and suggests
that it is clinging to the edge of the cliff but may not fall 
over. The unemployment rate did increase to 5.7% from 5.6%.

Construction Spending rose an unexpected +0.6% in September
but the prior month was revised down to -0.8% from -0.4%. These
are hindsight numbers and therefore are not as compelling but
the unexpected gain in September was appreciated. Most analysts
claim the economy came to a halt in late September so the 
October numbers may tell a different tale. 

Personal Income rose less than expected at +0.4% but Personal
Spending fell by -0.4%. We made less money and spent even less. 
The consumer is definitely pulling back and conserving but that
could be simply a lull before the holiday spending begins. Add
the falling consumer confidence and you get worry by retailers
that they will have to come up with new and expensive promotions
to get shoppers into the stores for that holiday season. 

Automobile sellers have their backs against the wall after
seeing record sales in prior months. The numbers released today
showed that all the major manufacturers saw huge decreases in 
sales. GM -32%, Ford -35%, Chrysler -31%, Toyota -20%. The total
vehicles sold fell to 15.4 million. This is down from huge numbers
over 18 million in July and August. According to reports the 
sales have dropped significantly but they have also flattened. 
GM said they thought they would hold their October levels for
November and added a new $2000 cash back component to the Zero,
Zero, Zero program as an added incentive. While autos have held
up the economy for two quarters they are not going to be a
player going forward. Nearly everyone who can afford a new car
has already bought one. 

The biggest number on Friday was the ISM Manufacturing Index
which fell to 48.5 and below consensus of 49.5. Any number
below 50 is considered a contracting economy. This is the 
single component that could tip the scales in favor of a rate
cut next week. This was the second month of contraction and
indicated that inventories were continuing to shrink. Nobody
is confident enough of the 4Q to invest money to create goods
or inventory them if there are no sales ahead. The new orders
component rose slightly but not enough to signify a new trend.
The ISM has now posted four months of no growth and an 
increasing rate of decline. 

A positive sign in some respects was a slight increase in
semiconductor billings. They increased +3% in September and
were powered by sales of application chips and wireless phones. 
While this growth is good it is not coming in the PC sector. 
The reduced capital spending in the sector is still warning
of further concerns by the chip makers themselves. The breadth
of chips is growing but not the depth. There are chips in
almost everything now sold which builds volume but the quantity
needed to see high profits is lacking. Everything points to a
reduced demand of chips for computers and that means a real
recovery is yet to be seen. 

The economy may not be dropping at the same rate as it was
over the last few weeks but the momentum is still slowing. 
Productivity continues to increase at a meager 4% but that is 
enough for an eventual recovery. It is just not low enough to 
build a case for huge rate cuts. The GDP is growing at a +3.0% 
rate and while not exciting it is growing. The 4Q GDP is 
expected to be in the +2.0% range or less but the year will 
still be respectable. Since the rally on Friday was a clear 
bet on a rate cut next week we should analyze that chance 
one more time. 

Over the last two years we have had massive stimulus and are
now enjoying an interest rate at decade lows. The economy is
growing at a +3.0% annual rate as a result of this stimulus. 
Any new stimulus would not have a material impact to the current
economy. It would be June of next year before any of it 
filtered down to the business level and the impact would be 
minimal. Cutting rates adds liquidity into the banking system. 
With money flowing freely the idea is to loan it out to 
businesses for capital equipment, construction, home 
improvements, home loans, etc. Cheaper rates are supposed to 
influence businesses to buy/spend on projects they would not
have done at higher rates. It is hoped they will buy more, 
produce more inventory, create more value and inject activity
into the economy. The problem today is not lack of money. 
There is plenty of money. The system is awash with it. The 
only people who want to borrow it are the ones without credit.
Nobody wants to build buildings today so they can sit vacant
for a couple years until the economy catches fire. Nobody 
wants to build inventory to fill warehouses and then have
to write it down for a loss when customers don't buy it. 
Ask Cisco, Intel or Lucent if another 25 point cut would 
make their excess inventory age slower. 

The only reason for a rate cut next week is because the market
needs reassurance from Uncle Alan that they are still on the
job and they care about our well being. It has been eleven
months since they cut rates and even though they have done
the trick the market is begging for more. How many times have
we seen the market stuck in some trend that just seems to go
on forever and suddenly something comes out of left field to
break the trance? Analysts think another rate cut is that
event. The market "should" continue to grow. There are 
signs that it has stopped falling in most cases but it
just has not started growing. The conventional wisdom is that 
a rate cut next week will be an "insurance" cut that will 
guarantee no further slippage in the economy. We all know 
there are no guarantees. The economy will improve when it
improves. The economy has the flu and just like there is no
cure for the flu in people there is no instant cure for the 
economic flu. Everything has been done that can be done and 
now we just have to wait for it to pass. 

The bullish contingent are convinced there is at least a 25
point cut in the wings and maybe even a 50 point cut. If
25 is good then 50 could be better according to the analysts.
A 25-point cut is already priced in and therefore will have 
no real impact to the markets. (their words not mine) If the
Fed really wants to make a statement they "have" to cut 50
points. They view the current conditions as similar to Japan
which spiraled down over years to its current conditions. They
feel a continued diet of 25 point cuts as conditions worsen 
will only set the Fed up to be in the same shape as the Bank
of Japan with zero interest and no cuts left. 

The bearish view is that there will be no cut. There has been
zero Fedspeak that would imply there is a possibility. The
only line is the party line of "more than adequate stimulus
has already been injected". The Fed needs to retain all the
ammo it has left to counter any future terrorist attacks and
the possibility of a long war with Iraq. Why give the patient
another antibiotic shot when he is already showing signs of
improvement? The more antibiotics someone receives the more
immune they become to future treatments. Another factor is
the European Central Bank. They have been reluctant to cut
rates and I am sure the Fed would rather not cut again until 
they do. If the Fed holds the line this week then the ECB may
feel pressured to pick up the pace. 

The wild card in the rate cut scenario is the election. I think
the Fed has not come out to talk down the possibility of a rate
cut to keep from negatively influencing the election for the
administration. If you think about it the election outcome can
influence the Fed's decision. A Republican victory that gives 
them control would probably lessen the possibility of a rate
cut substantially. More items would get approved in Congress
in a smaller amount of time. This would be implied stimulus. 
If the Democrats maintain control then gridlock might prevail
and a rate cut might be needed to get the markets mind off the
political outcome. The markets normally like gridlock because
it means restrictive new laws take forever to pass and can 
get mired down for years. Currently they would love for gridlock
to disappear so that new stimulus programs could be passed and
spending increased. 

Despite analysts comments to the contrary there is no sure 
answer to the rate cut question for Wednesday just like there
is no answer to the election with so many races up for grabs. 
As investors the side we take depends on our bias. The bulls
are buying stocks with the clear assumption that the Fed will
cut rates and the markets will soar off into the clouds. Bears
are closing shorts just in case the bulls are right. Nobody
wants to be short if the Fed pulls a rabbit out of their hat. 
The difference in opinion sent the market back to resistance
one more time and they appear poised to rally again on Monday.

As investors we need to be careful in putting too much faith
in the rate cut scenario of our choice. A 25-point cut will 
probably result in an eventual sell off since this size of
cut is already priced into the market. A 50-point cut could
give the market an initial pop but there is still the possibility
of a sell the news event after the remaining shorts cover. No
cut at all would generate an immediate drop until the cut
expectations were removed. The bottom line is that we have 
already had a strong run over the last four weeks and it will
take a lot more to move it higher. There should be profit taking
after the Fed meeting regardless of the outcome. With the Nasdaq
up +13% in October and the Dow up +10.6% there is always the 
risk that new investors will want to wait before joining the
crowd. Even if the Fed did cut rates 50 points Cisco announces
earnings two hours later. How much is the market going to run
with the CSCO axe hanging over their head? 

What I think is more important this weekend is fundamental 
events occurring in stocks. Friday after the close the Microsoft
antitrust case was decided in the favor of the current penalty
settlement. This is very bullish and the stock was up strongly
in after hours. This will buoy all the markets simply because
MSFT is a major component in the indexes. (Ironically the Microsoft 
news could actually be detrimental to the rate cut possibilities. 
If the Fed sees the markets in strong rally mode sparked by 
Microsoft then they may not feel the urge to cut rates quite as strongly.)

Additionally the dockworkers reached an agreement on the west 
coast and the slowdown should end Monday. Supply lines will 
fill up promptly and the holiday season may not be hampered. 
The semiconductor sales numbers I mentioned above will continue 
to attract investors to the chip sector. There were also some 
rumors on Friday that there were about to be some large orders 
released in the networking sector. JNPR soared +18% on the 
expectation that the dry spell could be over. Cisco could be 
a bigger key than the Fed next week. With the Microsoft led 
rally on Monday, a favorable outcome in the elections and any 
cut from the Fed on Wednesday a positive Cisco earnings event 
could blow the lid off the market. The reverse is of course 
true if the rate cut is 25 points or less and Cisco warns then 
the bears will roar out of hiding. 

October is over and November started out with a bang. Monday 
morning is going to look like a stampede as the bulls trip over
themselves trying to dive into the new bull market. Explosive
rallies breed more explosive rallies as shorts race to cover 
and the flashing green numbers attract more investors like moths
to a flame. For whatever reason the Dow has put together four
positive weeks in a row. It will have a head start next week
with a Microsoft Monday but the finish could be a struggle. 
Don't count the bears out just yet there could still be some
serious potholes in our future.

I apologize for the long winded commentary this weekend but the
many emails I received on Friday were begging for an explanation
of factors affecting the coming week. There is no simple answer
and I hope this helped rather than confused you. 

Enter Very Passively, Exit Very Aggressively!

Jim Brown

"If all the economists in the world were laid end to end, they
still would not reach a conclusion"  - George Bernard Shaw

Revised version: "If all the economists in the world agreed a 
50-point rate cut was needed the Fed would still ignore them"



Attn: OIN Futures Traders

The futures section is undergoing some changes in format
and methodology. We have received many comments from readers
with many suggestions for improving the content you have
been receiving. We are responding to those changes but
would like to try and get a better idea of what you would
like to see in the commentary, trade suggestions and 
educational articles. 

Some of the trade formats presented recently did not appeal
to many readers in their frequency and format. Some thought
there were too many trades and others thought there were 
not enough. Many thought they were not descriptive enough.

Evidently there is a large amount of interest in futures
trading but that interest is divided between position 
trading using longer term support and resistance levels
with one or two trades a week and readers wanting to trade
5-10 times a day or more. 

The method of presentation also drew numerous comments.
We were listing the trade suggestions in the Market Monitor
which is viewed in real time by thousands of readers daily. 
Of those readers in the monitor who responded to our poll
approximately 25% were interested in the futures trades. 

Once those trade suggestions began there was a considerable
number of complaints by non-futures traders about the number
of futures related posts. Unfortunately we cannot please
everybody at the same time in the same medium.

We have decided to implement a second "Futures Monitor" 
once we get the new Java application running smoothly. For
those desiring either monitor they can select only the one
they prefer or both in the same window.  

This will not happen next week. It is going to take several
weeks to complete. 

During this period we would strongly appreciate your input 
on what you want to see in that window when completed. 

Do you want position trades? Intraday trading, Scalping 

Do you want Emini S&P, Dow and Nasdaq combined or separate?

How would you like to see the trade recommendations made?

Obviously that differs by style of trading you prefer. We
are assuming position traders would like advance planning
the night before with intraday updates as the indexes move
through the various trigger points. 

Intraday traders are likely to require fewer reasons why and
just more action. 

You can see our problem. There are so many strategies available
that adding them to the current market monitor was just not

We want to give you the trading vehicle you desire. Unfortunately
you must tell us exactly what you want. We do not want to build
it only to have everyone complain that it does not fit their

You are in control. Decide what you want and send us a descriptive
email with plenty of details. Do not be shy!

The sooner everyone sends us their want list the sooner we
can get it into production.

Do it today while it is fresh in your mind.

Send your comments and suggestions to:



Futures Wrap 11-01-2002

Until we get a better idea of exactly what you want the futures
wrap will be more of just a recap of the days action and projected
support and resistance levels for the next trading day. We will
expand on the amount of content once we launch the Futures Monitor
and begin offering trade signals again. 

Ready for Takeoff!

The Microsoft news after the bell sent the futures through the roof. 
The Dow futures close the regular session at 8490 but rocketed in
after hours to close at 8548 on the Microsoft news. 

The NDX futures closed at 1020 but BASED on the trading in the 
QQQ which finished in after hours at 25.75 the NDX would have
traded to 1030. (25.75 x 40 = 1030)

The S&P is poised to break well over its close at the 100 DMA of
898.50. A quick approximation of Monday's regular market open 
should see the S&P in the 912 area and the first resistance over
the recent trading range. If there is any follow though short
covering the next leg up could see a retest of the mid September
highs around 927. 

This would be my ideal entry point for a short position before 
the Fed meeting as it is likely to hold and there should be
plenty of profit taking before the Fed decision. I would not
hold a short over the close of the meeting.

S&P Futures Chart – Daily

S&P Futures Chart - 30 min

S&P Futures Chart – Intraday


The NDX futures are poised to break the down trend resistance at
1033 at the open. Once broken I would look for resistance to appear
in the 1050-1058 range with 1058 being strong resistance from the
August highs. I would look to enter a short position at 1050 in
anticipation of a pull back before the Fed meeting. 

NDX Futures Chart – Daily


NDX Futures Chart - 30 min


NDX Futures Chart – Intraday


The Dow futures closed after hours at 8548 and very near the 8580
resistance from mid September. Once short covering begins this level
should be broken but the stronger resistance at 8736 if touched
should hold. I would look to enter a short position on any failure
around the 8700 level. 

Dow Futures Chart – Daily


Dow Futures Chart - 60 min


Dow Futures Chart – Intraday


Above all do not attempt to short the opening bounce. We have 
seen many times recently where the dips were bought when everyone
expected a drop. The markets have a very high short interest, 
especially in the Nasdaq and like we saw on Friday they will not
want to hold over the Fed meeting. 

Wait for an exhaustion top and a failure of the last intraday
support level before initiating a position. This is one market
where trying to pick a top could be very expensive.

Jim Brown


Russell?  Is that you?

The smaller caps as depicted by the Russell 2000 Index (RUT.X) 
383 +2.66% were this weeks major index winner as the smaller caps 
gained 3% on the week in an attempt to catch up with the large 

Technology stocks supplied the lift to have the NASDAQ-100 Index 
(NDX.X) 120 +2.98% post a 2.4% gain on the week, with other 4-
lettered stocks and the very broad NASDAQ Composite (COMPX) 1,360 
+2.3% recovering on Friday to post a 2.2% gain for the week.

The very broad NYSE Composite (NYA.X) 480 +1.58% just barely 
eked out a gain of 0.2% for the week as Insurance, Retail, Home 
Construction, Healthcare and Forest Paper Products, all which are 
full of 1,2, and 3-letterd stocks saw their sectors fall during 
the week.

A Friday rally in the Dow Industrials (INDU) 8,517 +1.4%, S&P 500 
Index (SPX.X) 900 +1.7% and S&P 100 Index (OEX.X) 458 +1.54% was 
just enough to have these major indexes finishing the week with 
marginal gains of less than 1%.

Almost in lockstep fashion, the market internals as measured by 
the bullish percent indicators inched higher.  The NASDAQ-100 
Bullish % ($BPNDX) finish Friday's session at 59%, and showing a 
net gain of 4 stocks to point and figure buy signals on the week.  
The also narrow S&P 100 Bullish % ($BPOEX) saw a net gain of 1 
stock getting back on a p&f buy signal with a reading of 54% on 
Friday.  The S&P 500 Bullish % ($BPSPX) inched higher to 50% on 
Friday, up from last Friday's 48.8% reading (net gain of 6 stocks 
to p&f buy signals).  The very broad bullish % indicators saw the 
NASDAQ Composite Bullish % ($BPCOMPQ) finish the week at 36.31%, 
which was up from last Friday's 33.67% and NYSE Bullish % 
($BPNYA) rise to 37.68, which was also higher from last week's 
35.7% reading.  The very narrow Dow Industrials Bullish % 
($BPINDU) saw a net gain of 1 stock to a point and figure buy 
signal this week, with Friday's reading at 56.67%. 

While the major equity indexes didn't necessarily surge higher 
this week, they did manage gains despite a second straight week 
of buying in Treasuries.  The benchmark 10-year December futures 
(ty02z) 114'080 -0.4% traded lower on Friday, but posted a 0.9% 
gain on the week, which had the 10-year YIELD ($TYX.X) falling to 
3.977% compared to last Friday's 4.095% YIELD.

Weekly Index/Sector Changes


The Fiber Optic Index (FOP.X) was this weeks biggest sector 
gainer with the Networking Index (NWX.X) running a close second.  
It's continues to be stocks like Alcatel (NYSE:ALA) $5.30, which 
jumped 35% on the week and more than 100% from a 52-week low of 
$2 and once thought to be on the brink of bankruptcy and heavily 
shorted that are driving the sector action.  Cisco Systems 
(NASDAQ:CSCO) $11.62, one of the few stocks that trades over $10, 
actually fell -1% on the week.

Dow Industrials Chart - Daily Interval


The Dow came close to trading 8,550, which would get its point 
and figure chart back on a buy signal.  Look for Friday's 
favorable court ruling regarding Microsoft (NASDAQ:MSFT) $53.00 
-0.87%, which had the stock surging to $56.33 in after-hours 
trading to boost the Dow above 8,550 and have 8,717 in play.

Since were on the subject of MSFT, lets review the NASDAQ-100 of 
which MSFT is the largest weighted component.

NASDAQ-100 Index Chart - Daily Interval


NASDAQ futures tacked on another 2 points at 1,020.50 and traded 
as high as 1,024 after a federal judge endorsed Microsoft's 
antitrust settlement with the U.S. government and nine states in 
a victory for the software giant.  Other software components saw 
VRTS $16.09 +5.5% adding 28 cents to $16.37, RATL $6.98 +5.43% 
gaining 12 cents to $7.10, PSFT $19.01 +5.02% adding 33 cents to 
$19.34, CHKP $14.25 +3.3% gaining 25 cents to $14.50, ADBE $24.47 
+3.5% adding 46 cents to $24.93, and ORCL $10.14 -0.49% edging up 
9 cents to $10.23.  

S&P 500 Index Chart - Daily Interval


The SPX has traded sideways for the most part the past 10 
sessions.  Today's trade at 900 did have the SPX point and figure 
chart generating a buy signal and negating the previous bearish 
count.  That action now has the vertical count turning bullish to 
945, with the first sign of trouble on the p/f chart being a 
trade at 875.  First "hurdle" to upper end of retracement and 
upper Bollinger Band would be the 909 level.  With stochastics 
turning higher, bulls can look long, but expect some volatility 
into Wednesday's FOMC meeting.  Risk management ahead of 
volatility says partial positions only.  If holding a put, don't 
be opposed to creating a straddle with an offsetting call to get 
a trader through next week's FOMC meeting.

S&P 100 Index Chart - Daily Interval


Not unlike the S&P 500, the narrower S&P 100 Index (OEX) trades 
rather sideways between 440-460.  That's a 4.5% range.  If I were 
seeing some type of internal bullishness from the bullish % 
charts this week that vastly outweighed this weeks 0.7% gain, 
then I'd be more bullish.  As it is, I have to wait for the 
bearish resistance trend to be broken and a trade at 465 to get 
me moving into a new bullish trade here.


One thing I'm noting after this weeks trading is this.  The gains 
in the beaten down telecom equipment sectors like Networking, 
Wireless, Fiber Optic aren't coming from Cisco Systems (CSCO) or 
Qualcomm (QCOM), which both lost marginal ground this week.  The 
gains are coming from the stocks that are promising they'll be 
positive cash flow or earnings by the end of next year that have 
been trading under $5 and seeing a lot of short-covering.

One can see and no longer wonder why the QQQ or NASDAQ-100 is up 
"only" 2.4%, when the telecom equipment indexes are up 17%, 11%, 
18%.  We've talked about NDX and QQQ weightings and the stocks 
that have any weighting like CSCO and QCOM aren't seeing euphoric 
percentage gains.  Institutions are "old hat" in that they aren't 
going to load up the portfolios in many of these telecom service 
stocks where debt levels remain very high.

In our October 20th Index Wrap 
I thought the Russell 2000 Index (RUT.X) might be the 
"outperformer" to the upside on a risk/reward basis.  One of the 
reasons I thought that way was that it would perhaps be less 
shorted and look to close in on some of the larger caps that had 
moved ahead a greater percentage in weeks prior.

What we're kind of seeing right now is the larger caps, as 
depicted by the Dow Industrials (INDU), S&P 500 (SPX.X) and S&P 
100 (OEX.X) stall out a bit.  At the same time, we could explain 
this "stalling out" with Treasuries seeing buying again this 

Meanwhile the NASDAQ Composite and NASDAQ-100 are seeing a little 
more bullishness.  Hey, it's great that MSFT is doing well, but 
isn't this a stock we've thought a trader could go long while 
short/put the NDX or QQQ?  Yes it is.

But until this evening in after-hours, even "Mr. Softee" had been 
stuck in a range.

The gains found for the most part have been coming from the 
bottom of the pile, not necessarily from the larger technology 
components that would stand to benefit first from certain sector 

The bullishness in all this?  Bears are covering for one of two 
reasons in the bottom heap of the technology pile.  I'm thinking 
the reason for this not necessarily because they "fear" a huge 
turn in fundamental fortune (reason #1), but that BIG bearish 
gains are at risk (reason #2) and not unlike the Russell-2000 
Index, there is some distance to be closed between a stock like 
Ciena (CIEN) $4.37 +18.75% and Cisco (CSCO) $11.62.

Tuesday is election day, so don't forget to get out there and 
vote!  Normally, this would be a rather calm session, but on 
Wednesday, we'll have the FOMC decision on interest rates and 
Cisco Systems' earnings after the bell.  This will bring some 
near-term uncertainty and anxiousness into the markets, and with 
uncertainty, a trader expects volatility.

I learned a long time ago that I don't need to trade.  In the 
past week, I've run about 2 options trades and still hold them 
(call and put), but multiple short-term trades in stocks where I 
can limit my capital exposure to short-term and dodge extended 
uncertainty.  Heck, I think we hit two nice trades in PSFT and 
RATL software in today's market monitor, and both of those from 
time of profile look to outpace this weeks major index gains.

If you're trading some Index options and not liking the way 
things are going, then move to the sidelines or get the position 
down to a size where you can sleep through some of the 
uncertainty of "what's the Fed going to do," or "what's this 
company going to say when they report earnings."  

I don't know about you, but I could really care less what the Fed 
does on Wednesday and I can't wait until we get past it.  Heck, 
all I have to do is turn on CNBC for 5-minutes, listen to two 
different economists or analysts and understand there is varying 
opinion on "this would be good" or "this would be bad" comments 
regarding certain Fed action.  Many times it is regarding the 
SAME type of Fed action.  Funny thing is, both arguments will 
make sense.

I talked about this weeks potential lower risk/high reward type 
trade in the 30-year Calls in today's 11:00 Update.  It's not too 
different than my thinking regarding the Russell-2000 Index a 
couple of weeks ago.  Note that I profiled MARCH expiration on 
this LONG-TERM bond's YIELD and ONLY 1/2 position.  This gets me 
some exposure BEFORE the Fed meeting, but PLENTY OF TIME to 
eventually ascertain a market response from the FOMC meeting on 

Jeff Bailey

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Editor's Plays

Free Money

With the Microsoft news after the bell on Friday it appears
the stock will rocket at the open on Monday. It traded up over
$3 in after hours. I heard two analysts who expected it to reach 
$70-$75 very quickly. Possibly in the next two weeks. 

With the four year antitrust cloud now cleared the stock has
huge unrecognized value. This company is making far more money
now than they were $120 in Jan-2000. They are executing on
all fronts and are now free to take on all comers. 

While everyone I heard spoke in glowing terms I think the stock 
has serious resistance at $70 and that should slow any runaway
inflation of the price. 

How to profit. 

First, buying calls at the open is not going to cut it. The
premiums are going to be huge So lets use that to our advantage. 

I have three suggestions.

Covered call: 

Buy the stock at the open and write the November $60 covered 
call. I am estimating the stock to be $57.00 and the call to 
be $2.00. That is a pure guess on my part. The odds are very
good you will be called away two weeks from now for a $5 profit.
That is a 17% profit based on $28.50 margin. The worst case
would be a close under $60 and a chance to do t again next
month. You could also buy the stock at the open and wait until 
Tuesday for expectation to be factor in and then sell the 
December $65 or $70 call depending on your expectations and
if called your profit could be significantly higher. 

Naked put:

Since the expectations are for a rapid increase in the stock 
price over the next couple months there is a very good case
for selling naked puts. You will get dollar for dollar price
appreciation in the form of premium reduction. 

Using numbers from Fridays close the puts look like this:

Stock at close = $53.00 ($56.30 in after hours)

Nov $55 = $ 3.10  (Monday estimated open = $ 1.50)
Nov $60 = $ 6.80  (Monday estimated open = $ 4.30)
Nov $65 = $11.60  (Monday estimated open = $ 9.50)
Nov $70 = $16.50  (Monday estimated open = $14.50)
Dec $55 = $ 4.10  (Monday estimated open = $ 2.50)
Dec $60 = $ 7.50  (Monday estimated open = $ 5.50)
Dec $65 = $11.80  (Monday estimated open = $ 9.80)
Dec $70 = $16.60  (Monday estimated open = $14.50)
Dec $75 = $21.50  (Monday estimated open = $20.00)

If we assume a target price by November expiration of $65
then the only November put to have value at expiration 
would be the $70 at $5.00. 

This means that ANY November put sold would expire worthless
for a full profit except for the $70 which would need to 
be repurchased for $5.00. 

Selling the November $70 put would give you the maximum
profit potential and you would have to give back only
the unused portion of the premium upon expiration. For 
every penny MSFT appreciated your put premium would
depreciate by a penny.  

Personally I would rather only sell front month puts but
this close to expiration I would have no problem selling
the December $75 put for the estimated $20.00 premium. The
only worry you have is where MSFT closes in December and 
anything over $57 (estimated Monday price) is profit to 
you. If it appreciated to the full $75 price that would be 
a $20 profit. 

Bull Put Spread:

Since everyone does not have naked writing capability there
is another way to accomplish the same thing. That is with
a Bull Put Spread. 

That means you will buy a lower strike put for protection
and then sell short a higher put. This does not require
naked permission and can be just as profitable. 

Using the November example and the estimated prices for
Monday you could do the following:

Buy  Nov $55 put (estimated open = $1.50)
Sell Nov $70 put (estimated open = $14.50)

If MSFT appreciated to $68 by the Nov expiration then you 
would buy back the $70 put for $2.25 (est) and the Nov $55
put would expire worthless. 

Your profit would be $14.50 - $1.50 - $2.25 = $10.75

Using the December options:

Buy  Dec $55 put (estimated open $2.50)
Sell Dec $75 put (estimated open $20.00)

If MSFT appreciated to $73 by the Dec expiration then you
would buy back the $75 put for $2.25 (est) and the Dec $55
put would expire worthless. 

Your profit would be $20.00 - $2.50 - $2.25 = $15.25

The risk on these spreads is that you could be exercised on
the short put and end up with stock in your account. As long
as you sold the stock and resold the short put at the open
if that happened you would be right back where you started
with a minimal loss of only a few cents from the spreads. 

Microsoft Chart


SMH Ladder Recap (see last Sunday's Editors Plays for setup)

Boy that was exciting! The Market gapped open last Monday and 
then fell on Tuesday to take all the time value out of the 
options. After blowing through the 24.00 to the 24.50 level at
the Monday open it did not trigger the remaining positions until
Friday afternoon. After the drop on Tuesday I had written the
entire play off until it suddenly caught fire on Friday. 

If you were not scared away from the play on the Tuesday drop
these should approximate the fill numbers on the various levels. 

Buy 10 NOV $22.50 PUTS @ $24.00 (est price $.93) actual .75
Buy 10 NOV $22.50 PUTS @ $24.50 (est price $.80) actual .75
Buy 10 NOV $22.50 PUTS @ $24.75 (est price $.73) actual .55
Buy 20 NOV $22.50 PUTS @ $25.00 (est price $.66) actual .50  

If you were filled at the prices in effect when the SMH levels
were touched then your average price was .61 for a total 
investment of $3,050. It has a current value of $2,000. (.40)

The insurance on the trade was the Nov-$26 call on the QQQ. 
Those calls traded for $.55 or less within 10 min of the open 
on Monday before depreciating significantly on Tuesday's drop. 
They came roaring back on Friday and with the QQQ only .75
cents below $26 they closed at $.55 again on Friday. If you
bought 40 contracts at the open on Monday you spent $2200. 

If you completed both sides of the trade you have somewhere
in the $5,250 range invested with a value today of $4,500. 

Now is where the fun starts. 

The object of the game is to sell the QQQ calls when they 
reach their peak next week. The object is to recover as much
money from the calls as possible to offset the premium in
the SMH puts. We are assuming there will be profit taking
in the SMH soon. Probably after the Fed meeting. I would also 
assume the QQQ would rocket on Monday since Microsoft was
up over $3 in after hours on Friday. This could rocket the
QQQ over the $26 resistance to the $27 range if the rest of
the tech sector joins in the fun. Short covering should kick
in and $28 is possible. At $27 the call should be worth $1.65
to $1.75. For 40 contracts the total is $6600 @ $1.65. This
is well over what you paid for the total position and your
SMH puts are now free. 

It is up to you when to sell the calls but remember the bird
in the hand concept. If you decided to hold over the Fed
meeting an CSCO earnings you could be handsomely rewarded
or very disappointed. 

I always suggest taking a profit when offered. If we do get
a strong short covering rally on Monday that closes at the 
high of the day I would probably look for follow through on
Tuesday morning and follow them up with a trailing stop to 
capture the most gains. Once sold we will look for profit 
taking in the semiconductor sector after the Fed meeting
and Cisco's earnings. The target price on the SMH puts should
be in the $22-22.50 range but depending on the early week
gains that may be too optimistic. The Fed and CSCO will 
control our fate. This is why you need to sell the QQQ for
enough to cover all costs if possible. That leaves us with
a free lottery play on the SMH. 


Remember, these are high risk plays and should only be made
with risk capital.

Good Luck

Jim Brown  


Who Needs Logic?
by Steven Price

Bad news, pretty much all around, continued to lift the markets.  
Sound like an oxymoron?  Not when investors are hoping for a rate 
cut. With the FOMC meeting on Wednesday, the bulls got more of 
what they wanted today. Personal Income rose less than expected, 
at 0.4%, while personal spending declined more than expected, at 
-0.4%.  Nonfarm payrolls saw an unexpected decline, and the 
hourly workweek and hourly earnings also came in under consensus. 
The ISM manufacturing index continued to show contraction and 
came in worse than expected, as well.  The one positive was the 
unemployment rate, which was 0.1% better than the consensus.   
The news was bad enough to more than justify a rate cut, IF that 
is what the FOMC is planning.  While it is not a sure thing, the 
Fed Funds futures are predicting a cut of at least 25 basis 
points by the end of the year. The close of 98.605 (100-98.605 = 
1.395; this is more than .25 less than the current rate of 1.75) 
actually indicates a cut of more than 25 points.

We got a healthy rally of 120.61 Dow points, 30.95 Nasdaq points 
and 15.20 SPX points.  While the Dow remains rangebound between 
8200 and 8550, the SPX achieved its first close over 900 since 
9/11.  The Nasdaq also broke above recent resistance at 1350, 
managing to close at 1360.70.  The news of Microsoft's settlement 
after hours brought with it a tech rally and if the bulls aren't 
scared off after digesting the economic data over the weekend, we 
could see more buying on Monday. Microsoft traded up more than $3 
after the bell.  As both a Nasdaq and Dow stock, it could lift 
the Dow through 8550 resistance.  If there is any tech stock that 
can lead a sustained rally, it would be Mr. Softie.

While the market action looks bullish, today's rally did fade 
into the end of the day.  It also seems irrationally exuberant 
(to borrow from Sir Alan), given the economic data.  I'd like to 
think the rally is a result of the numbers being not as bad as we 
thought they would be, but the fact that they were below 
consensus estimates tells me otherwise.  Another rate cut may 
help business investment, but I am skeptical after the last 11 
cuts did little good.  Of course, I may be wrong about the last 
statement, as Fed watchers may say we'd be much lower without 
them.  In any case, a rally may continue through Wednesday, but 
without a cut of more than 25 basis points, it seems that the 
economic data should overwhelm any sense of euphoria. 

For now, I'll go along for the ride, but a Dow over 8550 would 
make me more comfortable with a full deck of long plays.  I have 
been targeting SPX 900 for several weeks now, as confirmation of 
a rally.  While my inner bear still tells me things don't look so 
hot, I got what I asked for, so I'll trade what I see.   

The retail sector got a reprieve from the sell-off of the last 
couple of days.  That seems odd, given the decrease in personal 
spending, poor Consumer Confidence and reduction in payrolls.  
The bounce was minor, so I am expecting renewed selling in the 
sector, whether it comes on Monday, or Wednesday afternoon.

The semiconductors set another relative high, with the 
Semiconductor Index (SOX) cruising back up through 300, and past 
resistance at 310 as well.  While I'm still trying to figure out 
who is betting on the sector, I'll go along for the ride until it 
ends.  Which logic tells me should be soon.  Of course logic 
dictated the average remain in the low 200s, as well.  

This is not the first time the market has rallied on bad news 
ahead of a rate cut that was not entirely set in stone. In fact, 
this type of action has been common in the past.  The tricky part 
is figuring out what will happen after the news is out. It is a 
trader's axiom to fade the first move after the announcement.  
That works much of the time, but the second move is usually less 
predictable.  After this week's numbers, I will be looking to 
short a rally, and then close on the pullback. Beyond that I'll 
stick to what I see, and hope logic doesn't get in the way. 


Market Averages


52-week High: 10673
52-week Low :  7286
Current     :  8517

Moving Averages:

 10-dma: 8432
 50-dma: 8189
200-dma: 9293

S&P 500 ($SPX)

52-week High: 1176
52-week Low :  775
Current     :  900

Moving Averages:

 10-dma:  891
 50-dma:  869
200-dma: 1002

Nasdaq-100 ($NDX)

52-week High: 1734
52-week Low :  795
Current     : 1019

Moving Averages:

 10-dma:  982
 50-dma:  914
200-dma: 1163

The Semiconductor Index (SOX.X): The SOX continues to seek out 
new highs.  It got back above resistance at 300 and broke through 
the next level at 310.  Until we see a turnaround of the current 
trend we'll stay away from expensive shorts in the sector.  The 
Editor's Plays from last Sunday recommended buying puts on the 
way up, and certainly the earnings results have been bad enough 
from the sector to justify the saying "buy them when you can, not 
when you have to."   The 46% gain since October 9 seems 
unsustainable and unjustifiable.  However, it is continuing. When 
the music stops it could be a long way down, so be very careful 
when playing long in this group. 

52-week High: 657
52-week Low : 214
Current     : 282

Moving Averages:

 10-dma: 288
 50-dma: 270
200-dma: 428

Market Volatility

The VIX slid today on the market rally.  While there is still 
plenty of downside room if we get a sustained, long term rally (I 
have traded the VIX under 20 on numerous occasions in upward 
trending markets), I doubt it will get below 30 before the Fed 
interest rate announcement on Wednesday.  Heading into next week's 
events, with elections and the FOMC meeting, we got a surprising 
number of weekend premium sellers.  If anything, I might be buying 
premium at these levels, in anticipation of some big swings next 

CBOE Market Volatility Index (VIX) = 33.98 –1.93
Nasdaq-100 Volatility Index  (VXN) = 49.86 –3.13


          Put/Call Ratio  Call Volume   Put Volume

Total          0.71        596,692       426,509
Equity Only    0.56        468,903       264,578
OEX            0.93         26,791        24,923
QQQ            0.51         72,632        37,085


Bullish Percent Data

           Current   Change   Status
NYSE          38      + 1     Bull Confirmed
NASDAQ-100    59      + 4     Bull Alert
Dow Indust.   57      + 0     Bull Confirmed
S&P 500       50      + 1     Bull Alert
S&P 100       54      - 4     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   1.21
10-Day Arms Index  1.03
21-Day Arms Index  0.99
55-Day Arms Index  1.27

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       1991           741
NASDAQ     2129          1018

        New Highs      New Lows
NYSE         30              39
NASDAQ       48              58

        Volume (in millions)
NYSE     1,766
NASDAQ   1,832


Commitments Of Traders Report: 10/29/02

Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the 
Chicago Mercantile Exchange and Chicago Board of Trade. COT data 
can be found at www.cftc.gov.

Small specs are the general trading public with commercials being 
financial institutions. Commercials are historically on the 
correct side of future trend changes while small specs tend 
to be wrong.  

S&P 500

Commercials loaded up slightly on both sides of their position, 
adding 5,000 long and short contracts.  Small traders treated 
their positions similarly, adding 3,000 contracts to both sides.

Commercials   Long      Short      Net     % Of OI 
10/08/02      427,070   445,135   (18,065)   (2.1%)
10/15/02      429,448   449,138   (19,690)   (2.2%)
10/22/02      432,775   463,827   (31,052)   (3.5%)
10/29/02      437,565   468,557   (30,992)   (3.4%)

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
10/08/02      131,486    81,010    50,476     23.7%
10/15/02      134,507    83,714    50,793     23.3%
10/22/02      134,641    72,681    61,960     29.8%
10/29/02      137,740    75,587    62,153     29.1%

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

Commercials left positions virtually the same, with a slight 
reduction to the long side and a slight increase to the short 
side.  Small traders added less than 1,000 contracts to both 

Commercials   Long      Short      Net     % of OI 
10/08/02       45,384     55,504   (10,120) (10.0%)
10/15/02       45,578     51,969    (6,391) ( 6.6%)
10/22/02       48,954     54,088    (5,134) ( 4.9%)
10/29/02       47,837     55,261    (7,324) ( 7.1%)

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
10/08/02       10,735     5,721     5,014    30.4%
10/15/02       10,185    12,478     2,293    10.1%
10/22/02       10,202     8,892     1,310     6.6%
10/29/02       10,584     9,419     1,165     5.8%

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


Commercials kept the status quo here, as well, reducing the net 
long position by 300 contracts, of 0.4% of open interest.  Small 
traders increased longs by 1,200 and shorts by 2,000.

Commercials   Long      Short      Net     % of OI
10/08/02       19,550    11,823    7,727      24.6%
10/15/02       20,914     9,630   11,284      36.9%
10/22/02       22,189    13,448    8,741      24.5%
10/29/02       21,800    13,337    8,463      24.1%

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

Small Traders  Long      Short     Net     % of OI
10/08/02        7,890     9,645    (1,755)   (10.0%)
10/15/02        6,040    10,329    (4,289)   (26.2%)
10/22/02        4,445     9,270    (4,825)   (35.1%)
10/29/02        5,602    11,090    (5,488)   (32.9%)

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


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

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An Expanded View
by Steven Price

I would like for you to analyze QLGC.  It is a stock that moves 
nicely.  It has had almost a 100% move since Oct 7.  It can't 
sustain that rate.  I should have gone long at $20 but didn't.  
It's always easy to see in hindsight.  I haven't been able to 
find another entry point.  Don't want to get on the chopping 
block now.  What kind of pullback might we see?
Thank you,   Denise 


I thought this would be a good time to look at one of the most 
confounding sectors in the marketplace recently - the chip 
stocks.  QLogic (QLGC) is one of the few stocks in the sector to 
post an earnings surprise to the upside, beating estimates by 
$0.02 on October 16.  Bear Stearns then raised profit targets for 
2003 and 2004, citing the company's "superb" quarterly earnings. 

The stock has soared from a low of $19.97 on 10/09 to Friday's 
close of $37.15, for a gain of 86% in 3 weeks.  The story here is 
really more about the sector.  The Semiconductor Index (SOX.X) 
has had a similar meteoric gain, beginning on the same day, and 
taking most of the stocks in the sector right along with it.  I 
was one of the biggest bears in this sector throughout most of 
the summer and fall.  I was somewhat startled by the sudden 
turnaround, given the fact that most of the stocks in the sector 
were still reporting a slowdown in IT spending.  As earnings 
crept out of the group the last two months, many companies in the 
storage and chip sectors continued to predict decreases in 
revenue in coming quarters and said they would be reducing 
capital spending.  Sun Microsystems alone reduced its capital 
spending for 2003 by 75%, taking $1.5 billion out of the money 
stream.   Many of these companies also said they lacked the 
visibility to see a turnaround any time soon. 

We stopped playing the sector short as soon as we got a break in 
the trend of lower highs, and have been on the sidelines since.  
This is mostly because it is hard to go long in a sector with 
decreasing revenues and we certainly don't want to short a rising 
sector and try to catch a falling knife.  Many readers have been 
emailing me in disbelief of the recent run in the SOX, and asking 
if it is time to short the chip stocks yet.   While the 46% gain 
since 10/09 seems unbelievable, let's look back through the year 
and see just where we came from.   

The SOX closed at 522.16 on December 31, 2001.  It traded as high 
as 637.94 on March 8.  That leaves us off 40% for the year and 
51% down from the year's high, at the current level.  The Index 
traded as low as 209, with a close of 214 on October 9.   At that 
closing price, the SOX was off 59% for the year, and 66% from its 
March high.  My point is that while it may seem that we have seen 
an unsustainable increase in value, what we may be seeing is a 
rebound to more reasonable levels, considering the massive drop. 

Chart of the SOX


A look at the point and figure chart also shows an interesting 
story.  The SOX has a nicely defined upward trend.  While it 
looks as though it is due for a pullback from the upper end of 
its channel, it remains on a buy signal.   What is even more 
interesting is that the current bullish vertical count is 
actually 396, with bearish resistance at 364.  These would also 
indicate a lot of upside room to the current move.  Those traders 
looking to go long the sector can look to the PnF for 
reassurance.  However, I am not endorsing long trades here.  It 
still seems as though the sector is seeing decreased spending and 
limited visibility for a rebound.  The recent earnings numbers 
may not have been as bad as expected; however, they were anything 
but good.   I am really just making a point to the shorts out 
there (who seem reluctant to step out of the way) that the sector 
is not turning over, and it may not do so for a while.  If and 
when it does, make room for me on the bandwagon, because I'm 
coming aboard.

Point and Figure chart of the SOX


The wild card here is the current market rally.  While it seems 
that we are only rallying ahead of a possible rate cut, there was 
an increase in equipment spending buried in the disappointing GDP 
report.   If the market does sell-off following the FOMC 
announcement Wednesday, then the above analysis may be all for 
nothing.  However, we need to wait for that to happen before 
risking too much capital to the short side. 

I realize the original question had to do with QLogic, but I 
believe it will move in concert with the SOX, as will most of the 
chip sector.  Therefore, any investor considering individual 
stocks in the group can refer to the above analysis for my 

Thanks for all of your suggestions.  For those I didn't address 
in today's column, look for my comments on the Market Monitor.

Please send your questions and suggestions to: 

Contact Support


Market Watch for the week of October 21st

Major Earnings This Week

Symbol  Company               Date           Comment      EPS Est

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

ABN    ABN Amro Holdings     Mon, Nov 4  Before the Bell       N/A
ACDO   Accredo Health        Mon, Nov 4  Before the Bell      0.36
AFG    American Fin Group    Mon, Nov 4  Before the Bell      0.62
ATH    Anthem, Inc.          Mon, Nov 4  Before the Bell      0.99
AIV    Apartment Inv & Man   Mon, Nov 4  After the Bell       1.09
CHK    Chesapeake Energy     Mon, Nov 4  After the Bell       0.10
CHD    Church & Dwight Co.   Mon, Nov 4  Before the Bell      0.39
DTE    DTE Energy Company    Mon, Nov 4  -----N/A-----        0.76
FHCC   First Health Group    Mon, Nov 4  Before the Bell      0.32
FSH    Fisher Sci Intl       Mon, Nov 4  After the Bell       0.49
KEG    Key Energy Services   Mon, Nov 4  Before the Bell      0.02
MLS    Mills Corporation     Mon, Nov 4  Before the Bell      0.75
OGE    OGE Energy            Mon, Nov 4  Before the Bell       N/A
PRE    PartnerRe Ltd.        Mon, Nov 4  After the Bell      -0.63
PIXR   Pixar Anime Studios   Mon, Nov 4  After the Bell       0.74
RA     Reckson Ass Rlty Corp Mon, Nov 4  After the Bell       0.60
REG    Regency Centers Corp  Mon, Nov 4  After the Bell       0.69
RYAAY  Ryanair Holdings      Mon, Nov 4  -----N/A-----        0.63
STO    Statoil ASA           Mon, Nov 4  Before the Bell      0.19
TLD    TDC A/S               Mon, Nov 4  Before the Bell       N/A
TU     TELUS                 Mon, Nov 4  Before the Bell      0.05
TRZ    Trizec Properties     Mon, Nov 4  After the Bell       0.48
VRTX   Vertex Pharm Inc      Mon, Nov 4  After the Bell      -0.30

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

ALS    Alstom SA             Tue, Nov 5  Before the Bell       N/A
AMH    AmerUs Group Co.      Tue, Nov 5  After the Bell       0.90
BJS    BJ SVCS CO            Tue, Nov 5  Before the Bell      0.21
BAB    British Airways       Tue, Nov 5  Before the Bell       N/A
GIB    CGI Group             Tue, Nov 5  Before the Bell       N/A
CSC    Computer Sci Corp     Tue, Nov 5  After the Bell       0.54
CEI    Crescent Rl Est Eq Co Tue, Nov 5  Before the Bell      0.43
EMR    Emerson Electric      Tue, Nov 5  -----N/A-----        0.61
ECA    EnCana Corporation    Tue, Nov 5  -----N/A-----         N/A
EQR    Equity Residential    Tue, Nov 5  During the Market    0.60
EXPD   Expeditors Intl WA    Tue, Nov 5  Before the Bell      0.28
FOX    Fox Entertainment Grp Tue, Nov 5  After the Bell       0.09
GRP    Grant Prideco Inc     Tue, Nov 5  Before the Bell      0.02
HRC    Healthsouth           Tue, Nov 5  -----N/A-----        0.21
HSIC   Henry Schein          Tue, Nov 5  Before the Bell      0.72
ICOS   ICOS Corporation      Tue, Nov 5  After the Bell      -0.57
CLI    Mack-Cali Realty Corp Tue, Nov 5  Before the Bell      0.90
MBI    MBIA Inc.             Tue, Nov 5  Before the Bell      1.07
MET    MetLife Inc.          Tue, Nov 5  After the Bell       0.60
MRH    Montpelier Re Hldng   Tue, Nov 5  After the Bell        N/A
PDS    Precision Drill Corp  Tue, Nov 5  Before the Bell      0.12
PRU    Prudential Finl       Tue, Nov 5  After the Bell       0.49
SPI    Scottish Power        Tue, Nov 5  -----N/A-----         N/A
SHU    Shurgard Strge Cen    Tue, Nov 5  Before the Bell      0.78
TEM    Telefonica Moviles    Tue, Nov 5  Before the Bell       N/A
NWS    The News Corp Lmtd    Tue, Nov 5  After the Bell       0.10
TOC    The Thomson Corp      Tue, Nov 5  -----N/A-----        0.34

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

AW     Allied Waste Ind      Wed, Oct 30  After the Bell      0.27
DOX    Amdocs Limited        Wed, Nov 6  After the Bell       0.17
ARM    ArvinMeritor, Inc.    Wed, Nov 6  Before the Bell      0.60
BDX    Becton, Dick & Co.    Wed, Nov 6  After the Bell       0.53
BNN    Brascan Corporation   Wed, Nov 6  After the Bell        N/A
VNT    C. A. Nac Tele Ven    Wed, Nov 6  -----N/A-----         N/A
CLU    Canada Life Financial Wed, Nov 6  -----N/A-----        0.47
CED    Can Nat Resources     Wed, Nov 6  Before the Bell      0.66
CFFN   Capitol Federal Finl  Wed, Nov 6  -----N/A-----        0.30
CEPH   Cephalon, Inc.        Wed, Nov 6  After the Bell       0.28
CSCO   Cisco Systems         Wed, Nov 6  After the Bell       0.13
CMLS   Cumulus Media Inc.    Wed, Nov 6  -----N/A-----       -0.02
DVA    DaVita                Wed, Nov 6  Before the Bell      0.44
EVC    Entrvsns Comm Corp    Wed, Nov 6  After the Bell       0.00
FLR    Fluor Corporation     Wed, Nov 6  After the Bell       0.55
MME    Mid At Med Services   Wed, Nov 6  After the Bell       0.49
NAB    National Aus Bank     Wed, Nov 6  After the Bell        N/A
RL     Polo R. Lauren Corp   Wed, Nov 6  Before the Bell      0.51
PFG    Principal Finl Group  Wed, Nov 6  Before the Bell      0.52
SHPGY  Shire Pharm Group     Wed, Nov 6  Before the Bell      0.35
TMPW   TMP Worldwide Inc.    Wed, Nov 6  After the Bell       0.14
UNM    UnumProvident Corp    Wed, Nov 6  After the Bell       0.64
WPI    Watson Pharm Inc.     Wed, Nov 6  Before the Bell      0.42
HLTH   WebMD                 Wed, Nov 6  After the Bell       0.05

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

AET    Aetna                 Thu, Oct 31  Before the Bell     0.70
AEG    AEGON N.V.            Thu, Nov 7  -----N/A-----        0.26
BRL    Barr Laboratories     Thu, Nov 7  Before the Bell      0.86
BRG    BG Group              Thu, Nov 7  -----N/A-----        0.24
BTY    BT Group Plc          Thu, Nov 7  Before the Bell       N/A
CVC    Cablevision Sys Corp. Thu, Nov 7  Before the Bell     -1.36
CRE    Carramerica Realty    Thu, Nov 7  After the Bell       0.85
CZN    Citizens Comm Co.     Thu, Nov 7  After the Bell      -0.02
CNA    CNA Financial Corp    Thu, Nov 7  Before the Bell      0.56
DF     Dean Foods            Thu, Nov 7  Before the Bell      0.69
DEG    Delhaize Group        Thu, Nov 7  -----N/A-----         N/A
DVN    Devon Energy Corp     Thu, Nov 7  -----N/A-----        0.66
ENB    Enbridge Inc.         Thu, Nov 7  -----N/A-----         N/A
GFI    Gold Fields Limited   Thu, Nov 7  Before the Bell      0.14
HAL    Halliburton Company   Thu, Nov 7  Before the Bell      0.21
HCC    HCC Insurance Hldngs  Thu, Nov 7  After the Bell       0.47
HIW    Highwoods Properties  Thu, Nov 7  After the Bell       0.87
IGT    Intl Gaming Tech      Thu, Nov 7  -----N/A-----        0.92
JBLU   Jetblue Airways Corp  Thu, Nov 7  Before the Bell      0.28
KTC    Korea Telecom         Thu, Nov 7  Before the Bell       N/A
LTR    Loews Corp.           Thu, Nov 7  Before the Bell      1.47
MGA    Magna Intl Inc.       Thu, Nov 7  -----N/A-----        1.19
MTD    METTLER TOLEDO        Thu, Nov 7  -----N/A-----        0.50
PSC    Philadelphia Suburban Thu, Nov 7  Before the Bell      0.29
PCO    Premcor U.S.A.        Thu, Nov 7  -----N/A-----       -0.31
REY    REYNOLDS & REYNOLDS   Thu, Nov 7  Before the Bell      0.43
ROK    Rockwell Automation   Thu, Nov 7  -----N/A-----        0.26
RSA    Royal & Sun All Ins   Thu, Nov 7  Before the Bell       N/A
SPP    Sappi Limited         Thu, Nov 7  -----N/A-----        0.28
TI     Telecom Italia        Thu, Nov 7  -----N/A-----         N/A
TRLY   Terra Lycos           Thu, Nov 7  During the Market   -0.06
MNY    The MONY Group Inc.   Thu, Nov 7  Before the Bell      0.11
TRMS   Trimeris, Inc.        Thu, Nov 7  Before the Bell     -1.25
UVN    Univision Comm        Thu, Nov 7  After the Bell       0.07
DIS    Walt Disney           Thu, Nov 7  After the Bell       0.11

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

BSY    Brit Sky Bradcstg Grp Fri, Nov 8  -----N/A-----         N/A
CEP    Centerpulse AG        Fri, Nov 8  -----N/A-----         N/A
EP     El Paso Corp.         Fri, Nov 8  Before the Bell      0.27
FS     Four Seasons Hotels   Fri, Nov 8  Before the Bell      0.16
HEW    Hewitt Associates     Fri, Nov 8  Before the Bell      0.26
IFX    Infineon Tech         Fri, Nov 8  -----N/A-----  -     0.09
ORH    Odyssey Re Hldngs     Fri, Nov 8  After the Bell       0.31
PBR    Pet Bras Petrobras    Fri, Nov 8  -----N/A-----        0.63

Upcoming Stock Splits In The Next Two Weeks...

Symbol  Company Name              Ratio    Payable     Executable

CPBI    CPB Inc.                  2:1      Nov. 8th    Nov. 12th

Economic Reports This Week

Will they or won't they?  There is still a steady stream of late 
third quarter earnings reports to keep the brokerage houses busy 
and stocks moving as they miss or beat the numbers.  Yet the BIG 
focus this week will be the FOMC meeting on Wednesday.  Will 
they cut, if so by how much, or will they stand pat?


Monday, 11/04/02
Factory Orders (DM)     Sep  Forecast:  -3.0%  Previous:     0.0%

Tuesday, 11/05/02
ISM Services (DM)       Oct  Forecast:   53.0  Previous:     53.9

Wednesday, 11/06/02
FOMC meeting (AB)

Thursday, 11/07/02
Initial Claims (BB)   11/02  Forecast:     NA  Previous:     410K
Productivity-Prel (BB)   Q3  Forecast:   4.2%  Previous:     1.5%
Wholesale Inventries(BB)Sep  Forecast:   0.3%  Previous:     0.2%
Employment Cost Index(DM)Q3  Forecast:   0.9%  Previous:     1.0%
FOMC Minutes (AB)     09/24
Consumer Credit (AB)    Sep  Forecast:  $5.0B  Previous:    $4.2B

Friday, 11/08/02

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

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Trend Change!

After struggling for two weeks to hold support while trending 
lower the markets did exactly the opposite of what most traders 
expected on Friday. Instead of selling off on mutual fund dumping 
and bad economic numbers the markets rallied instead and closed at 
the high of the day.

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Contact Support
The Option Investor Newsletter                   Sunday 11-03-2002
Sunday                                                      2 of 5

In Section Two:

Daily Results
Call Play of the Day: ERTS
Put Play of the Day: LOW
Dropped Calls: None
Dropped Puts: HIG

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For Best Alignment view in Courier Ten Font

CALLS              Mon    Tue    Wed   Thu  Week
AZO      87.90   -3.14   1.19  -0.18  1.75  1.65  Running
ERTS     66.08   -4.58   0.15   1.41 –0.38 –1.70  New, back again
FCS      13.30   -0.74   0.22   0.75  0.90  2.50  nice start
FRX     100.18   -0.45   1.08   1.00 –1.01  2.03  over $100
INTU     54.01   -0.89  -0.06   1.30  0.93  3.71  New, breakout
TRMS     53.92    0.35   0.37   1.35 –0.43  2.77  approval soon
WPI      28.34    0.40   0.98   0.29 –0.31  2.14  new base


BAX      24.22    0.07  -0.96  -1.64 –0.35 –3.43  New, consistency
HIG      41.10   -1.70  -3.00  -1.83 –0.67 –8.00  Drop, gapped
IP       35.19   -0.55  -0.23  -0.40 –0.56 –1.48  new resistance
LEH      54.57   -1.13  -0.58  -0.01 –1.89 –2.18  better entry
LOW      42.10   -1.37   1.20  -0.77 –1.22 –2.00  bad numbers
NTRS     35.63   -0.08  -1.12   0.11 –0.80 –1.07  market bounce
RTH      75.43   -2.11   0.15  -0.64 –1.36 –3.82  spending down
SPW      42.82   -2.26  -1.44   0.24  0.66 –1.88  small bounce

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Call Play of the Day:

ERTS - Electronic Arts - $66.08 +0.96 (-1.53 for the week)

See details in play list

Put Play of the Day:

LOW - Lowe's Companies - $41.73 -1.22 (-2.12 for the week)

See details in play list


Remember that historically, when we drop a pick it will go up
10 to 15% the very next week. It is part of Murphy's Law.
Just because we drop a stock as a pick does not mean we are
advocating a "sell" on any position you have. We are simply
dropping our recommendation as a new play. Existing plays
can and do continue on and are usually profitable.




HIG $41.10 (-6.78) While a large part of HIG's rise on Friday
can be attributed to the broad market rebound, the fact that
the stock rebounded more than 4% on volume 70% above the ADV
hints that perhaps the buying was more than just an oversold
bounce.  While our stop at $42.50 hasn't yet been violated, we
want to get out of the way on the off chance that Financial
stocks continue to be in favor between now and the FOMC meeting
on Wednesday.  Trader's currently in the play can continue to
hold for another decline, but need to abide by their stops.  We
don't advocate initiating new positions here, and would use any
decline early next week as an opportunity to exit the play.


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

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

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

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

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

The risk of selling naked puts is always the possibility
of a catastrophic event that drops the stock below the
strike price and could result in the stock being PUT to you.
Always protect yourself with a "buy to cover" limit order
to take you out before this can happen.

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Contact Support
The Option Investor Newsletter                   Sunday 11-03-2002
Sunday                                                      3 of 5

In Section Three:

New Calls: ERTS, INTU
Current Calls: WPI, TRMS, AZO, FCS, FRX
New Puts: BAX

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option executions

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ERTS - Electronic Arts - $66.08 +0.96 (-1.53 for the week)

Company Summary:
Electronic Arts, headquartered in Redwood City, California, is 
the world's leading interactive entertainment software company. 
Founded in 1982, Electronic Arts posted revenues of more than 
$1.7 billion for fiscal 2002. The company develops, publishes and 
distributes software worldwide for the Internet, personal 
computers and video game systems. EA markets its products under 
four brand names: EA SPORTS(TM), EA GAMES(TM), EA SPORTS BIG(TM) 
and EA.COM(SM). (source: company release)

Why We Like It:
Electronic Arts has been a tricky stock to trade through earnings 
season.  The last time we played the stock, fellow game maker 
THQI warned that it expected soft demand for game consoles during 
the holiday season.  In spite of the fact that analysts expressed 
the opinion that THQI's warning was due its game line-up, and 
shouldn't affect ERTS's strong fundamentals, nervous investors 
sold off stocks in the sector, taking ERTS down to its bullish 
support line on the point and figure charts.  However, ERTS 
released earnings 2 days later, which not only surpassed 
expectations, but doubled them.  The company earned $0.34 per 
share, versus expectations of $0.17.  Net revenue was up 89% from 
the previous year, on the strength of games like Madden 2003, 
Medal of Honor and the Sims. The company raised guidance, and 
analysts said the strong results showed that game sales during 
the holiday season were not being squeezed by the slow economy.  
While that may seem to be a stretch of logic, ERTS numbers 
support the view for at least this company.  ERTS will be not 
only the first game maker to post quarterly revenues of $1 
billion, but that total is more than the yearly revenues of its 
closest competitor.

Each of the stocks recent pullbacks has found support at the 
bullish support line on the PnF chart, and this was no exception.  
Four of the last six rebounds have also taken it above the 
previous high.  The stock has experienced a four-box reversal off 
the bounce and our target on the play is at least the recent high 
of $73.  With the holiday shopping season approaching, we expect 
ERTS to continue to post solid numbers.  For whatever reason, its 
product has sold through tough economic times and recent guidance 
indicates that trend has not changed.  One of the reasons it 
cites for this is the fact that many of its customers are in the 
21 and over age bracket.  This helps them appeal to consumers 
with jobs, as opposed to just the kids who are dependent on 
parents' generosity during the holidays. The stock recently broke 
back above the 50-dma of $65.03 and then found support there the 
last two days. We like that breakthrough for entries at this 
level, and will hang our hats on the stock once again. Place 
stops below recent support at $61.

*** November contracts expire in 2 weeks ***

BUY CALL NOV-65*EZQ-KM OI= 3492  at $2.80 SL=1.40
BUY CALL NOV-70 EZQ-KN OI= 10929 at $0.70 SL=0.00
BUY CALL DEC-65 EZQ-LM OI= 2769  at $5.10 SL=2.50
BUY CALL DEC-70 EZQ-LN OI= 8168  at $2.65 SL=1.30

Average Daily Volume = 4.93 mil


INTU – Intuit Inc. $54.01 (+4.08 last week)

Company Summary:
Intuit is a provider of small business, tax preparation and
personal finance software products and services that simplify
complex financial tasks for small businesses, consumers and
accounting professionals.  The company's principal products and
services include small business accounting and business
management solutions, including its QuickBooks line of products
and services, as well as the Intuit line of industry-specific
business management solutions, TurboTax consumer tax products
and services and Quicken personal finance products and services.

Why We Like It:
Watching the market internals on a daily basis makes it clear
that the recent rally isn't proceeding from a broad base.  New
yearly lows are still outpacing new yearly highs, and volume is
far from convincing.  So when you do find a stock that is breaking
out to new 52-week highs on strong volume, it makes you stand up
and take notice.  Two weeks ago, shares of INTU stunned traders
by hitting a new high at $52, and believe it or not, they pulled
off a repeat performance on Friday by scaling the $54 level.
Volume ran about 20% over the ADV too, so we seem to have a stock
that is under accumulation.  Already on a PnF Buy signal with a
price target of $74, Friday's gain underscored the stock's bullish
tone with another double-top breakout.  To be sure, the price
action has been rather volatile of late, but so long as the trend
remains up, we ought to be able to harvest some gains on the way
up.  INTU is a late reporter, and is scheduled to release its
earnings results on November 13th.  If the recent price action is
any indication, investors seem to be expecting a strong quarter.
Just as a point of reference, that expectation is not borne out
by the earnings estimates, where the company is expected to post
a loss of 23 cents vs. last year's loss of 13 cents and last
quarter's loss of 9 cents.  But as long as the markets are in
rally mode, we'll go along for the ride.  The best entries will
likely come from buying a dip and bounce near intraday support,
first at $52 and then at $51.  Aggressive dip buyers could even
consider buying a rebound from $50, which appears to be strong
support.  Just keep in mind that is just above the $49.50 stop we
have selected for the play.  Given the strong rally the stock has
experienced over the past 3 days, we want to be very careful about
buying into further strength.  But if that fits your risk profile,
use a trade above $54.50 to initiate the position.

*** November contracts expire in 2 weeks ***

BUY CALL NOV-50 IQU-KJ OI=2498 at $4.70 SL=2.75
BUY CALL NOV-55 IQU-KK OI=2284 at $1.35 SL=0.75
BUY CALL DEC-55*IQU-LK OI= 539 at $3.00 SL=1.50
BUY CALL DEC-60 IQU-LL OI= 321 at $1.25 SL=0.50

Average Daily Volume = 3.34 mln

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

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



WPI -Watson Pharmaceuticals - $28.34 +0.85(+2.52 for the week)

Company Summary:
Watson Pharmaceuticals, Inc., headquartered in Corona, 
California, is a leading specialty pharmaceutical company that 
develops, manufactures, markets and distributes branded and 
generic pharmaceutical products. Watson pursues a growth strategy 
combining internal product development, strategic alliances and 
collaborations and synergistic acquisitions of products and 
businesses.  (source: company release)

Why We Like It:
Watson consolidated for several days after its big move following 
a recent deal with Ortho-McNeil.  WPI will expand is generic drug 
portfolio to include three popular oral contraceptives when the 
market exclusivity runs out.  Investors ran the stock up 
following the announcement and completed a reverse head and 
shoulders pattern on the point and figure, and long-term daily 
charts.  The measuring objective of the head and shoulders on the 
daily chart is $35 and today's bullish engulfing pattern looks 
like it has the stock moving toward that end. That announcement 
followed news from Watson that the FDA accepted the company's New 
Drug Application seeking marketing approval for the use of 
Oxytrol in the treatment of overactive bladder. The FDA has 
provided the Company with a primary user fee goal date of 
February 28, 2003 for a response on the application. It has now 
established 6 straight intraday higher highs, and today's close 
was the first above $28 since March.  It has found support the 
last four days at $27 and entry from this point provides a good 
risk/reward scenario.  The current bullish vertical count is $42 
and the bearish resistance line is above that at $48.   Our 
target on the play will be the measuring objective of  $35, 
however the stock is likely to encounter some resistance at $30 
and again at $33.  New entries at this point should keep these 
resistance levels in mind, and watch the $27 support level on a 
market pullback. Watson releases earnings on November 6, so we 
will be exiting the play before next Wednesday.  We will not be 
updating the play after that, so readers not yet in the play will 
have to decide whether to enter a play with short-term 
implications for OI from this point.

*** November contracts expire in 2 weeks ***

BUY CALL NOV-25*WPI-KE OI= 827 at $4.00 SL=2.00
BUY CALL NOV-30 WPI-KF OI= 827 at $0.85 SL=0.00
BUY CALL DEC-25 WPI-LE OI=  38 at $4.30 SL=2.15
BUY CALL DEC-30 WPI-LF OI= 219 at $1.40 SL=0.00

Average Daily Volume = 600 k


TRMS -Trimeris - $51.24 -0.03 (+1.33 for the week)

Company Summary:
Trimeris, Inc. is a biopharmaceutical company engaged in the 
discovery and development of novel therapeutic agents for the 
treatment of viral disease. The core technology platform of 
fusion inhibition is based on blocking viral entry into host 
cells. Trimeris has two anti-HIV drug candidates in clinical 
development. FUZEON, currently in Phase III clinical trials, is 
the most advanced compound in development. A New Drug Application 
(NDA) and Marketing Authorisation Application (MAA) have been 
submitted for FUZEON with the US FDA and the EU EMEA, 
respectively. Trimeris' second fusion inhibitor product 
candidate, T-1249, has received fast track status from the FDA 
and is in Phase I/II clinical testing. Trimeris is developing 
FUZEON and T-1249 in collaboration with F. Hoffmann-La Roche. 
(source: company release)

Why We Like It:
TRMS  Trimeris has had a busy couple of days and has passed one 
test after another.  Thursday's sell-off found support and 
bounced impressively.  That action was followed by a flat-line 
Friday, until just before the close.  The buyers came in at the 
end of the day and pushed TRMS back toward $54 in the last few 
minutes. As time draws closer to March, when the FDA will release 
its decision on Fuzeon, the first in a new class of HIV drugs, 
investors are looking at the potential $1 billion per year in 
revenue for TRMS and its partner Roche.  TRMS also has another 
drug in the pipeline, designated T-1249, which is in the same 
class of drugs and also has proved effective in trials. The point 
and figure chart shows the stock above recent resistance from 
earlier in the year at $53, having traded as high as $54.60 early 
Thursday. The stock's previous resistance points of $50 and $52 
appear to now be providing support on pullbacks, which is a 
positive sign for call holders. The current bullish vertical 
count on the stock is $83, and while that may not have a chance 
to be achieved until the company starts selling the drug next 
year, it does underscore the bullish sentiment currently in the 
market for the stock. The company releases earnings November 7, 
so we will be closing the play next week.  New entries should 
keep in mind that they will be on their own after that time. If 
readers still want to enter the play, then a break over $55, or a 
pullback to support at $52 look like the most logical entries.  
$52 was previous before the breakout and $55 is the next 
resistance level, based on Thursday's action.  Leave stops at 
$50, just below Thursday's low of the day. 

*** November contracts expire in 2 weeks ***

BUY CALL NOV-50*RQM-KJ OI= 1001 at $5.00 SL=2.50
BUY CALL NOV-55 RQM-KK OI= 1596 at $1.70 SL=0.90
BUY CALL DEC-50 RQM-LJ OI=   30 at $7.10 SL=2.90
BUY CALL DEC-55 RQM-LK OI=   39 at $4.10 SL=2.05

Average Daily Volume = 523 k


AZO – AutoZone, Inc. $87.90 (+1.95 last week)

Company Summary:
AutoZone is a retailer of automotive parts and accessories,
primarily focusing on do-it-yourself customers.  Each of its
more than 2900 stores in 42 states and Mexico carries an
extensive product line for cars, vans and light trucks,
including new and re-manufactured automotive hard parts,
maintenance items and accessories.  Approximately half of its
domestic stores also have a commercial sales program, which
provides commercial credit and prompt delivery of parts and
other products to local repair garages, dealers and service

Why We Like It:
Despite more dismal economic news on Friday, the bulls were not
to be denied.  With expectations still running high for a rate
cut next week, virtually every sector finished the day in the
green, as the broad market finished with its fourth consecutive
weekly advance.  Even the beaten-down Retail group staged a
modest advance of 1.5%, despite the gloomy outlook for the
holiday shopping season.  But our AZO play is a bit different
from the bulk of the sector, as the company's sales don't depend
on seasonal factors.  And based on the recent string of
outstanding earnings reports, growth is still running well ahead
of anyone's estimates.  Like clockwork last week, AZO dropped
sharply with the rest of the market, perfectly tagging that
ascending trendline near $81.50 and beginning a recovery almost
immediately.  This is the fourth time since the trendline has
been in place that it has served as a spring-board for the dip
buyers, and judging by the 2.5% gain on Friday, this time it is
following the script again.  The current rebound ought to have
AZO pushing through its most recent high near the $90 level in
short order, and our first target should be the $91 level, which
is the PnF price target generated in early September.  Based on
the stock's trading pattern late-comers don't get much of an
opportunity to enter the play; it is pretty much a dip to support
and then run straight up the chart before pulling back again.
A pullback into the $84.50-85.00 area would make for a solid
entry, but based on the stock's pattern seems unlikely.  Based
on the ascending trendline over the past 4 days, traders looking
for an entry will likely need to rely on a pullback to the
$86.00-86.50 area for an entry point.  Aggressive traders can
still enter on further price strength over $88.50 (just above
Friday's high), but need to be cognizant that profit taking could
appear as early as the $91-92 area.  We're going to recommend
harvesting gains (at least partially) on a trade at $91.  Raise
stops to $84.

*** November contracts expire in 2 weeks ***

BUY CALL NOV-85 AZO-KQ OI=2081 at $4.50 SL=2.75
BUY CALL NOV-90 AZO-KR OI= 810 at $1.45 SL=0.75
BUY CALL DEC-90*AZO-LR OI= 926 at $4.30 SL=2.75

Average Daily Volume = 1.20 mln


FCS – Fairchild Semiconductor Int'l $13.30 (+2.98 this week)

Company Summary:
Fairchild Semiconductor is a global company that designs,
manufactures and market high-performance building block
semiconductors critical for multiple end markets, with a focus
on developing power and interface solutions.  The company's
products are used in consumer, communications, computer,
industrial and automotive applications.  FCS' products are
organized into three principal product groups: Analog and Mixed
Signal Products, Discrete Products and Interface and Logic
Products.  Additionally, the company produces non-volatile memory
and optoelectronics.

Why We Like It:
Whether it made sense or not, Semiconductor stocks were in favor
again on Friday with the SOX index advancing by more than 6%, and
closing in on strong resistance in the 317-320 area.  Whether
this is real buying, or just jockeying ahead of the Fed meeting,
we can't say.  Not to be outdone, FCS rocketed higher by nearly
12% on Friday, on continued strong volume.  This solidifies the
recent breakout over the $11.50 level and gives the impression
that the bulls intend to make a serious run at the $15 resistance
level.  Eager bulls are hoping the pattern of an October bottom
holds true and are throwing money at the sexy Semiconductor
sector in hopes that it will lead the way higher.  With a lack of
demand growth currently apparent, this current move is clearly
being done as an act of faith.  But as traders, we're willing to
go along for the ride, so long as it lasts.  Those that entered
on the breakout on Friday have a little cushion in their position,
while the rest of us need to look for the next pullback.  Intraday
support can be found at $12.25, $11.60 and finally $11.00-11.25.
A pullback on profit taking and subsequent rebound from any of
these levels looks good for new entries, so long as the SOX
continues to post higher lows and higher highs.  Aggressive
traders can still chase FCS higher from Friday's close, but need
to be thinking about the exit as the stock nears $15, as that
is the site of some strong resistance.  Raise stops to $10.25.

*** November contracts expire in 2 weeks ***

BUY CALL NOV-12 FCS-KV OI=785 at $1.40 SL=0.75
BUY CALL NOV-15 FCS-KC OI=270 at $0.35 SL=0.00
BUY CALL DEC-12*FCS-LV OI=144 at $1.95 SL=1.00
BUY CALL FEB-15 FCS-BC OI= 97 at $1.55 SL=0.75

Average Daily Volume = 2.20 mln


FRX – Forest Laboratories $100.18 (+3.03 last week)

Company Summary:
One of many specialty pharmaceutical companies, Forest
Laboratories develops, manufactures and sells both branded
and generic forms of ethical prescription and non-prescription
drug products.  . Some of the company's more notable products
are Celexa (for depression), Tiazac (for hypertension and
angina), and respiratory products Aerobid, Aerochamber and
Tessalon.  Additionally, the company produces Infasurf, a
lung surfacant for the treatment and prevention of respiratory
distress syndrome in premature infants.  FRX markets its
products directly to physicians using the company's own
specialized sales force.

Why We Like It:
With the broad market looking weak at the open on Friday, it
looked like the best we could hope for from FRX would be another
rangebound session awaiting a more positive market.  But after
the initial dip to $97.30 (just above the bottom of week's
trading range), FRX rebounded throughout the day, with buying
volume increasing throughout the session.  By the time the
closing bell rang, the bulls had successfully propelled the stock
to another close over the $100 level.  While buying the dip on
Friday (or any other day last week, for that matter) made for a
solid entry into the play, what we really need to see is a
breakout to the upside (above $102) on strong buying volume.
Despite the trend of increasing volume throughout the day on
Friday, the day's overall volume was downright anemic, barely
half the ADV.  Closing back over $100 is encouraging, but it
doesn't change the fact that FRX is still in the $95-102 range
that it has occupied for nearly 3 weeks.  Judging from recent
price action, a breakout to the upside should be powerful and
carry with it strong volume.  So momentum traders can target a
breakout to the upside for new entries.  Dip buyers got their
chance on Friday, but might get another chance.  Use a renewed
dip into the $97-98 area to initiate new positions ahead of the
expected breakout.  For now, leave stops set at $95.

*** November contracts expire in 2 weeks ***

BUY CALL NOV-100 FRX-KT OI=3606 at $2.95 SL=1.50
BUY CALL NOV-105 FRX-KA OI=2044 at $0.80 SL=0.40
BUY CALL DEC-100*FRX-LT OI= 109 at $5.70 SL=3.50
BUY CALL DEC-105 FRX-LA OI=  66 at $3.30 SL=1.75

Average Daily Volume = 2.06 mln


BAX - Baxter International $24.22 -0.80 (-2.98 for the week)

Company Summary:
Baxter International Inc. is a global health care company that, 
through its subsidiaries, provides critical therapies for people 
with life-threatening conditions. Baxter's bioscience, medication 
delivery and renal products and services are used to treat 
patients with some of the most challenging medical conditions 
including cancer, hemophilia, immune deficiencies, infectious 
diseases, kidney disease and trauma. (source: company release)

Why We Like It:
Baxter is one of the few healthcare stocks without even a single 
positive month since March.  It has suffered one technical 
breakdown after another and has been in a descending channel for 
seven months.  During that time the company has lowered its sales 
guidance, suffered questions about its dialysis machine tubing 
causing deaths, and been repeatedly downgraded.  A month ago, 
Baxter lowered sales growth targets for the rest of the year, due 
to competition in its blood-products business.  Just a week ago, 
the company revealed that sales for the third quarter at its 
biotechnology unit increased less than expected for the second 
consecutive quarter. BAX said that sales of its Factor VIII 
treatment for haemophilia were weaker than expected and that the 
sluggishness would continue at least through the fourth quarter 
of this year and first quarter next year.   The company's renal 
business also saw slower demand, following the aforementioned 
connection to deaths in haemodialysis patients.  BAX once again 
lowered sales estimates for recombinate from 25% to 20%.  

On Wednesday, Morgan Stanley cut its rating on the stock to 
underweight, citing Baxter's increasing capacity for production 
of Factor VIII, in spite of what appears to be decelerating 
demand. Morgan's analyst said, " "We believe Baxter's long-term 
earnings growth story is at risk. We also see balance sheet 
issues overhanging the stock."

Baxter has seen increasing volume on each sell-off, which is very 
bearish, and our target entry of $24.00 will constitute a triple 
bottom sell signal on the point and figure chart.  The last 
triple bottom resulted in a $5 sell-off, and each sell signal on 
the PnF has been reliable thus far.  Although each sell-off has 
preceded rebounds, no rebound has been significant enough to 
create a buy signal since March.   According to Professor Robert 
Earl Davis' chart pattern study, the triple bottom signal is 
profitable 93.5% percent of the time for an average gain of 23% 
within 3.4 months.  This data is for bear market conditions.   
While we may not hold the play for that long a period of time, 
the percentages seem to be in our favor. New entries should look 
for the $24 sell signal, or can target a failed rebound under 
recent resistance at $28 for ideal entry, if a rally before the 
FOMC meeting manages to lift BAX next week. Place stops above 
that resistance, at $29.

*** November contracts expire in 2 weeks ***

BUY PUT NOV-25 BAX-WE OI=1985 at $1.45 SL=0.70
BUY PUT DEC-25*BAX-XE OI= 468 at $2.70 SL=1.35

Average Daily Volume = 4.61 MIL

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The Option Investor Newsletter                   Sunday 11-03-2002
Sunday                                                      4 of 5

In Section Four:

Current Put Plays: IP, LOW, RTH, LEH, NTRS, SPW
Leaps: It's A New Bull Market!
Traders Corner: Making Profits When Things Go Nowhere Fast
Traders Corner: Dow Theory and Technical Analysis: Part 2

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IP - International Paper - $35.19 +0.26(-1.31 for the week) 

Company Summary:
International Paper is the world's largest paper and forest 
products company. Businesses include paper, packaging, and forest 
products. As one of the largest private forest landowners in the 
world, the company manages its forests under the principles of 
the Sustainable Forestry Initiative (R) (SFI(SM)) program, a 
system that ensures the continual planting, growing and 
harvesting of trees while protecting wildlife, plants, soil, air 
and water quality. Headquartered in the United States, 
International Paper has operations in over 40 countries and sells 
its products in more than 120 nations.

Why We Like It:
IP made a token effort today, following the Dow higher.  However, 
this Dow component could only manage a 0.26 point gain on a day 
when the index posted a triple digit gain ahead of next week's 
FOMC meeting. What seems more important is the failure of support 
at $35. The stock had found support at $35 during the early part 
of the week, however, has both broken below that level the last 
two days, and set a series of lower lows.  It is awfully hard to 
get a Dow component to trend down in an upward trending market, 
but IP has managed to do so. The stock had found support at the 
50-dma throughout the early part of the week. However, now that 
it has broken down through that level, the 50-dma appears to have 
put a ceiling on it.    Both rally attempts the last two days 
were turned back at that level, making for good risk reward on 
entries at the current level. The company continues to issue more 
debt to help retire some of its previous notes.  It added to its 
recent offering today, after completing private placement of $1 
billion, by issuing an additional $200 million. The stock 
recently saw its hold rating lowered to a sell by Prudential, 
which cited a net worth of tangible assets of around $2 billion, 
versus $16 billion in debt. The stock has been trending lower 
since October 22nd, and today's minor bounce did nothing to 
change that trend.  We like the new ceiling, and lack of $35 
support, and new entries can initiate with the stock under the 
50-dma (currently $35.60).

*** November contracts expire in 2 weeks ***

BUY PUT NOV-37.50 IP-WU OI=2395 at $2.60 SL=1.30
BUY PUT DEC-37.50 IP-XU OI= 142 at $3.40 SL=1.70

Average Daily Volume = 3.31 mil


LOW - Lowe's Companies - $41.73 -1.22 (-2.12 for the week)

Company Summary:
With 2001 sales of $22.1 billion, Lowe's Companies Inc. is a 
Fortune 100 company that serves more than seven million customers 
a week at more than 800 home improvement stores in 43 states. The 
14th largest retailer in the nation, Wilkesboro, N.C.-based 
Lowe's is the second-largest home improvement retailer in the 
world. (source: company release)

Why We Like It:
Lowe's traded at a new recent low intraday, before riding the 
afternoon rally to a mild gain of 0.37.  The stock had found 
support at $41.00, but the trade down to $40.75 demonstrated that 
buyers at that level have been overwhelmed.  The trade of $41 
established a three-box reversal down on the point and figure 
chart, and if not for a broad market rally, it seems safe to 
assume LOW would have ended the day in the red. This morning's 
economic data only added to the bad news for the retailers.  
Personal income and personal spending were below expectations, as 
were payrolls.  Following poor Consumer Confidence numbers, there 
does not appear to be a light at the end of the tunnel for 
retailers.  While the bad news stoked the flames of rate cut 
expectations, carrying all boats higher, it appears as though it 
is only a matter of time before retailers once again release 
disappointing sales data.  The only way it seems to avoid missing 
expectations, is to lower them, as Wal-Mart has done this month.  
We still like a short play in LOW down to at least the bullish 
PnF support line of $38.  However, if the stock can break below 
that level, then the August lows around $33 look possible. New 
entries can look for the stock to break back below $42 and then 
intraday resistance at that level.

*** November contracts expire in 2 weeks ***

BUY PUT NOV-42.50 LOW-WV OI= 1049 at $1.90 SL=1.00
BUY PUT DEC-42.50*LOW-XV OI=   39 at $3.00 SL=1.70

Average Daily Volume = 5.59 MIL


RTH - Retail Holding Company Depository Receipts - $74.60 -1.36 
(-3.90 for the week)

Company Summary:
Retail HOLDRS are Depositary Receipts issued by the Retail HOLDRS 
Trust which represent your undivided beneficial ownership in the 
common stock of a group of specified companies that are involved 
in the retailing industry. The Bank of New York is the trustee. 
Retail HOLDRS may be acquired, held or transferred in a round-lot 
amount of 100 Retail HOLDRS or round-lot multiples. Retail HOLDRS 
are separate from the underlying deposited common stocks that are 
represented by the Retail HOLDRS. The Retail HOLDRS Trust is not 
a registered investment company under the Investment Company Act 
of 1940. (source: AMEX)

Why We Like It:
The retailers got additional bad news this morning, with the 
release of a host of economic data.  There were lower than 
expected numbers in payrolls, personal income, personal spending, 
average workweek, and auto and truck sales.  While this data may 
have driven the market higher temporarily, in anticipation of a 
rate cut next week, it is certainly negative for the economy. 
Heading into the holiday shopping season, retailers do not want 
to see a drops in personal spending, and personal income growing 
at a less than expected 0.4%.  The RTH started the day negative, 
and surfed the rising tide higher in the afternoon.  However, 
even with the bounce, it came nowhere close to the 50-dma of 
$76.89.   While a rate cut may eventually help the economy after 
it makes its way through the system six to nine months from now, 
it will not put many dollars in shoppers pockets in the next 2 
months.  We have been hearing many specialty retailers complain 
that mall traffic is weak and now even grocery chain Albertson's 
has predicted a decline in same store sales for the third 
quarter.  It was reduced from a "reduce" to a "sell" by UBS 
Warburg, after reducing earnings expectations, citing competition 
from Wal-Mart, which itself was recently downgraded and removed 
from Goldman Sachs recommended list.  We are expecting holiday 
sales to continue the trend of missed expectations, and this 
morning's data only reinforced that sentiment.   New entries in 
RTH can watch for a failed rebound at the 50-dma if the broad 
market rally continues Monday in anticipation of a rate cut on 
Wednesday.  If the market gives back today's rally, then look for 
a break back below $75.  We will use the PnF bullish support line 
of $67 for our initial target on the play.

*** November contracts expire in 2 weeks ***

BUY PUT NOV-75 RTH-WO OI= 1618 at $2.00 SL=1.00
BUY PUT DEC-75*RTH-XO OI=  133 at $3.70 SL=2.00

Average Daily Volume = N/A


LEH – Lehman Brothers Holdings $54.57 (-1.91 last week)

Company Summary:
Through its subsidiaries, LEH constitutes one of the leading
global investment banks, serving institutional, corporate,
government and high-net-worth individuals clients.  The company
is engaged primarily in providing financial services, including
securities writing and direct placements, corporate finance and
strategic advisory services, private equity investments and
securities sales and trading.  Completing its array of banking,
research and trading capabilities, LEH also engages in the
trading of foreign exchange, derivative products and certain

Why We Like It:
The first hour of trading on Friday made it look like we were 
going to just have a slow bleed lower, as shares of LEH were 
drifting lower.  But the gloomy economic news seemed to revive 
expectations for a rate cut from the Fed next week, and the 
rebound began.  Shares of LEH found support right at the 50-dma 
(currently 52.65), before moving strongly up the chart, coming to 
rest right in the $54.50-55.00 resistance zone that we favor for 
initiating new positions.  That isn't to say LEH can't move higher 
before exhibiting fresh signs of weakness, but it will take more 
than a tepid bounce from support to push through that resistance 
level.  If a breakout above that level does occur, the bulls will 
have to once again contend with the 5-month descending trendline 
at $57.50, which has consistently turned back several rally 
attempts.  When LEH does roll over, that will make for the next 
high-odds entry into the play, with our first goal being a 
breakdown under the 50-dma.  More conservative traders will want 
to wait for a drop under that level before initiating new 
positions.  LEH's rally on Friday was likely due to the strength 
in the overall Brokerage sector (XBD.X), which pushed right back 
up to resistance near $414-415.  Of course, even if the XBD can 
get through that level, it will have to deal with resistance in 
the $425 area, which is the site of the August highs.  Look for 
confirming weakness from the XBD index before initiating new 
positions in LEH.  Until we get the breakdown under $52, our stop 
remains at $58, just above the trendline.

*** November contracts expire in 2 weeks ***

BUY PUT NOV-55*LEH-WK OI=2357 at $2.25 SL=1.00
BUY PUT NOV-50 LEH-WJ OI=1884 at $0.75 SL=0.25
BUY PUT DEC-50 LEH-XJ OI=1365 at $2.10 SL=1.00

Average Daily Volume = 2.81 mln


NTRS – Northern Trust Corp. $35.63 (-0.93 last 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:
The weakness in the Banking stocks has had our attention of late,
as we've been focusing on shares of NTRS.  Following the early
October relief rally, the stock has been slowly drifting lower,
pinned under its descending trendline of the past few weeks.
Following an early dip, the stock rebounded and slowly crawled
higher with the support of the overall market.  It took the
entire day, but in the final 15 minutes, NTRS reached its
descending trendline (currently $36) and promptly reversed on a
rush of selling volume.  So despite the rebound on Friday, it
looks like the bears are still in control on this one.  The
Financial stocks may be rebounding in hopes of a rate cut next
week, but as we know from the past 11, this one isn't going to
have any appreciable effect in the marketplace, at least not
in the near term.  Once that event has passed, NTRS will likely
revert to its recent trend, which is down.  Use intraday rallies
to the descending trendline, or possibly as high as $37 (the
current site of our stop) to initiate new positions.  Be careful
about trading a breakdown, due to the stock's recent pattern of
reversing higher after each slightly lower low.  We need to see
a decisive break under $34 on strong volume before considering
momentum entries to the downside.

*** November contracts expire in 2 weeks ***

BUY PUT NOV-40 NRQ-WH OI=110 at $4.60 SL=2.75
BUY PUT NOV-35*NRQ-WG OI=730 at $1.10 SL=0.50
BUY PUT DEC-35 NRQ-XG OI= 32 at $2.10 SL=1.00

Average Daily Volume = 1.69 mln


SPW - SPX Corporation $42.82 (-1.10 last week)

Company Summary:
SPX Corporation is a global provider of technical products and
systems, industrial products and services, flow technology and
service solutions.  The company offers networking and switching
products, fire detection and building life-safety products,
television and radio broadcast antennas and towers, life science
products and services, transformers, dock products and systems,
cooling towers, air filtration products, valves, back-flow
protection and fluid handling devices and metering and mixing
solutions.  The company also provides specialty service tools,
diagnostic systems, service equipment and technical information
services.  SPW services a broad array of customers in a variety
of industries, including chemical processing, pharmaceuticals,
infrastructure, mineral processing, petrochemical,
telecommunications, financial services, transportation and
power generation.

Why We Like It:
Following its big breakdown a couple weeks ago, we've been
looking for a bit of an oversold bounce in shares of SPW in
order to give us an attractive bearish entry into the play.
Going against conventional wisdom, the broad markets have
battled back from some dismal economic news in the past 2 days
to post their 4th consecutive weekly gain and that's been enough
to lift SPW off the mat.  While far less than the recent heavy
volume on the downside, the buying volume has been impressive,
as it is still running well above the ADV, indicating a
significant bid in the stock near the $41 level, which is just
above major support at $39, the site of the September 2001 lows.
But the recent breakdown has left significant supply overhead
near $45, which ought to put an end to any euphoric rally
attempts in the near-term.  The first hints of that supply can
be seen in the stock's inability to hold over the $43 level on
Friday, and a continued rollover from this level can be used to
initiate new positions.  We'd prefer a push up near $44 before
taking an entry, but we'll have to take what the market gives
us.  Trader's looking to enter on a breakdown can target a drop
under $40, but will need to be careful. There are likely to be
buyers waiting just below the recent lows until the stock breaks
the $38 level.  That breakdown under $38 will make for a much
better trigger for momentum entries, as it would open the door
for a quick trip down to the $35 support level.  For now, keep
stops set at $45.

*** November contracts expire in 2 weeks ***

BUY PUT NOV-42*SPW-WV OI=293 at $2.35 SL=1.25
BUY PUT NOV-40 SPW-WH OI= 74 at $1.30 SL=0.75
BUY PUT DEC-40 SPW-XH OI=760 at $2.95 SL=1.50

Average Daily Volume = 1.15 mln

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It's A New Bull Market!
By Mark Phillips

Not likely!  Oh, to watch the closing action on Friday, you might
have thought that was the case, and certainly there was an
impressive bid under the market going into the close.  And we're
likely to open with a positive tone on Monday following the
favorable ruling handed to MSFT Friday night after the close of
trading.  After trading in the $51-54 range for the past 2 1/2
weeks, the stock exploded in the after-hours session, moving as
high as $57, a level last visited in April.  Barring some
unpleasant development over the weekend, that ought to lend a
strong bid to the broad market on Monday.  I wouldn't be surprised
to see the DOW challenging the 8750 resistance level before the
FOMC meeting.

But then what?  The market has already priced in a 25 basis point
cut, and if it is delivered as expected, I'd really expect to see
a 'Sell the news' reaction.  If Uncle Alan tells us that the
economy is fine and we don't need a rate cut, I would expect a
rapid selloff.  And if he gives us the bonus of a 50 basis point
cut, I would expect a selloff as investors panic and ask
themselves if it is really that bad.  My expectation is for a
quarter-point cut and then I'll honestly be surprised to see
significant further upside in the market.  It's just one man's
opinion, and I could be dead wrong.  I just can't quite see the
catalyst that is going to light up the charts and send the DOW
screaming through the 9000 level to challenge its 200-dma up near

How about the NASDAQ?  It's been driven sharply higher,
predominantly on the back of gains in the Semiconductor,
Networking and Software sectors in the past 3 weeks.  MSFT has
delivered the good news Software investors may have been waiting
for.  CSCO has earnings next Wednesday, and barring euphoria from
John Chambers, I don't see anything they have to say as lighting
a bullish fire in the Networking group.  And Semiconductors have
been rallying on the dismal news coming out of virtually every
company in the industry.  I saw the news about Semiconductor
billings being up in September and a whopping 20% above the prior
year.  Big deal!  I want to know where the BOOKINGS are.  The
abysmal Book to Bill number isn't going to get better unless the
bookings (future billings) are on the rise.  Otherwise, this
current blip will be very short-lived.

The action in the VIX a week ago turned out to be rather telling
didn't it?  That break under 39 gave a clear picture that
nervousness in the market was waning, and it just continued
downward throughout the week.  With Friday's close at 33.98,
we're now approaching the top of the historical range, where
we'll get another read on the nervousness of investors.  If 30
once again provides a floor like it did back in mid-August, then
we may need to give serious consideration to a possible upward
shift in the 'normal' range of the VIX.  Don't panic yet, as
we'll need to see the data confirm that premise, but it is
something to watch in the weeks and months ahead.  One other
thing worth noting is that the 200-dma of the VIX is now above
30 (currently 30.67), for the first time EVER.  Of course, if
the VIX simply plunges back below the 30 level, that will be a
strong indication that the seasonal rally just might have some

I think the important point to keep in mind is that until we see
the markets deviate from their recent pattern of lower highs and
lower lows, this is just another bear market rally.  To break out
of that pattern, the S&P 500 needs to top the 965 level, the DOW
needs to rally through 9100 and the NASDAQ-100 needs to power
through 1055.  All of these are achievable goals, mind you.  But
I question whether these levels can be broken without some
confirmation of a firming of the underlying fundamentals in the
market.  I've focused a fair amount of attention on the Bullish
Percent readings in recent weeks and I think those levels are
worth highlighting again this weekend.  But the October lows are
no longer the important point of comparison.  Now we need to be
focused on the August highs.  If the levels above are to be
achieved, then I have to believe that it will be preceded by each
of the relevant Bullish Percent readings taking out their August

Bullish Percent:

Index         August High    Current    Status
S&P 500       59%            50%        Bull Alert
DOW           60%            56%        Bull Confirmed
NASDAQ-100    60%            59%        Bull Alert

The bullish percent readings have come an awfully long way in
less than 4 weeks, working off the majority of the deep oversold
condition in the process.  But we really haven't changed anything
about the overall trend of the market (it's down) and the
majority of the risk is now to the downside again.  While this
rebound has been encouraging, and I think it actually might have
a few more weeks to run.  But I haven't seen the kind of
conviction from long-term buyers that will be necessary to extend
this rally into the end of the year.

The fundamental picture is still pretty awful, highlighted by the
sharp drop off in auto sales last month.  In case you missed it,
sales for all of the major domestic manufacturers fell by more
than 30%.  That sure hints at a consumer that has lost interest
in spending money, no matter how good the deal is.  How do YOU
think that sentiment is going to play out in the important
holiday shopping season?  I'll give you a hint.  I certainly
won't be going long on any stocks that depend on a surge of
holiday spending to pad the bottom line.  Unless business spending
is poised to explode and take up the slack of the tired consumer,
I don't see where the economic growth is going to come from.

Enough of my growling about the market in general.  Let's take
a look at the playlist.


LEN - That's looking better now.  After the earnings-induced run
up the charts, LEN came back to earth and now appears to be pinned
below the 50-dma, which is just starting to roll over.  The
picture should get much more bearish (good for our play) when
price falls under the 200-dma (currently $54.52) and then the
50-dma falls below that level as well.  The Housing market does
appear to be slowing, and LEN should now get with the business
of heading south.  The first major test will be for the stock to
fall under the $50 support level.  Repeated rally failures below
our $60 stop can still be used for new entries, as the weekly
Stochastics are just starting to roll over.

JNJ - There's been a fair amount of back on forth on JNJ in the
past few weeks, as the market has been volatile surrounding the
latest batch of earnings results.  But JNJ has held tough,
rebounding again from the 50-dma near $56 last week.  Showing
some strength towards the end of the week, the stock pushed back
through the 200-dma, keeping it in its moderately bullish mode.
Look for a rally back above $60, along with the 50-dma crossing
up through the 200-dma to confirm the long-term bullish potential
for the stock.

Watch List:

MO - Despite the strong rebound on Friday, shares of MO don't
look attractive at current levels due to formidable resistance
in the $42-44 area.  The fundamental picture remains unclear for
the big Tobacco firms, as they continue to be pressured by the
smaller firms.  That being said, once a firm base is back in
place, MO should continue to perform well due to the diversity
of its product lines.  But in terms of entries, I see nothing in
the fundamental or technical picture that motivates me to chase
the stock higher.  Continue to look for entries on a decline down
near the $38 level and subsequent rebound.

MSFT - Mr. Softee remained rangebound again all week, but the
favorable ruling by the judge in the antitrust case Friday night
should have the stock breaking out big time on Monday.  The big
question is whether that breakout will be sustainable.  I
definitely would not advocate initiating new positions on Monday,
or even ahead of the FOMC meeting.  We'll need to see where MSFT
settles out after the surge higher on Monday.  Aggressive traders
might consider an entry on a pullback to the $53 level, but the
LEAPS portfolio is going to abstain from taking an entry, at
least for the next week.  Time is on our side.

QQQ/DJX - It looks like the party is over, and we missed it.  I
kept waiting for a decent pullback that we could use as an entry
point in both of these plays, but it never came.  With MSFT's
late news on Friday, I expect the markets to gap up on Monday
and perhaps trade very strong ahead of the FOMC meeting.  But
beyond there, I just see no catalyst to keep things moving up.
The Bullish Percent charts are nearing their August highs, and
while that doesn't mean we head down right away, it certainly
limits the upside potential and increases the downside risk.
Rather than try to guess where we might gain a favorable entry
on either of these plays, I'm going to put them on Hold this
weekend.  In terms of LEAPS, it is fruitless to try catching the
move this week, and I think we are better served by looking for
entry setups to the downside.  Because of the market's propensity
for proving me wrong, I'm not dropping the DJX or QQQ plays just
yet.  But if we get another up week, they'll be drops next

GM - Last week certainly provided nothing in the way of an entry
point into our new GM play, as the stock continued to languish
south of $36.  But a broad market MSFT-induced rally next week
could do the trick.  Based on the sharp decline in auto sales
last month (30%+ for all the domestic manufacturers), it looks
like the sales surge from the great incentives has outlived its
usefulness.  Look for any rebound next week to find firm
resistance first at $37-38, and then up near $40, both of which
would make for solid entry points on the rollover.

The next week is likely to be quite volatile again, especially on
Monday and then again on Wednesday following the FOMC meeting.  I
would be very hesitant to initiate full positions until the
post-FOMC volatility settles out.  Remember that lost
opportunities are far preferable to lost money!

Have a great week!


LEAPS Portfolio

Current Open Plays


JNJ    10/10/02  '04 $ 60  LJN-AL  $ 6.50  $ 7.30  +12.31%  $54
                 '05 $ 60  ZJN-AL  $ 9.10  $10.20  +12.09%  $54
NEM    10/30/02  '04 $ 30  LIE-AF  $ 3.90  $ 4.00  + 2.56%  $22
                 '05 $ 30  ZIE-AF  $ 6.10  $ 6.20  + 1.64%  $22

LEN    10/02/02  '04 $ 50  KJM-MJ  $ 8.60  $ 9.60  +11.63%  $60
                 '05 $ 50  XFF-MJ  $11.20  $12.90  +15.18%  $60

LEAPS Watchlist

Current Possibles


MO     08/25/02  $38           JAN-2004 $ 40  LMO-AH
                            CC JAN-2004 $ 35  LMO-AG
                               JAN-2005 $ 50  ZMO-AJ
                            CC JAN-2005 $ 40  ZMO-AH
MSFT   09/29/02  HOLD          JAN-2004 $ 50  LMF-AJ
                            CC JAN-2004 $ 45  LMF-AI
                               JAN-2005 $ 50  ZMF-AJ
                            CC JAN-2005 $ 40  ZMF-AH
QQQ    10/13/02  HOLD          JAN-2004 $ 24  KLF-AX
                            CC JAN-2004 $ 21  KLF-AT
                               JAN-2005 $ 24  ZWQ-AX
                            CC JAN-2005 $ 21  ZWQ-AT
DJX    10/20/02  HOLD          DEC-2003 $ 84  ZDJ-LF
                            CC DEC-2003 $ 80  ZDJ-LB
                               DEC-2004 $ 84  YDJ-LF
                            CC DEC-2004 $ 80  YDJ-LB

GM     10/27/02  $40-41        JAN-2004 $ 35  LGM-MG
                 $37-38        JAN-2005 $ 30  ZGM-MF
SMH    11/03/02  $27-27.50     JAN-2004 $ 25  KBS-ME
                 $25.50        JAN-2005 $ 25  ZTO-ME

New Portfolio Plays

NEM - Newmont Mining Corp. $26.35  **Call Play**

It seemed like it was taking forever, but the price of Gold
finally found some traction at its 200-dma near $310 and got some
upward momentum going last week, briefly pushing above $320 again
on Friday.  That seems to have finally given our NEM play the
incentive it needed to get back over the $25 resistance level.
The first close over that level on Wednesday created our entry
into the play, and it was confirmed with Friday's slightly higher
close.  Weekly Stochastics are just now turning up from oversold,
so the technicals are definitely in our favor.  In order for the
stock to make significant upward progress though, we're going to
need to see the price of Gold rally through the $320 level and
more importantly close above the $330 level.  Remember, our NEM
play is not so much predicated on a rally in the equity markets,
as it is on a rise in the price of gold.  As such, this is more of
a hedge play in the event that gold prices rise precipitously due
to continuing economic weakness.  Traders should only be in the
play if they agree with that logic.  Our initial stop on the play
will be $22, which is just below the early October low as well as
just below the long term ascending trendline.

BUY LEAP JAN-2004 $30 LIE-AF $3.90
BUY LEAP JAN-2005 $30 ZIE-AF $6.20

New Watchlist Plays

SMH - Semiconductor HOLDR $25.25  **Put Play**

We had such great results the last time we played the downside
in the SOX, that I want to do it all over again.  This play is
real simple, in my opinion.  The fundamentals in the sector are
still abysmal, and if you followed many of the earnings conference
calls over the past month, there isn't much expected improvement
according to the bulk of the CEOs.  The sharp rise the in the
Semiconductor sector in the past few weeks has been largely
driven by short-covering, and then this past week, hopes of a rate
cut from the Fed.  It doesn't matter what decision the Fed makes,
I expect to see the SOX top out this week and then trade
significantly lower in the next couple weeks.  These gains are
just unsustainable.  It is worth noting that the $317 level on
the SOX is both a prior level of resistance, as well as the 25%
retracement of the entire March-October decline.  In my opinion,
a rollover there could make for a solid entry point.  Of course,
there's no telling how much of a lift the group will get from
Friday's late news from MSFT.  There could be enough to push the
SOX up near the $343-346 area, which was major support back in
July.  A rally up to that level is almost sure to fail and would
make for the optimum entry point (most likely prior to the Fed
meeting).  The SMH at $27 roughly corresponds to the $343-346 SOX
level, so we'll want to target the $25 strike for our play.  Once
filled on our entry, we'll set our stop rather loose, up at
$29.50.  This is near the August highs, and a rally through that
level would definitely tell us something is wrong.





Making Profits When Things Go Nowhere Fast
By Mike Parnos, Investing With Attitude

Today, class, we’re going to study insects.  The Couch Potato 
Trading Institute has taken a giant step backwards in order to 
take two steps forward.  Sounds like the Cha-Cha or Rumba, 
doesn’t it?  But, if you look closely, you’ll see we’re making 
progress as we evolve into 

The market is churning.  It wants to go higher, but all those 
folks who bought (guessed wrong) on the way down are sitting 
there, salivating and hoping that their stocks will come back – 
just high enough so they can get out even.  Hence the trader’s 
lament, “I sure hope I break even because I need the money.”

How high will this bear market bounce go?  Only time will tell.  
However, while the market is banging its head against resistance, 
regrouping and trying again, not much progress is being made.  
Since volatility numbers are still high, it might be providing us 
an opportunity to explore a strategy for somewhat stagnant 

The Butterfly
You could call this a passive-aggressive method to make money in 
a directionless market.  It’s a safe way to take advantage of 
premium decay.  The risk reward is very attractive.  It’s a great 
strategy for CPTI students to add to their arsenals.

Butterfly spreads can use either puts or calls and can be long or 
short.  It doesn’t really matter which.  The risk/reward profiles 
are the same.  So, you should price it out both ways and, 
obviously, use the method that provides you with the higher 
credit (short butterfly) or the lowest debit (long butterfly).

I wonder why they named this strategy a “butterfly.”  Maybe 
because condor was taken?  They could have used “eagle” or “hawk” 
– something with a little more pizzazz.  Hardly one of the great 
mysteries of life. 

To simplify things, we’ll use call options in our first butterfly 
example.  We can address other types of butterfly spreads in 
future columns.  A “Call Butterfly” consists of:
1.  The purchase of 1 in-the-money (ITM) call
2.  The sale of 2 at-the-money (ATM) options.
3.  The purchase of 1 out-of-the-money (OTM) call

All options will have the same expiration.  The object is to take 
advantage of the higher premiums in the ATM calls, and use those 
to pay for the other long calls.  If it works out, the risk will 
be minimal and the potential rewards worthwhile.  

Don’t be too early to the party.  No need to be there before the 
bar opens.  Butterflies work best when the time exposure is 
limited.  The less time with your assets exposed, the fewer bad 
things can happen.  

Today’s Example:  
Surprise, surprise.  We’re going to use my favorite trading 
vehicle – the QQQs.  Friday they broke above $25, but there’s 
major resistance waiting for them at $26.  It’s a good bet that 
it will test the resistance at $26 a few times before it either 
breaks through or heads back down to retest the lows again.  
We’re only going to be in this position for two weeks.

OK.  Let’s make a butterfly.  We have to get two caterpillars 
drunk, a little Barry White music and let nature take its course.  
Do you ever wonder where they put all those little legs when they 
. . . .?”  
A butterfly spread consists of a “body” and two “wings.” We’re 
going to:
a)  Buy 1 contract – QQQ Nov. 23 calls @ $2.55 = ($2.55) – a 
b)  Sell 2 contracts –  QQQ Nov. 25 calls @ $1.00 = $2.00 – the 
c)  Buy 1 contract – QQQ Nov. 27 calls @ $.25 = ($.25) – a “wing”

Our cost, and maximum risk, is $.80 – or $80 per contract.  The 
maximum profit is the difference between the body strike $25 and 
either wing less the initial debit.  That’s is $2.00 less $.80 = 
$1.20.  Maximum profit is achieved if the QQQs finish at exactly 
$25.  Your profit if the QQQs finish anywhere between $23.80 and 

For the more visual CPTI students, if you want to see one of 
those risk graphs, I’m sure I can find one.  I happen to be more 
verbal (another surprise, I’ll bet).  I know a picture is 
supposed to be worth 1,000 words, but not if you don’t know what 
the hell you’re looking at.
The “What If” Analysis . . .
As CPTI students know, the only way to understand a strategy is 
to examine all possible scenarios.  So let’s analyze this puppy.

What if the QQQs finish at $22?
a)  Nov. $23 call expires worthless; b)  Both Nov. $25 calls 
expire worthless; and c)  Nov. $27 call expires worthless.  You 
experience the maximum loss of $.80.

What if the QQQs finish at $24.25?
a)  Nov. $23 call is worth $1.25; b) Both Nov. $25 calls expire 
worthless; and c) Nov. $27 call expires worthless.  You make a 
profit of $.45 ($1.25 less initial $.80 debit).  Now $.45 doesn’t 
sound like much, but what was the risk?  $.80.  That’s a 56.25% 
return on risk.

What if the QQQs finish at $26.00?
a)  Nov. $23 call and one Nov. $25 call are exercised – Yielding 
$2.00; b) The other Nov. $25 call must be bought back for $1.00; 
and c) Nov. $27 call expires worthless.  You make a profit of 
$.20 ($2.00 less $1.00 buyback less $.80 initial debit).  Again, 
it may not seem like a lot, but it’s still a 25% return on risk 
for only two weeks of exposure.

What if the QQQs finish at $27.75?
a)  Nov. $23 call and one Nov. $25 call are exercised – yielding 
$2.00:  b) The other Nov. $25 call and the Nov. $27 call are 
exercised – costing $2.00.  The $2.00 profit and $2.00 debit 
cancel each other out and you experience the loss of the initial 
$.80 debit.

The butterfly, as you can see, is a commission intensive spread.  
So, if you’re still using a full service broker who charges $5 a 
contract (by the way, I have this great bridge for sale), you 
need to figure these commissions into your calculations – as you 
try and deal with those dependency issues.

A butterfly spread may also yield a seemingly small profit.  If 
you decide to partake, it may be wise to do a large number of 
contracts to minimize the effect of commissions.  You won’t make 
a killing, but, if you’re right, the percentage return is very 

Watch for stocks trending sideways, or consolidating in a range – 
possibly in the handle of a cup-and-handle formation.  Try to 
use, for the body of your butterfly spread, option strikes that 
have the largest open interest.  As we’ve discussed, market 
makers like to move their stocks towards the high open interest 

One step back, two steps forward – Gene Kelly, eat your heart 
out.  While he’s “singin’ in the rain,” we’re going to make some 

CPTI Portfolio Update (as of Friday’s close)

BBH Condor – BBH finished at $86.97 – comfortably in the $80-$95 
range. (See last week’s “CPTI Portfolio” column for position 

MMM Condor – MMM finished at $128.05 – comfortably in the $120-
$130 range. (See last week’s “CPTI Portfolio” column for position 

QQQ ITM Strangle – QQQs moving up a little at $25.25.  We’re 
looking for that three-point move from our $26/$24 strangle. (See 
last week’s “CPTI Portfolio” column for position description)

TTWO Short Strangle – TTWO finished at $26.13.  We are short the 
$25 and $30 calls.  As TTWO dipped below our short $25 call on 
Monday, we shorted 1,000 shares – using the $25,000 in our 
portfolio (the powder we’re keeping dry for just such occasions).  
Then, when TTWO moved back over $25, we covered those shares.  
All is well.

Note:  Due to technical problems, my Thursday column did not 
appear last week.  It will likely run on Tuesday.  The CPTI will 
definitely be on schedule and in session again on Thursday.   I 
thank you for your questions and concern. 

I spent last week in Florida, and couldn’t help but notice this 
sign on a swimsuit store: “Our bikinis are exciting. They are 
simply the tops.” 
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.  


Dow Theory and Technical Analysis: Part 2 
By Leigh Stevens

In my recent initial article (see –
http://www.OptionInvestor.com/traderscorner/103102_2.asp )
on Dow Theory containing an interpretation on the current market 
– the NYSE part, not the Nasdaq – I indicated that, based on the 
recent monthly close holding above the 1998 low or the major low 
before the 2000 top, there has yet to be a Dow Theory “sell 
signal”.  This claim can be made even though on a monthly closing 
basis (from peak to low to date), the Dow Industrials has fallen 
34% - approximately 1/3. 

On an “investment” basis and focusing on the long-term outlook, 
as we might for 401k type holdings, it would be like buying a 
stock at 100 and seeing it fall over two years to as low as 66 
before starting to rebound – the stock has some way to recover 
before getting back to breakeven, but those with a long-term 
orientation might feel that the stock (in this example) is worth 
holding as long as it didn’t exceed say, a 38% retracement. Of 
possible interest is my prior article on retracements: see - 

I also indicated however, in my previous introduction to Dow 
Theory, that there was a lot more that Dow contributed to 
technical analysis than whether staying invested in the market 
was warranted or not.   

What follows are the basic tenets of Charles Dow along with my 
thoughts on it.  I should also tip my hat to the contribution of 
Robert Edwards and John Magee, who wrote what many consider to be 
the “bible” of technical analysis, Technical Analysis of Stock 
Trends, for their descriptions and analogy to the “tide, wave and 
ripple” effect, although this did not originate with them.  

Dow determined which stocks; the ones making up his averages, 
best represented the overall market. Every possible fact and 
factor relating to the price of a stock within the averages is 
quickly priced into the current traded price of that stock and 
hence into the averages.  This is because the traded price 
reflects all knowledge that exists about the company and its 
current and future prospects in terms of its earnings power.  
Even so-called “insider” information will show up in the price 
and volume patterns that can be seen by astute observers of the 
trading in that stock.  This group will in turn act on that 
information and that activity will become apparent to an ever-
widening group.  This principle is even truer today, given the 
extremely rapid and widespread distribution of information that 
occurs on the financial channels and on the Internet.  

The point I emphasis here is that the phases of both bull and 
bear markets, while different depending on whether it’s a bull 
market or a bull market, are similar in terms of two factors:
- Relative knowledge about the market  
- Investor “sentiment” (attitude) about the market that ranges 
from disinterested to indifferent to interested; with varying 
degrees of intensity within disinterested and interested

A bull market comes after a lengthily and substantial decline in 
stock values that comes about due to a downturn in the economy or 
a recession.  Major market advances are usually, but not always, 
divided into 3 phases.  These phases are marked by who 
participates in them and what they are doing in each phase.  

In the first phase, there is “accumulation” or buying over a 
period of time, during which very knowledgeable investors with 
good foresight about a coming business upturn, are willing to 
start buying stocks offered by pessimistic sellers who want out.  
This group of investors will also start to pay higher prices as 
the willing sellers exit.  The economy and business conditions 
are still often quite negative.  The public, and this is mirrored 
by the financial press, is quite disinterested in the market, to 
the point of where owning stocks is very unattractive to them and 
they are out of the market.  The people that got “burned”, so to 
speak, in the last bear market, are actively disgusted with the 
market.  Sound familiar!? Market activity is modest at best but 
is picking up a bit on rallies, but this is mostly only noticed, 
if at all, by professional market participants.  

The second phase is one of a fairly steady advance, but one that 
is not dramatic.  There is a pickup in business and encouraging 
economic reports as an improving economy leads to a pick up in 
corporate earnings.  This phase is also a phase where money can 
be made relatively safely, as technical indicators turn positive 
and there tends to be an absence of volatile trading swings.  

The third phase, which at one and the same time can both be 
highly profitable and quite risky, is marked by heavy “public” 
interest and participation in the market.  The economic news is 
good during this period and suddenly front pages of magazines 
have articles heralding the new bull market.  The new issue 
market gets going as the public now has an appetite for new 
companies.  This is the phase where you will hear banter at 
parties about the market, how well so and so is doing in stocks 
and where market-related Internet chat rooms are quite active.  
Price advances can be huge and volume matches.  The more 
speculative stocks continue to advance but it is here that the 
“blue chip” stocks of the most established big-name companies 
start to lag.  Some sharp downswings occur among stocks that fall 
out of favor.  Speculation remains intense as seen in increased 
option activity, the first-day closes of hot new issues and in 
the level of buying stocks on margin.  The end of this phase is 
always the same, varying degrees of collapse. This can come after 
a year or two or even after several years has passed from the 
beginning phase.

The animal analogy is quite apt, as the bear can both be very 
fierce and unforgiving, or can just go to sleep for a long 
period.  Bear markets can usually also be divided into 3 phases.  
That this does not always occur is seen in the 1987 bear market 
that was sharp and steep, but with the decline only lasting two 
months.  After that, there was a slow gradual process of 
advancing prices during which some bearish sentiment built up and 
people swore off the market.  This phase didn’t reach the typical 
bearish extremes however; as within 7-10 months the Dow had 
recovered nearly half of its October-November decline.

The first phase of a primary bear market tends to be a period of 
“distribution”.  This really begins in the final phases of the 
bull market. It is the phase where selling begins by the type of 
experienced investors that didn’t get overly swept up in the 
extremes in emotion and price at the bull market peak – this 
group are the more investors with more foresight and a more 
balanced point of view. This group has the knowledge to 
understand that company profits have probably reached their peak 
and that the price multiples paid (P/E ratios) for those earnings 
are also at extreme levels.  They began to sell or “distribute” 
stocks to the still eager and willing buyers.  Volume of trading 
begins to slow.  The public is still in the market heavily but 
may be a bit frustrated as the rate of increase slows down and 
not all stocks participate on rallies.  

The distribution phase is also one where people who are not 
usually in the market become buyers of stocks.  A story that I 
used in my book (Essential Technical Analysis) is about a friend 
of mine who had always only invested in real estate.  This person 
told me near the 2000 top that he had decided to buy some stocks, 
but had modest expectations – he “only” expected or wanted to 
make 20% on his money. This kind of expectation for stocks that 
historically return 10% on average and had already been going up 
sharply for months, was the final thing that got me out of the 

I had noticed the froth in 2000 and that the volume was slipping 
and profits harder to come by. Then, my friend’s actions and 
comment became my “shoe shine boy” event – referring to the 
famous story of Barnard Baruch, who one day got a stock tip from 
the fellow that shined his shoes.  Baruch went and sold his 
holdings and said that “when shoeshine boys are giving me stock 
tips, this was the time to sell”.  I was stuck by a similar 
occurrence in 2000 at Cantor Fitzgerald, where I was working in 
2000, when I overheard one of our security guards on the 
telephone discussing his trading and going on about this and that 
stock in a very knowledgeable way like one of our floor traders.    

The distribution phase I already knew well, having been through 
two earlier ones before this last one.  The first was in the 
silver and gold bull market and bubble of the mid to late-70’s.  
In the final phase, I finally succumb to the siren call of this 
market and made an impulse buy of some precious metals.  At least 
I can re-plate my silverware with the silver bars I bought. 

Then in the late summer of ’86 I was the trader-manager of a 
stock index program at PaineWebber and had the sense to sell my 
positions on “black Monday”, but not the conviction to be short, 
where fortunes were made over a couple of days.  (Actually the 
distribution phase had already completed itself by the preceding 
Friday and we were about to enter a panic.) The other side of my 
missed profit opportunity in not being short was that at least I 
was out - there were a lot of losses incurred, especially if 
investors panicked or traders had to sell to meet margin calls 
and didn’t hang on for the ensuing weeks and months of recovery. 

Panic is a major characteristic of the second phase of a bear 
market.  Buyers become scarce, bids falls sharply and sellers 
become desperate to get out.  The downward acceleration becomes 
extreme and a near vertical drop can ensue – at first, after 
March 2000 in the Nasdaq, the decline was gradually, occurring 
over weeks and months although there were some sharp down weeks, 
especially in the beginning. But then in 2002 as you know, it got 
pretty brutal as the market went into free fall – this became 
very much the phase of discouragement which we’ll look at next.  

The decline goes on longer when there is very strong conviction 
about the continuation of the bull market that has ended already 
– the investing public, in general, does not “believe” the 
potential severity of the bear market or how they will eventually 
react to it.  The handmaiden to fear, so speak, is hope.  There 
is a reluctance to take a loss in stocks, especially a sizable 
one.  Better to hope for a recovery.  This is the phase where 
people will make a point of telling you that they are “long-term” 
investors.  Investors have become conditioned to stocks going up 
and will maintain their faith in a market rebound for longer than 
is warranted by facts.  Hope springs eternal as is said.  
After the initial part of the decline – sometimes the worst part 
of the decline – and often where prices are not dropping so 
steeply often comes the point where the economy has stabilized.  
Here, there can be a gradual market recovery and a rebound in 
prices of the stocks of the strongest companies. Or, this may be 
a long period where the market trends sideways.  This is the 
third phase and is marked by discouraged sellers as the market 
does bounce back (more typical of BULL markets). There are many 
that didn’t sell in the panic atmosphere that had prevailed 
earlier and “give up” on stocks – the so called “capitulation” 

Selling in the discouragement phase could also be coming from 
those investors and traders who bought during and after the 
steepest declines as they thought stocks looked cheap relative 
the inflated values of the late bull market stage.  What causes 
this discouraged selling is that the rallies aren’t sustained and 
prices sink lower.  There’s an old analogy about the erosion of a 
bear market being like a faucet dripping.  Such slow steady loss, 
over time, becomes buckets.  Business conditions at this stage 
may deteriorate further.  Certainly there is an absence of good 
news with corporate earnings as the economy slides further. Sound 

The stocks that were very “speculative”, in terms of their 
potential to make money, may lose most of the rest of the their 
value in this phase.  There were many Nasdaq stocks that have 
lost 80-90% of what they had gained in the prior bull market, in 
the 2 years after the March 2000 top.  Blue chip type stocks tend 
to decline more slowly because investors hold on to them the 

A bear market ends when all the possible bad news has been 
discounted.  And it after it ends there is often even more 
negative news that keeps coming.  Keep in mind that the 
“discounting” mechanism of stocks is always also an attempt to 
look ahead, so stock values will reflect the expectations of what 
earnings could be when business conditions improve – for example, 
about six months ahead.  It also should be noted that no two bear 
markets are exactly alike.  The 1987 bear market was amazingly 
short in time duration and could be measured in weeks, although 
the price declines were quite severe.  Some bear markets skip the 
panic stage and others end with it as in 1987.  Bear markets go 
on for quite different time and price durations.  

Of 13 years with significant declines in the 40 years preceding 
the March 2000 – March 2001 market drop, some have had steeper 
sell offs in percentage terms then what we have seen to date at 
least in the Dow. If we measure by the Nasdaq Composite, the 
2000-2002 decline to date has brought a drop from closing weekly 
high to closing weekly low of 77% - 1987’s loss of 37% seems 
minor compared to this.

The key aspect to knowing how it all works – that however steep 
the price swings are, such as was seen in spectacular last phase 
of the tech bull market run up of 1998-2000 – keeping in mind the 
characteristics of each phase will help you keep a level head.  
You know what is coming when the “excess” phase you are in ends 
and you can prepare for it.  Keep in mind also, that these 
descriptions were made over 100 years ago.  I have added more up 
to date examples, but the essential nature of the market phase 
stems from HUMAN nature and this is the “constant” or what 
doesn’t change much.  This relatively unchanged human nature, 
ours and others, is what you have to deal with in the stock 
market and it benefits us greatly when we can see which market 
phase we are in.   

Just as the market tends to have three phases related to mood or 
market sentiment, market trends can be divided into three types.  
The most important to investors, those who look to buy and hold 
stocks for as long as a stock is tending to command an increasing 
price over time – is the primary or major trend.   The primary 
trend is one lasting a year or more – up to several years.  There 
are counter movements in the direction of the major trend and 
these trends in the opposite direction, Dow called secondary 
price movements.   

Bullish or bearish expectations for the market gets overly one-
sided and ahead of the “fundamentals” related to earnings 
prospects.  Eventually a “reaction” develops that causes prices 
to correct back to a more realistic price level.  Reactions or 
corrections are price swings that are in the opposite direction 
of the main or major trend.  Once these run its course, the 
primary trend resumes.  

The segments that make up the price swings that are both in, and 
against, the direction of the primary trend can also be referred 
to as intermediate price swings or moves when they last a few 
weeks to a few months only.  

Within these intermediate price moves are day-to-day price 
fluctuations that Dow called minor trends.  These can be a few 
hours to a day or a few days – they’re most often contained 
within a week period.   Both intermediate and minor trends are of 
importance to traders primarily – minor trends are all that 
concern a day trader who will likely complete every trade within 
the same day.  Intermediate trends are of some importance to 
investors when they are looking for the best point to enter the 
primary trend or to add to their position(s) in a stock or the 

The primary or major trend is a price movement that usually lasts 
for a year or more.  The exceptions to this time duration do 
exist and I pointed out the very short duration of the 1987 
decline.  One widely accepted measure of what constitutes a bear 
market is when there is a decline that takes prices more than 20% 
below the high point reached in the prior advance.  Dow didn’t 
have a “rule” or guideline on this subject.   

The primary trend is composed of smaller movements of an 
“intermediate” duration of a few weeks to a few months.  These 
intermediate trends run counter to AND in the same direction as 
the primary trend  - they can also send prices into a sideways 
movement. Intermediate trends are also called secondary trends.  

An essential guideline as to a trend being a primary bull market 
is that each advance within the advancing trend should reach a 
higher level than the rally that preceded it.  And, each reaction 
or counter-trend move should stop at a level that is above the 
prior major downswing.  The reverse would need to hold true to be 
considered a primary bear market trend.  

An analogy to the primary trend is that it is like the tide of 
the ocean.  In the rising tide, each wave comes in to a higher 
and higher point.  And, just as the rising tide lifts all the 
boats, a bull market takes all stocks higher.   The waves in an 
outgoing tide gradually recede away from a high point and all 
boats fall with it.   

A primary up trend is considered to be a bull market and primary 
down trend, a bear market according to Dow. If you are an 
investor in terms of your time horizon and investment goals, you 
should attempt to buy stocks as soon as possible after a bull 
market has begun.  And example is shown in the chart below, taken 
from the 1990 – 1991 period, showing both a primary down trend or 
bear market and the primary up trend or bull market that 
developed following it – 


You will notice from this period shown in the above chart that 
the duration of the primary bear market trends were relatively 
short compared to the duration of the primary uptrends.  On 
average this has been true since the 1950s due to the longer 
periods of economic expansion and shorter periods of recession – 
there is more urgency to end a recession.  The current bear 
market is not much older than 2 years – compare this to the 
multi-year bull market that preceded it; e.g., from about 1994 to 
2000; or, taking an even longer view of an overall bull market 
existing from around 1982 to 2000 (discounting the ’87 “crash” as 
it was so short-lived).

This fact of the relative duration of bull and bear markets also 
relates to the fact that investors tend to stagger their 
purchases over the duration of bull markets, providing ongoing 
buying power, whereas selling out is often a one time decision 
and would be buyers stay away and don’t “support” the market on 
the declines, especially in a panic phase.

The secondary trends are of shorter duration – typically, 3 weeks 
to 3 months interrupt the major direction of stock prices with a 
countertrend movement.  These are the corrections in a bull 
market – they “correct” the situation where prices have risen too 
far, too fast – and the recovery rallies in a bear market.  

Frequently these secondary countertrends retrace anywhere from a 
little over a third to as much as two thirds of the prior advance 
or decline.  Very common is to see retracements of 50% of the 
prior price swing that was in the direction of the primary trend. 
It is not always easy to decide when and if a secondary trend is 
underway, but there are technical analysis tools that will help 
us tell.    

To continue the ocean analogy, the secondary trend is like the 
waves of the ocean.  They can be big and they can knock you over, 
but they will come in and go out within the bigger movement of 
the tide – the primary trend.   

The minor trends are the price fluctuations that occur from day 
to day and week to week, although a minor trend will rarely last 
more than 2-3 weeks.  In terms of the overall market trend these 
are just “noise” and relatively unimportant.  They can be 
compared to the ripples on a wave – the secondary trend.  
Together, the minor trends make up the intermediate trends.  

Lastly, we could say that the minor trend could be one that is 
set off by the actions or words of an individual – for example, 
the chairman of the Fed when that individual makes a statement 
hinting at the direction of policy regarding Fed bias toward 
raising or lowering of interest rates.  Or, the precipitating 
action might be a statement from a key company in a key industry 
about their actual or expected earnings or profit trends. 

Last, but not least is the theory of “confirmation” and 
“divergence” that I discussed in my prior article on Dow theory. 
For this concept, came all that followed on technical INDICATORS 
(e.g., RSI) “confirming” or not confirming PRICE moves to new 
highs or lows. Also, the way that volume is seen as confirming 
the price trend or diverging from it – if so, a clear warning 
sign. Dow indicated that volume was a “secondary” indicator to 
PRICE but it was important to watch as a confirming aspect.

On balance, Charles Dow made a huge contribution to the 
understanding of market behavior or “human” behavior as it 
manifests in trading and investing in stocks.   

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The Option Investor Newsletter                   Sunday 11-03-2002
Sunday                                                      5 of 5

In Section Five:

Covered Calls: Trading Basics: Q&A With The Editor
Naked Puts: Options 101: Limiting Risk With Trading Stops - Part II
Spreads/Straddles/Combos: Recovery Rally Continues!

Updated In The Site Tonight:
Market Watch
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Trading Basics: Q&A With The Editor
By Mark Wnetrzak

One of our readers asked for an explanation of the calculations
involved in a covered-call position.

Attn: Covered-Calls Editor
Subject: Covered-Call Calculations

Hello Mark,

Wanted to ask a question in regards to using covered calls.  I
think I understand the basic premise of you purchase the stock
and sell a call against it.  You collect the premium for selling
the call with the goal of having the stock trading at or above
the strike price of the call when it expires, as it will get
"called" away.  Thus the premium you collect for selling the
call will be all profit minus commissions.  If the stock is
trading below the strike but above you cost basis (purchase
price of the stock - call premium collected ) you will still
have some profit.  If the price of the stock is less then your
CB, then you are in a loss position.

My question centers on how you figure the amount of return you
get when you have a successful trade.

For example:  Say you purchase CREE at 15.049 and sell the
NOV-12.50 call for 2.95.

I know that you are measuring on target yield (which maybe I don't
understand).  However, say if you are looking at the amount of
dollars you make if the trade is successful.  Using the above
example, by selling the call you have collect $295.  Isn't the
total dollar profit potential for the trade is $295 minus any
commissions?  If the stock falls below the strike price but stays
above your CB, then you would make less then the $295.  If the
stock price falls below the CB, then you would loss all the $295
and more.

Say you purchase 100 shares of CREE for 15.049 - thus your total
outlay is $1504.90.  You sell 1 Nov 12.50 call and you collect
$295.  Say the price stays above the 12.50 strike, so you keep
the entire $295.  How I see it: you would make a 19% return on
the $1504 investment (excluding commissions).  However, if you
run this through the options pricing calculator it comes up with
a negative .49 call profit per share.  I guess I'm confused or
don't understand something.



Greetings MM,

When you sell an "in-the-money" (ITM) covered-call, the profit
will be the difference between the stock price, minus the premium
received (your cost basis) and the strike price of the sold call.
The cost basis of the position (including the impact of stock and
option commissions) must be below the strike price of the sold
call to produce any profit.  Generally, the cost of commissions
for an ITM covered-call will be about 8 cents a share, on a 1000
share position (2 stock plus 1 option commission divided by 1000).

Using your example:

100 shares of CREE purchased at $15.05
Sell 1 contract NOV-12.50 call at $2.95

Your cost basis would be: $15.05 - $2.95 = $12.10 plus 

Your potential profit is the difference between the sold strike 
andthe cost basis: $12.50 - $12.10 = $0.40 or $40.00 for a 100 

As long as the stock remains above your cost basis (break-even
point) at expiration, the position would return a profit (if you
sell the stock).  Obviously, the cost of commissions would negate
any potential profit in this position.  To reduce the impact of
commissions, most ITM covered-call positions require a minimum
purchase of 500 to a 1000 shares.

With regard to calculating the potential yield on a covered-call,
ROI, or return on investment, is determined by two circumstances
when writing covered calls: Return if Called (RC), and return not
called (RNC).  Most traders use the RNC to evaluate plays since
there is no assumption made on the movement of the underlying
equity.  Essentially, you take the "net" premium received and divide
it by the cost basis.  The cost basis would be the price paid for
the stock minus the premium received; this is the maximum amount
of equity required for the duration of the play.  Larry McMillan's
book, "Options: As a Strategic Investment," details the Covered
Write Strategy and the formulas used in evaluating the return on

For in-the-money (ITM) RC, net premium would be the option premium
minus the difference between the cost of the stock and the strike
price.  ITM RNC is the same as RC since the sold strike is already
in the money -- this is the best return possible.

ITM example of RC:
XYZ @ $12.00, strike = $10.00, option premium = $2.50
net premium = 2.50 - (12 - 10) = 0.50
cost basis = 12.00 - 2.50 = 9.50
RC = 0.50/9.50 = 5.26% after multiplying by 100.
RNC = the same.

For out-of-the-money (OTM) RC, the net premium would be the option
premium plus the difference between the cost of the stock and the
strike price.  This approach assumes the stock price will move up!
OTM RNC uses just the option premium and assumes the stock price
remains unchanged.

OTM example of RC:

XYZ @ $12.00, strike = $12.50, option prem. = $1.00
net premium = 1.00 + (12.5 - 12) = 1.50
cost basis = 12.00 - 1.00 = 11.00
RC = 1.50 / 11.00 = 13.64%
RNC = 1.00 / 11.00 = 9.09% (You wouldn't get the benefit of the
stock price moving up to the strike).

Since all of our candidates are ITM, I correlate the returns to a
monthly basis.  Using the above ITM example of 5.26%: if expiration
were 3 weeks (21 days) away, I would calculate the Target Yield as
follows:  5.26 / 21 * 365 / 12 = 7.61%.  Essentially, I annualize
the return and divide by 12.  This helps people visualize the 
value of compounding a seemingly small return over and over again.

Well MM, I hope this answers your questions.

Best Regards,

Mark W.


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

Note:  Margin not used in calculations.

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

UAL     2.59   2.56   NOV   2.50  0.35  *$  0.26  16.8%
IMCL    8.16   7.80   NOV   7.50  1.25  *$  0.59  12.4%
MANU    3.17   3.12   NOV   2.50  0.85  *$  0.18  11.2%
REGN   15.21  15.79   NOV  15.00  1.25  *$  1.04  10.8%
WWCA    2.71   4.20   NOV   2.50  0.50  *$  0.29   9.5%
PCS     2.82   3.87   NOV   2.50  0.50  *$  0.18   8.4%
SNDK   14.30  20.98   NOV  12.50  2.75  *$  0.95   7.1%
VOXX    7.40   7.93   NOV   7.50  0.45  *$  0.55   6.9%
SEPR    8.72   9.09   NOV   7.50  1.55  *$  0.33   6.7%
VSAT    8.47   8.10   NOV   7.50  1.40  *$  0.43   6.6%
BCGI   10.30  13.04   NOV  10.00  1.10  *$  0.80   6.3%
TMCS   18.14  23.70   NOV  17.50  1.80  *$  1.16   6.2%
MU     17.30  16.80   NOV  15.00  2.85  *$  0.55   5.5%
MACR    9.15  11.85   NOV   7.50  2.00  *$  0.35   5.3%
GNSS   12.29  13.16   NOV  10.00  2.75  *$  0.46   5.2%
FDRY    6.02   7.63   NOV   5.00  1.35  *$  0.33   5.1%
MEDI   24.95  25.15   NOV  22.50  3.70  *$  1.25   5.1%
MCHP   23.18  25.98   NOV  20.00  4.20  *$  1.02   4.7%
IVX    12.95  12.80   NOV  12.50  0.80  *$  0.35   4.2%
BCGI   11.26  13.04   NOV  10.00  1.60  *$  0.34   3.8%
CREE   14.98  18.50   NOV  12.50  2.90  *$  0.42   3.8%
MENT    7.50  10.35   NOV   5.00  2.70  *$  0.20   3.6%
CPB    22.59  21.29   NOV  22.50  1.05   $ -0.25   0.0%
CVH    37.55  32.59   NOV  35.00  3.90   $ -1.06   0.0%

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


Bad news, good news, no news, and the major averages continue
to rally higher!  Whether you like it or hate it doesn't matter,
you still have to respect the momentum!  Most of the positions
in the covered-call portfolio are moving in tune to the market
or continue to remain in their respective trading ranges.  But,
a few of the positions are early-exit (or adjustment) candidates:
MedImmune (NASDAQ:MEDI), Campbell Soup (NYSE:CPB), and Coventry
Health Care (NYSE:CVH).  With the current negative environment
in the health care sector, we will show Coventry closed in the
name of money-management as a move towards $30 seems likely.

Disclosure: Short UAL puts (a bullish position).


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

CKFR   16.39  NOV 15.00   FCQ KC  1.95 760   14.44   14    8.4% 
HAL    17.10  NOV 15.00   HAL KC  2.45 17528 14.65   14    5.2% 
HPQ    16.31  NOV 15.00   HHY KC  1.60 11341 14.71   14    4.3% 
ISSX   19.19  NOV 17.50   ISU KW  2.00 1475  17.19   14    3.9% 
MDCO   14.63  NOV 12.50   MQL KV  2.35 62    12.28   14    3.9% 
NVDA   14.10  NOV 12.50   UVA KV  2.05 5748  12.05   14    8.1% 
TTN    13.02  NOV 12.50   TTN KV  0.85 136   12.17   14    5.9% 
VRST   16.63  NOV 15.00   UVQ KC  1.90 68    14.73   14    4.0%

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

CKFR   16.39  NOV 15.00   FCQ KC  1.95 760   14.44   14    8.4% 
NVDA   14.10  NOV 12.50   UVA KV  2.05 5748  12.05   14    8.1% 
TTN    13.02  NOV 12.50   TTN KV  0.85 136   12.17   14    5.9% 
HAL    17.10  NOV 15.00   HAL KC  2.45 17528 14.65   14    5.2% 
HPQ    16.31  NOV 15.00   HHY KC  1.60 11341 14.71   14    4.3% 
VRST   16.63  NOV 15.00   UVQ KC  1.90 68    14.73   14    4.0%
ISSX   19.19  NOV 17.50   ISU KW  2.00 1475  17.19   14    3.9% 
MDCO   14.63  NOV 12.50   MQL KV  2.35 62    12.28   14    3.9% 

Company Descriptions

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

CKFR - CheckFree  $16.39  *** On The Move! ***

CheckFree (NASDAQ:CKFR) is a provider of financial electronic
commerce products and services.  The company operates three 
business divisions: Electronic Commerce, Investment Services 
and Software.  Through the Electronic Commerce division, CKFR
enables consumers to receive and pay bills electronically.  The
company, through the Investment Services division, provides a 
range of portfolio management services to financial institutions,
including broker dealers, money managers and investment advisors.
In addition, through the Software division, it delivers software,
maintenance, support and professional services to large financial
service providers and other companies across a range of industries.
CheckFree appears to have completed a "double-bottom" formation
as the stock has now moved above its August and September highs.
The company beat analysts’ estimates when it reported earnings a
few weeks ago and this position offers a favorable entry point
near technical support.

NOV 15.00 FCQ KC LB=1.95 OI=760 CB=14.44 DE=14 TY=8.4% 

HAL - Halliburton   $17.10  *** Earnings Anticipation? ***

Halliburton (NYSE:HAL) provides a variety of services, products,
maintenance, engineering and construction to energy, industrial
and governmental customers.  The company operates in 2 business
segments: the Energy Services Group, consisting of Halliburton
Energy Services and Landmark Graphics, and the operations of 
product service lines; and the Engineering and Construction Group,
which provides a wide range of services to energy and industrial
customers and government entities worldwide.  Halliburton rallied
after announcing that its Kellogg Brown & Root unit and Japan's 
JGC Corp., received a $745 million contract to provide engineering
services for a gas project in Algeria.  The company also recently
amended agreements covering $260 million in letters of credit to
remove a provision allowing banks to demand collateral if the 
company's debt ratings fell below investment grade.  With earnings
due Thursday, November 7, the stock has now broken above a 4-month
base on increasing volume.  Traders can speculate on the near-term
performance of the issue with this conservative position.    

NOV 15.00 HAL KC LB=2.45 OI=17528 CB=14.65 DE=14 TY=5.2% 

HPQ - Hewlett-Packard  $16.31  *** Upgrade Booster Shot ***

Hewlett-Packard (NYSE:HPQ) is a global provider of products,
technologies, solutions and services.  The company's offerings
span information technology infrastructure, personal computing
and access devices, global services and imaging and printing. 
In May 2002, the company merged with Compaq Computer Corporation.
As a result of the merger with Compaq, the two companies' previous
businesses and product lines have been integrated and reorganized
into four major groups:  The Enterprise Systems Group, HP Services,
The Imaging and Printing Group, and The Personal Systems Group.
On Monday, Hewlett-Packard jumped when Lehman Brothers analyst Dan
Niles raised his rating on the company to “overweight” from “equal 
weight.”  Niles said that HPQ has booked a solid 4th-quarter, with
printing revenues above expectations.  He also said PC revenues
increased as the company holds market share, which should offset
any weakness in sales of its server computers.  Our outlook is 
also bullish, due to the recent technical strength in HPQ and this
short-term position offers a low risk cost basis in the issue.

NOV 15.00 HHY KC LB=1.60 OI=11341 CB=14.71 DE=14 TY=4.3% 

ISSX - Internet Security Systems  $19.19  *** Rally Mode! ***

Internet Security Systems (NASDAQ:ISSX) is a security software
company engaged in information protection solutions dedicated
to protecting online assets.  The company's security management
solutions include software products, managed security services
and professional services that are made up of both consulting 
and training services.  The Company offers a comprehensive line
of products and services for enterprise, smaller enterprise, 
consumer and service provider customers.  ISSX is another stock
that appears to have completed a "double-bottom" formation as
the share price has moved above the August high.  We favor the
bullish technical indications and our conservative position
offers a method to participate in the future movement of the
issue with relatively low risk.

NOV 17.50 ISU KW LB=2.00 OI=1475 CB=17.19 DE=14 TY=3.9% 

MDCO - The Medicines Company  $14.63  *** Break-Out City? ***

The Medicines Company (NASDAQ:MDCO) operates as a pharmaceutical
company selling and developing products for the treatment of 
hospital patients.  MDCO acquires, develops and commercializes
biopharmaceutical products that are in late stages of development
or have been approved for marketing.  The company began selling
Angiomax, its lead product, in U.S. hospitals in January 2001 as
an anticoagulant replacement for heparin.  MDCO is developing
Angiomax for additional potential hospital applications as a 
procedural anticoagulant and for use in the treatment of ischemic
heart disease.  The Medicines Company rallied sharply after 
reporting earnings earlier this month and has now broken out of
a year-long base.  Favorable short-term speculation with a cost
basis near technical support.  

NOV 12.50 MQL KV LB=2.35 OI=62 CB=12.28 DE=14 TY=3.9% 

NVDA - NVIDIA  $14.10  *** Short Squeeze = Shorts Screams? ***

NVIDIA (NASDAQ:NVDA) designs, develops and markets graphics and
media communication processors and related software for personal
computers, workstations and digital entertainment platforms.  
The company provides an architecturally compatible family of 3-D
graphics processors and graphics processing units that set the
standard for performance, quality and features for a broad range
of desktop PCs.  Its processors are designed to be architecturally
compatible backward and forward between generations, which allows
for a low cost of ownership.  A nice rally on heavy volume moves
NVIDIA out of 3-month base and this position will allow traders
to speculate, in a conservative manner, on the future movement of
the company's share value.

NOV 12.50 UVA KV LB=2.05 OI=5748 CB=12.05 DE=14 TY=8.1% 

TTN - Titan  $13.02  *** Bottom-Fishing ***

Titan (NYSE:TTN) is a technology company that creates, builds and
launches technology-based businesses.  The company operates 
through four business segments: Titan Systems Corporation, Titan 
Wireless, Inc., Cayenta and Emerging Technologies and Business.  
On October 16, 2001, the company adopted a definitive plan to spin 
off and discontinue the operations of its fifth segment, SureBeam 
Corp.  The spin-off was completed in August 2002.  Merrill Lynch 
recently cut its rating on Titan to "neutral" from "buy," 
believing any benefit from increased defense spending is already 
reflected in the stock price.  This just after Titan said that it 
was selected for a  contract of up to $533 million from an 
undisclosed government customer?  Hmmm...  We simply want to take 
advantage of bullish momentum in the issue and this position 
offers a favorable cost basis at technical support for those 
investors who disagree with Merrill Lynch.

NOV 12.50 TTN KV LB=0.85 OI=136 CB=12.17 DE=14 TY=5.9% 

VRST - Verisity  $16.63  *** Change-of-Character? ***

Verisity (NASDAQ:VRST) provides proprietary technologies and 
software products used to verify designs of electronic systems
and complex integrated circuits that are essential to virtually
every high-growth segment of the electronics industry.  VRST’s
functional verification products automate critical steps in the
process of determining whether systems and ICs conform to their
design specifications.  A strong rally off the October low that
breaks a year-long downtrend and Adams Harkness lowers its 
rating on Verisity (to “buy” from “strong buy”)?  Interesting
times indeed!  The Internet sector has performed very well in
recent weeks and investors who want a long-term position in an
industry-leading company can use this position to establish a
low risk cost basis in the issue.    

NOV 15.00 UVQ KC LB=1.90 OI=68 CB=14.73 DE=14 TY=4.0%



The following group of issues is a list of additional candidates
to supplement your search for profitable trading positions.  As
with any investment, you must decide if the selections meet your
criteria for potential plays.  Only you can know what strategies
and positions are suitable for your experience level, risk-reward
tolerance and portfolio outlook.  They will not be included in
the weekly portfolio summary. 

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

UAL     2.56  NOV  2.50   UAL KZ  0.30 16723  2.26   14   23.1% 
GPS    12.45  NOV 12.50   GPS KV  0.75 6835  11.70   14   13.9% 
LRCX   13.46  NOV 12.50   LKR KV  1.60 1791  11.86   14   11.7% 
VRTS   16.09  NOV 15.00   VIV KC  1.65 10580 14.44   14    8.4% 
NET    16.35  NOV 15.00   NET KC  1.75 840   14.60   14    6.0% 
ICST   21.25  NOV 20.00   IUY KD  1.75 898   19.50   14    5.6% 
INTL   27.20  NOV 25.00   TPQ KE  2.80 93    24.40   14    5.3% 
LF     27.00  NOV 25.00    LF KE  2.60 2     24.40   14    5.3% 
NSCN   13.72  NOV 12.50   QKN KV  1.45 275   12.27   14    4.1% 

SUPG    3.02  DEC  2.50   UQG LZ  0.85 0      2.17   49    9.4% 
JDSU    2.48  DEC  2.50   UQD LZ  0.30 14624  2.18   49    8.5% 
ASML    8.94  DEC  7.50   MFQ LU  2.10 109    6.84   49    6.0% 
XMSR    3.43  DEC  2.50   QSY LZ  1.15 150    2.28   49    6.0% 
RFMD    8.50  DEC  7.50   RFZ LU  1.60 2150   6.90   49    5.4% 
SEPR    9.09  DEC  7.50   ERQ LU  2.15 407    6.94   49    5.0%


Options 101: Limiting Risk With Trading Stops - Part II
By Ray Cummins

Last week's article on the use of trading stops with "naked" put
positions generated some excellent E-mail replies and one of them
deserves further discussion.

Attn: Naked Puts Editor
Subject: Using Trading Stops

Hello Ray,

I am relatively new to the options market but have traded stocks
for many years with some success (less success in recent months).
Because I am more of an investor than a trader, I have almost no
experience with the use of stops, especially with options.  Since
I am selling puts with the idea of earning monthly premium rather
than owning the issue, I would appreciate any other thoughts you
have on the correct use of trading stops with this strategy.

Thanks in advance for your help!


Regarding the use of trading stops:

There is definitely something to be said for stop-loss orders as
they are an efficient means to follow the movement in a stock or
other instrument while insuring some profit (or limited loss) if
the primary trend changes character.  Trading with stops is also
a great method to eliminate the emotional and reactive decisions
that often occur in the financial markets.  The most common way
traders use this tool is by monitoring the technical outlook for
the underlying issue and when a significant changes or correction
becomes likely, they tighten the stop (by moving the closing order
nearer to the current price) to guarantee a reasonable profit (if
"stopped" out) and still allow for a greater position profits upon
resumption of the primary trend.

In most cases, a simple STOP order is the best way to limit losses
and/or protect profits in an option position.  As I said last week,
the guidelines for establishing protective stops suggest that the
initial or opening limit order should be placed at a point where
important technical support is evident.  Most often, this will be
a relatively small range reflecting the bottom of a basing pattern
or trend-line established prior to entering the position.  Again,
the most important objective of the stop-loss order is to preserve
capital if the play goes badly and yet provide every opportunity
for the position to achieve its potential.  If you are using a stop
on the stock and the primary trend is directional, the placement of
the first stop will differ, depending on your overall risk-reward
tolerance.  To assist in correctly placing the initial stop, we
generally use major trend-lines, minor lows, and current support
and resistance areas.  One should also take into account the past
volatility of the issue when setting the initial loss limit.  After
the play is initiated, most traders trail the stop loss slightly
below the previous day's low to lock-in gains (or preserve capital)
if the trend falters.  With highly volatile issues, this can be
difficult as they often fluctuate by large amounts.  If the issue
moves strongly in your favor, the stop-loss order can be advanced
more aggressively until the target profit is achieved.

While these principles work well with the majority of situations,
there will always be those cases when even the most common rules
do not seem to apply.  In particularly fast-moving markets where
straight-line advances make the placement of protective stops
difficult, arbitrary buy and sell targets might be more advisable.
There are also "progressive" stop-order systems for traders who
like to fine tune the loss-limiting process to allow for brief
periods of technical consolidation.  Regardless of the manner in
which you determine the placement of stops, there are two common
rules for of using loss-limiting orders.  After an initial profit
is achieved, it is critical to avoid placing stops below a point,
which if violated on a closing basis, indicates a change in the
primary trend.  In addition, protective stop orders under long
positions are never moved down, nor are protective stop orders
over short issues ever adjusted higher.  The reason behind these
rules is obvious: You must face the fact that if a trade is going
against you, it is prudent to exit in a timely manner because it
usually will only get worse.

For more information on the subject of trading stops, read these
informative articles:




Good Luck! 

                        *** WARNING!!! ***

Occasionally a company will experience catastrophic news causing
a severe drop in the stock price.  This may cause a devastatingly
large loss which may wipe out all of your smaller gains.  There is
one very important rule: Don't sell naked puts on stocks that you
don't want to own!  It is also important that you consider using
trading STOPS on naked option positions to help limit losses when
the stock price drops.  Many professional traders suggest closing
the position when the stock price falls below the sold strike or
using a "buy-to-close" STOP at a price that is no more than twice
the original premium from the sold option.


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

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

VXGN   10.40  14.99   NOV   7.50  0.35  *$  0.35  15.6%
AMZN   19.04  19.80   NOV  15.00  0.50  *$  0.50  12.6%
AFCO   13.19  15.14   NOV  10.00  0.25  *$  0.25  12.5%
KOSP   15.25  15.23   NOV  12.50  0.30  *$  0.30  11.9%
AMLN   16.95  17.69   NOV  15.00  0.75  *$  0.75  11.7%
AMZN   18.46  19.80   NOV  15.00  0.55  *$  0.55  10.7%
HOLX   11.74  12.93   NOV  10.00  0.50  *$  0.50  10.5%
TMCS   20.33  23.70   NOV  17.50  0.55  *$  0.55  10.2%
JWN    20.98  20.68   NOV  17.50  0.35  *$  0.35   9.6%
TMPW   17.68  15.75   NOV  15.00  0.30  *$  0.30   9.3%
HLYW   17.20  18.88   NOV  15.00  0.60  *$  0.60   8.2%
GETY   26.41  27.88   NOV  22.50  0.40  *$  0.40   8.2%
NOK    14.44  16.90   NOV  12.50  0.40  *$  0.40   8.2%
QCOM   31.37  35.67   NOV  25.00  0.65  *$  0.65   8.2%
AMLN   15.80  17.69   NOV  12.50  0.40  *$  0.40   8.1%
QCOM   36.20  35.67   NOV  30.00  0.65  *$  0.65   7.9%
KDE    23.77  27.88   NOV  20.00  0.70  *$  0.70   7.9%
COCO   37.75  38.73   NOV  30.00  0.75  *$  0.75   7.9%
OVER   30.07  23.05   NOV  22.50  0.45  *$  0.45   7.6%
DRD    19.70  19.25   NOV  17.50  0.30  *$  0.30   7.3%
PPDI   26.99  27.89   NOV  22.50  0.45  *$  0.45   7.2%
QCOM   36.52  35.67   NOV  30.00  0.40  *$  0.40   6.8%
AFFX   23.99  26.24   NOV  17.50  0.30  *$  0.30   6.4%
VZ     35.19  38.59   NOV  30.00  0.70  *$  0.70   6.3%
GENZ   23.57  28.37   NOV  17.50  0.35  *$  0.35   6.0%
SYMC   39.00  40.95   NOV  30.00  0.45  *$  0.45   5.9%
OVER   27.51  23.05   NOV  20.00  0.40  *$  0.40   5.9%
INVN   35.05  35.13   NOV  25.00  0.40  *$  0.40   5.9%
QLGC   33.15  37.15   NOV  22.50  0.25  *$  0.25   5.3%

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


Despite the optimistic attitude among investors, the market has
much to prove if the recent recovery rally is to be believed.  The
first step would be a move above the current resistance area near
910 (SPX) and a second, more important feat would be a break above
the August highs near 965-970.  Until those goals are achieved,
traders should be on the alert for any bearish indications in
their portfolio positions.  Overture (NASDAQ:OVER) has been a
very productive issue in recent months but this week's sharp drop
after a Salomon Smith Barney analyst cut his earnings estimates,
price target and rating for the stock suggests it is time to move
on.  Conservative traders should consider closing the position.


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

BSTE   30.74  NOV 25.00   BQS WE  0.30 779   24.70   14    9.5% 
BSX    38.40  NOV 35.00   BSX WG  0.35 1140  34.65   14    6.2% 
CAI    41.29  NOV 37.50   CAI WU  0.40 3     37.10   14    6.6% 
CIMA   27.17  NOV 25.00   UVK WE  0.45 16    24.55   14   10.7% 
KLAC   37.39  NOV 30.00   KCQ WF  0.30 23227 29.70   14    8.3% 
NVLS   33.06  NOV 27.50   NLQ WY  0.40 3991  27.10   14   10.8% 
TARO   35.39  NOV 32.50   QTT WZ  0.40 64    32.10   14    7.4% 
WPI    28.34  NOV 25.00   WPI WE  0.45 1804  24.55   14   11.6%

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

WPI    28.34  NOV 25.00   WPI WE  0.45 1804  24.55   14   11.6%
NVLS   33.06  NOV 27.50   NLQ WY  0.40 3991  27.10   14   10.8% 
CIMA   27.17  NOV 25.00   UVK WE  0.45 16    24.55   14   10.7% 
BSTE   30.74  NOV 25.00   BQS WE  0.30 779   24.70   14    9.5% 
KLAC   37.39  NOV 30.00   KCQ WF  0.30 23227 29.70   14    8.3% 
TARO   35.39  NOV 32.50   QTT WZ  0.40 64    32.10   14    7.4% 
CAI    41.29  NOV 37.50   CAI WU  0.40 3     37.10   14    6.6% 
BSX    38.40  NOV 35.00   BSX WG  0.35 1140  34.65   14    6.2% 

Company Descriptions

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

BSTE - Biosite  $30.74  ** Favorable Quarterly Report! ***

A leader in the drive to advance diagnosis, Biosite (NASDAQ:BSTE)
is a unique research-based company dedicated to the discovery and
development of novel protein-based diagnostic tests that improve
a doctor's ability to diagnose debilitating and life-threatening
diseases.  The firm combines integrated discovery and diagnostics
businesses to access proteomics research, identify proteins with
high diagnostic utility, develop and commercialize products and
educate the medical community on new diagnostic approaches that
improve health care outcomes.  Biosite's "Triage" rapid diagnostic
tests are used in approximately 50 percent of U.S. hospitals and
in approximately 40 international markets.  Last week, Biosite
reported strong growth for the third quarter of 2002 and projected
continuing growth in fiscal year 2003.  The company said that it
expects revenues in 2003 to be 35 to 40 percent higher than in
2002, with the possibility for upside from new products and new
markets that are currently under development.  Traders can profit
from continued upside activity in the issue with this position.

NOV 25.00 BQS WE LB=0.30 OI=779 CB=24.70 DE=14 TY=9.5% 

BSX - Boston Scientific  $38.40  *** Future Upside Potential? ***

Boston Scientific (NYSE:BSX) is a global developer, manufacturer
and marketer of medical devices whose products are used in a wide
range of interventional medical specialties.  The firm's products
are offered by two dedicated business groups, Cardiovascular and
Endosurgery.  The Cardiovascular organization focuses on products
and technologies for use in the firm's interventional cardiology,
interventional radiology, peripheral vascular and neurovascular
procedures.  The Endosurgery organization focuses on products and
technologies for use in oncology, vascular surgery, endoscopy,
urology and gynecology procedures.  BSX shares have rallied in
recent weeks due to the company's victories in court over rivals
in the drug-coated stent market.  The question now is, "Does the
company's earnings potential justify the current valuation?"  Well,
as with any other stock, it really doesn't matter in the near-term.
What matters is what people "believe" it's worth and traders can
speculate on that price in a conservative manner with this position.

NOV 35.00 BSX WG LB=0.35 OI=1140 CB=34.65 DE=14 TY=6.2% 

CAI - CACI International  $41.29  *** Bullish Outlook! ***

CACI International (NYSE:CAI) delivers information technology and
communications solutions to clients through four areas of expertise
or service offerings: systems integration, managed network services,
knowledge management and engineering services.  Through this range
of service offerings, the company provides comprehensive, practical
information technology and communications solutions by adapting
emerging technologies and continually evolving legacy strengths in
the areas of information assurance and security, reengineering,
logistics, engineering support, automated debt management systems
and services, litigation support systems and services, product data
management, software development and reuse, voice, data and video
communications, simulation and planning, financial and also human
resource systems and geo-demographic and customer data analysis.
CACI International recently announced that quarterly profit soared
42% and forecast future growth on strong sales of security products
to the U.S. government.  Investors were happy with the news and the
issue is now testing its all-time highs.  Traders can profit from
continued bullish activity in CAI's share value with this position.

NOV 37.50 CAI WU LB=0.40 OI=3 CB=37.10 DE=14 TY=6.6% 

CIMA - Cima Labs  $27.17  *** A Big Day! ***

Cima Labs (NASDAQ:CIMA) develops and manufactures fast-dissolve and
enhanced-absorption oral drug delivery systems.  OraSolv & DuraSolv,
the firm's proprietary fast-dissolve technologies, are oral dosage
forms that dissolve quickly in the mouth without chewing or the need
for water.  The firm manufactures five pharmaceutical brands using
its DuraSolv and OraSolv fast dissolve technologies.  These comprise
three prescription brands and two over-the-counter brands, including
Triaminic Softchews for Novartis; Tempra FirsTabs for Bristol-Myers
Squibb; AstraZeneca Zomig-ZMT and its equivalent for the European
market, Zomig Rapimelt; Remeron SolTab for Organon, and NuLev for
Schwarz Pharma.  The United States Food and Drug Administration is
reviewing a regulatory submission for a product the firm developed,
an orally disintegrating dosage form of loratadine, which is likely
to be marketed as a generic alternative to Claritin Reditabs.  On
Thursday, Cima Labs reported a larger profit compared to the year
earlier period and offered bullish guidance for the fourth quarter.
Investors can establish a conservative entry point in the issue with
this position.

NOV 25.00 UVK WE LB=0.45 OI=16 CB=24.55 DE=14 TY=10.7% 

KLAC - KLA-Tencor  $37.39  *** Semiconductor Rally! ***

KLA-Tencor (NASDAQ:KLAC) is a supplier of process control and yield
management solutions for semiconductor and related microelectronics
products.  The firm's comprehensive portfolio of products, software,
analysis, services and expertise is designed to help integrated
circuit (IC) manufacturers manage yield throughout the entire wafer
fabrication process, from research and development to final mass
production yield analysis.  Semiconductor stocks have led the rally
in the technology group and traders who believe the upside activity
will continue can profit from that outcome with this position.

NOV 30.00 KCQ WF LB=0.30 OI=23227 CB=29.70 DE=14 TY=8.3% 

NVLS - Novellus Systems  $33.06  *** Chip Sector Favorite! ***

Novellus Systems (NASDAQ:NVLS) manufactures, markets and services
semiconductor processing equipment.  The company's products are
comprised of advanced systems used to deposit thin conductive and
insulating films on semiconductor devices, as well as equipment
for preparing the chip's surface before these deposition processes.
Novellus is a supplier of high productivity deposition and surface
preparation systems used in the fabrication of integrated circuits.
Chemical Vapor Deposition systems use chemical plasmas to deposit
all of the dielectric (insulating) layers and certain of the metal
(conductive) layers on the surface of a semiconductor wafer.  The
Physical Vapor Deposition systems are used to deposit conductive
metal layers by sputtering metallic atoms from the surface of a
target source via high DC power.  Electrofill systems are used for
depositing copper conductive layers in a dual damascene design
architecture using an aqueous solution.  NVLS is another popular
stock in the semiconductor equipment sector and traders can profit
from a continued recovery in its share value with this position.

NOV 27.50 NLQ WY LB=0.40 OI=3991 CB=27.10 DE=14 TY=10.8% 

TARO - Taro Pharmaceutical  $35.39  *** Solid Earnings! ***

Taro Pharmaceutical Industries (NASSDAQ:TARO) is a multinational,
science-based pharmaceutical firm dedicated to meeting the needs
of its customers through the discovery, development, manufacture
and marketing of the highest quality healthcare products.  The
company was founded with the goal of building a pharmaceutical
firm in Israel that would provide high quality pharmaceutical
products while investing in research to develop an international
presence.  Last week, Israel's Taro Pharmaceutical posted a 58%
rise in third-quarter net income on Thursday, boosted by higher
sales and lower expenses.  Taro posted a profit of $11.6 million,
or 39 cents per share, compared with $7.3 million, or 29 cents per
share a year earlier as revenues rose to $55.5 million from $41.0
million.  Taro Pharmaceutical is a relatively stable issue with a
favorable long-term outlook and drug-sector investors can use this
position to a establish a conservative cost basis in the company's

NOV 32.50 QTT WZ LB=0.40 OI=64 CB=32.10 DE=14 TY=7.4% 

WPI - Watson Pharmaceuticals  $28.34  *** Earnings Speculation! ***

Watson Pharmaceuticals (NYSE:WPI) is primarily engaged in the
development, manufacture, marketing and distribution of branded
and off-patent (generic) pharmaceutical products.  Through its many
internal product developments and synergistic acquisitions of other
products and businesses, the company has grown into a diversified
specialty pharmaceutical company.  Watson markets approximately 30
branded pharmaceutical product lines and roughly 140 off-patent
pharmaceutical products.  The company also develops advanced drug
delivery systems designed to enhance the therapeutic benefits of
existing drug forms.  Watson Pharmaceuticals is due to announce
quarterly earnings next week and traders are speculating on the
outcome.  This position offers a conservative method to participate
in that activity.

NOV 25.00 WPI WE LB=0.45 OI=1804 CB=24.55 DE=14 TY=11.6%



The following group of issues is a list of additional candidates
to supplement your search for profitable trading positions.  As
with any investment, you must decide if the selections meet your
criteria for potential plays.  Only you can know what strategies
and positions are suitable for your experience level, risk-reward
tolerance and portfolio outlook.  They will not be included in
the weekly portfolio summary. 

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

UAL     2.56  NOV  2.50   UAL WZ  0.40 16137  2.10   14   63.7% 
PPD    21.90  NOV 17.50   PPD WW  0.30 2361  17.20   14   13.9% 
ADRX   18.37  NOV 15.00   QAX WC  0.25 1236  14.75   14   12.8% 
PHTN   23.34  NOV 20.00   PDU WD  0.35 83    19.65   14   12.0% 
MANH   22.75  NOV 20.00   MQR WD  0.35 21    19.65   14   11.3% 
QLGC   37.15  NOV 32.50   QLC WZ  0.45 2775  32.05   14    9.2% 
STE    27.00  NOV 25.00   STE WE  0.30 198   24.70   14    7.2% 
QCOM   35.67  NOV 30.00   AAW WF  0.25 9490  29.75   14    6.1% 
GILD   36.50  NOV 32.50   GDQ WZ  0.20 617   32.30   14    4.0%



Recovery Rally Continues!
By Ray Cummins

Investors continued to buy stocks Friday despite renewed economic
concerns and data suggesting there will be little improvement in
corporate earnings in the coming months.

The Dow Jones Industrial Average climbed 120 points to 8,517 amid
a late session surge that boosted the major equity averages to a
fourth consecutive week of gains.  Blue-chip investors flocked to
SBC Communications (NYSE:SBC), Alcoa (NYSE:AA), J.P. Morgan Chase
(NYSE:JPM), Intel (NASDAQ:INTC), Hewlett Packard (NYSE:HPQ), and
Phillip Morris (NYSE:MO) among others.  In the technology segment,
semiconductor, networking and data storage issues were the leaders,
helping the NASDAQ to a 30 point gain at 1,360.  The broader S&P
500-Stock Index closed up 15 points at 900 on optimistic buying in
virtually every sector.  Market breadth was positive on the NYSE,
where 2,324 stocks rose and 898 fell on 1.45 billion shares traded.
On the technology exchange, 1.83 billion shares changed hands with
2,196 stocks advancing against 1,051 decliners.  In the treasury
market, bonds moved lower.  The 10-year Treasury note fell 13/16
point, or $8.125 for each $1,000 invested.  The yield, which moves
inversely to price, rose to 3.99%. The 30-year long bond was down
23/32 point to yield 5.04%.


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


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

SLM     96.58 102.94  NOV   80  85  0.50   84.50  $0.50   Open
UNH     93.49  92.69  NOV   80  85  0.60   84.40  $0.60   Open
WTW     45.40  47.70  NOV   35  40  0.50   39.50  $0.50   Open
ABK     63.21  60.97  NOV   50  55  0.60   54.40  $0.60   Open
CHIR    42.51  40.09  NOV   35  38  0.30   37.20  $0.30   Open?
CDWC    50.61  54.15  NOV   40  45  0.60   44.40  $0.60   Open
CEPH    50.58  49.81  NOV   40  45  0.50   44.50  $0.50   Open
CTSH    69.54  67.80  NOV   55  60  0.55   59.45  $0.55   Open


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

FITB    57.47  65.57  NOV   70  65  0.65   65.65  $0.08   Open?
LEN     53.67  55.21  NOV   65  60  0.80   60.80  $0.80   Open
LMT     62.45  56.38  NOV   75  70  0.55   70.55  $0.55   Open
MMM    120.60 128.05  NOV  140 135  0.50  135.50  $0.50   Open
AIG     63.71  61.85  NOV   75  70  0.60   70.60  $0.60   Open
GD      76.58  79.30  NOV   90  85  0.55   85.55  $0.55   Open
AGN     55.57  53.24  NOV   65  60  0.50   60.50  $0.50   Open
NE      31.45  33.98  NOV   38  35  0.30   35.30  $0.30   Open

Fifth Third Bancorp (NYSE:FITB) continues to hover at resistance
(near $65), further strengthening the opinion that a catalyst
will be necessary to move it above the current range.  Traders
with an aggressive outlook should monitor the issue for a rally
above $67, on increasing volume, before exiting or adjusting the
position.  Noble (NYSE:NE) has reversed course in recent sessions
and the issue is now a candidate for early exit on a close above
the sold strike at $35.


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

ERTS   67.73  66.08   NOV  75  60   0.40   0.50   0.90   Open?
SCHL   47.43  43.82   NOV  55  40   0.25   0.60   0.85   Open?
DLTR   25.12  26.56   NOV  30  20   0.00   0.30   0.30   Open
NXTL    9.69  12.48   JAN  12   7   0.10   1.30   1.40   Open
CAI    39.21  41.29   DEC  45  35   0.10   0.80   0.90   Open
Nextel (NASDAQ:NXTL) was the big winner this month, offering up
to $1.40 profit in the speculative position.  Caci International
(NYSE:CAI) has also provided excellent gains and the bullish play
in Dollar Tree Stores (NASDAQ:DLTR) has achieved a small profit.
The recent rallies in Electronic Arts (NYSE:ERTS) and Scholastic
(NASDAQ:SCHL) appear to have ended, thus it may be time to close
those positions.


No Open Positions


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

CHTT   42.99  41.85   NOV   35  40   4.20   4.60  39.20  Open?
Shares of Chattem (NASDAQ:CHTT) fell from grace after the firm's
board approved a two-for-one split of its common stock and said
it was maintained its earnings forecast for the quarter.  Maybe
there is something we don't know?  Also, the bullish position in
Lumenis (NASDAQ:LUME) has been closed.


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

LPNT   33.04  33.57   FEB-35C   NOV-35C    1.25   2.00   Open
CREE   14.98  18.50   JAN-17C   NOV-17C    1.00   1.25   Open
HNT    25.75  24.25   JAN-30C   NOV-30C    0.75   0.60   Open
HGSI   11.34   9.09   DEC-15C   NOV-15C    0.40   0.20  Closed
Lifepoint (NASDAQ:LPNT) has been very active in recent sessions
but the position has already offered a favorable gain and remains
profitable.  Cree (NASDAQ:CREE) has also become more volatile over
the past week and Friday, the issue rallied to a 7-month high.
Traders who think the recent upside activity will continue should
consider a transition to a diagonal spread, rolling to the DEC-$20
options in the short position.  A more neutral adjustment would
involve rolling to the DEC-$17.50 options (short) for a credit.
The speculative position in Human Genome Sciences (NASDAQ:HGSI)
did not move as expected, although the loss was minimal, and the
bullish portion of the Waters (NYSE:WAT) calendar spread has been
closed to preserve capital.


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

AES     2.92   1.98   J04-7.5P  J03-2.5P   4.50   4.25   Open
IMCL    7.77   7.80   J04-15P   JO3-5P     8.00   7.75   Open
NVDA   11.10  14.10   J04-20P   J03-7P    10.00   9.00   Open

Nvidia (NASDAQ:NVDA) was a big winner this week, offering up to
a $1.00 profit after only four days in the position.


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

PPD    21.58  21.90   NOV  25  17   1.25   1.00   0.25    Open

Questions & comments on spreads/combos to Contact Support

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


One of our readers requested some synthetic positions on low cost
issues in the technology group.  All of these stocks have bullish
(short-term) trends as well as favorable option premiums.  Traders
who believe the underlying issues have upside potential may find
the risk-reward outlook in these plays attractive.

FCS - Fairchild Semiconductor  $13.30  *** On The Rebound! ***

Fairchild Semiconductor International (NYSE:FCS) is a global
company that designs, manufactures and markets high-performance
building block semiconductors critical for multiple end markets,
with a focus on developing power and interface solutions.  The
company's products are used in consumer, communications, computer,
industrial and automotive applications.  Fairchild's products are
organized into three principal product groups: Analog and Mixed
Signal Products, Discrete Products and Interface & Logic Products.
Other products include non-volatile memory and opto-electronics.

PLAY (speculative - bullish/synthetic position):

BUY  CALL  FEB-17.50  FCS-BW  OI=2163  A=$0.85
SELL PUT   FEB-10.00  FCS-NB  OI=160   B=$0.75

Note:  Using options, the position is similar to being long the
stock.  The initial collateral requirement for the sold (short)
put is approximately $350 per contract.

LTXX - LTX Corporation  $6.83  *** Hot Sector! ***

LTX Corporation (NASDAQ:LTXX) designs, manufactures, markets and
services semiconductor test equipment.  The company sells its test
systems to semiconductor designers and manufacturers worldwide,
including Texas Instruments, Philips Semiconductor, NEC, National
Semiconductor, Motorola, Vitesse Semiconductor, Agere Systems,
Infineon Technologies and Hitachi.  These customers utilize this
semiconductor test equipment to test every semiconductor device
at two different stages during the manufacturing process.  These
devices are incorporated in a wide range of products, including
data communications equipment such as switches, routers, servers,
broadband products such as cable modems and Ethernet accessories,
personal communication devices such as cell phones and personal
digital assistants, retail consumer products such as televisions,
videogame systems, digital cameras and automobile electronics,
and personal computer accessory products such as disk drives and
3-D graphics accelerators.

PLAY (speculative - bullish/synthetic position):

BUY  CALL  FEB-10.00  UXT-BB  OI=83  A=$0.65
SELL PUT   FEB-5.00   UXT-NA  OI=25  B=$0.50

Note:  Using options, the position is similar to being long the
stock.  The initial collateral requirement for the sold (short)
put is approximately $200 per contract.

MENT - Mentor Graphics  $10.35  *** Favorable Earnings! ***

Mentor Graphics (NASDAQ:MENT) is engaged in electronic design
automation (EDA), providing software and hardware design tools
that enable companies to send better electronic products to
market faster and more cost-effectively.  Mentor manufactures,
markets and supports EDA products and provides related services,
which together are used by engineers to design, analyze, simulate,
model, implement and verify the components of electronic systems.
Customers use the firm's products in the design of such diverse
products as automotive electronics, video games systems, computer
network hubs and routers, telephone-switching systems, cellular
handsets, signal processors, video conferencing equipment, 3-D
graphics boards, digital audio broadcast radios, smart cards and
products enabled with the Bluetooth short-range wireless radio

PLAY (speculative - bullish/synthetic position):

BUY  CALL  JAN-12.50  MGQ-AV  OI=180  A=$0.90
SELL PUT   JAN-7.50   MGQ-MU  OI=41   B=$0.50

Note:  Using options, the position is similar to being long the
stock.  The initial collateral requirement for the sold (short)
put is approximately $275 per contract.

XMSR - XM Satellite Radio  $3.43  *** Bottom Fishing! ***
XM Satellite Radio Holdings (NASDAQ:XMSR) is transforming radio,
an industry that has seen little technological change since FM,
almost 40 years ago.  XM's programming lineup features over 100
coast-to-coast digital channels: 70 music channels, many of them
commercial- free, from hip-hop to opera, classical to country,
bluegrass to blues; and 31 channels of sports, talk, children's
and entertainment.  The company will build a subscriber base for
XM Radio through multiple distribution channels, including an
exclusive distribution arrangement with General Motors, other
automotive manufacturers, car audio dealers and consumer retail
electronics stores.  XM was named 2001 "Product of the Year" by
Fortune, "Invention of the Year" by Time and won Popular Science's
2001 "Best of What's New" Grand Award in the electronics category.
XM also won several awards at the 2001 Consumer Electronics Show,
including "Best of CES" in the automotive category, and received
a coveted "A" rating from Entertainment Weekly.  XM's strategic
investors include America's leading car, radio and satellite TV
companies; General Motors, American Honda Motors, Clear Channel
Communications and DIRECTV.

PLAY (very speculative - bullish/synthetic position):

BUY  CALL  APR-5.00  QSY-DA  OI=411  A=$0.80
SELL PUT   APR-2.50  QSY-PZ  OI=205  B=$0.60

Note:  Using options, the position is similar to being long the
stock.  The initial collateral requirement for the sold (short)
put is approximately $140 per contract.


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

BR - Burlington Resources  $42.01  *** Oil Sector Hedge! ***

Burlington Resources (NYSE:BR) is a holding company that is
engaged, through its principal subsidiaries, Burlington Resources
Oil & Gas Company LP, The Louisiana Land and Exploration Company,
Burlington Resources Canada, Canadian Hunter Exploration and their
affiliated companies, in the exploration for and the development,
production and marketing of crude oil, NGLs (natural gas liquids)
and natural gas.  The company's asset base is dominated by North
American natural gas properties and its extensive North American
lease holdings extend from the Gulf of Mexico to the Mackenzie
Delta region in the Northwest Territories of the Canadian Arctic
and Alaska's north slope.  The company also has operations in the
Northwest European Shelf, North Africa, Latin America, the Far
East and West Africa.

BUY  PUT  DEC-35.00  BR-XG  OI=69  A=$0.45
SELL PUT  DEC-37.50  BR-XU  OI=77  B=$0.70
POTENTIAL PROFIT(max)=14% B/E=$37.20

EBAY - eBay Inc.  $64.79  *** New Trading Range? ***

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

PLAY (conservative - bullish/credit spread):

BUY  PUT  DEC-50  QXB-XJ  OI=1734  A=$0.65
SELL PUT  DEC-55  QXB-XK  OI=950   B=$1.10
POTENTIAL PROFIT(max)=12% B/E=$54.45

IGEN - IGEN International  $36.49  *** Rally Mode! ***

IGEN International (NASDAQ:IGEN) develops and markets products
that utilize its proprietary electrochemiluminescence (ORIGEN)
technology, which permits the detection and measurement of
biological substances.  ORIGEN provides a combination of speed,
sensitivity, flexibility and throughput in a single technology
platform.  ORIGEN is incorporated into instrument systems and
related consumable reagents, and the company also offers assay
development as well as other services used to perform analytical
testing.  Products based on IGEN's ORIGEN technology address the
Life Sciences, Clinical Testing and Industrial Testing worldwide

PLAY (less conservative - bullish/credit spread):

BUY  PUT  DEC-25.00  GQ-XE  OI=1376  A=$0.35
SELL PUT  DEC-30.00  GQ-XF  OI=894   B=$1.00
POTENTIAL PROFIT(max)=16% B/E=$54.45

SLM - SLM Corporation  $102.94  *** Recession Proof? ***
SLM Corporation (NYSE:SLM), formerly USA Education, is a private
source of funding, delivery and servicing support for higher
education loans for students and their parents in the United
States.  SLM provides a range of financial services, processing
capabilities and information technology to meet the needs of
educational institutions, lenders, students and guarantee
agencies.  The company's managed portfolio of student loans,
including loans owned and loans securitized, totals over $70
billion, of which the majority is federally insured.  The firm
also has commitments to buy billions of dollars of additional
student loans.  Primarily a provider of education credit, the
company serves a diverse range of clients, including over 6,000
educational and financial institutions and guarantee agencies.
The company serves in excess of seven million borrowers through
its ownership or management of student loans.

PLAY (conservative - bullish/credit spread):

BUY  PUT  DEC-85.00  SLM-XQ  OI=39   A=$1.15
SELL PUT  DEC-90.00  SLM-XR  OI=569  B=$1.70
POTENTIAL PROFIT(max)=15% B/E=$89.35

ABC - AmerisourceBergen  $72.45  *** Premium Selling! ***

AmerisourceBergen (NYSE:ABC) is a pharmaceutical services firm
dedicated solely to the pharmaceutical supply chain.  The company
markets its pharmaceutical products and services to hospital
systems (hospitals and acute care facilities), alternate care
customers (mail order facilities, physicians' offices, long-term
care institutions and clinics), independent community pharmacies,
and regional drugstore and food merchandising chains.  The firm
also provides outsourced pharmacies to long-term care and workers'
compensation programs. AmerisourceBergen operates in two segments:
Pharmaceutical Distribution and PharMerica. The Pharmaceutical
Distribution is primarily the Company's wholesale and specialty
drug distribution business, and PharMerica is their institutional
pharmacy business.  AmerisourceBergen was formed in connection
with the merger of AmeriSource Health Corporation and Bergen
Brunswig Corporation, which was consummated in August 2001.

PLAY (conservative - bearish/credit spread):

BUY  CALL  DEC-85  ABC-LQ  OI=172  A=$0.50
SELL CALL  DEC-80  ABC-LP  OI=145  B=$1.05
POTENTIAL PROFIT(max)=14% B/E=$80.60

OEX - S&P 100 Index  $458.16  *** Sell The Rally! ***

The Standard & Poor's 100 Index is a capitalization-weighted index
of 100 stocks from a broad range of industries.  The component
stocks are weighted according to the total market value of their
outstanding shares.  The impact of a component's price change is
proportional to the issue's total market value, which is the share
price times the number of shares outstanding.

Traders who participate in OTM credit-spreads often utilize S&P
100 (OEX) options because they generally contain more premium
than options on individual stocks and also provide an underlying
instrument less prone to huge, gapping moves.  Please review the
OIN's Market Sentiment section for more specific information on
the current trends in equities.

PLAY (conservative - bearish/credit spread):

BUY  CALL  NOV-495  OXB-KS  OI=2147  A=$0.70
SELL CALL  NOV-490  OXB-KR  OI=5635  B=$1.00
POTENTIAL PROFIT (monthly)=14%

SBGI - Sinclair Broadcast Group  $10.60  *** Disparity Play! ***

Sinclair Broadcast Group (SBGI) is one of the largest and most
diversified television broadcasting companies, owns and operates,
programs, or provides sales services to 62 television stations
in 39 markets.  Sinclair's television group includes FOX, ABC,
WB, CBS, NBC, and UPN affiliates and reaches approximately 24%
of all U.S. television households.

PLAY (very speculative - bearish/credit spread):

BUY  CALL  DEC-15.00  JQO-LC  OI=91   A=$0.45
SELL CALL  DEC-12.50  JQO-LV  OI=193  B=$1.05
POTENTIAL PROFIT(max)=35% B/E=$13.15


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