Option Investor

Daily Newsletter, Wednesday, 12/11/2002

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The Option Investor Newsletter                Wednesday 12-11-2002
Copyright 2002, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Caught In-Between
Futures Wrap: Silence Before The Storm
Index Trader : An anticipatory session
MUI CONTENT OF THE DAY: Top Three Fund Families: #2 Vanguard Funds
Options 101: Picking The Right Target

Updated on the site tonight:
Swing Trader Game Plan: Percentage Plays

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
12-11-2002                  High    Low     Volume Advance/Decl
DJIA     8589.14 +  14.88  8625.89 8487.53   1815 mln  1175/621
NASDAQ   1396.59 +   5.83  1407.15 1377.71   1587 mln  1279/289
S&P 100   460.69 +   0.20   463.87  456.44    totals   2454/910
S&P 500   904.96 +   0.51   909.94  896.48
RUS 2000  393.88 +   0.41   395.36  391.41
DJ TRANS 2348.06 -   5.32  2352.65 2327.57
VIX        31.40 -   0.27    32.46   30.81
VIXN       51.62 -   0.13    52.89   51.24
Put/Call Ratio 0.76

Caught In-Between
by Steven Price

We continue to see consolidation after the recent sell-off, but 
are starting to see signs of a support for a rebound. How far 
that rebound takes us is unclear, as we're getting a lot of 
intraday drift, but we seem to be setting at least a short-term 
bottom. The markets took a dive this morning, following the 
seizure yesterday of a North Korean ship carrying fifteen Scud 
missiles, 15 conventional warheads and 23 containers of nitric 
acid, that was believed headed to the Middle East.  However, 
Yemen stepped up and said the missiles were intended for their 
armed forces. Yemen previously denied the shipment belonged to 
them during the ship's tracking, which began when it left North 
Korea several weeks ago. The U.S., reasonably convinced the 
missiles would not eventually wind up in Iraqi hands, released 
the shipment and the fear in the markets seemed to drain out with 
a 130-point Dow rally. 

The significance of the morning drop was the point at which it 
stopped.  The low of the day in the Dow was 8487, which is 
approximately the same point it bottomed the last three days. 
After last week's drop, there was bound to be some consolidation 
before a rebound and it appears that this could be that 
consolidation point.  If that level fails, then there is 
significant support just below, in the 8300-8400 range.  That 
daily support coincides with the bullish support line on the 
point and figure chart. The recent pattern of lower intraday 
highs and lower lows was reversed the last two days. However, 
this morning's drop back through 8500 threw a kink in what 
appeared to be a series of higher intraday highs and higher lows.  
We got a higher high and a higher low than we did for the day 
yesterday, but not a convincing one, as intraday support at 8500 
failed. The intraday trend of the last couple days remains up, 
although not overwhelmingly so. As we head into the end of the 
year, volumes should continue to drop off, making large momentum 
moves less likely. Today's volume was only 1.2 billion shares on 
the NYSE and 1.4 billion on the Nasdaq.   The best broad market 
plays may come on a bounce from the Dow 8300-8400 range, or a 
failed rally around 8800.  

Intraday Chart of the Dow

Daily Chart of the Dow

The fly in the ointment for a continued rally was the activity in 
the bond market today.  While we normally we a drop in bonds when 
cash moves into the stock market, we saw no such action today.  
In fact, we are seeing a consistent trend of buying over the last 
several sessions in the five, ten and thirty year notes, which is 
more consistent than the schizophrenic action we see in stocks. 
Combine that with the low equity volumes and the bond market is 
sending bearish signals.  All three of these treasuries are up 
against descending trend lines and bullish traders should keep an 
eye on those trend lines for a breakout.  If bonds do break out 
to the upside, then long positions could be in danger. 

Chart of the Five and Ten Year Bond Futures

Last week's drop has also weakened the bullish percentages, with 
those of the Dow, OEX and NDX all reversing into a column of "O" 
that has yet to reverse back up on the minor rally of the last 
couple of days.  This indicates the high percentage of stocks 
that were giving point and figure buy signals has been reduced 
significantly and remained at lower levels. After these 
percentages reached overbought territory, above 70%, on the rally 
up to Dow 9043, SPX 954 and NDX 1155, the risk to long positions 
increased significantly.  Bullish percentages can remain in 
overbought territory for long periods of time, during rallies, 
but once they get over 70% they throw up a red flag.  That 
certainly turned out to be the case this time, and they haven't 
given any signal that the rollover into bearish columns has 

The Nasdaq actually broke above the 1400 level on the mid-day 
rally, but also failed the mark, eventually falling to a close of 
1396.59.  The rally came in spite comments from Intel Chairman 
Andy Grove that it may be too early to forecast a rebound in the 
semiconductor sector.  On the positive side, a report on the spot 
price of the 256-megabit chip showed the first price increase 
since last month.  It was attributed to a rush of short-term 
demand from the U.S. and European markets, coupled with low 
inventory.  That would seem to confirm the added demand that was 
noted by Taiwan Semiconductor last month and as recently as last 
week.  This morning also saw raised guidance from Cymer, which 
makes laser products for the semiconductor industry.  The company 
also said it expects its book-to-bill ratio for the quarter to 
come in at or above 1.0, indicating at least as many new orders 
as those currently being billed.  Some of that increase can be 
attributed to seasonal demand for PCs, but it is still a positive 
sign for the industry. There is usually a downturn after the 
holidays and the depth of that drop-off should set the tone for 
the first half of 2003. 

The Semiconductor Index (SOX) actually tested resistance at 329-
330 today and failed that level, finishing up only +0.86 on the 
day.  The SOX has given up 18% since topping out at 393 on the 
Monday after Thanksgiving, and appears to have also settled in 
above previous support in the 300-310 area.  It will most likely 
take a decisive move back above 330, or below 300, to get any 
momentum in one direction or another. 

Chart of the Semiconductor Index (SOX)

We saw the first major IPO in a while, when disk drive maker 
Seagate (STX) sent shares to market. This was the largest tech 
IPO of 2002 and it was a disappointing debut, highlighting the 
reluctance of investors to roll the dice on new issues. The stock 
was originally slated between $13 and $15, but instead wound up 
priced at $12. By the end of the day, that price failed to hold 
up and the stock closed at $11.52.  I think back on the days a 
few years ago when stocks often doubled in value on their IPO 
date and realize just how much has changed.   There has been a 
lack of IPO and M&A activity over the last 18 months and this is 
a good example of why. 

It is hard to take anything significant from such a low volume 
day and low volume time of the year.  We are entering a 
traditionally bullish trading period, but doing so after a failed 
rally that was turned back with significant speed. Bond activity 
looks bearish for equities and war fears are hanging over the 
market. The last couple of days look bullish and we appear to 
have built a base around Dow 8500.  So what can a trader take 
from the current circumstances?   We are getting bearish signals 
in a very short-term uptrend. Bulls can enter positions for a 
bounce, but need to be very nimble and quick to close positions 
if things turn around.  Shorts have the ammo, but not the current 
trend.  If we do get a failed rally around Dow 8800, then the 
odds favor short plays if treasuries continue upward. We are mid-
support/resistance right now, so there simply are not a lot of 
high percentage plays in the broader markets.  This is the type 
of market in which I favor playing small and taking quick profits 
when they are present. 


 Silence Before The Storm
By John Seckinger

The YM contact found resistance at the highly profiled 8625 area, 
while the ES contract was unable to rise above 910.  With 
profiled support holding as well, who will prevail following the 
Retail Sales report?

Wednesday, December 11th at 4:15 P.M. 

Contract          Net Change     High        Low        Volume    

ES02Z     902.25     +0.75      910.25      895.50      523,288
YM02Z    8565.00    +10.00     8627.00     8485.00       16,762
NQ02Z    1035.50     +5.50     1048.50     1019.00      225,469

ES02Z  =  E-mini SP500 futures    
YM02Z  =  E-mini Dow $5 futures    
NQ02Z  =  E-mini NDX 100 futures     

Note:  The 02Z suffix stands for 2002, December, and will change 
as the exchanges shift the contract month.  The contract months 
are March, June, September, and December.  The volume stats are 
from Q-charts.  

The December Contract is set to expire on December 20th.  Volume 
is still extremely light in the 03H contracts; however, this 
should change in the near term as traders roll out to March.  

Fundamental News:  The equity markets opened lower on Wednesday 
following Intel’s Chairman reiterating that it is premature to 
forecast a rebound in end market demand.  He also touched on the 
fact that there is little growth in industry sales.  After a soft 
start, Semiconductor issues found strength while video-game 
makers and disk drive companies continued to under pressure.  It 
was a weak IPO by Seagate (STX) that gave most disk drive 
companies problems on Wednesday.  In other news, shares on Amgen 
(AMGN) remained relatively unchanged despite word that its 
generic form of Epogen might be delayed.  Shares of Ebay fell on 
Wednesday after word hit that a site (ebayupdates.com) was trying 
to steal credit card information from customers.  Ebay closed 
down 0.89% at 67.59.  

Technical News:  Prices of the 30-year bond (ZB03H) broke out 
higher on Wednesday and closed outside a wedge pattern that 
started back on October 8th.  Reasons included unwinding of hedges 
from a Freddie Mac bond offering, buying from Asian Central 
Banks, and worry over Thursday’s retail sales data.  Is this 
breakout portending a fall in equity prices?  Possibly.  Note:  A 
chart of the 10-year yield contract (tnx.x) closed exactly on a 
bullish trend line that began on October 10th and bisects the low 
on November 12th.  I do put more weight on the ZB03H contract.  
Also interesting was the Sox closing exactly on a daily bearish 
trend line at 323.61.  The index did trade under its 50 DMA 
(316.9) with a 314 intra-day low, before rising to test its 22 
DMA at 331.  Other notes include a possible breakout in the XAU 
and the UTY index.  XAU currently at 70.58, with 72 as the 
breakout level.  The UTY index had a high of 248.48, and just 
missed the 249 breakout area.  


The December Mini-sized Dow Contract (YM02Z)

The contract traded true to form on Wednesday, rising above 
Tuesday’s high of 8579 and testing 8625 soon thereafter.  
Thursday’s Retail Sales report should really set the stage for 
trading during the next few days, and with most contracts closing 
on an important trend line – be prepared for anything.  The 
levels mentioned should still hold psychological importance; 
however, as we have seen before, the 8:30 a.m. number could gap 
the market(s) to an important trading level on the open.  Above 
8625, I will look for a test of 8725 and 8825 if the market 
becomes over exuberant.  On the other hand, a move under the 8480 
area should send the Dow back towards 8400 and then the 38.2% 
retracement level at 8338.  Risk still seems to be on longs’ 
shoulders; however, they could only mean that there are more 
shorts to squeeze.  

Chart of Dow Jones, Daily

A chart of the YM contract shows the relative high at 8736, and 
this will become the objective for the contract if 8632 is 
solidly cleared.  Note that the difference between the YM 
contract and the Dow is 13 points.  If the market rallies, I 
expect that spread to narrow.  The reverse holds true if the 
market sells off.  I certainly can “imagine” the YM contract 
going to 8825 and then consolidating before rolling over, as well 
as a gap lower and then sell-off towards 8300.  I mention this 
because I believe the market will NOT be range bound tomorrow.  
If this turns out to be the case, I would award bulls a slight 
victory and quickly look for the next catalyst.  

Chart of YM02Z, Daily 


Support         Resistance          Pivot    

8515			8625-32		8480
8480			8700-25		8632
8400			8825				

The December E-mini Nasdaq 100 Contract (NQ02Z)

The NDX almost tested 1015 on Wednesday, which would have 
triggered thoughts of a 1000 level; however, an old relative low 
at 1019 saved buyers.  On the other hand, the index did not rise 
above 1050 and bring the 1060 level into view, which now 
corresponds with the 200 Period Moving Average.  The newly formed 
upward trend line (solid blue) should act as support going 
forward, and, because of the importance of the retail sales 
number, traders can look for 1000 to be tested if 1019 is taken 
out (instead of 1015).  The same resistance levels remain.  Note:  
A close above 1060 should portend a higher opening on Friday, 
while a close between 1010 and 1015 would be viewed as bearish.  
If the market closes on 1000, I am not sure that would 
necessarily mean the NQ contract will continue downward in the 
immediate future.  

As far as pattern recognition is concerned, the NQ contract has 
formed a “b” pattern since December 9th and seems to be rested on 
its apex at 1036.  By definition, the apex is a very efficient 
area and very hard to get a feel for direction.  However, a move 
outside the relative highs within the “b” pattern can be telling.  
With that said, aggressive traders can look for bids to come in 
if 1048 is taken out (close enough to 1050), while shorts could 
use 1028.50.  The bearish trend line (blue) comes in at 1023.  
Sometimes the “b” pattern is not close to other significant 
support or resistance lines; however, in this case it might save 
a few points on the upside and roughly 5 on the downside.  If a 
follower of long-liquidation patterns, it might be worth it.  

Chart of NDX, 30-minute


Support        Resistance           Pivot 

1015-19		1045			1050
1000			1050			1017
973			1085			

Bold signifies levels within the NDX.  

The December E-mini S&P 500 Contract (ES02Z)

Support held on Wednesday, but so did Resistance.  The 910 area 
did prove to be too strong for bulls, especially ahead of the 
retail sales number.  Aggressive traders can play a move from 910 
to 915, but expect some solid selling pressure as the contract 
approaches 915.  A close above 915 should portend a move to 927, 
and if the contract comes under pressure, watch for support at 
the 200 PMA (900 level) and the descending trend line (green that 
comes in at 889 and will travel downward).  It is not that 
uncommon for these contracts to give a neutral bias before an 
important economic number; however, it should mean better trading 
opportunities during the next few days after the dust settles.  

Chart of S&P 500 Index, 120-minute

The ES contract opened under the 900 level on Wednesday and 
slightly changed the scope from Tuesday night (looking for 
weakness on a move down through 900).  Example for tomorrow:  If 
the ES gaps above 915 and then trades below 915 (which should 
have been good support), begin thinking of a move to 910 or 905.  
Only if the contract confirms support at 915 does it make sense 
to look for a move to 927.  It is different if the market opens 
at 902 and then trades up through 915.  This should show more 
strength from buyers.  The same theory holds true on a gap lower.  

Chart of ES02Z, 30-minute 


Support          Resistance        Pivot    

900			905.50		910
880-885		910-915		892
869			922			

Bold signifies levels within the S&P 500.  

Good Luck.

Questions are welcomed,

John Seckinger


An anticipatory session

I'd call today's session an "anticipatory" session as stocks 
showed little change on a day when there was no economic data 
released and earning's announcements had homebuilder Toll Brother 
(NYSE:TOL) $19.47 beating estimates by 4 cents a share.  With 
just one stock reporting earnings on or before the bell, the 
markets were left with little daily catalyst and only the 
anticipation of tomorrow's session.

Things should "liven up a bit" before tomorrow's opening bell as 
8 companies from various sectors are slated to report earnings 
before the open.  Auto parts retailer AutoZone (NYSE:AZO) $79.66 
-0.82% and wholesaler Costco (NASDAQ:COST) $28.39 -3.17% will 
release earnings.  With AutoZone $9 off a 52-week high set in 
late October, and Costco setting a new 52-week low, I'm thinking 
investors are anticipating a better earnings showing from AZO 
than they are COST.

Investors didn't look to be anticipating any type of surprises 
from tomorrow morning's release of November's retail sales 
numbers.  Yesterday morning's notes out of Bank of Tokyo-
Mitsubishi and UBS Warburg saying their weekly retail sales index 
showed a -2.3% decline from the Thanksgiving week sales data, 
seemed to have the retailers trading in a very tight range today.  
The Retail HOLDRS (AMEX:RTH) $73.15 -1.28% gave back the bulk of 
yesterday's gain in a tightly traded session of $72.90-$73.58.

Gold stocks as depicted by the Gold/Silver Index (XAU.X) 70.58 
+2.63% recouped the bulk of yesterday's losses and challenged the 
CBOE Internet Index (INX.X) 97.49 +3.5% for today's sector 
winner.  Both sectors can show greater volatility and percentage 
swings, but today's action shows just how range-bound today's 
session was.  Gold stocks most likely found some buyers ahead of 
tomorrow morning's release of the third-quarter government 
current account, which is expected to show a deficit of $-133.6 
billion.  That combined with the Bush administration likely to 
seek legislation that would make permanent last year's $1.3 
trillion, 10-year tax cut packages has "gold bugs" hopeful that 
some type of "flation" (stagflation or inflation) will eventually 
present itself.

The U.S. Dollar Index (dx00y) 105.35 -0.01% was little changed, 
while Treasuries saw buying across the major maturities.  

It's my analysis that today's DIVERGENCE with YIELDS falling 
(buying in Treasuries) and rising prices for gold stocks has the 
market anticipating some type of trouble for broader equities in 
the not too distant future.  The benchmark 10-year YIELD ($TNX.X) 
3.994% fell on the session, closing just a smidge above its 
upward trend from the October lows and just above a trying to 
round higher 50-day SMA.  In my opinion, today's Treasury action 
looks to be a market anticipating some type of negativity and 
needs to be monitored closely.

10-year Treasury YIELD ($TNX.X) - Daily Interval

While stocks have tried to show some stability in the past two 
sessions, there were some rather sharp breaks lower in Treasury 
YIELDs today and the "rate" of decline in my view portends that 
stocks are at risk.  While the "riskier" 30-year YIELD closes 
below its 50-day SMA for a second consecutive session, it's the 
technicals of the 10-year YIELD ($TNX.X) above that look to be at 
a critical juncture near-term.  I view a break below current 
trend caused by further buying in the 10-year as a negative for 
equities.  A further break lower below the 3.885% level would as 
a second step lower would negate the reverse head/shoulder 
pattern in YIELD which had the equity bull in me looking for 
higher stock prices as YIELD moved higher (selling in bonds) and 
cash rotating toward equities.  While that technical scenario is 
still "in play" I do NOT like the fact that the longer-dated and 
RISKIER 30-year YIELD has made a breaking move lower.  

The question I must pose is this.  Why is the MARKET willing to 
buy a 4.865% 30-year YIELD, which is riskier than a 2,5, or 
10-year YIELD and what looks to be a more "ferocious" pace in 
today's session?  While upward trend in the 30-year YIELD 
($TYX.X) 4.865% currently resides at 4.8%, the bond market action 
looks to portend for further lower YIELD.

Tomorrow's economic data now comes front and center.  The above 
work on YIELDS also sets the stage and trading scenario for the 
indexes in tonight wrap.

Dow Industrials Chart - Daily Interval

A trader can establish an upward trend on the Dow, similar to 
that found with more technical merit in the 10-year YIELD chart.  
A bear will scream out, "that's cheating" as a previous upward 
trend was broken several sessions ago.  I agree, and why I call 
the upward trend on the above chart a "cheater's trend."  
However, it allows a trader to enter tomorrows trading with a 
rather unbiased view toward the economic data, and simply allow 
the market to make the call.  Even a bearish trader short/put the 
Dow at 9,000 looks to tomorrow's economic data as a potential 
"risk event" that could have current profits eroding as he/she 
must assess upside risk to 8,800.  Conversely, a break in YIELD 
below trend and the indexes following that lead lower has a bear 
adding to positions and targeting Dow 8,250.  Dow 8,250 might be 
a level correlative with a 10-year YIELD at 3.885%.

I forgot to "flag" it in the Dow, but the recent Dow relative 
high, which was reversed lower, is also December 12th, when the 
ISM Mfg. Index was reported below 50.00 and disappointed 

I should not assume that traders understand that UPSIDE or better 
than expected economic reports before the opening bell that see 
selling in Treasuries BEFORE stocks begin their trading, could 
then bode well for a Dow rebound (other indexes too).  Short-term 
bulls could play the move with a nice tight stop below 
yesterday's Dow low of 8,469.

Today's action saw no change in the Dow's p/f chart, or its 
Bullish % ($BPINDU).  Current bullish % reading is "bear alert" 
at 63.33%.

S&P 500 Index Chart - Daily Interval

As we look at the index charts, it certainly appears that the 
equity and even the bond markets have discounted some type of 
negative news.  Similar to the 10-year YIELD and Dow Industrials, 
the SPX shows similar reversal lower from its 12/02 relative 
high.  It's been anything but easy sledding for a bearish trader 
that short/put the SPX on the break below the 21-day SMA and 
yesterday's and today's stability gives hint that market 
participants now await tomorrow's economic data.  Undoubtedly, 
many bets have been made and those bets may be removed after 
tomorrow morning's economic data.

However, don't forget that at 02:00 PM EST, the FOMC minutes from 
yesterday's FOMC meeting where the board decided to hold interest 
rates steady will be released.  Sometimes traders will find just 
one paragraph or set of comments in the notes and build some 
bullish or bearish scenarios from those comments.  That can 
influence market action.  Just be aware that those notes will be 
released at 02:00 PM and have the shorter-term trader monitoring 
things at that time.

Today's action saw no change in the $SPX.X p/f chart.  While 
today's high of 909.94 was close to 910, which would have been a 
3-box reversal, it wasn't 910, so no entry can be made.  While 
the "externals" showed little movement, the internals had 1 stock 
generating a p/f "buy signal" and the S&P 500 Bullish % ($BPSPX) 
inched up to 64.2% from Tuesday's 64% reading.  Nothing 
meaningful today and still "bull confirmed" at 64.20%.  A reading 
of 62% is needed for a bullish % reversal into "bull correction" 
status and we might be able to envision that, but only with a 
break below 890 in the SPX.

S&P 100 Index Chart - Daily Interval

The OEX is trading in what resembles a little wedge the past five 
sessions.  "Pressure" released up or down from tomorrows economic 
data could drive action over the next several sessions.  Action 
points to the upside are 465 and downside at 452 with an eye on 
Treasury YIELDS for confirmation.

The conventional $5 box of the OEX saw no chart entries today.  
However, the less conventional $2.50 box size that we've shown to 
introduce a little more noise to the OEX chart did show a 3-box 
reversal higher with a trade at 462.50.  This chart entry has the 
bullish support trend (longer-term bullish trend on p/f chart) 
moving up 1-box to 445.00.  This is the p/f charts "critical" 
longer-term support as a trade at 445 would be a break of bullish 
support trend on the $2.50 box, but also trigger a spread-triple-
bottom sell signal on the $2.50 box size at 445.

Today's action saw the OEX Bullish % ($BPOEX) seeing a net loss 
of 1 stock to a point and figure sell signal and the bullish % 
dropping to 64%.  That has the bullish % chart making another "O" 
entry.  Current status remains "bear alert."

NASDAQ-100 Trust (QQQ) - Daily Interval

Technology sectors were rather quiet today and had the QQQ little 
changed.  Today's low trade at $25.32 just barely violated 
Tuesday's low of $25.35, while the NDX.X intra-day low of 
1,109.40 also just barely violated Tuesday's low of 1,109.70.  
Both violations came in the first 10-minutes of trading and most 
likely were on the heels of Intel's (NASDAQ:INTC) $18.16 +0.16% 
CEO's comments that he isn't ready to call a bottom in the 

The QQQ can be a very "emotionally" traded index and market 
makers in NASDAQ stocks that use the QQQ as their hedge for 
inventory will use that "emotion" against a trader.  

If I were a market maker, and a positive market reaction were to 
come from tomorrow morning's economic data, I'd "back off" the 
offer and let the QQQ and NASDAQ stocks rally, say to the $26.18 
level and try and let them rally the QQQ near $27 before firming 
at my offer and measure some order flow.  

My thinking here for us individual traders is this.  Broader 
market volume at both the NYSE and NASDAQ has been light the past 
three sessions, and we can see the QQQ volume also tapering off.  
The last "volume" spike came from just below $27 and that creates 
our "pivot" or key inflection point.  That's where I'd look for 
any type of light volume rally (less that 100 million shares on 
daily basis) to begin to fade as downside risk to $25 is 

Conversely, a break below recent lows and test of $25 has market 
makers then looking to sell $26.18, especially if volume is heavy 
at the $25 level as they provide liquidity to market participants 
in NASDAQ stocks and use any rebounds from $25-$26.18 as 
opportunity to sell short at QQQ offer and hedge any long NASDAQ 
stock inventory that they can't get rid of as NASDAQ bulls become 
more jittery.

Today's action saw no net change in the NASDAQ-100 Bullish % 
($BPNDX).  Current status remains "bull correction" at 70%.

Jeff Bailey

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Top Three Fund Families: #2 Vanguard Funds

The second installment in our Top 3 Fund Families series looks at 
the nation's second largest fund family, the Vanguard Funds Group 
of Valley Forge, Pennsylvania.  Since 1975, millions of investors 
have come and stayed with the world's largest pure no-load mutual 
fund company, choosing Vanguard for their array of low-cost funds 
and variable annuities.

Until Vanguard came along, mutual funds were sold and distributed 
through financial intermediaries and had "load" structures.  When 
John C. Bogle, former chairman and founder of the Vanguard Group 
broke ranks with the industry and started to sell Vanguard mutual 
funds directly to the retail investor, he heralded the age of the 
pure no-load mutual fund.

Bogle's book titled "Bogle on Mutual Funds" provides some insight 
into the firm's guiding principles.  Bogle built Vanguard on the 
premise that investment firms can increase their level of assets 
by reducing their costs to investors.  He saw an industry, which 
would become increasingly price competitive over time, resulting 
in pressure to lower initial costs and annual operating expenses 
to investors.  

Other mutual fund companies such as Fidelity Investments decided 
to go the no-load route as well in building their empire, though 
not all fund families jumped on the no-load bandwagon.  Our fund 
profile last week on the American Funds Group is an example of a 
firm that has kept its "load" structure, believing investors are 
more likely to stay the course and attain success when they work 
with an investment advisor.

Bogle also recognized the link between total return and low cost, 
believing that no-load funds have a distinct advantage over load 
funds "after" adjustment for sales charges.  He also believed it 
was important to keep a lid on annual operating expenses so that 
more of a fund's gross return would be captured for shareholders.  
Most stock funds with very high operating expense ratios haven't 
performed relatively well and have attracted limited cash inflow.

So, the key to investment success for the Vanguard Group and its 
millions of investors is the perpetual link between low cost and 
expense, high performance, and large asset bases.  Throw risk in 
there and you have what Mr. Bogle calls the "eternal triangle of 
investing."  In his book, Bogle tells investors that they should 
never forget that risk, return and cost comprise the three sides 
of the investment triangle; and that unless you're confident the 
greater costs you incur are justified by higher expected returns 
or enhanced value of services, you are better off selecting your 
investments from among lower-costing no-load funds.

In the mutual fund world, costs have a tremendous importance for 
the long-term investor.  Other things held equal, lower expenses 
generally mean higher returns for investors.

Along the line of lower-cost investment strategies, the Vanguard 
Group also developed a reputation for passively managed (indexed) 
fund strategies.  Bogle believed that "index" funds could work in 
the mutual fund business, providing market-style returns with low 
cost to the average investor.  Vanguard index funds don't seek to 
beat the markets they invest in; rather, they simply seek to "be" 
the market.  

Low cost is a key advantage of index funds, and Vanguard has the 
advantage there over other mutual fund companies, using its size 
and sophisticated trading networks to manage billions of dollars 
of retail and institutional indexed portfolios.  Vanguard 500 at 
$72.3 billion in assets is the largest stock index fund today in 
the retail marketplace.  It has a low 0.18% annual expense ratio 
and over the last 10 years has beaten three out of four category 
peers (i.e. large-cap blend funds), using Morningstar data as of 
November 30, 2002.

Today, the Vanguard Group is a global investment management firm 
with total assets of more than $550 billion, per company sources.  
Vanguard's current chairman, John J. Brennan, states on the fund 
website that the firm has never strayed from its fundamental aim 
of providing top-performing, high quality investment products at 
the lowest reasonable cost to investors.  In the next section we 
delve into the array of no-load mutual funds offered by Vanguard 
directly and through retail fund networks.

Fund Overview

The Vanguard Group offers an array of superior-performing funds 
and related financial services that meet the needs of investors, 
with the lowest reasonable cost.  Investors that seek different 
market exposures have a broad range of passively managed (index) 
funds to choose from among all investment styles and strategies.

Vanguard 500 Index Fund (VFINX) was launched on August 31, 1976, 
and since then has grown to over $72 billion in assets.  It has 
been managed by Vanguard index guru Gus Sauter, a key member of 
the Vanguard core management group since October 5, 1987.  This 
core stock strategy seeks investment results that correspond to 
the price and yield performance of the S&P 500 index, by owning 
all stocks in the S&P 500.  The flagship index product has gone 
up at an annual-equivalent rate of 12 percent per year over the 
past 15 years, according to the marketwatch.nytimes.com website.

Other popular index products include Vanguard Total Stock Market 
Index (VTSMX) and Vanguard Total Bond Market Index (VBMFX) funds, 
each with over $24 billion in assets today.  The former seeks to 
provide investment results that correspond to the Wilshire 5000, 
the broadest measure of U.S. equities.  The latter seeks results 
that correspond to the price and yield performance of the Lehman 
Brothers Aggregate Bond Index which measures the total U.S. bond 
market (i.e. investment-grade debt securities).  Vanguard offers 
about 20 index funds covering a variety of investment styles and 
asset classes, which can serve the "core" role in your portfolio.

Vanguard's bond funds are actively managed but are kept close to 
the index benchmarks they seek to match or beat in terms of risk 
and other portfolio characteristics, such as duration and credit 
quality.  The Vanguard Group is one of the few fund companies to 
offer a long-term bond index fund, and a long-term U.S. Treasury 
bond index product.  They have bond funds that limit investments 
to Treasury securities and/or government agency securities, plus 
those that include investments in corporate bonds, mortgages and 
high-yield securities.  

Vanguard GNMA (VFIIX) is the company's most successful bond fund 
product, with assets of $27.2 billion today.  This intermediate-
term government bond fund has been deftly managed by Paul Kaplan 
of Wellington Management Company since March 1994.  Morningstar 
says Kaplan has earned stellar returns over time without making 
big interest-rate bets and uses a variety of techniques to limit 
prepayment risk.  Over the past 15 years, Vanguard GNMA Fund has 
produced an average annual total return of 8.7% for shareholders, 
high by historical bond fund norms.

The Vanguard Group is well known as a leading index-fund manager 
but they also offer some of the industry's best actively managed 
funds.  Vanguard Wellington (VWELX), the oldest/largest balanced 
fund in America, sub-advised by Wellington Management Co. (since 
July 1, 1929) has weathered many economic and market cycles over 
the years remaining true to its conservative balanced investment 
approach (60% stocks and 40% bonds).  One of Wellington's crafty 
veterans, Ernst von Metzsch is retiring at the end of 2002, says 
Morningstar, but the portfolio is being handed over to Ed Bousa, 
another experienced manager.  Over the past 15 years, Wellington 
has produced an annualized total return of 11.6%, with less risk 
than its partial and full equity fund peers.  

Other popular actively managed funds include Vanguard Wellesley 
Income (VWINX), Vanguard Primecap (VPMCX), Vanguard Windsor and 
Windsor II funds (VWNDX/VWNFX), and Vanguard Health Care (VGHCX).  
Vanguard Wellesley Income is similarly managed as the Wellington 
Fund, but emphasizes income and stability over capital growth by 
investing substantially in high quality, fixed income securities.  
Vanguard Windsor and Windsor II funds are large-cap value driven, 
while Vanguard Primecap Fund has large-cap blend characteristics, 
per Morningstar.  Vanguard Health Care provides a broad exposure 
to health care and related stocks.

In the next section, we look at how well Vanguard's mutual funds 
have performed relative to their respective index benchmarks and 
category peer groups.  

Fund Performance

There is more than 80 Vanguard mutual funds with minimum initial 
investments of $25,000 or less in Morningstar's system, of which 
a third of them are 5-star rated overall for risk-adjusted, cost-
adjusted performance relative to category peers.  In addition to 
the 27 highest-rated funds, 29 Vanguard funds have above-average 
4-star ratings from Morningstar.  So out of 81 funds, 56 of them 
(69 percent) are currently rated above average or high on a risk-
adjusted, cost-adjusted basis relative to their category peers.

Popular Vanguard funds with Morningstar's highest 5-star ratings 
include Vanguard GNMA, Vanguard Health Care, Vanguard Wellington 
and Vanguard Wellesley Income.  Vanguard 500 Index Fund holds an 
overall star rating of 4 stars per Morningstar, as does Vanguard 
Total Bond Market Index Fund, Vanguard Primecap and the Vanguard 
Windsor II Fund.  So, investors can take comfort in knowing that 
Vanguard's largest mutual funds are also some of their top rated 
funds.  Vanguard proves that index funds can work with their S&P 
500 index and LB Aggregate Bond index funds both 4-star rated on 
a risk- and cost-adjusted basis.

Below is a performance summary for Vanguard's ten largest funds 
using data from the morningstar.com and marketwatch.nytimes.com 
sites.  Trailing 10-year average returns are through the end of 
November 2002 per Morningstar.  The 15-year numbers are per the 
New York Times' mutual fund section online.

 Average Annual Total Returns (10 Years):
 +10.0% 500 Index (VFINX) 21st percentile
 + 7.2% Vanguard GNMA (VFIIX) 8th percentile
 + 7.2% Total Bond Market Index (VBMFX) 19th percentile
 + 9.4% Total Stock Market Index (VTSMX) 40th percentile
 +10.8% Wellington (VWELX) 8th percentile
 +10.7% Vanguard Windsor II (VWNFX) 24th percentile
 +18.8% Health Care (VGHCX) 1st percentile
 +14.5% Primecap (VPMCX) 2nd percentile
 +10.8% Vanguard Windsor (VWNDX) 23rd percentile
 + 6.0% Vanguard Intermed. Tax-Exempt (VWITX) 22nd percentile

You can see that all but one of these Vanguard funds ranked in 
the top quartile of their respective category for the trailing 
10-year period.  Four of them ranked in their category's first 
decile; six of them still sport double-digit percentage gains, 
something becoming less common today because of the downswing.

A sampling of 15-year annualized returns shows what discipline 
and low expense can translate into over longer periods of time.

 Average Annual Total Returns (15 Years):
 +12.0% Vanguard 500 Index (VFINX)
 +20.6% Vanguard Health Care (VGHCX)
 +14.9% Vanguard Primecap (VPMCX)
 +11.6% Vanguard Wellington (VWELX)
 +11.3% Vanguard Wellesley Income (VWINX)
 +10.9% Vanguard STAR (VSGTX)
 + 9.7% Vanguard Long-Term Corporate (VWESX)
 + 8.7% Vanguard GNMA (VFIIX)
 +10.0% Vanguard Long-Term Treasury (VUSTX)

If you would have invested in the Vanguard Health Care Fund 15 
years ago, you would have experienced volatility but your fund 
investment would have grown at an average annual rate of 20.6%, 
impressive by any standard of performance.  Not worrying about 
trying to beat the market and simply investing in Vanguard 500 
Index Fund 15 years ago would have earned you a 12% annualized 
rate of return.  Many stock mutual funds have come up short of 
that over the past 15 years because they don't generate enough 
alpha (value added over benchmark) to justify the higher costs 
and expenses they impose on investors.  

Finally, a look at Vanguard's industry low fund expense ratios.  
Below is a summary of the annual expense ratios for the top 10 
largest Vanguard funds using Morningstar data.

 Average Annual Expense Ratio (Current):
 0.18% 500 Index (VFINX) 
 0.25% Vanguard GNMA (VFIIX)
 0.22% Total Bond Market Index (VBMFX)
 0.20% Total Stock Market Index (VTSMX)
 0.36% Wellington (VWELX)
 0.40% Vanguard Windsor II (VWNFX)
 0.31% Health Care (VGHCX)
 0.50% Primecap (VPMCX)
 0.41% Vanguard Windsor (VWNDX)
 0.19% Vanguard Intermed. Tax-Exempt (VWITX)

To put Vanguard's expense advantage into perspective, the all-
fund average per Morningstar is currently 1.38% of assets per 
annum.  So, a fund with a 1.38% expense ratio has to beat the 
Vanguard 500 Index fund by an average of 1.20% a year to keep 
pace with it, due to expense alone.  Even Vanguard's actively 
managed funds benefit from their low-cost advantage.  It's no 
wonder that so many of the Vanguard mutual funds receive high 
marks from independent fund trackers, such as Morningstar and 


Since 1975 the Vanguard Group has helped millions of investors 
reach their capital growth and current income investment goals.  
A stable of passively managed index and actively managed funds 
offer potential investors many suitable options to select from 
across a variety of asset classes and market sectors.  All the 
Vanguard funds benefit from the firm's low-cost advantage that 
allowed shareholders to put more return in their pockets. 

John C. Bogle remains a voice in the mutual fund industry, and 
his low-cost, high-performance, high-asset growth philosophies 
are the firm's guiding principles today.  For more information, 
or to download a prospectus, log on to www.vanguard.com.


Steve Wagner
Editor, Mutual Investor


Picking The Right Target
by Mark Phillips

Over the past week, we've been talking about the importance of
confirmation in selecting trades, especially in the option
world.  Due to the strongly positive flood of reader email from
the last two installments, I thought it would be useful to
extend the concept a little further.

One of the central points I was trying to make last week was
that there is no magical, works-all-the-time indicator.  All
of technical analysis boils down to pattern recognition and
degrees of confirmation between various indicators.  There are
no guarantees.  As technicians, our job is to correctly apply
the tools of our trade to pick solid entry points on high-odds
targets.  We've already spent a fair amount of time covering
the technical aspects of what makes a good trade in a given
stock.  Where I think we ought to focus our attention today
is on picking winning trade candidates. 

I've had a number of readers write in recently, asking about
how to find solid trade candidates in the first place.  My
answer is always, "They are where you find them".  I'm not
normally so flip, but there's a reason for my response.  I
think you can pick ANY stock and find trading opportunities
on a regular basis.  It's all about getting familiar with the
way that stock trades.  There's an old saying about familiarity
breeding contempt, but in the trading world, it is my opinion
that familiarity breeds profits.  In fact, I think any
accomplished trader can make a steady income stream from only a
handful of stocks that the trader follows closely.

The reason I want to talk about this aspect of trade selection
today is that I think there are a lot of traders that are
constantly searching for that perfect stock to trade, scanning
innumerable possibilities on a regular basis.  To me, that
endeavor is akin to trying to find the perfect, can't-lose
technical indicator.  Since a picture is worth a thousand words,
let's spend the rest of our time looking at an example, and I
think you'll see what I mean.

Up until recently, I frequently would use generic stock symbols
like ABC or XYZ for hypothetical examples in my articles.  But
then a couple weeks ago, I noticed that there was a new put
play listed on the OI site on ABC.  Much to my surprise, I
found that it was a real stock symbol for the company
AmerisourceBergen Corporation.  I've never traded the stock
before, but I can recognize high-odds setups on the chart when
I see them.

Throughout September and October, ABC was banging into solid
resistance in the $74-75 area, but was completely unable to
break through.  There wasn't any trading signal available at
that point, but the lack of an ability to break through
resistance hinted at weakness in the future.  The first
confirmation came in mid-October, when the stock traded down
to just below $70, generating the first PnF Sell signal in
close to a month.  Since that column of O's came to rest right
on the bullish support line, I would have shied away from
entries on weakness right there.  But another failed rally near
the $75 level would be just the ticket for a low-risk/high
potential reward bearish trade.

Sure enough, the last week of October had ABC rallying to and
failing right at the $75 level before the bottom fell out in
early November.  Then the stock took out support at the 200-dma
and then the $65 level before a big gap down on November 19th
that took the stock down to roughly $56.  For traders with a
longer time horizon, that would have made for a great 3-4 week
trade.  Buy a put on the rollover near $75 and then exit on the
rebound from $56.  I doubt there are many traders that would
have held on through all the intervening volatility, but the
point is that there was a $19 range in which to capture a
profit.  I don't know about you, but that's more than enough
for me!

Alright, that's water under the bridge though.  OI initiated
coverage of ABC as a put on November 14th when the stock was
trading at $63.80 and closed out the play on the 19th when the
stock rebounded back to the $59 level.  What I really want to
talk about here is how to capitalize on future opportunities
in the stock.  We've covered a lot of ground here without the
benefit of a chart, so let's delve into one now.

Daily Chart of ABC - 12/02/02

This is the picture that ABC presented us with as of the close
of trading last Monday.  The second solid bounce off of the $56
level reinforces it as strong support in my mind, so I don't
want to try shorting a breakdown until I see a trade at $55,
which would create a new PnF Sell signal and give us a new
price target from the vertical count of $46.  But that's not
the most likely scenario that would have jumped out at me.  I
see the top of the mid-November gap as a price magnet that will
likely be touched sooner than later.  But there are a lot of
traders that got trapped on that big gap down and will use a
return to the $63-64 price level to get out.  That means
significant overhead supply.  At the other end of the near-term
price spectrum, I see $56 as pretty strong support.

That gives me two actionable levels over the near term, if I
wanted to trade ABC.  Buy puts on a rally failure in the $63-64
area is my favorite trade.  But a close second would be buying
calls on another rebound from the $56 level.  Both of these
trades present very favorable risk/reward ratios.  The put trade
would have the stop set at $65, and my target to the downside
would be $56-57.  The call trade can be managed with a tight
stop at $55, targeting $63-64 to the upside.  In both cases, we
would be risking $1-2 to potentially make $6-8.  I'll take odds
like that every day of the week and twice on Sunday!  So let's
see what would have happened.

Daily Chart of ABC - 7 Trading Days Later

Sure enough, the second bounce from the $56 level actually stuck
and ABC clawed its way up to the $63 level by early December.
The stock gave us 3 great entry opportunities, with intraday
trades up to $63.50, $63.75 and $63.80 before daily Stochastics
finally rolled over and led to another big decline.  Just taking
the most recent entry opportunity provided on Monday morning
would have yielded more than a $6 drop in the stock in just 3
days time.  Note that the stock was right back at the $56 support
level on Wednesday.  Is this a good entry opportunity to the
long side?  I really don't know, as the declining Stochastics
make me a bit nervous.  A quick look at the PnF chart though,
shows a Buy signal still in effect, with a $75 target currently
in play.  We'd need a trade at $55 in order to invalidate that
target, so I'd probably go with the odds and take the trade.
There's $2.15 of downside risk, with the likelihood of another
trip to the top of the gap ($6-7 upside potential) over the near
term and then up to $75 ($18 potential upside) over the longer

The point I'm trying to make (and hopefully I succeeded) is
that it doesn't matter what stocks you decide to trade.  Just
like it doesn't really matter what selection of technical
indicators you elect to use.  This should all fit into your
business plan -- select in advance what you are going to trade,
and how you are going to trade it.  Rest assured that if you
select equities or indices that have liquidity and volatility,
then the solid trading opportunities will come.  Our job is to
exercise the necessary patience while waiting for the high-odds
opportunities to arrive.  Put another way, pick your targets
and then pull the trigger when they drift into range.

Traders that can put this habit into consistent practice will
be successful, whether their chosen trading vehicle is options,
stocks, or futures.  I can tell you this.  Waiting for my targets
to wander into range is certainly a lot easier than trying to
charge through the forest of optionable stocks, trying to catch
the one that looks to be moving right now.  Look at any stock
trading above the $20 level with an average weekly range greater
than $2-3, and I'm willing to bet there are a couple of solid
trades that set up each and every month.  Build a stable of 6-8
stocks to follow, and you should never suffer from a lack of
solid trading opportunities.

So coming back to the title of tonight's article, I don't think
there is a "right target".  A more appropriate endeavor is to
pick YOUR target and then patiently wait for it to come to you.
I hope that helps in your trade selection process!

Have a great week!


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offers true direct access to each option exchange offers stop and
stop loss online option orders offers contingent option orders
based on the price of the option or stock offers online spread
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Percentage Plays

A look at the end of day numbers makes it appear 
as though nothing really happened today. However, 
from a swing trade standpoint, that is certainly 
not the case.

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

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The Option Investor Newsletter                Wednesday 12-11-2002
Copyright 2002, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.

In Section Two:
Stop Loss Updates: none
Dropped Calls: none
Dropped Puts: none
Play of the Day: Call - MERQ
 Rally Hopes Alive...Barely!

Updated on the site tonight:
Market Watch
Market Posture

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Note: Options involve risk. Risk disclosure:

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guide book:

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



MERQ - Mercury Interactive - $29.80 +0.99 (-0.22 for the week)

Company Description:
Mercury Interactive, the leading provider of software and 
services that optimize automated business processes, delivers a 
complete, integrated family of enterprise testing, production 
tuning and performance management solutions that enable customers 
to optimize business processes and maximize business results. 
(source: company press release)

Most Recent Write-Up:
Software bulls haven't had much to cheer about over the past 
week.  Pressured by a weakening NASDAQ, the GSO.X moved steadily 
lower after it spiked above 120 on December 2nd.  The subsequent 
breakdown below the 200-dma sent the software index plummeting 
towards the 50-dma at 100.  Now that the GSO has started to 
rebound above this level of support, it looks like the short-term 
downtrend may have come to an end.  Sector behemoth MSFT is also 
above support at its converging 50-day and 200-day moving 
averages.  This should help to put a floor under the software 
group.  We're picking MERQ as a bullish sector play because of 
the way shares have pulled back to support at the 200-dma.  The 
stock leveled out at this moving average after a rapid decline 
from the relative high of $35.68.  The company's CEO commented 
this weekend that he expected the company's annual sales to grow 
to $1 billion over the next 3-5 years.  By contrast, reported 
revenue for the first nine months of 2002 has ticked in at $282 
million.  While that bullish forecast hasn't led to any explosive 
upside movement, it seemed to effectively halt the two-week 
decline.  Shares outperformed both the NASDAQ and GSO.X on 
Tuesday after successfully testing the 200-dma ($28.97).  The 
daily stochastics, which are just beginning to reverse from 
oversold levels, offer technical encouragement for the bulls.  
With no significant levels of overhead resistance, we think MERQ 
could quickly reach the $35.00 area.  Traders can look for a move 
over $30 and intraday support over that level for entry.   Our 
stop will be placed at $28.00, slightly under today's low. 

Why This is Our Play of the Day:
MERQ topped out at $30.00 on Tuesday. In spite of the morning's 
sell-off, the stock opened on a tear after the announcement that 
Siebel is using Mercury's enterprise testing software to deliver 
Siebel Test Services.  The rally took the stock over $31, where 
it found support for most of the afternoon, in spite of a 
volatile day for the broader markets. We like the move and the 
resilience throughout the day.  New entries can look for a 
pullback to support at $30 or a move up to $32, which will 
register a PnF reversal into a bullish column of "X."

****** December Contracts Expire Next Week ***************
BUY CALL DEC-25 RQB-LE OI=1746 at $6.40 SL=3.20
BUY CALL DEC-30*RQB-LF OI=4290 at $2.25 SL=1.10
BUY CALL JAN-25 RQB-AE OI= 712 at $7.20 SL=3.60
BUY CALL JAN-30 RQB-AF OI=2259 at $3.80 SL=1.90

Average Daily Volume = 3.88 mil

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offers true direct access to each option exchange
offers stop and stop loss online option orders
offers contingent option orders based on the price of the
option or stock
offers online spread order entry for net debit or credit
offers fast option executions

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more; call 1-888-889-9178 or click for more information.



In The Middle

To Read The Rest of The OptionInvestor.com Market Watch Click Here


Turning Around

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Investor's Year-End Rally Hopes Alive...Barely!
By Ray Cummins

Stocks edged higher today, despite reports of corporate job cuts
and renewed concerns about foreign terrorist activity.

The Dow Jones Industrial Average added 14 points to close at 8,598
on strength in Eastman Kodak (NYSE:EK), AT&T (NYSE:T), Honeywell
(NYSE:HON) and Dupont (NYSE:DD).  Technology stocks continued to
rebound from Monday's drubbing with the NASDAQ ending up 5 points
at 1,396.  Software, telecom and Internet stocks were among the
leaders in the hi-tech segment.  The broader S&P 500-stock index
remained relatively unchanged at 904 as gains in insurance, gold,
and utility stocks offset losses in drug, agricultural, and oil
service issues.  Activity was lighter than normal and the volume
intensified the market's volatility.  Trading volume was a thin
1.2 billion shares on the NYSE and 1.4 billion on the technology
exchange.  Winners outpaced losers 17 to 14 on the Big Board and
6 to 5 on the NASDAQ.  In the bond market, Treasurys edged higher
as traders sought a safe haven with stocks under renewed selling
pressure.  The 10-year Treasury note rose 8/32 at 99 26/32 to
yield 4.02%.




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.

Editors note:  A new data field; Simple Yield, has been added to
the position specifics for all (uncovered) sold options.  However
the summaries have yet to be updated and this component will not
be calculated for previous candidates.  Time permitting, the new
summary field will be completed prior to the December options
Naked Puts

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

CCMP     DEC    40   38.80  54.16   $1.20   7.04%
CDWC     DEC    40   39.15  47.04   $0.85   5.10%
FRX      DEC    85   83.05  93.11   $1.95   5.14%
GILD     DEC    32   31.85  37.58   $0.65   4.41%
KLAC     DEC    30   29.25  38.86   $0.75   6.06%
NBIX     DEC    35   34.30  45.00   $0.70   4.64%
AZO      DEC    75   73.05  80.32   $1.95   6.05%
COCO     DEC    30   29.40  35.43   $0.60   5.89%
GILD     DEC    30   29.40  37.58   $0.60   5.36%
IGEN     DEC    30   29.15  40.51   $0.85   8.01%
MSFT     DEC    50   49.00  54.01   $1.00   4.62%
NBIX     DEC    35   33.85  45.00   $1.15   9.08%
SNPS     DEC    35   34.50  44.79   $0.50   4.31%
CYMI     DEC    25   24.70  33.55   $0.30   4.33%
IR       DEC    35   34.50  41.05   $0.50   4.97%
LLTC     DEC    25   24.75  29.25   $0.25   3.84%
MERQ     DEC    25   24.65  29.80   $0.35   5.33%
QCOM     DEC    32   32.10  39.61   $0.40   4.31%
QLGC     DEC    30   29.60  37.66   $0.40   4.67%
SYK      DEC    60   59.15  65.98   $0.85   4.15%
TTWO     DEC    22   22.20  27.00   $0.30   4.91%
BSX      DEC    40   39.55  42.40   $0.45   5.88%
C        DEC    35   34.55  36.79   $0.45   6.81%
COF      DEC    27   27.20  32.95   $0.30   7.92%
GM       DEC    32   32.20  36.95   $0.30   5.85%
PPD      DEC    22   22.25  29.14   $0.25   7.96%

With the recent volatility in the market, it is very
important to maintain a close watch on any positions
that move near their respective sold (short) strikes.

Naked Calls

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

ABK      DEC    65    65.90  59.32   $0.90   4.88%
ATK      DEC    65    66.05  58.74   $1.05   5.24%
EXPE     DEC    80    81.05  70.74   $1.05   5.16%
NVLS     DEC    38    37.80  30.84   $0.30   7.73%
QLGC     DEC    45    45.50  37.66   $0.50   8.80%

Put-Credit Spreads

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

FCN     41.18  39.91  DEC   30  35  0.55  34.45  $0.55   Open
MSFT    57.03  54.01  DEC   48  50  0.30  49.70  $0.30   Open
SNPS    47.35  44.79  DEC   35  40  0.60  39.40  $0.60   Open
COLM    40.85  44.77  DEC   30  35  0.60  34.40  $0.60   Open
CCMP    53.80  54.16  DEC   40  45  0.50  44.50  $0.50   Open
ROOM    68.94  62.11  DEC   55  60  0.50  59.50  $0.50   Open
WFMI    50.55  53.58  DEC   40  45  0.30  44.70  $0.30   Open
XL      80.15  82.87  DEC   70  75  0.50  74.50  $0.50   Open
AMGN    46.93  47.08  DEC   40  43  0.25  42.25  $0.25   Open
NKE     46.10  43.29  DEC   40  43  0.25  42.25  $0.25   Open
XAU     68.03  68.77  DEC   60  65  0.60  64.40  $0.60   Open

Call-Credit Spreads

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

CAH     70.01  63.08  DEC   85  80  0.55  80.55  $0.55   Open
FNM     68.21  65.09  DEC   80  75  0.75  75.75  $0.75   Open
LLL     44.49  43.30  DEC   55  50  0.50  50.50  $0.50   Open
TOT     67.37  66.50  DEC   80  75  0.45  75.45  $0.45   Open
CAH     75.70  63.08  DEC   75  70  0.80  70.80  $0.80   Open
NVS     38.40  37.15  DEC   45  40  0.50  40.50  $0.50   Open
ERTS    65.54  62.99  DEC   70  65  0.50  65.50  $0.50   Open
LEN     50.25  49.15  DEC   60  55  0.40  55.40  $0.40   Open
MMM    128.00 125.10  DEC  135 130  0.20 130.20  $0.20   Open

Positions in Barr Labs (NYSE:BRL) and Apache Oil (NYSE:APA)
have been closed to limit losses.

Credit Strangles

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

KBH      DEC     50C    52.00   41.08   $2.00    7.68%
KBH      DEC     40P    38.75   41.08   $1.25    6.67%
THO      DEC     40C    40.50   38.81   $0.50    4.34% ***
THO      DEC     30P    29.50   38.81   $0.50    4.46%

Conservative traders should have closed the Thor Industries
(NYSE:THO) position when the issue moved up and out of the
recent trading-range top (near $37) on heavy volume.  The KB
Home (NYSE:KBH) strangle is also an early-exit candidate with
the issue moving towards the sold put strike ($40) after an
analyst downgrade.

Synthetic Positions:

No Open Positions

Questions & comments on spreads/combos to Contact Support


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


BULLISH PLAYS - Premium Selling

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

AMGN - Amgen  $47.27  *** Good News Coming? ***

Amgen (NASDAQ:AMGN) is a biotechnology company that discovers,
develops, manufactures and markets human therapeutics based on
advances in cellular and molecular biology.  Amgen manufactures
and sells human therapeutic products including Epogen, Neupogen,
Aranesp, Neulasta and Kineret.  Amgen focuses its research and
development efforts on therapeutics delivered in the form of
proteins, monoclonal antibodies and small molecules in the areas
of nephrology, cancer, inflammation and neurology and metabolism.
The company has research facilities in the United States and has
clinical development staff in the United States, the European
Union, Canada, Australia and Japan.  Amgen has acquired Immunex,
a biopharmaceutical firm dedicated to developing immune system
science to protect human health.  Immunex has developed two
major products, Enbrel and Leukine, and has two other products,
Novantrone and Thioplex, which can be used in treating multiple

AMGN - Amgen  $47.27

PLAY (sell naked put):

Action    Month &  Option    Open    Last  Cost    Max.  Simple
Req'd     Strike   Symbol    Int.    Price Basis  Yield  Yield

SELL PUT  DEC 42.5 AMQ XV    2,800   0.30  42.20   7.0%   0.7%
SELL PUT  DEC 45   AMQ XI    8,129   0.75  44.25  14.6%   1.7%
SELL PUT  JAN 37.5 AMQ MU    3,906   0.55  36.95   4.5%   1.5%
SELL PUT  JAN 40   AMQ MH   12,597   0.80  39.20   5.3%   2.0% *

MERQ - Mercury Interactive  $31.17  *** New Siebel Contract! ***

Mercury Interactive (NASDAQ:MERQ) is a provider of integrated
performance management solutions that enable businesses to test
and monitor their Web-based applications.  Its software products
and hosted services help Global 2000 companies enhance the user
experience by improving the performance, availability, reliability
and scalability of their Web-based applications.  Its many hosted
services provide its customers with a cost-effective solution that
quickly meets business needs without dedicating significant time
and internal resources.  Its integrated performance management
solutions enable customers to more quickly identify and correct
problems before users experience them.  The company also provides
outsourced load testing and Web performance monitoring services
that complement its software products.

MERQ - Mercury Interactive  $31.17

PLAY (sell naked put):

Action    Month &  Option    Open    Last  Cost    Max.  Simple
Req'd     Strike   Symbol    Int.    Price Basis  Yield  Yield

SELL PUT  DEC 30   RQB XF    1,067   0.85  29.15  23.7%   2.9%
SELL PUT  JAN 22.5 RQB MX      741   0.45  22.05   5.5%   2.0% *
SELL PUT  JAN 25   RQB ME    2,937   0.70  24.30   8.2%   2.9%

NBIX - Neurocrine Biosciences  $45.94  *** Premium Selling! ***

Neurocrine Biosciences (NASDAQ:NBIX) develops and intends to
commercialize drugs for the treatment of neurologic and endocrine
system-related diseases and disorders.  The company's product
candidates address many worldwide pharmaceutical markets such as
insomnia, anxiety, depression, cancer, diabetes and multiple
sclerosis.  The company has almost 20 programs in various stages
of research and development, including seven programs in clinical
development.  The company's lead clinical development program is a
drug for the treatment of insomnia that is being evaluated in Phase
III clinical trials.

NBIX - Neurocrine Biosciences  $45.94

PLAY (sell naked put):

Action    Month &  Option    Open    Last  Cost    Max.  Simple
Req'd     Strike   Symbol    Int.    Price Basis  Yield  Yield

SELL PUT  DEC 45   UOT XI     641    1.20  43.80  21.8%   2.7%
SELL PUT  JAN 40   UOT MH       0    1.25  38.75   7.5%   3.2% *
SELL PUT  JAN 45   UOT MI       0    2.80  42.20  11.4%   6.6%

OMC - Omnicom Group  $68.23  *** On The Rebound! ***

Omnicom (NYSE:OMC) is a marketing and corporate communications
company.  Omnicom has grown its strategic holdings to over 1,500
subsidiary agencies operating in more than 100 countries.  The
company's wholly and partially owned businesses provide various
communications services to clients on a global, pan-regional and
national basis.  The firm's agencies provide an extensive range
of marketing and corporate communications services, including
advertising, brand consultancy, crisis communications, custom
publishing, database management, digital-interactive marketing,
direct marketing, directory and business-to-business advertising,
employee communications and environmental design.  Omnicom also
provides field marketing, healthcare communications, marketing
research, media planning and buying, multi-cultural marketing,
non-profit marketing, promotional marketing, public affairs,
public relations, recruitment and specialty communications, and
sports and event marketing.

OMC - Omnicom Group  $68.23

PLAY (sell naked put):

Action    Month &  Option    Open    Last  Cost    Max.  Simple
Req'd     Strike   Symbol    Int.    Price Basis  Yield  Yield

SELL PUT  DEC 65   OMC XM    2,198   0.70  64.30   9.6%   1.1%
SELL PUT  JAN 55   OMC MK    3,399   0.70  54.30   3.9%   1.3%
SELL PUT  JAN 60   OMC ML    4,269   1.35  58.65   5.4%   2.3% *
SELL PUT  JAN 65   OMC MM    2,828   2.55  62.45   7.9%   4.1%

PPD - Pre-Paid Legal Services  $28.96  *** 6-Month High! ***

Pre-Paid Legal Services (NYSE:PPD) was one of the first companies
in the United States organized solely to design, underwrite and
market legal expense plans.  The company's legal expense plans
(referred to as Memberships) currently provide for a variety of
legal services in a manner similar to medical reimbursement plans.
Plan benefits are provided through a network of independent law
firms, typically one firm per state or province.  Members have
direct, toll-free access to their Provider law firm rather than
having to call for a referral.  Legal services include unlimited
attorney consultation, traffic violation defense, auto-related
criminal charges defense, letter writing/document preparation,
will preparation and review and a general trial defense benefit.

PPD - Pre-Paid Legal Services  $28.96

PLAY (sell naked put):

Action    Month &  Option    Open    Last  Cost    Max.  Simple
Req'd     Strike   Symbol    Int.    Price Basis  Yield  Yield

SELL PUT  DEC 25   PPD XE    6,808   0.30  24.70  12.8%   1.2%
SELL PUT  JAN 20   PPD MD      149   0.35  19.65   4.7%   1.8%
SELL PUT  JAN 22.5 PPD MX      388   0.95  21.55  11.6%   4.4% *
SELL PUT  JAN 25   PPD ME      875   1.70  23.30  15.0%   7.3%

QCOM - Qualcomm  $39.54  *** Entry Point! ***

Qualcomm (NASDAQ:QCOM) is a developer and supplier of code
division multiple access (CDMA)-based integrated circuits
and system software for wireless voice and data communications
and global positioning system (GPS) products.  The company 
offers complete system solutions, including software and 
integrated circuits for wireless handsets and infrastructure 
equipment.  This complete system solution approach provides 
customers with advanced wireless technology, enhanced component
integration and interoperability, as well as reduced time to 

QCOM - Qualcomm  $39.54

PLAY (sell naked put):

Action    Month &  Option    Open    Last  Cost    Max.  Simple
Req'd     Strike   Symbol    Int.    Price Basis  Yield  Yield

SELL PUT  JAN 32.5 AAW MZ    9,561   0.65  31.85   5.7%   2.0% *
SELL PUT  JAN 35   AAW MG   21,696   1.10  33.90   7.3%   3.2%
SELL PUT  JAN 37.5 AAW MU    3,567   1.75  35.75   9.3%   4.9%

SYMC - Symantec  $42.55  *** Brokerage Upgrade! ***

Symantec (NASDAQ:SYMC) provides a broad range of content and
network security solutions to individuals and enterprises.  The
company is a provider of virus protection, firewall, virtual
private network, vulnerability management, intrusion detection,
remote management technologies and security services to various
consumer groups and enterprises around the world.  The company
currently views its business in five primary operating segments:
Consumer Products, Enterprise Security, Administration, Services
and Other.
SYMC - Symantec  $42.55
PLAY (sell naked put):

Action    Month &  Option    Open    Last  Cost    Max.  Simple
Req'd     Strike   Symbol    Int.    Price Basis  Yield  Yield

SELL PUT  DEC 40   SYQ XH    4,162   0.50  39.50  11.3%   1.3%
SELL PUT  JAN 35   SYQ MG    2,932   0.70  34.30   5.7%   2.0% *
SELL PUT  JAN 40   SYQ MH    2,442   1.85  38.15   9.3%   4.8%


BULLISH PLAYS - Credit Spreads

These candidates are based on the underlying issue's technical
history or trend.  The probability of profit in these positions
may also be higher than other plays in the same strategy, due to
small disparities in option pricing however, each play should be
evaluated for portfolio suitability and reviewed with regard to
your strategic approach and trading style.

EK - Eastman Kodak  $38.22  *** New 52-Week High! ***

Eastman Kodak Company (NYSE:EK) is engaged mainly in developing,
manufacturing and marketing traditional and also digital imaging
products, services and solutions for consumers, professionals,
healthcare providers, the entertainment industry and commercial
customers.  The firm is a major participant in the "infoimaging"
industry, which is composed of devices (digital cameras as well
as personal data assistants), infrastructure (online networks and
delivery systems for images) and services and media (software,
film and paper enabling people to access, analyze and print
images).  Kodak uses its technology, market reach and a host of
industry partnerships to provide products and services for its
customers who need the information-rich content that images can

EK - Eastman Kodak  $38.22

PLAY (conservative - bullish/credit spread):

BUY  PUT  JAN-30.00  EK-MF  OI=30305  A=$0.30
SELL PUT  JAN-35.00  EK-MG  OI=23843  B=$0.75
POTENTIAL PROFIT(max)=11% B/E=$34.50

MRX - Medicis Pharmaceutical  $48.86  *** Rally Underway! ***

Medicis Pharmaceutical (NYSE:MRX) is a specialty pharmaceutical
company focusing primarily on developing and marketing drugs in
the United States for the treatment of dermatological, pediatric
and podiatric conditions.  The company offers a range of drugs
addressing various conditions including acne, fungal infections,
asthma, rosacea, hyperpigmentation, photoaging, psoriasis, eczema,
skin and skin-structure infections, seborrheic dermatitis, head
lice and cosmesis (improvement in the texture and appearance of
skin).  Medicis' pharmaceutical franchises are divided between
the dermatological and non-dermatological fields.  The company's
dermatological field represents products for the treatment of
acne and acne-related dermatological conditions and non-acne
dermatological conditions.  The firm's non-dermatological field
represents products for the treatment of asthma and urea cycle

Note: Target a higher premium in this initially, to allow for a
brief consolidation in the underlying issue.

MRX - Medicis  $48.86

PLAY (very conservative - bullish/credit spread):

BUY  PUT  JAN-40.00  MRX-MH  OI=212  A=$0.25
SELL PUT  JAN-45.00  MRX-MI  OI=44   B=$0.55
POTENTIAL PROFIT(max)=8% B/E=$44.60


BULLISH PLAYS - Synthetic Positions

These stocks have excellent chart patterns with well established
technical support areas and favorable option premiums.  Traders
with a bullish outlook on the underlying issues may find the
risk-reward outlook in these positions attractive however, they
should also be evaluated for portfolio suitability and reviewed
with regard to your personal investing criteria.

EASI - Engineered Support  $37.25  *** Solid Earnings! ***

Engineered Support Systems (NASDAQ:EASI) along with its various
subsidiaries, designs and manufactures military support equipment
and electronics for the United States armed forces.  The company
also engineers and manufactures air handling and heat transfer
equipment, material handling equipment and custom molded plastic
products for commercial and industrial users. Engineered Support
Systems' six wholly owned subsidiaries are Systems & Electronics
(SEI), Engineered Air Systems (Engineered Air), Keco Industries,
(Keco), Engineered Coil Company (d/b/a Marlo Coil), Engineered
Electric Company (d/b/a Fermont) and Engineered Specialty

EASI - Engineered Support Systems  $37.25

PLAY (very aggressive - bullish/synthetic position):

BUY  CALL  JAN-40.00  UFE-AH  OI=119  A=$1.20
SELL PUT   JAN-35.00  UFE-MG  OI=21   B=$1.20
TARGET PROFIT=$0.75-$1.25 B/E=$34.90

Note:  Using options, the position is similar to being long the
stock.  The initial collateral requirement for the sold (short)
put is approximately $1,375 per contract.  Do not initiate this
play if you do not want to own (or can not afford to buy) the
underlying stock.



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

CCMP - Cabot Micro  $51.37  *** Profit-Taking Underway! ***

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

CCMP - Cabot Microelectronics  $51.37

PLAY (less conservative - sell naked call):

Action    Month &  Option    Open    Last  Cost    Max.  Simple
Req'd     Strike   Symbol    Int.    Price Basis  Yield  Yield

SELL CALL DEC 55   UKR LK   1,664    0.65  55.65   12.5%  1.2%
SELL CALL JAN 55   UKR AK     807    2.60  57.60   11.0%  4.5%
SELL CALL JAN 60   UKR AL   1,974    1.35  61.35    8.4%  2.2% *

EXPE - Expedia  $70.66  *** Pure Premium-Selling! ***

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

EXPE - Expedia  $70.66

PLAY (conservative - sell naked call):

Action    Month &  Option    Open    Last  Cost    Max.  Simple
Req'd     Strike   Symbol    Int.    Price Basis  Yield  Yield

SELL CALL DEC 75   UED LO   2,459    0.50  75.50   6.9%   0.7%
SELL CALL JAN 75   UED AO   1,663    2.75  77.75   8.5%   3.5%
SELL CALL JAN 80   UED AP   1,440    1.35  81.35   5.5%   1.7% *


BEARISH PLAYS - Credit Spreads

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

ERTS - Electronic Arts  $60.68  *** Rolling Over! ***

Electronic Arts (NYSE:ERTS) operates in two principal business
segments globally: EA's Core business segment comprises the
creation, marketing and distribution of entertainment software,
while the EA.com business segment is composed of the creation,
marketing and distribution of entertainment software which can
be played or sold online, ongoing management of subscriptions
of online games and Website advertising.

ERTS - Electronic Arts  $60.68

PLAY (very conservative - bearish/credit spread):

BUY  CALL  JAN-75.00  EZQ-AO  OI=603   A=$0.30
SELL CALL  JAN-70.00  EZQ-AN  OI=6147  B=$0.70
POTENTIAL PROFIT(max)=9% B/E=$70.45

ITMN - InterMune  $29.29  *** Rally At An End? ***

InterMune (NASDAQ:ITMN), formerly InterMune Pharmaceuticals, makes
and commercializes products for the treatment of serious pulmonary
and infectious diseases and cancer.  In the United States, the firm
markets its lead product, ACTIMMUNE, for the treatment of chronic
granulomatous disease, a life-threatening congenital disorder of
the immune system, and severe, malignant osteopetrosis, also a
life-threatening congenital disorder causing an overgrowth of bony
structures.  Globally, InterMune markets Amphotec for the treatment
of invasive aspergillosis, a life-threatening fungal infection.
The firm has mid- or advanced-stage trials underway for ACTIMMUNE
and Amphotec in a range of new disease indications; idiopathic
pulmonary fibrosis, infections caused by various fungi that attack
patients with weakened immune systems, ovarian cancer, other types
of cancer and cystic fibrosis.  

ITMN - InterMune  $29.29

PLAY (conservative - bearish/credit spread):

BUY  CALL  JAN-40.00  IQY-AH  OI=1296  A=$0.25
SELL CALL  JAN-35.00  IQY-AG  OI=3592  B=$0.75
POTENTIAL PROFIT(max)=11% B/E=$29.45


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