Option Investor

Daily Newsletter, Sunday, 05/18/2003

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The Option Investor Newsletter                   Sunday 05-18-2003
Copyright 2003, 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: Expired
Futures Market: Conflicting Signals
Index Trader Wrap: What Me Worry?
Editor's Plays: Competition is Good
Market Sentiment: Least Resistance?
Ask the Analyst: Shut down your account for vacation?  No way!
Coming Events: Earnings, Splits, Economic Events

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
        WE 5-16         WE 5-09         WE 5-02         WE 4-25
DOW     8678.97 + 74.37 8604.60 + 18.92 8582.68 +276.33 - 31.30
Nasdaq  1538.53 + 18.38 1520.15 + 17.27 1502.88 + 68.34 -   .96
S&P-100  475.72 +  3.47  472.25 +   .38  471.87 + 15.77 +  2.49
S&P-500  944.30 + 10.89  933.41 +  3.33  930.08 + 31.27 +  5.23
W5000   8989.85 +106.51 8883.34 + 49.28 8834.06 +308.17 + 59.04
RUT      414.67 +  1.14  413.53 +  5.86  407.67 + 19.17 +  4.80
TRAN    2419.31 - 42.87 2462.18 +  1.38 2460.80 +108.19 -  9.58
VIX       21.01 -  1.03   22.04 -  1.57   23.61 -  0.29 -   .69
VXN       31.02 -  1.07   32.09 -  0.27   32.36 -  1.34 -  2.18
TRIN       0.93            0.83            0.66            1.95
Put/Call   0.52            0.82            0.71            0.87

by Jim Brown

Another option expiration Friday has expired and traders were
very eager to escape the week with no major losses. All the
major indexes finished the week higher except for the transports,
which lost some of the ground recently gained. It was a good
week despite the repeated defeat at higher levels. Call it a
consolidation week and chalk one up for the bulls.

Dow Chart - Daily

Nasdaq Chart - Daily

Wilshire-5000 Chart - Daily

If this week were a football game the economists would have lost.
They had a lot of fumbles on bad news and each time the bulls
recovered the ball and went on to score. The trend continued on
Friday with the CPI headline number dropping -0.3% and the core
rate holding at zero for the second month after only a +0.1% gain
in February. Drops in energy were responsible for the larger
than expected headline rate. The core rate has not seen two
consecutive months of zero growth since the 1981/82 depression.
No deflation? Tell that to the apparel makers after the eighth
consecutive month of declines in prices for that component.
Even the perennial rise in health care costs nearly broke even
with the smallest gain of the year at +0.2%. The market reacted
to the report with a gain at the open as the bad news bulls
bought the potential for aggressive Fed action once again.

Also depressing the sentiment before the open was the -6.8% drop
in Housing Starts in April. This was about twice as bad as was
expected. If you remember there was a +6.6% gain in March which
was unexpected and this simply reversed that gain. The prior month
was a -10.3% drop in February. Homebuilder stocks had rallied on
last months number and they crashed on Friday's news. The biggest
decline was in multifamily homes. There was a big jump in permits
which would indicate a strong jump in starts for next month. Given
the lower mortgage rates this month and the prospect for even
lower rates ahead this number should rise next month. Traders
bought the jump in permits and ignored the drop in starts.

The biggest surprise for the day was the jump in Michigan Sentiment
to 93.2 and much higher than the expected 87 and last months 86.
The biggest jump came in the expectations component, which rose
from 79.3 in April to 92.7 in May. The present conditions component
actually dropped from 96.4 to 94.1 as relief over the end of the
war waned. Current unemployment levels are depressing the present
conditions component despite the gains in the market and the
lower interest rates. Everyone has bought the second half recovery
story hook, line and sinker and we are setting up for a major blow
if that recovery does not come. Comments from Intel on Thursday
about no recovery in sight appeared to be ignored. The bad news
bulls did not know what to do with the good sentiment news and
the market quickly sold off from spike to 8742. 8743 was the high
for the year on the 12th. Coincidence?

There was some negative news on Friday that did not get bought.
Prudential downgraded GM to a sell and joined the auto bears with
comments that targets would be tough to hit, prices are falling
and incentives are becoming more costly. They also hit the auto
parts manufacturers like JCI, VC, GNTX and DPH on expectations of
lower sales.

The big drop in the Semi book-to-bill on Thursday night pressured
the Nasdaq but some semis drew "buy on weakness" comments from
analysts. Traders faced with falling orders and a negative
outlook were encouraged to load up. Dell was hit with downgrades
on valuation and comments they were not bullish enough on their
outlook, costs could not be cut significantly from here and there
was only so much market share they could take from others without
an economic rebound to fill the pipeline. Sometimes you just
cannot win. I thought Michael Dell was not dodging the pointed
questions very well on CNBC Thursday night but at least he did
not say anything negative. Analysts saw the evasiveness and
attacked like sharks on a blood trail.

Fund flow numbers from last week showed a -$67 million outflow
from equity funds. Outflows after two weeks at new market highs?
Yes, there is still no real conviction from retail traders. Bond
funds were still suffering from overloads of cash but that should
be about to change.

The U.S. may be an economic island of prosperity despite the
current slump but it still depends on the world for consumption.
Global economies are not healthy and with other countries already
in recession it provides little comfort that the U.S. can avoid
a similar drop. Current GDP numbers announced this week include
Germany -0.2%, Italy -0.1%, Netherlands -0.3% and Japan flat at
0.0%. This is why there are increasing concerns about the Fed's
coded mention of the "D" word in the last FOMC release. Surprise,
it is not coded any more. Fed Vice Chairman Roger Ferguson came
right out and put markets on notice that the Fed was on guard and
ready to attack it in advance in a speech given Friday afternoon.
Initially using the other "D" word, disinflation, he said "the
possibility that the process of disinflation will cumulate to the
point that price levels actually decline for a sustained period
of time - that is, we enter into deflation - remains quite remote".
He actually spoke the dreaded economic curse word. He said the
Fed has to be on guard against such a development and preferred
to act in advance of the event rather than in reaction to these
economic developments. Analyst immediately were split on what
their reaction should be. Should they be terrified that the Fed
was now trying to prepare us for a period of deflation? Or should
they be ecstatic that the Fed was going to act aggressively in
advance to prevent the deflation from occurring. The speech hit
the wires at 2:PM just as the markets were testing the highs of
the day again and they quickly sold off into the close. Not
seriously but they did sell off. There were also numerous large
blocks of stock dumped in order on close transactions. 4.4
million in GE alone, an average of one million each of MSFT, INTC,
KO, WMT. Somebody was definitely exiting large positions at the
close. Bonds which had been selling off on the afternoon stock
market rebound soared again pushing the yields to near the 45
year low for the week.

Next week should be really exciting. The comments by Ferguson
on Friday would seem to either guarantee a rate cut by the Fed
either at or before the June-24th Fed meeting unless the economy
actually began to improve. Either way the conventional wisdom
would indicate a bottom in sight. According to the Fed Funds
futures at noon on Friday there was a 66% chance of a 25 point
cut by the June meeting. That chance has definitely increased
with Ferguson's speech. There was another news item on Friday
that the St Louis Fed and the San Francisco Fed had requested a
cut in the discount rate in March. All of these items combined
to push bonds to an even higher high for the week.

Next week has almost no economic reports of importance. The only
two being Leading Indicators on Monday and Treasury Budget on
Tuesday. Neither of which are market movers. The weekly Jobless
Claims on Thursday is a bigger mover than either of those. This
means stocks will be left to move on stock news alone and there
are almost no big name companies left to report. There are a few
retailers on Mon/Tue with HPQ the headliner on Tuesday. CIEN
leads the list on Thursday with ADKS, MRVL, SRNA and TIVO as the
supporting cast. Definitely not a stunning week for earnings.

The markets will be left to chew on existing economic snippets
and cuss and discuss the stimulus versus recovery potential.
The bad news bulls will have no bad news to feed on and limited
potential for good news. With no economics and no earnings and
too early for earnings warnings it is possible the focus will
return to global events. As I am typing this there are several
new terrorist warnings for different countries overseas. The
trail back to Osama has heated up again and they are saying the
global risk is increasing. Personally I think without an attack
in the U.S. the markets will not suffer. Traders have become
immune to global news. They have almost become immune to U.S.
news. This should be a sign to some that things are about to

If you read my wrap on Thursday night you know I am expecting
an asset allocation shift out of bonds and into stocks soon.
The ideal scenario was a consolidation pull back to provide the
incentive for bond holders to feel better about taking profits
and moving into stocks for the long run. I believe we are the
crossroads and next week will be a defining moment for the

The Dow came to a sudden stop this week at the downtrend
resistance from last August at 8725. It has held at this
resistance all week and put in higher lows on Thr/Fri. There
is a very strong bullish wedge building on the Dow with weaker
confirmation on the Nasdaq and S&P. Traders have been buying
the dips with abandon and ignoring all bad news as pro stimulus
good news. With a news blackout next week it remains to be seen
if we will forge ahead or pull back to rest.

The VIX closed at a low not seen since last May-23 and just
before the market began its long descent into oblivion. This
May conditions are different. Prices are much lower, about
1500 points lower on the Dow. We are also well off our lows by
1300 points and three years into a bear market. Dead in the
middle at down trend resistance. Time to raise, call or fold.
Conditions are ripe for either direction.

Weekly VIX Warning

I view last week as a major win for the bulls. They held at new
yearly highs and even managed to add a few points despite some
very bad news. I think the market sentiment has changed. Trading
volume is increasing, market breadth is increasing. There is not
a lot of volume but there are simply no sellers. Despite the bad
news this week and the negative markets on Friday the new 52 week
highs were 562 and new lows only 26. This is a huge indicator of
positive market sentiment even at these lofty levels. There may
not be any conviction in terms of volume but there is definitely
conviction in terms of breadth. Based on this updated $NYSI chart
from last week they should be worried. This is the most extreme
reading since Feb-1991 and should be a warning for anyone bullish.

NYSE Summation Index

Before I get too bullish I need to restate the bearish case for
next week. We failed at the new highs for five consecutive days.
The VIX is approaching the historical sell signal at 20. There is
a very good case for a deflation spiral already underway. Intel's
Andy Bryant said "I see no recovery in sight but I am hoping for
a better 2004." IBM said technology was facing a tough time ahead
even though conditions were stabilizing. Jobless Claims have been
over 400K for thirteen straight weeks. Retail sales are in the
tank. I could go on but you have heard it before. We are far
from out of the woods but do traders really care?

Markets discount future events very well. We have seen it time
and time again. When the last recession occurred in the 2Q of
2001 the market was already rebounding as traders looked ahead
6-12 months. It eventually came back to bite them six months later
but the theory remains the same. Investors are always betting on
the future and not the past. With the aggressive Fed, stimulus
coming out of the Senate and company costs cut to the bone the
odds are good they are entering the discount period again. The
challenge remains timing. We are entering the weakest period of
normal years in the May-September time frame. Will institutions
wait for the end of summer for the typical September/October
dip to spend the big money? OR, will they dive in immediately
once the bonds begin rolling over? The odds are probably both.

I doubt we are going straight up and I doubt we are going to
sell off very far. I think we may continue to be stuck in a
range bound market between 8200-9000 until more economic data
becomes available. Whoa! Big range. Yes, unless the bond market
self destructs soon I think 8800-9000 is going to be a tough
range to break. If we continue to get weak economic data the
overseas money will continue to bleed from the market. Once
really good economic news appears the starter gun will fire and
we will be off to the races. Until then we are likely to remain
stuck in the Twilight Zone below 9000. It may continue to be a
buy the dip market but the dips could be lower soon. Dow 8500
should provide decent support unless the news turned really
negative. The reason for the 8200 low end of the range is the
tendency for markets to over react to sudden changes. Everybody
may be bullish today but that can change in a heartbeat if the
big boys decide to take profits and flush the weak holders out
of the market one more time. While 8200 may seem like a long way
off it is only a 38% retracement of the rally from the March lows.

In summary, I think the worst is over. Traders looking at a 3.5%
before tax yield on ten year treasuries will soon be starting to
think stocks are very attractive for the long term. If a +75
point gain for the week was the worst damage we suffered after a
week of terrible economics then what else is in front of us that
can make it worse. The Fed is going out of its way to assure
investors that better times are ahead even if they have to buy
them at a high price. In short, don't get your hopes up for a blow
out rally next week but you can stop looking over your shoulder
for that next lower low. Even though I hate the bond watchers
always telling me that the bonds are the key to stocks, this time
I believe they are right. If the bond bubble bursts the resulting
explosion could be very good for option investors.

Enter Very Passively, Exit Very Aggressively!

Jim Brown


Conflicting Signals
by Jim Brown

   05-18-2003           High     Low
DJIA     8682.96 - 34.17  8742.37  8682.96
NASDAQ   1538.53 - 12.85  1550.44  1534.35
S&P 500   944.30 -  2.37   948.65   938.60
NDX      1154.48 -  8.45  1162.64  1146.29
ES03M     944.25 -  2.00   949.75   938.00
YM03M    8675.00 - 22.00  8734.00  8628.00
NQ03M    1156.50 -  7.00  1166.00  1147.00

Daily Pivots (rounded to nearest point)
           R2     R1    Pivot   S1     S2
DJIA      8788   8735   8690   8638   8593
COMPX     1557   1548   1541   1532   1525
ES03M      956    950    944    938    932
YQ03M     8785   8730   8679   8624   8573
NQ03M     1175   1166   1156   1147   1137

I cannot remember in the last five years when so many signals
conflicted so completely. The stock market continues to rise
despite a falling economy, falling dollar, rising gold and
rising bonds. Repeated resistance levels have fallen prey to
the ever rising indexes. However, despite excellent market
breadth the market volume has been lethargic. It has been a
broad based rally, which constantly built on successive dips
but without any real excitement. Maybe this is why I continue
to be skeptical despite obvious signs.

The stealth rally, sounds silly when you look at a long term
chart because the trend is definitely there and it has crept up
inch by inch on the charts with analysts predicting its demise on
a weekly basis. I am sure this week is going to be no different.
Everyone will be focused on S&P 950, W5000 at 9000, Nasdaq at
1550 and thinking, how much longer can this go on without a
real bout of profit taking? Currently our run has stretched
since March 31st without any real profit taking. Nearly two
months. Does that strike anyone else as nearly unbelievable?
Since about April 10th the Dow has traded in a 200 point
uptrend channel with no significant deviation. We have seen
a strong revival of old fashioned dip buying.

The point of this long-winded essay is that everyone has been
straining so hard to see the reversal that each mini breakout
has caught most professional traders by surprise. Three years
of bearish bias is hard to overcome without any confirmation
from the economy. If we were seeing decreasing Jobless claims
each week or upticks in things like the ISM then traders could
feel good about the rally and their bias would change.

I think the fund managers have been watching the rally with one
eye and the economy with the other. They cannot afford not to
buy something at the risk of falling behind the competition but
they are afraid to dip too far into their precious cash in case
a bad case of reality hits. Hence the lack of volume. The market
is drifting up not because there is strong buying pressure but
because there is little selling pressure. The bears have become
afraid to short in volume just like the bulls are afraid to buy
in volume. This may be the week that the pattern changes.

The Dow has butted heads with the down trend resistance for a
week and failed to drop significantly. It closed just below 8700
after failing to hold over that down trend resistance at 8720
numerous times. Still close enough to strike but every attempt
is quickly swatted back. If you look closely at the 15 min chart
there is an almost imperceptible downward tilt since last Monday.
Granted there are higher lows as well so there is not a real
conclusion to draw other than it held near the highs on bad news.

On the S&P the index is showing a little more strength and edging
ever closer the electric fence at 950. Once over that level the
bulls should feel a little more confident but there is significant
resistance waiting. The longer we hold and continue to penetrate
on an intraday basis above the 947 level the better chance we
have of breaking out. Every upward spike takes out a few more

The same story is true of the Nasdaq and 1550. We tried to take
out that resistance six times last week and failed each time. The
pattern of higher lows still exists and indicates buyers getting
more confident at higher levels. The intraday range on thr/fri
was only 15 points. This is slowly eating away at the sellers

On the surface the previous comments would appear bullish. The
lack of economic reports for the coming week should also be
bullish as no bad news should be good news. However the markets
have a strange way of doing exactly the opposite of what you
expect. Just when you think they are going to take the ball and
charge across the finish line the game changes. Just like the
hype around the Matrix Reloaded movie this weekend. For weeks
the intensity built with clips, interviews and appearances on
talk shows. The theaters scheduled round the clock showings
beginning at 12:01 AM on Thursday with some holding multiple
sneak previews at 10:PM to add to the hype. The grand opening
came and although the picture did well at the box office due to
the 8500 simultaneous showings they hype was stronger that the
movie. The picture was panned by many reviewers and according to
Saturday reports attendance is already dropping below expectations.
It would probably have been a decent movie without the hype but
expectations had been pressed to the limit. As Spock would say,
"having is not always as exciting as wanting. It is illogical but
it is true."

For weeks we have been watching the markets rise on little
substance always in fear of the next economic report. Now that
the worst is over until month end the natural tendency would be
for a relief rally. Instead it is entirely possible we will get
a sell the news (or lack of news) event. I actually see no
indication of it yet other than the overbought extremes in things
like the $NYSI and the VIX but everything appears to be lining up
too perfectly for the bulls. When conditions appear too bullish
the gremlins normally appear.

The number one condition that could change the sentiment is of
course the bonds. If they implode the markets should explode.
The amount of cash pouring into bonds is astronomical in my
opinion. With yields at 45 year lows there is nowhere to go. The
potential is huge for an asset allocation event where funds start
taking profits in bonds and shifting assets back into stocks. The
only thing holding it back in my opinion is the level of the stock
market. The ideal scenario would be for a dip in the market to
further raise bonds one last time and give fund managers a little
more comfort about not buying stocks at the high. The bigger the
dip the more bond cash would switch sides.

All these points are simply conjecture and about the only thing
I can guarantee for this week is a major move. The odds of us
closing around 8700 again next Friday are very slim. In the Sunday
market wrap I suggested a future trading range of 8200-9000. A
big range and we are much closer to the highs than the lows.
Initial strong support is around 8500 with critical support at

How does this relate to the futures? For the ES contract we have
been seeing a slight uptick in the highs all week with higher
lows. It clearly wants to test the 950 range soon. Every time we
get close the market depth shows significant orders to sell in
the 948-950 range. It will not be a simple trade through event
and it will more likely be a challenge when it comes. Strong
support is in the 935-938 range with 920 as the backup. That up
trending support at 935 has been bought every time since April
1st. Without a significant change in market sentiment it should
be bought strongly again.

The NQ futures are actually showing a little more weakness than
the ES which is probably due to the semi book-to-bill, Intel "no
recovery" comments and the lack of "economic" bullishness by Dell.
The 1165 level has proven to be a top all week and there is a
slight down trend to the intraday highs since Tuesday. If there
was going to be a weakness for next weeks markets I would think
it would be the NQ. Uptrend support is still rising at 1150 and
the bullish wedge has to either break out or fail soon. 15 points
is not enough room for the NQ to trade and something is about to

The Dow contract has support at uptrending support at 8600 and a
solid top at 8715. Again, something has to break soon. 8450-8500
is second level support with 8250 the bottom. The Dows trend has
been very strong and stable. This was the first week without a
significant dip back to the longer term support in over a month.
We are due and it could be soon.

My outlook for next week is unbiased. I could build a case for
either direction. The ideal scenario would be for an early dip
to provide a last pop for bonds and an entry point for those
still flat. An initial Drop to Dow cash 8600 would probably be
bought with a secondary failure highly desirable to 8500. I
suspect that dip would attract a lot of interest. Without a dip
we could bleed up to strong resistance at 8800-8850, which would
precipitate an even bigger sell off when it finally occurs.

Dow Chart - 240 min

Nasdaq Chart - 120 min

ES03M Chart - 120 min

NQ03M - 120 min

YM03M Chart - 30 min

While I claimed to be unbiased earlier the more I looked at the
charts the more resistance I am seeing. Without SOME selling in
bonds I would be very surprised to see a further rally. Time
will tell. Monday after expiration is typically flat as positions
are squared away and option premiums for June become the front
month. Trading should pick up on Tuesday.

See you in the Futures Monitor!

Jim Brown


What Me Worry?
By Leigh Stevens

While the market has been holding up quite well overall (and was
again on the week), with more new highs than new lows as it chugs
higher, there are technical warnings of a further correction
coming. The Nasdaq which is leading the market, is in turn being
led by the recovering semiconductor index (SOX), but the SOX has
formed a bearish rising wedge on its chart, signaling a possible
fall. Moreover, the Composite (COMPX) is at an overbought extreme
and has fallen out of its hourly uptrend channel. Volume and
price trends for the key bellwether stocks, including QQQ, are
also suggesting that the market will retrace some of its gains.

A bearish rising wedge pattern is also seen on the OEX daily
chart, although in a less pronounced manner than the SOX.  All in
all, technically momentum has slowed significantly and the market
is vulnerable to accelerated selling on negative news.
Fundamentally, a real concern from Friday is the drop in the CPI
and the implied inability for companies to raise prices and lift
earnings. This and the decline in producer prices may raise
further concern about a possible deflationary cycle and draw more
comparisons between the U.S. and the stuck Japanese economy.

Relative to deflationary or downward trends in prices - what
might not be so good for stocks is heaven to bond holders.
Treasury prices mounted a strong rally into the end of Friday

Bonds rose early on news that suggested a deflationary price
trend, then fell on a round of profit taking and finally rallied
again into the close. 10-year T-bonds rose 20/32 to 101 13/32, to
yield 3.46%. The 30-year Treasury gained 23/32, to yield 4.45%.
Bond market participants pointed to the release of the April
Consumer Price Index or CPI by the Labor Department and which
came after Thursday's release of the wholesale price report
(PPI), which contracted by the widest margin in over 50 years.

The April CPI fell 0.3% after a 0.3% increase in March. Falling
post-Iraq conflict energy prices were behind the overall decline;
the core index, which excludes food and energy items, held steady
for a second consecutive month.

The flat reading of core CPI in April meant the annualized rate
of core inflation for the first four months of the year is now
running at 0.6% compared with a rate of 2.0% during the second
half of 2002 - quite a drop. The price declines fed into the
market's current concern about deflation - despite economists
that were suggesting caution in reading too much into the report.

Concerns derive from the Federal Reserve's meeting of just over a
week ago, in which policy makers said the chief risk to the
economy is that already low inflationary pressures will fall even

A significant aspect of the report was the unchanged reading for
the core inflation rate. Unlike Thursday's PPI report, softness
in the core was broadly based and may bring us closer to a
further Fed easing - Morgan Stanley's chief economist noted that
this becomes even more likely if the next jobs report is poor.
What concerns me is that the Fed has less and less room to ease
rates - they can come down to a Fed funds rate of .75% from the
current 1.25%, but they aren't going to go to zero like Japan.

Normally influential for the market, the U of M consumer-
sentiment data was mostly ignored as the focus was on the
inflation numbers. The midmonth report on consumer sentiment
showed the preliminary estimate for May sentiment at 93.2, versus
86.0 in April and 77.6 in March. The reading came in well above
economists' forecasts. The (positive) "expectations" number
increased dramatically to 92.7, from 79.3 in April, which was up
from 69.6 in March.

In other economic data released Friday, housing starts fell by
6.8% in April to an annual rate of 1.630 million, with single-
family starts down 3.0% to 1.356 million and multifamily starts
down a much sharper 22.5% to 244,000. Consensus estimates were
for a drop of 3.1%.

The S&P 500 or SPX fell 2 points (0.3%) on Friday to 944. The Dow
ended the day off 34 points at 8678.97. The Nasdaq Composite
Index closed down 12.85 to 1538.53. The Russell 2000 Index (RUT)
of small-cap stocks was off 1.7% on the day.

Despite what looks like mostly a sideways and sluggish trend this
past week, only the rate of upside momentum slowed - there were
overall gains and it was the 5th straight week of higher highs
for the benchmark SPX. The Nasdaq Composite and the S&P 500 each
finished 1.2% higher for the week with the Dow up 0.9%.

Volume totaled a decent 1.5 billion shares on the NYSE and 1.75
billion on the Nasdaq Market. New York Stock Exchange market
breadth was positive with advancers slightly outnumbering
decliners - 16.6 to 15.9. On the Nasdaq, decliners beat out
advancers by 18 to 13.

Trim Tabs estimated that equity funds that invest primarily in
U.S. stocks got an infusion of $200 million versus inflows of
$400 million during the prior week. Bond funds got inflows of $2
billion vs. inflows of $2.2 billion the prior week.  You can see
where the money is going primarily in the past two weeks.

In sector action Friday, retail and brokerage fell, with the
broker-dealer index dragged down by negative analyst comments. GM
was a Dow decliner following a downgrade while Dell Computer
dropped after releasing it last quarter earnings.

Dell Computer (DELL) fell 3% on Friday, after the company
reported Q1 results that only matched Wall Street targets - buy
the hope (hype?) sell the fact I suppose.

General Motors (GM) dropped 1.3% after Prudential lowered its
rating on the Dow stock to a "sell" from a "hold," citing
negative market share.  Prudential - an influential research
group as the firm does not have investment banking operations -
also was cited as a key influence on brokerage stocks after
cutting its rating on the industry sector (XBD) to a "market
perform" rating from a "market outperform".

Their report cited a belief that stocks in the group will remain
in a trading range due to current valuations. Pru cut Merrill
Lynch (MER) to a "hold" from a "buy" due to it current (P/E)
valuation. Merrill fell 1.3% while Goldman Sachs ran up 0.8% and
Morgan Stanley gave up 0.4%.

Gold has been advancing again - go figure, what with no
inflationary trend.  Best I can figure, as far as basic economic
reasoning, is the decline in the dollar causes gold to rise as
the metal is priced in dollars. I find this tendency for gold to
rebound unsettling for an overly bullish outlook on equities -

Maybe the rebound in gold doesn't bode exactly well for equities
in general, but anyone who played these stocks and the sector off
from technical support as indicated above, has a nice bullish
play going.

Speaking of the dollar, it fell again on Friday. The greenback
was down against the yen (to 115.91, from 116.5) and also slipped
against the euro, which changed hands at $1.1582, compared with
$1.1390 the week before.


The Semiconductor Index (SOX) daily chart leads off the indices -

The rising wedge pattern is outlined above.  This usually signals
a correction ahead as lower highs and higher lows tend to suggest
the exhaustion of buying.  I anticipate a correction that might
take SOX back to its main (up) trendline, intersecting currently
around 318.

S&P 500 Index (SPX) – Weekly, Daily & Hourly charts:

Resistance appears on the charts as likely in the 950 area, then
at 960.  I don't see how SPX will break out above 960, at its
prior weekly closing peaks, without a decline in the overbought
extreme suggested by the 8-week and 14-day RSI readings (see the
weekly and daily charts below). Overbought oscillator readings
are never an "automatic" sell.  But they do suggest where a
market is vulnerable to shocks.

Given that the trend is up, traders can wait to see if there are
definite signs of a breakdown in the trend such as a decline
through a prior low - around 937 in the case of the hourly chart.
The other strategy is to buy puts with SPX around 950, or up at
960 if there is a further upswing, and exit on a close above this
same resistance say by a 5% margin.

On this later trading strategy, it is my preference to buy calls
at support or puts at possible major resistance before their
premiums get inflated - as they do as soon there is a definite
signs of breakdown or breakout. I suppose you could call this the
"assumed" top or assumed bottom.

Taking this approach also depends on how many factors line up to
suggest the probabilities of a correction or reversal to the
trend. And a profitable outcome also depends on adherence to
exiting on a decisive penetration of such a well-defined line of
resistance or support.

By the way, the end of the current bear market is not really
confirmed on even a preliminary basis, until we witness the S&P
500 (SPX) close above 960 on the week and then maintain that
level as support on subsequent pullbacks.

S&P 100 Index (OEX) – Daily & Hourly charts:

I mentioned a slight upward sloping or rising wedge type pattern
that can be seen on the OEX daily chart.  A much more pronounced
and "classic" pattern is seen on the SOX chart above. But this
pattern and the fact the current levels are pretty extended above
the key moving averages, goes suggest a correction back down
toward the "mean" so to speak - in this case, back toward the
moving average.

Its pretty common to see a re-test of the moving average later
on, such as is seen on the chart (more than once) where prices
rallied to, but not above, the 200-day average.

Resistance implied by the top of the hourly channel and by prior
daily highs comes in around 482-485. Near support is at 473, then
more key technical support in the 467 area. A break of 465-467
would suggest a deeper correction such as back to 450.

On a longer-term trend basis, I would also note that last week
saw the first bullish upside crossover of the 50-day average
above the 200-day.

Market "sentiment", at least as measured by my equities option
call to put volume ratio (seen below the daily chart above,
left), is neither at a bullish or bearish extreme.  It seems that
the current rally is more led by the institutional fund managers
who need to put money to work as the market rises rather than by
a bullish "public" - typically, they have little faith in stocks
at the end of a bear market if this is that.

Nasdaq Composite Index (COMPX) – Weekly, Daily & Hourly:

The Composite or COMPX has cleared 1520 on the weekly chart,
which is a bullish development.  Now the question becomes whether
it can maintain this level.  Resistance, once broken, should
"become" support to be a valid breakout and bear trend

As mentioned with the S&P, COMPX is overbought.  The bearish
signs of possible failing (upside) momentum is that prices are
slipping below its uptrend channel.  This might signal a pullback
to at least initial support around 1480-1490.

It would take a close above 1552-1555, and the ability to
maintain this level, to suggest a renewed up leg.

Another bearish omen for the Composite, beside the waning
momentum and overbought condition is the bearish Price/RSI
divergence that has developed, as is highlighted on the daily
chart above. Prices have made new highs but the RSI has
registered a lower low.  Such divergences are so often a sign of
an upcoming trend reversal - at least signaling a deeper
correction than has come before.

Given the factors I've discussed above, I suggest bearish trading
strategies by buying NDX or QQQ puts on further rallies in the
Composite.  Basis the Composite, I can foresee a move back down
to at least 1485-1490, from recent highs around 1550.

QQQ charts - Daily & Hourly:

As prices have moved higher on balance, On Balance Volume or OBV
is suggesting that volume is picking up on down days, not on up
days, which does not maintain a strong bullish picture.  29.00 is
near resistance, then 29.50.  Short the stock in this zone.

Near support is at 28.00 to around 27.60-27.75 currently. A close
under 28 would be bearish, suggesting a possible correction back
to the 27 area or to as low as 25.50-26. I am not suggesting that
a correction to this area would spell an end to a bullish trend -
a correction to this degree would still fall within a "normal"
correction in an emerging uptrend.

QQQ is registered an overbought extreme on the daily stochastic,
although not in terms of the hourly model (measuring 21 hours) so
another rally may well develop - to my favor, as I would rather
short a further rally than take out a new long position on
another minor price dip. I believe that the risk (to profits) is
on overstaying on the long side currently.

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Editor's Plays

Competition is Good

Unless it is in your market where you were the sole manufacturer
for several years and derived a large part of your income from
that single product.

I am speaking about QCOM. With the announcement this week that
TXN, Nokia and STM would all start making chipsets that compete
directly with the CDMA chips that QCOM produces. Qualcomm
produces 90% of all CDMA chips. Unfortunately they sell a large
portion of those chips to Nokia. I am guessing those days are
about over and QCOM is going to be fighting for orders to anybody
else making phones. Could be a tough battle for a market where
QCOM could name its price for the last three years. QCOM grossed
a 30-40% margin on CDMA chips in the past and that could be
about to change.

I am far from a telecom analyst but I think the weakness in QCOM
since the announcement is just the beginning. With the summer
doldrums ahead of us the competition for investor dollars could
be fierce and I cannot see any reason to be chasing QCOM until
the real impact of the new manufacturers is known. These are not
little guys and they would not be entering the market if they
thought they could not take market share from QCOM.

This play does not have a lot of explanation behind it and it
should be easy for everyone to understand. There was a small
bounce to $30.70 on Friday but the down trend reasserted itself
by the close and I think we are seeing a quick buying opportunity
for the puts above $30.

The puts I am considering are the July-$27.50 and the Oct-$27.50.
The July is cheap at $1.15 but we only have 60 days and we can
only get about half way through the summer. I do not have a
confirmed earnings date for July but based on the last earnings
on Apr-23rd I would say something in the July-23rd range. That
means any negative guidance with the July earnings would come
after the July put had expired. That makes the October $27.50
put at $2.20 my target. This gets us through the summer and the
normally dreadful September period. If we are lucky we might get
an earnings warning in September.

Qualcomm's trend has not been all that exciting to begin with
so the bounce on Friday may be our last chance to get in over

BUY OCT-$27.50 PUT AAW-VY $2.20 close on Friday

QCOM Chart - Daily


Play updates:

I am only listing the current recommendations with a
link to the initial write up and unless the play changed

DIA - Strangle $86.99
5/11/03 ($86.17 when recommended)

Close but no cigar. Everything went according to plan with the
exception of the market selling off on bad news. We entered the
May-$87 calls on Monday morning for 40 cents followed by the
May-$85 puts also at 40 cents. We sold the calls for 95 cents
on Monday afternoon when the Dow failed at 8740. I would have
been in good shape to just let it ride but I averaged down with
some more May-$85 puts at 20 cents making my average cost 30
cents and my net out of pocket five cents. (-80, +95, -20 = 5)
The Dow low on Wednesday was 8632 and the puts never made it
back over 25 cents before the market rebounded again. The bad
news came in as expected on Thursday but there was no drop. It
only cost me a nickel to play so I can't complain too loudly.

IVX - Calls - $17.80
4/27/03 ($15.28 when recommended)

Still no pullback to $14 and we are setting new highs. Our $2.00
calls closed Friday at $3.80. Cancel the orders for the additional
contracts and set a stop loss at $16.75 on the play.


QQQ - Put - $28.69
4/20/03 ($26.82 when recommended)

The QQQ puts expired worthless. We had a cost basis of 15 cents
but they never came back. The QQQ has been holding just below $29
despite the bad news. At least the losses was minimal but that
is a slim consolation.


CY - Cypress Semi Call - $9.78 ($10.29 week high)
3/2/03 ($6.41 when recommended)


EMC Call from Feb-2nd  $9.85 ($10.40 week high)
($7.70 when recommended)



RFMD remains the worst performer but several others are beginning
to slip into the green. Only down $295 this week and still eight
months remaining.

It would have taken $1,255 to buy one contract of each on
January-2nd. Any bets on what this will be worth on 12/31/03


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

Good Luck

Jim Brown


Least Resistance?
- James Brown

Last week held a ton of economic data and looking back at the numbers
we don't see anything that really suggests the economy is on the
comeback trail.  Sure, there are bits and pieces that might suggest
some improvement but overall it's as if the U.S. economic machine has

The CPI numbers showed virtually no growth.  The housing starts were
twice as bad as expected.  The semiconductor book to bill ratio was

So what's keeping the market rally alive?  That is if you call the
INDU's 74-point gain and the NASDAQ Composite's 18-point gain on the
week a rally.  It seems like we just drifted higher.

The answer is still investor hope.  Hope that the worst really is
behind us.  Yet surprisingly it's not the individual investor.  Fund
flow numbers actually showed a $67 million out flow from equity funds.
Meanwhile fund managers appear to be doing a lot of buying.  That's
what some reports hinted at after looking through the latest round of
SEC filings.  As one Intel VIP said this week, they're encouraged about
the second half but cautious about tomorrow.  If investors get the
feeling that the second half recovery is going to fail to show up for
the third year in a row, then this rally could be over real quick.
Fortunately, the sentiment numbers this last week were stronger than
expected.  Let's hope they stay that way.

Let me correct myself.  I stated that the individual investor isn't
contributing to the rally.  That's not true.  Yes, there were net
outflows from equity funds but Schwab came out this week and said that
April (and so far May as well) trading activity was vastly improved.

It's great to see the comeback of the small trader but I'm concerned it
is exactly at the wrong time.  The markets are way overbought.  The
bullish percent numbers have almost all reached the "70" mark, which
denotes overbought and risk-reward right now favors the bear, not the
bull.  Unfortunately for the bears, they've been getting run over by
the bulls these last six to eight weeks and the bears may be a little
gun shy.

There has been so many conflicting signals lately that something has to
give.  Wall Street seems perplexed that gold and oil and equities are
all going up at the same time while the dollar drops and the Fed
worries about deflation and higher unemployment.

Jim hinted that we could see another massive round of asset allocation
out of bonds, with yields near 55 year lows, to equities.  Yet at the
same time the VIX is approaching its historic market-top signal levels
near 20.  Frame the entire picture with contrasting historic trends of
May-October being the worst six months of the year and the third year
of a Presidential term almost always being bullish.

It would seem that the path of least resistance has been up but I
suspect we'll get some resistance soon.  We just don't know where it
will come from as the economic calendar is pretty light this week.  To
throw another wildcard in the deck, the recent round of terrorist
bombings (Riyadh, Israel, and Morocco) will not be a positive influence
on the global markets.


Market Averages


52-week High: 10353
52-week Low :  7197
Current     :  8679

Moving Averages:

 10-dma: 8622
 50-dma: 8295
200-dma: 8325

S&P 500 ($SPX)

52-week High: 1107
52-week Low :  768
Current     :  944

Moving Averages:

 10-dma:  936
 50-dma:  887
200-dma:  883

Nasdaq-100 ($NDX)

52-week High: 1351
52-week Low :  795
Current     : 1154

Moving Averages:

 10-dma: 1147
 50-dma: 1074
200-dma: 1005


Same old song?  Yes, but the volume is getting louder and offering
a greater warning as the VIX approaches the 20 level.

CBOE Market Volatility Index (VIX) = 20.83 -0.84
Nasdaq-100 Volatility Index  (VXN) = 31.02 -1.16


          Put/Call Ratio  Call Volume   Put Volume

Total          0.54      1,013,415       543,432
Equity Only    0.40        851,224       340,036
OEX            0.86         53,400        46,142
QQQ            0.74         89,152        65,886


Bullish Percent Data

           Current   Change   Status
NYSE          59.6    + 1     Bull Confirmed
NASDAQ-100    78.0    + 1     Bull Confirmed
Dow Indust.   70.0    + 3     Bull Confirmed
S&P 500       68.6    + 1     Bull Confirmed
S&P 100       67.0    + 2     Bull Confirmed

Bullish percent measures the number of stocks in an index
currently trading on a buy signal on their point and figure
chart.  Readings above 70 are considered overbought, and readings
below 30 are considered oversold.

Bull Confirmed  - Aggressively long
Bull Alert      - Cautiously long
Bull Correction - Pause or pullback in upward trend
Bear Alert      - Take defensive action if long
Bear Confirmed  - High risk if long, good conditions for shorting
Bear Correction - Pause or rebound in downtrend


 5-Day Arms Index  0.78
10-Day Arms Index  1.01
21-Day Arms Index  1.04
55-Day Arms Index  1.24

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

            -NYSE-   -NASDAQ-
Advancers    1396      1241
Decliners    1468      1792

New Highs     210       130
New Lows       16         8

Up Volume    983M     730M
Down Vol.    790M     977M

Total Vol.  1792M     1743M

M = millions


Commitments Of Traders Report: 05/13/03

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

Just as the major averages barely moved on the week, we're
seeing the same hesitation in the futures positions.  No
one is shifting any money around as they wait for the next

Commercials   Long      Short      Net     % Of OI
04/22/03      430,758   423,295     7,463     0.9%
04/29/03      432,710   419,245    13,465     1.6%
05/06/03      429,519   419,545     9,974     1.2%
05/16/03      429,028   419,553     9,475     1.1%

Most bearish reading of the year: (111,956) -   3/6/02
Most bullish reading of the year:   14,366  -  4/15/03

Small Traders Long      Short      Net     % of OI
04/22/03      147,068   140,153     6,915      2.4%
04/29/03      149,616   154,782     5,166      1.7%
05/06/03      150,345   148,681     1,664      0.6%
05/16/03      151,883   148,479     3,404      1.1%

Most bearish reading of the year:  10,754 - 4/15/03
Most bullish reading of the year: 114,510 - 3/26/02

E-MINI S&P 500

Again, this is a repeat of what we're seeing with the
S&P 500 futures.  There is little change in the overall
net long or net short positions for either the commercials
or the small trader.

Commercials   Long      Short      Net     % Of OI
04/22/03      124,200   437,597   (313,397)  (55.7%)
04/29/03      134,751   472,247   (337,496)  (55.6%)
05/06/03      169,388   447,330   (277,942)  (45.1%)
05/16/03      178,679   452,727   (274,048)  (43.4%)

Most bearish reading of the year: (337,496)  - 04/29/03
Most bullish reading of the year: (222,875)  - 04/01/03

Small Traders Long      Short      Net     % of OI
04/22/03      395,596    40,480   355,116    81.4%
04/29/03      459,687    50,030   409,657    80.4%
05/06/03      423,918    55,932   367,986    76.7%
05/16/03      421,540    57,483   364,057    75.9%

Most bearish reading of the year: 283,831   - 04/08/03
Most bullish reading of the year: 409,657   - 04/29/03


Hmmmm.. now we're seeing some movement here.  Commercials
have lightened up on their bullish positions while small
traders have lightened up on their shorts.  Is this
forecasting a potential trend change in the NDX?

Commercials   Long      Short      Net     % of OI
04/22/03       45,647     38,531     7,116    8.5%
04/29/03       45,497     37,557     7,940    9.6%
05/06/03       46,327     38,216     8,111    9.6%
05/16/03       43,539     39,046     4,493    5.4%

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
04/22/03       10,929    20,376   ( 9,447)  (30.2%)
04/29/03       11,219    19,760   ( 8,551)  (27.6%)
05/06/03       13,482    21,010   ( 7,528)  (21.8%)
05/16/03       11,706    16,104   ( 4,398)  (33.0%)

Most bearish reading of the year: (10,769) - 06/11/02
Most bullish reading of the year:  19,088  - 01/21/02


We're not seeing a lot of change here either.  Yes, the
commercials added to both long and short positions and
the small trader beefed up their shorts but there is
nothing to suggest a change in sentiment.

Commercials   Long      Short      Net     % of OI
04/22/03       16,942    14,750    2,192       6.9%
04/29/03       17,927    14,083    3,844      12.0%
05/06/03       16,772    13,568    3,204      10.6%
05/16/03       18,265    14,396    3,869      11.8%

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
04/22/03        8,081     8,275    (  194)   ( 1.2%)
04/29/03        7,081     8,604    (1,523)   ( 9.7%)
05/06/03        7,829     8,642    (  813)   ( 4.9%)
05/16/03        7,873     9,058    (1,185)   ( 6.9%)

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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Shut down your account for vacation?  No way!

You mentioned you might open a newspaper while visiting Dorothy
but certainly not watching the markets.  I was wondering with the
summer coming up whether you could pen an education piece on what
to do before you go on vacation. I.e., do you close all positions
or keep them open with stops or keep only those, which are risk
capital with no stops.

Evidently, there are other people in this world that are traders
and investors, that will pull themselves away from the markets
for a week or two and go on vacation.

Here's the post I made in the OptionInvestor.com Market Monitor
the evening I went on vacation.  All positions were also
previously profiled positions in either the Market Monitor or
intra-day commentary, were also positions I held/hold in my own
account, and how I looked to handle things while on vacation.  In
"pink," I've reflected on my state of mind, and quickly review.

Market Monitor Post - 05/06/2003 11:35:51 PM EST

I can only answer the subscriber's question as it relates to me
personally, but I would have to start with this.

First, be true to yourself and ask yourself this question.

Am I the kind of person, that can enjoy my vacation, not think,
no...make that WORRY, about the markets or my open positions, to
the extent that it will RUIN my hard-earned vacation, or would
RUIN a special time that I get to spend with family and friends.

When I'm sitting in insect-infested woods, taking in fresh air on
my vacations, I'll think about the markets, but I'll be darned if
I'll carry a large position in my account and then sit and worry
about it while listening to a turkey gobble or elk bugle.

If your answer to the above question was ... "No, I will worry or
want to steal away from family and friends to check the markets 2
or 3 times a day while I'm on vacation," then close out your open
positions and have a wonderful vacation!  Life is too short to
not enjoy time off with your family and friends.

If however, you view things a little differently, then here's my
take on things.

First of all, EVERYONE that has read anything I've written as it
relates to RISK management, ESPECIALLY as it relates to the use
of options to better MANAGE THAT RISK, should know that I DO NOT
OVERLEVERAGE in options (if I'd only buy 100 shares of the
underlying stock, then I'd only buy 1 options contract), and will
tend to buy at LEAST 2-3 months expiration.  This all goes back
to an article I wrote regarding "Your account is your business"
in this column on Sunday, November 17, 2002.  This is my (Jeff
Bailey's) foundation that I operate my business on.

Now.  Some proprietors choose to shut down their flower shop or
when they're gone.  They KNOW that by doing so, they will not
have had the opportunity to make any money while they were on
vacation.  The store can get robbed while they're gone, but
there's some comfort in not worrying about things and just
closing the doors and considering it an opportunity cost.  For
me, I'm not that type of person.

If you're a STOCK trader/investor and looking to go on vacation,
then I'd do one of two things.  First of all, the trade that is
open in your account, you've ALREADY established a stop level and
profit level BEFORE you initiated the trade.  As long as you are
COMFORTABLE with the capital exposed (100 shares of a $25 stock
is $2,500 of RISK capital exposed), and do not feel the stock
you're trading has a high likelihood of "gapping" against your
position (if you're long and don't feel it would stand a great
chance of gapping below your stop price based on historical
trading) then by all means, place a stop loss limit, or stop
market order on the downside.

Stop limit orders:  This is a stop that a trader would place
where the "limit" is the price you place with the broker.  For
instance, if I place an order that says... "stop limit $22.50"
then if the stock were to gap down to $22.00, my order would NOT
be filled, but would become active and if the stock were to trade
$22.50 to $22.51, then my orders should be triggered as sold.

Stop market:  This is a stop loss order that a trader would place
where the "market" means that the stated price or ANY PRICE below
(for bullish position) becomes the price your order could be
filled at.  For instance, if I place an order that says... "stop
market $22.50,"  Then if the stock "gaps" below $22.50, then my
order immediately becomes a MARKET order and my broker sells the
stock for me at whatever the market price is at.

Ugh!  Is what a stock trader might say.  I'm not sure I like
either of those choices.  You're thinking.. "if I weren't on
vacation, and able to watch my trades like a hawk, I'd be much
better able to assess things, and make a much more informed
decision when it comes to a gap situation."

Ahhhh!  But now think about OPTIONS as a RISK mitigating
instrument!  Especially when you're headed out on vacation!
Remember!  OPTIONS were created as instruments to mitigate and
HEDGE risk!  OPTIONS were NOT created to used as a tool for
SPECULATION.  Oh... you can still speculate, but risk to call/put
buyers is ALWAYS limited to the price of the option.

Let's say you do own 100 shares, or 1,000, you pick the size, of
a $25.00 stock and the stock still has room to your upside target
(for a bullish trade) and your still comfortable with the $22.50
stop.  The only thing you're NOT COMFORTABLE with is the fact
that you are about to embark on a wonderful vacation and you just
don't want to worry about this stock and potential "gap down"
type of situation.

"Gosh darn it!" you proclaim.  I think this bugger still has some
upside to my bullish target.  Why the heck did I have to plan
this vacation at such a critical time!

Hmmmm.... If you are willing to risk $2.50 per share on a $25.00
stock to your stop of $22.50, then it might make sense to do

What if you closed out your 100 shares, or 1,000 shares right now
at $25.00, took $2,500 or $25,000 of RISK CAPITAL out of the
MARKET and then turned to the OPTIONS MARKET to mitigate your
RISK?  Then bought either 1 contract (100 shares), or 10
contracts (1,000 shares) of an option, priced close to $2.50 per

Boom!  You've instantly assessed your risk as it relates to an
underlying stock position, shifted that RISK to the options
market, but NOW you've still got bullish exposure to 100, or
1,000 shares (the most you can lose is $250 per contract right?)
and you can enjoy a worry free vacation!  You've taken care of
EVERYTHING, as long as you have NOT OVERLEVERAGED in your
options!  Think about it.  Is that $250.00 for one contract any
different than a $22.50 stop from $25.00 on 100 shares?

The ONLY difference really, is that to MITIGATE your risk, allow
yourself opportunity to further profit, while still being able to
enjoy your vacation, is the cost of 2 commissions.

Let me say this.  If a trade EVER comes down the commissions you
pay, then STOP trading immediately.  NEVER base a buy/sell
decision on commissions.  If commissions are that bothersome to a
trader, then I don't think you should be trading.  The IRS treats
commissions as an EXPENSE and is accounted for as capital
gains/losses.  As a business owner in your account, it is simply
a cost of doing business as a trader/investor.  That's it!

Now, you don't have to worry about a stop loss in the option.
After all, who in their right mind trades options with stops to
begin with?  Ooops!  You and I both know who trades stops with
their options.  It's the silly options trader that OVERLEVERAGES
in their options trading.

Once you've properly positioned yourself in a call or put option
contract, have only exposed an equivalent amount of capital as it
related to the original risk capital to a 10% stop in the
underlying stock, all you have to do now is place a profit limit
order with your broker on the call option!

Hey, that's the way you've learned to trade options anyway isn't

For example:  Let's say your target for that $25.00 stock is
$31.00.  If you "switch" from the stock to an "in-the-money" or
"at-the-money" $25.00 call option, then you KNOW for a fact that
if the stock trades $31.00 then the option should be worth $6.00
(give or take the spread, say within $0.40).

You see.  I (Jeff Bailey) think a trader/investor can still
utilize the options market to help mitigate risk, but still hold
a position in a stock/index you feel has profitable potential,
even while you're on vacation.

Sometimes, I think we all get a false sense of security, with the
thought that by us actually watching things on a minute by minute
basis, that we somewhat have ULTIMATE CONTROL on how things play
out, and that if I go away for a week or two, then I don't stand
a chance to make money.

I don't think my being here to watch my account the past several
days, would have had any impact on getting stopped out of Intel
(INTC), or made the QQQ go lower, or had my GERN Sept. $5 calls
trading $2.90.  However, whatever did happen, I was comfortable
enough with things to fully enjoy my vacation.

Now, before I let you go, to enjoy what's left of the weekend, I
might also ask that you take some of what was written above, and
then quickly review an Ask the Analyst column I wrote on April 6,
2002 titles "Breaking a losing streak."  Only read the second
column as it relates to this article.

While I would in NO WAY equate a vacation, to an
unexpected/unplanned trip to the hospital for an extended period
of time, there's always a lesson to be learned.

Whether its life in general, or a vacation, ALWAYS try and expect
the unexpected, and think RISK!

When you go on vacation this summer, you've got 2 risks to
measure.  One risk is RISK to CAPITAL.  The second risk is

Don't let a vacation "ruin" your trading account potential.  At
the same time, learn to use options as a RISK management tool,
that allows you're account to still potentially profit, while
you're enjoying your well-earned vacation.  Life's short!  Trade

Jeff Bailey


Market Watch for the week of May 19th

Major Earnings This Week

Symbol  Company               Date           Comment      EPS Est

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

A      Agilent Technologies  Mon, May 19  After the Bell     -0.15
BAB    British Airways       Mon, May 19  Before the Bell      N/A
CPB    Campbell Soup         Mon, May 19  Before the Bell     0.27
LTD    Limited Brands        Mon, May 19  Before the Bell      N/A
LOW    Lowe's Companies      Mon, May 19  Before the Bell      N/A
MDT    Medtronic Inc.        Mon, May 19  -----N/A-----        N/A
JWN    Nordstrom             Mon, May 19  After the Bell       N/A
TOY    Toys R Us             Mon, May 19  Before the Bell      N/A

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

BLI    Big Lots, Inc.        Tue, May 20  Before the Bell     0.08
BJ     BJ's Wholesale Club   Tue, May 20  Before the Bell     0.16
BGP    Borders Group Inc.    Tue, May 20  After the Bell     -0.05
ERF    Enerplus Res Fund     Tue, May 20  -----N/A-----        N/A
HPQ    Hewlett-Packard       Tue, May 20  After the Bell       N/A
HD     Home Depot Inc        Tue, May 20  Before the Bell      N/A
MBT    Mobile Telesystems    Tue, May 20  -----N/A-----        N/A
ROST   Ross Stores, Inc.     Tue, May 20  Before the Bell      N/A
SKS    Saks Incorporated     Tue, May 20  Before the Bell      N/A
SPLS   Staples, Inc.         Tue, May 20  Before the Bell      N/A

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

ADCT   ADC                   Wed, May 21  After the Bell     -0.03
BCM    Can Imp Bank of Comm  Wed, May 21  -----N/A-----        N/A
EV     Eaton Vance Corp.     Wed, May 21  Before the Bell     0.39
OOM    mm02                  Wed, May 21  Before the Bell      N/A
NGG    National Grid Transco Wed, May 21  Before the Bell      N/A
PETC   PETCO ANIMAL SUPPLIES Wed, May 21  After the Bell       N/A
RL     Polo R Lauren Corp    Wed, May 21  Before the Bell      N/A
SNPS   Synopsys              Wed, May 21  After the Bell       N/A
TLB    Talbots               Wed, May 21  Before the Bell      N/A

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

ADSK   Autodesk, Inc.        Thu, May 22  After the Bell      0.05
BKS    Barnes&Noble          Thu, May 22  Before the Bell    -0.09
BTY    BT Group PLC          Thu, May 22  Before the Bell      N/A
CBRL   CBRL Group            Thu, May 22  -----N/A-----       0.45
CIEN   CIENA Corporation     Thu, May 22  Before the Bell    -0.12
CLE    Claire's Stores       Thu, May 22  -----N/A-----       0.26
FL     Foot Locker, Inc.     Thu, May 22  Before the Bell     0.27
GPS    Gap Inc.              Thu, May 22  After the Bell      0.21
HRL    Hormel Foods Corp     Thu, May 22  Before the Bell      N/A
KUB    Kubota Limited        Thu, May 22  Before the Bell      N/A
MRVL   Marvell Tech Group    Thu, May 22  After the Bell       N/A
PDCO   Patterson Dental      Thu, May 22  Before the Bell      N/A
TKP    TECHNIP COFLEXIP      Thu, May 22  -----N/A-----        N/A
TD     Toronto Dominion Bank Thu, May 22  -----N/A-----        N/A
UU     United Utilities      Thu, May 22  Before the Bell      N/A
WSM    Williams-Sonoma       Thu, May 22  Before the Bell      N/A

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


Upcoming Stock Splits In The Next Two Weeks...

Symbol  Company Name              Ratio    Payable     Executable

NYB     NY Bancorp                4:3      May  21st   May  22nd
FNF     Fidelity National         5:4      May  23rd   May  27th
AMN     Ameron Intl               2:1      May  27th   Apr  28th
AMFC    AMB Financial             5:4      May  29th   Apr  30th
FLIR    FLIR Systems              2:1      May  29th   May  30th
ERES    eResearchTech             2:1      May  29th   May  30th

Economic Reports This Week

Whew!  After last week's flood of economic reports, this week
looks almost empty.  We have leading indicators on Monday and
the weekly initial jobless claims on Thursday.


Monday, 05/19/02
Leading Indicators (DM) Apr  Forecast:    0.0%  Previous:   -0.2%

Tuesday, 05/20/02
Treasury Budget (DM)    Apr  Forecast:  $52.0B  Previous:  $67.2B

Wednesday, 05/21/02

Thursday, 05/22/02
Initial Claims (BB)   05/17  Forecast:    N/A  Previous:     417K

Friday, 05/23/02

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

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The Option Investor Newsletter                   Sunday 05-18-2003
Sunday                                                      2 of 5

In Section Two:

Market Watch: Break Outs & Break Downs!
Daily Results
Put Play of the Day: JCI
Dropped Calls: KLAC
Dropped Puts: PG

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Market Watch

Break Outs & Break Downs!

Wellpoint Health Network - WLP - close: 81.05 change: +3.09

Wow!  We've been watching WLP and its rival UNH for weeks now.
Both gave traders a 38.2% retracement from its Feb-April rally
before bouncing higher again.  The latest trend of higher lows
has given birth to twin breakouts above resistance for WLP and
UNH.  We like how shares of WLP traded sideways above the $80
mark intraday on Friday.  We also like how WLP has more room to
run on a percentage basis, before hitting old highs, than UNH.  A
pull back to $80.00 looks like a tempting entry to buy calls for



General Electric - GE - close: 27.85 change: -0.63

Once thought of as a proxy for the broader market as a whole,
shares of GE have fallen out of favor with investors.  The stock
has been suffering from a trend of lower highs since mid-April
and the Friday close under $28.00 looks like a recipe for a
bearish play.



Borg Warner - BWA - close: 56.57 change: -2.62

BWA is another auto stock that was hit hard by the Friday
downgrade of the sector (namely GM).  Shares of BWA had been
trying to break out above the $60.00 level for weeks but the
reversal on Friday may have doomed it to retest support at its
200-dma or even the $50.00 level again.  Another failed rally,
this time at $58.00, might be an entry to go short.



Viacom - VIA - close: 45.70 change: +0.60

The move over $45.00 actually breaks a very long-term descending
trendline of resistance on VIA's weekly chart.  However, it's
still very fresh and could be reversed.  Also watch for
resistance at $47.50 from last fall.



Pixar - PIXR - close: 53.20 change: -1.07

Four days of declines have brought shares of PIXR to its long-
term rising trendline of support.  This could be make or break it
time for the stock.  A bounce here and bulls might push it back
to $60.00.  A break here and who knows when the selling stops?



Exelon Corp - EXC - close: 56.07 change: +0.72

This electric utility company is breaking out to new 52-week
highs.  Helping lift the entire sector is the President's
stimulus package that has been modified by the Senate but still
includes, at least a temporary, ban on dividend taxes.  Utilities
are famous for paying strong dividends and this will increase
investor interest as the effective yields may have just doubled.



eBay Inc - EBAY - close: 99.19 change: +1.11

Gosh, I still can't get anyone in the office to volunteer and
take one for the team by shorting EBAY at natural psychological
resistance of $100.00.  As Jim likes to put it, no one wants to
step in front of the EBAY train.  Aggressive bears could open
short positions here with a very tight stop just north of
$100.00.  That seems like a low risk entry.  You either lose a
little or you win big.  The problem is bears have been trying to
pick "low risk" entries since $60.00 last October.


RADAR SCREEN - more stocks to watch

UNH $95.41 - We came very close to adding UNH or WLP to the OI
call list this weekend.  Keep an eye on UNH.  The next resistance
level is $100.00 and the stock has a 2:1 split coming soon.

SUP $37.14 - The auto sector downgrade on Friday hit the entire
group hard and SUP is no exception.  The recent failures at
$40.00 and now the close under the 50-dma look like a set up to
test recent lows.

GPI $27.94 - Investor fear knows no limit and the downgrade of GM
on Friday actually showed up in profit taking for GPI as well.
The breakdown in the rising trend could call for a pull back to

SEPR $20.61 - The bullish trend for this drug/biotech company has
remained intact.  Entries near $20.00 with a tight stop (19.44 ?)
might be profitable.

DISH $31.29 - The steady profit taking in DISH has been slow and
methodical, not panicky.  We think this looks like an entry point
to go long but one could wait and see if it dips to $30.00 again.

ELY $13.99 - Is anyone interested in a seasonal play on Callaway
Golf?  The move may already have been had. Shares moved from
$10.50 to almost $15.00 and have now pulled back to what should
be support at $14.00.  A break here and it could looking at a
retest of the 200-dma.

AMZN, YHOO, INSP, ASKJ... seems like old times doesn't it.  These
Internet stocks have been incredibly strong and we don't see any
fundamental reason for the buying spree.  Do you?


For Best Alignment view in Courier Ten Font

CALLS    LAST      Mon    Tue    Wed   Thu  Week

AMGN     62.31   0.75  -0.49 -0.14  0.78  1.07 Still Strong
IBM      88.99   1.45   0.98 -0.30  1.20  1.44 Ready to Go
KLAC     40.61   1.30  -0.88 -1.06  0.43 -1.72 DROP, on weakness
MEDI     34.32   1.10  -0.13  0.13  0.89  0.42 Long-term, No update


AIG      57.95   0.10  -0.73  0.31  0.85  1.70 Un-triggered
GM       34.41   0.72  -0.39 -0.34 -1.03 -1.56 Downgraded
GS       76.70   0.49  -0.54 -0.05  1.15  1.70 Caution!
JCI      81.61   1.64   0.52  0.11 -1.17 -2.07 NEW, downgraded
MTG      45.96   0.68   0.29 -1.03 -1.64 -0.73 Better entry?
PG       90.32  -0.37  -0.94  0.11  1.30  1.07 DROP, un-triggered
RYL      55.90   2.30   0.16 -0.39 -0.35  0.20 NEW, un-triggered

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Johnson Controls - JCI - close: 81.61 change: -2.14 stop: 85.25

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.


KLA-Tencor - KLAC - close: 40.61 change: -1.36 stop: 40.95

Will it hold?  We're talking about the bullish patterns on the
point-and-figure charts for KLAC and the $SOX.  Friday night's
semi-book to bill numbers were not encouraging and cautious
traders might take it as a sign to take more profits off the
table.  Shares of KLAC broke down through its recent trend of
higher lows and we were stopped out.  We would keep an eye on the
$40 level but KLAC may have some more consolidating to do.

Picked on May 4th at $42.15
Change since picked:  -1.54
Earnings Date      04/23/03 (confirmed)
Average Daily Volume = 11.4 Million
Chart link:


Procter & Gamble - PG - close: 90.32 change: +0.42 stop: 90.00

What can you say?  Buyers just haven't given up yet.  After
spending weeks in what looks like a topping pattern between $88
and $91.00, shares of PG fell below the $88.00 mark last week.
Yet it stalled right at its converging 50 & 200-dma's.  We
suggested a new put play IF and ONLY IF shares of PG traded at or
below $87.45.  We never got the chance as dip buyers saw their
opportunity and pounced.  Furthermore, the recent strength in PG
has been buoyed by this "new" perspective that "oh, a weak dollar
isn't bad.  Look at all the big multi-national companies that can
benefit by selling more products overseas."  Sure enough, PG has
been selling more products as the weaker dollar means its
American products are cheaper overseas and thus more attractive
(competitive) than they were when the dollar was strong.  The
stock still has not been able to break out above the $91.00 level
but we're not going to wait for it and look elsewhere for
potential put plays.

Picked on May Xth at $00.00
Change since picked:  -0.00
Earnings Date      04/28/03 (confirmed)
Average Daily Volume = 3.3 Million
Chart link:


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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The Option Investor Newsletter                   Sunday 05-18-2003
Sunday                                                      3 of 5

In Section Three:

New Calls: (See Note)
Current Calls: AMGN, IBM
New Puts: DJX, JCI, RYL

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No New Calls This Weekend

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Amgen, Inc. - AMGN - close: 62.31 change: -0.32 stop: 59.25

Company Description:
The biggest of the Biotech big guns, AMGN makes and markets
therapeutic products for hematology, oncology, bone and
inflammatory disorders, as well as neuroendocrine and
neurodegenerative diseases.  Anti-anemia drug Epogen and immune
system stimulator Neupogen account for about 95% of sales.  Its
Infergen has been commercialized as a treatment for hepatitis C,
and Stemgen is approved for stem cell therapy in Australia,
Canada, and New Zealand.  The company has a strong pipeline of
new drugs in various stages of development as well as research
and marketing alliances with Hoffman-La-Roche and Johnson &

Why we like it:
After surging strongly higher for most of the past week, the
Biotechnology index (BTK.X) paused for a breather on Friday,
slipping back towards the $398-400 support level.  Given that it
had also been up for most of the week, AMGN decided to relax as
well and drifted back to the tune of 0.5%.  Neither of these
retracements appear to be cause for concern as both the BTK and
AMGN remain in their ascending trends.  Also, the selling volume
on AMGN was paltry at only just over half the ADV.  One
interesting thing we've noticed lately is that the stock appears
to be finding support at the 20-dma, which has now risen to
$61.96.  So traders looking to enter the play may want to
consider new positions on a rebound from the $62 area.  Stronger
support exists near $61 and entries there look good too.
Critical to the stock being able to advance further is going to
be the bulls' willingness to push price through the short-term
descending trendline connecting the recent highs.  Once above
that level (currently $63.40), which was just above Friday's
intraday high, look for AMGN to gather speed and take another run
at the $64 resistance level.  While momentum traders could chase
the stock higher on such a move, remember the way AMGN trades --
slow and steady with virtually all breakout moves being followed
by a pullback to test old resistance for its validity as new
support.  For that reason, we're still recommending sticking to
buying the dips for new entries into the play.

Suggested Options:
Shorter Term: The June 65 Call will offer short-term traders the
best return on an immediate move, but this is a higher risk
approach due to AMGN's slow-moving nature.  Traders with less
tolerance for risk will want to use the June 60 Call.

Longer Term: Due to the slow and deliberate price action for
which AMGN is known, traders looking to capitalize on a breakout
move above $64 will want to look to the July 65 Call.  This
option is currently out of the money, but should provide
sufficient time for the stock to move higher without time decay
becoming a dominant factor over the short run.

BUY CALL JUN-60 YAA-FL OI= 3330 at $3.40 SL=1.75
BUY CALL JUN-65 YAA-FM OI=11107 at $0.95 SL=0.50
BUY CALL JUL-60 YAA-GL OI=42561 at $4.40 SL=2.75
BUY CALL JUL-65 YAA-GM OI=26388 at $1.75 SL=0.75

Annotated Chart of AMGN:

Picked on May 11th at    $61.24
Change since picked:      +1.07
Earnings Date          07/22/03 (unconfirmed)
Average Daily Volume = 10.5 mln
Chart link:


Intl Business Mach - IBM - cls: 88.99 chg: -0.91 stop: 86.89

Company Description:
Big Blue is being heralded as the world's largest technology
company.  Considering their massive hardware and software
business across the globe it's not surprising.  However, IBM's
services and consulting business is growing by leaps and bounds
and is a major source of revenues.

Why We Like It:
Is the bull market back?  One might think so if they followed the
hardware sector.  The GHA hardware index is closing at levels not
seen since last June.  Contributing to the rally is a growing
expectation that (finally) the worst is behind us.  The last two
weeks have heard a growing chorus that this year (unlike the last
two) we would see a second half recovery.  There are still plenty
of nay sayers out there and investors should be careful now that
we're in the worst six months of the year but IBM did recently
state that the industry appears to have "stabilized".

If the markets are going to keep this rally alive then IBM looks
like one of the stocks ready to lead the way.  Shares have been
butting up against long-time resistance and flirting with 52-week
highs.  A recent Fidelity Insight newsletter revealed that
Fidelity the mutual company's fund managers bought some 13
million shares of IBM this latest quarter, which is a huge
increase over the fourth quarter purchases.  Sounds like the
"smart" money is turning more bullish on the markets, or at least

The chart below shows that we look for a dip to the $88-87 area
as a possible entry as well as any move over the $90.00 mark for
momentum traders.

Suggested Options:
We listed mostly 90-strike options but that reflects our
expectation of a breakout above the 89-90 level.  It would not
hurt to use the 85 strikes on dips or if you can afford them.

BUY CALL JUN 85 IBM-FQ OI= 8684 at $5.30 SL=2.50
BUY CALL JUN 90 IBM-FR OI=16483 at $2.05 SL=1.00
BUY CALL JUL 90 IBM-GR OI=33074 at $3.40 SL=1.75
BUY CALL OCT 90 IBM-JR OI= 8065 at $5.80 SL=3.00

Annotated chart for IBM:

Picked on May 4th at $87.37
Change since picked:  +1.62
Earnings Date      04/14/03 (confirmed)
Average Daily Volume = 8.2 Million
Chart link:


Elliott Wave Plays
By Steve Gould

Company Profile

The Dow Jones Industrial Average (DJIA) is a price-weighted index
composed of 30 of the largest, most liquid NYSE and NASDAQ listed
stocks.  The DJX is a cash-settlement index option representing
1/100 of the value of the DJIA.

Chart Analysis

Rather than repeat the analysis here, please read the article,
"Where is the Dow Going?" for 5/18/2003.

Trade Setup

Since the move down in the Dow will most likely take several
months, the December 2003 options should offer enough time for
the play to complete.

The price for the December 2003 options are as follows:

Sym   Strike   Type   Bid    Ask   Delta   Vol   OI
DJXXB   76     Put   1.95   2.10   -20.0   771  96788
DJXXB   80     Put   2.90   3.00   -24.3   404  47290
DJXXB   82     Put   4.10   4.50   -38.0    85  12706
DJVXR   96     Put  11.00  11.50   -57.5     3    866

The recommended option would be the Dec 80 Puts because of the
delta being so close to -25%.  Other options deeper in the money
would offer a lower risk, but also a lower reward.  Options
further out of the money offer a higher risk, but with a higher

What If We Are Right

Chart: DJX Position Analysis for First Target

The first target is the March 12 low of 7416.  Once the Dow
starts its downward move, it should happen rather quickly.  I am
allowing for three months.  At that time, should the Dow be at
7400, the options would be worth at least 7.70.  I say at least
because as the Dow plunges, the volatility will increase raising
the value of the option even more.

Along the way, we will be taking partial profits when the price
of the option double.  This will make it a risk free trade.

What If We Are Wrong

If the Dow reaches 8870, it will invalidate the current wave
count.  That does not mean that the Dow will not go down, it just
means that it may take a little bit longer before the decline
starts.  A break above the current wave 2 peak at 8870 would also
signal a move higher before it starts the decline.  These moves
should happen before the end of the month.

Scenario 1

Chart: Wrong Scenario 1

If the Dow reaches 8770 by the end of the month, the value of the
option will decrease to 2.55 for a loss of .45 or 15%.

Chart: Wrong Scenario 2

If the Dow reaches 8870 by the end of the month, the value of the
option will decrease to 2.30 for a loss of .70 or 23%.

Picked on May 19th at $86.79
Change since picked:  -0.00
Average Daily Volume = 248 million


Johnson Controls - JCI - close: 81.61 change: -2.14 stop: 85.25

Company Description:
Johnson Controls, Inc. is engaged in automotive systems and
facility management and control.  In the automotive market, the
company is a major supplier of seating and interior systems and
batteries.  For non-residential facilities, JCI provides building
control systems and services, energy management and integrated
facility management.

Why we like it:
While auto manufacturing stocks have been languishing lately due
to falling sales, stocks of their suppliers have been charging
ever higher for the past 2 months, and we were wondering what it
would take for reality to set in.  We got the answer on Friday
when Prudential downgraded a group of the parts suppliers,
including our new play JCI.  The firm believes that clouds on the
near-term horizon are likely to halt share price gains, citing
their expectation that May sales are likely to disappoint, coming
in well below 16.5 million units.  Apparently the firm got
investors' attention with its comments, as JCI gapped down nearly
$2 at the open and spent the rest of the day treading water
between $81-82, ending right in the middle of that range.
Probably the only thing that held the stock up was the fact that
the broad market held up rather well.

Friday's decline inflicted some significant damage on JCI's
chart, as price plunged below both the bottom of the 6-week
ascending channel (see below) and the 20-dma ($82.56).  Broken
channels have a tendency to retrace about half of the advance
when in the channel, so that gives us a preliminary target of
about $78.50.  That coincides nicely with solid historical
support near $78 and the 50-dma ($78.37).  But before heading
down to that target, we're counting on JCI to hold to another
common habit of stocks that break down from ascending channels -
bounce to retest the bottom of that channel as new-found
resistance.  Such a test would require JCI to pop back up to the
$84 area, but given the severity of today's drop, we have doubts
whether it can get that far.  So our targeted entry will be for a
rollover in the $83-84 area, followed by a continued decline.
The first downside objective will be the 200-dma just below $80,
and then a drop to the 50-dma.  Place stops initially at $85.25,
just above last Thursday's intraday high.

Suggested Options:
Short-term traders will want to focus on the June 85 Put, as it
will provide the best return for a short-term play.  Those
looking for a larger move down towards the $78 level will want to
utilize the July 80 Put, which provides greater insulation from
the spectre of time decay.

BUY PUT JUN-85 JCI-RQ OI=  20 at $4.70 SL=2.75
BUY PUT JUN-80 JCI-RP OI=2255 at $2.05 SL=1.00
BUY PUT JUL-80 JCI-SP OI= 111 at $2.85 SL=1.50

Annotated Chart of JCI:

Picked on May 18th at   $81.61
Change since picked:     +0.00
Earnings Date         07/15/03 (unconfirmed)
Average Daily Volume = 620 K
Chart link:


Ryland Group Inc - RYL - close: 55.90 change: -1.70 stop: 59.01

Company Description:
With headquarters in Southern California, Ryland is one of the
nation's largest homebuilders and a leading mortgage-finance
company. The Company, which currently operates in 25 markets
across the country, has built more than 205,000 homes and
financed over 175,000 mortgages since its founding in 1967.
(source: company press release)

Why We Like It:
It's not what it looks like.  We know it "looks" like we're
picking a top here in the housing sector and more specifically
shares of RYL.  While it might be a short-term top we're NOT
going to initiate any bearish plays until we can get more of a
breakdown in the stock price.  Shares did pull back strongly on
Friday after two days of weakness when the housing starts number
came out.  Analysts had been expecting a drop of 3.1% but instead
received a drop of 6.8% in housing starts.  This completely
reversed the 6.6% gain in March, which came on the backs of a
10.3% drop in February.  Keep in mind that most economists who
follow the housing sector usually need four months of data to
start considering any change in trend but we also need to
consider other factors.  February witnessed huge snowstorms
across multiple areas of the country and there was a media blitz
on the military build up on the borders of Iraq.  So the weather
and Iraq concerns played a part in February's results.  March's
weather was much more agreeable and the housing starts were
buoyed by the bounce in the stock market, which was a result of
the successful conflict in Iraq and a rebound in consumer
confidence.  So what about April?  Consumer confidence seemed to
slip a bit and retail sales numbers were worse than expected.
The rising unemployment in the U.S. and slow job market can weigh
on the conscience of anyone consider such a big decision as a

Do we think the housing market is going to slow down?  Honestly,
we don't know.  If the economic data continues to show no signs
of improvement, then the answer is probably yes if the U.S.
consumer grows more and more cautious.  However, with interest
rates at 40 year lows and bond prices near 50 year lows these are
major influences on the mortgage industry and the housing sector
should continue to do well for months even if rates start to
creep higher again.

So why consider a bearish play on RYL?  Well frankly, shares of
RYL have appreciated by more than 50% since their March lows and
even more since their December 2002 lows.  Let's just say this
strategy is based on the market maxim that nothing goes up in a
straight line (forever).  We had to add that "forever" in there
because several housing stocks have been going up in a straight
line or at least a very narrow channel since mid-March.  That's
actually a great thing for us because we can clearly see when the
stock breaks out of that channel.  There are a lot of traders who
have been sliding their stops up as the stock rises and when it
rolls over there will be profit taking.

Here is our plan.  IF and ONLY IF shares of RYL trade at or below
$54.85 will we open a bearish play on RYL.  Right now the stock
is very near the bottom of its narrow, rising channel and we
could easily see a rebound as dip buyers do their thing and pick
up shares near the $55.00 mark.  Honestly, if shares were not so
extremely oversold, we'd consider the bullish side of this trade
with a very, very tight stop just under $55.00.  If we get
triggered we'll start with a stop loss at $59.01.  Our initial
target will be $50.00 and we'll re-evaluate our strategy if we
get close to it.

REMEMBER, we are NOT opening a bearish play until shares trade at
or below $54.85.  Whether you're bullish on the housing sector or
not, this group and this stock price need to digest some of these
gains.  We just want to take advantage of any downturn.  Check
out the weekly chart attached below.

Suggested Options:
We're going to suggest June and July put options since stocks
tend to fall a lot faster than they go up.  If you're longer-term
bearish on the industry then October options should work.

BUY PUT JUN-55.00 RYL-RK OI=206 at $1.80 SL=0.90
BUY PUT JUN-50.00 RYL-RJ OI=429 at $0.60 SL=0.00
BUY PUT JUL-50.00 RYL-SJ OI=304 at $1.35 SL=0.60
BUY PUT OCT-50.00 RYL-VJ OI= 82 at $2.90 SL=1.50

Annotated Chart for RYL:

Picked on May Xth at $00.00
Change since picked:  -0.00
Earnings Date      04/23/03 (confirmed)
Average Daily Volume =  633 thousand
Chart link:

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Contact Support
The Option Investor Newsletter                   Sunday 05-18-2003
Sunday                                                      4 of 5

In Section Four:

Current Put Plays: AIG, GM, GS, MTG
Leaps: Anti-Gravity
Traders Corner: Our Profit Song - "Money, Money, Money By The
Traders Corner: Where is the Dow Going?
Traders Corner: Corrections Part I
Futures Corner: Size Really Does Matter

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American Intl Group - AIG - cls: 57.95 chg: +0.64 stop: $58.00

Company Description:
American International Group, Inc. (AIG) is the world's leading
international insurance and financial services organization, with
operations in approximately 130 countries and jurisdictions. AIG
member companies serve commercial, institutional and individual
customers through the most extensive worldwide property-casualty
and life insurance networks of any insurer. In the United States,
AIG is the largest underwriter of commercial and industrial
insurance and a top-ranked life insurer through AIG American
General. AIG's global businesses also include financial services,
retirement savings and asset management. AIG's financial services
businesses include aircraft leasing, financial products, trading
and market making. AIG's growing global consumer finance business
is led in the United States by American General Finance. AIG also
has one of the largest U.S. retirement savings businesses through
AIG SunAmerica and AIG VALIC, and is a leader in asset management
for the individual and institutional markets, with specialized
investment management capabilities in equities, fixed income,
alternative investments and real estate. AIG's common stock is
listed on the New York Stock Exchange, as well as the stock
exchanges in London, Paris, Switzerland and Tokyo.
(source: company press release)

Why We Like It:
Buyers just won't seem to give up and they have driven the IUX
insurance index back towards overhead resistance near 265.  A
breakout above 265 might be just the catalyst bulls need to push
shares of AIG above its own overhead resistance at its 200-dma.
So far we have been regulated to observers.  OptionInvestor.com
is still UNTRIGGERED in this suggested put play for AIG.  If AIG
can close above $58.50 we'll throw in the towel and admit the
rally in insurance still has farther to go.  However, on the slim
chance (and growing slimmer) that AIG does trade at or below our
trigger of $54.94, then we would initiate the play with a stop
loss at $58.00.  In the meantime, if you're looking for possible
put plays... check out the new put on RYL.

Suggested Options:
By the looks of it, we're pretty close to dropping AIG as a
potential put play.  Therefore we're not going to list any
suggested put options until we get a bit more momentum in our
direction.  Should we get triggered, then the June 55's or 50's
are probably our best bet.

Annotated Chart for AIG:

Picked on May Xth at $00.00
Change since picked:  -0.00
Earnings Date      04/24/03 (confirmed)
Average Daily Volume = 7.2 Million
Chart link:


General Motors - GM - close: 34.41 change: -0.47 stop: 37.00*new*

Company Description:
General Motors Corporation provides automotive-related products
and services by primarily designing, manufacturing and marketing
vehicles, as well as providing communications services and
financial services.  The company operates in two segments,
Automotive, Communications Services and Other Operations, and
Financing and Insurance Operations.  It's automotive business
segment consists of General Motors Automotive, which encompasses
four regions: GM Norma America, GM Europe, GM Latin
America/Africa/Mid-East and GM Asia Pacific.  The communication
services include digital entertainment, information and
communications services and satellite-based private business
networks.  The company's other operations include the design,
manufacturing and marketing of locomotives and heavy-duty
transmissions.  GM's Financing and Insurance Operations primarily
relate to General Motors Acceptance Corporation (GMAC).

Why we like it:
We didn't know what the catalyst was for the sharp decline on
Thursday afternoon, but we got our answer first thing on Friday
as Prudential cut the stock to a SELL rating, issuing a $22 price
target.  Sounds good to us!  We haven't minced any words about
the fundamental problems confronting this beleaguered car maker.
Following up on Thursday's slight decline under the $35 level, GM
plunged early on Friday, hitting an intraday low of $33.77
(interestingly only 3 cents below the bottom of the 4/02 gap)
before rebounding with the rest of the market.  But as we see it,
the damage has been done, and the close under the 50-dma ($34.66)
on volume well over double the ADV only confirms the weakening
technical picture.  As good as things look this weekend though,
caution is warranted due to the stubborn way GM has resisted
selling off in recent weeks.  For that reason, we made GM a long-
term play so that it only gets updated when price action warrants
it.  More importantly though, it is a warning to not chase price
action lower.  Wait for the subsequent rebound and enter on the
rollover.  Right now, the important resistance level appears to
be near $36, so a failed bounce in the $35-36 area looks good for
new entries.  The highest intraday level for GM over the past few
weeks has been $36.94, so we're lowering our stop to $37, even
though that level is below the 200-dma and long-term descending
trendline.  Traders willing to give GM more breathing room can
leave stops just above those important resistance measures at

Suggested Options:
Since we're covering GM as a long-term play, we're only listing
September options.  The 35 strike will provide the best balance
of risk and reward.  More aggressive traders can use the 32 or
even the 30 strike, which although they are currently out of the
money, should have plenty of time to move in the money if our
expectations for GM are realized.

BUY PUT SEP-35 GM-UG OI= 1901 at $3.70 SL=2.00
BUY PUT SEP-32 GM-UZ OI= 5608 at $2.55 SL=1.25
BUY PUT SEP-30 GM-UF OI= 5718 at $1.70 SL=0.75

Annotated Chart of GM:

Picked on May 4th at    $35.80
Change since picked:     -1.39
Earnings Date         07/15/03 (confirmed)
Average Daily Volume = 5.10 mln
Chart link:


Goldman Sachs - GS - close: 76.70 change: +0.60 stop: 77.50*new*

Company Description:
The Goldman Sachs Group is a global investment banking and
securities firm that provides a wide range of services worldwide
to a substantial and diversified client base that includes
corporations, financial institutions, governments and high net-
worth individuals. The company provides investment banking, which
includes financial advisory and underwriting, and trading and
principal investments, which includes fixed income, currency and
commodities, equities and principal investments.  GS recently
completed the acquisition of Spear, Leeds & Kellog, which is
engaged in securities clearing, execution and market making, both
floor-based and off-floor.

Why we like it:
If there's a way in which we would like our GS play to behave,
this isn't it.  Actually that's not entirely true, but we
certainly would feel better about the play if the bears had been
able to crack the $74 support level before this latest bounce.
At any rate, it looks like we're going to get a resistance test
at the short-term descending trendline and the bottom of the
broken channel near $77, possibly as early as Monday.  Given the
significantly improved picture on the Broker/Dealer index (XBD.X)
we aren't as excited about entering near that level as we were
this time last week.  The XBD plowed right through the $465
resistance level on Thursday and held onto the bulk of those
gains on Friday, raising the concern that GS might follow suit,
only just a bit later.  But that resistance looks too strong for
us to just abandon the play this weekend.  A sharp reversal from
the $77 level can be used for aggressive entries, but we'll feel
a lot better about taking entries once GS is back under $75,
preferably with a breakdown under $74.  Due to our heightened
concern, we're lowering the stop tonight to $77.50, which is just
above both the short-term descending trendline, as well as the
trendline that began in January of last year.

Suggested Options:
Short-term traders will want to focus on the June 80 Put, as it
will provide the best return for a short-term play.  Those
looking for a larger move down towards the early April gap will
want to utilize the June 75 Put or even the July 75 put, which
provides greater insulation from the spectre of time decay.

BUY PUT JUN-80 GS-RP OI= 385 at $4.30 SL=2.50
BUY PUT JUN-75 GS-RO OI=3207 at $1.75 SL=0.75
BUY PUT JUL-75 GS-SO OI=5495 at $2.70 SL=1.25

Annotated Chart of GS:

Picked on May 8th at    $74.06
Change since picked:     +2.66
Earnings Date         06/19/03 (unconfirmed)
Average Daily Volume = 4.30 mln
Chart link:


MGIC Invest. Corp. - MTG - close: 45.96 change: +0.75 stop: 48.50

Company Description:
MGIC Investment Corporation is a holding company that, through
its wholly owned subsidiary, Mortgage Guaranty Insurance
Corporation (MGIC), is a provider of private mortgage insurance
coverage in the United States to the home mortgage lending
industry.  Private mortgage insurance covers residential first
mortgage loans and expands home ownership opportunities by
enabling people to purchase homes with less than 20% down
payments.  Private mortgage insurance also facilitates the sale
of low down payment mortgage loans in the secondary mortgage
market, principally to the Federal National Mortgage Association
and the Federal Home Loan Mortgage Corporation.

Why we like it:
When we initiated bearish coverage of MTG on Thursday, we just
couldn't get excited about chasing the stock lower, in large part
because of the technical action points seen on Thursday's sharp
decline.  The intraday low came right on the 2-month ascending
trendline ($44.40), and the rebound ended just above the 200-dma
(then at $45.13).  Sure enough, our concerns were warranted, as
MTG dipped just a few pennies below the 200-dma on Friday and
then rebounded for the remainder of the day, ending just 2 cents
shy of its intraday high.  This doesn't dissuade us from the
premise of the play, as fundamentally the company could be in
trouble if mortgage defaults start to rise (or even if investors
believe they will).  It just confirms that this is a play that is
best entered on failed rallies at resistance, not breakdowns
below support.  To that end, we've got our eye on the $47 level,
as it appears to be a firm resistance zone.  A failed rally there
should be good for new entries, with stops in place at $48.50.
Traders that absolutely insist on entering on confirmed weakness
will need to see MTG break the $44 level before playing.

Suggested Options:
Short-term traders will want to focus on the June 45 Put, as it
will provide the best return for a short-term play.  Those
looking for a larger move down towards the $40 target will want
to utilize the September 45 Put, which provides greater
insulation from the spectre of time decay.  Note that the open
interest is largest on the June 45 strike, so that one will
likely provide the best liquidity.

BUY PUT JUN-50 MTG-RJ OI=  5 at $5.00 SL=3.00
BUY PUT JUN-45 MTG-RI OI=475 at $1.90 SL=1.00
BUY PUT SEP-45 MTG-UI OI= 80 at $3.70 SL=2.00

Annotated Chart of MTG:

Picked on May 15th at    $45.21
Change since picked:      +0.75
Earnings Date         07/15/03 (unconfirmed)
Average Daily Volume = 1.05 mln
Chart link:

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By Mark Phillips

That's the only explanation I could come up with late last week,
as the broad market inexplicably refused to show any appreciable
weakness in the face of what I would call more disappointing
economic reports.  The bond markets certainly responded as I would
have expected with yields drilling down to new 45-year lows in
response to the weak economic data.  But in response to the heavy
buying of bonds, equity bulls simply yawned.  Maybe they've
discovered how to control gravity!  Hey, last week I invoked the
Heisenberg Uncertainty Principle, why not the stuff of science
fiction this week?

Here's the conundrum that bothers me the most right here, and Jim
mentioned it in one of his Wraps last week.  Over the past year,
we've seen some explosive asset-allocation rallies launched as
money managers have jumped out of bonds and into equities at
extreme lows for both yields and equities.  So last week's drop to
new lows on yields certainly brings up the possibility of an asset
allocation driven rally.  The problem is that all the major
indices are already sitting at new highs for the year and very
near their highest levels since last July.  If we were to get that
asset allocation move, it could be just the catalyst to break
above some very significant overhead resistance in the major

The problem with that occurring is that on so many other measures,
the market is in dangerously overbought territory.  The Investor's
Intelligence poll is now showing bullish advisors outnumber those
in the bearish camp by 55.8% vs. 24.4%.  When sentiment in the
advisory community becomes this skewed to the bullish camp it
nearly always is predictive of a near-term top in the market.
Looking at some more quantifiable measures certainly bears out the
fact that the bulls are once again bearing most of the risk in the

Bullish percent measures are now looking extended, with the
following readings:

NASDAQ-100 - 78% (12/02 high of 82%)
NASDAQ Composite - 59.99% (highest reading going back to 1996)
DOW Industrials - 70% (11/02 high of 73%, 4/02 high of 76%)
S&P 500 - 68% (12/02 high of 68%, 3/02 high of 77%)
S&P 100 - 67% (12/02 high of 76%, 3/02 high of 79%)

In all cases, the major indices BP is either in or very near
overbought territory, but with further upside possible from a
historical standpoint.  The one notable exceptions is the COMPX,
which is currently sporting its highest BP reading ever.

The new high vs. new low readings have been in nosebleed territory
for a while now, but those measures are starting to weaken.  Linda
Piazza managed to cobble together some interesting symbols for us
last week (with the help of some readers), and what I'm looking at
is the number of new highs minus new lows for the NYSE and NASDAQ.
The symbols for these values on StockCharts.com are $NAHL for the
NASDAQ and $NYHL for the NYSE.  I find it interesting that the
$NAHL PnF chart finally generated a Sell signal on Friday, and I
take that as one of the early signs of weakness that we're looking

The VIX is sending its own signals for bulls to start becoming
increasingly wary, as it dipped below the 21 level ever so briefly
on Friday.  From our past discussions, we know that a drop into
the 19-21 area is always a predictor of dangerous territory for
the bulls.  The VIX could continue to fall from Friday's 21.01
close, but as it does it makes a better and better case for long-
term bearish plays.

With all of these factors pointing towards the markets drawing
ever closer to a top, we're continuing to bias our playlist more
towards the downside, with two more bearish Watch List plays
making the transition into the Portfolio last week.  Despite that
bias, we have our one remaining Portfolio Call play still holding
tough and our new Watch List play this week is one for the bulls.
See below for all the details.


EMC - This play has certainly been a good performer for us, but it
sure seems to be getting a bit long in the tooth.  Last week, EMC
probed above the $10 level on 4 out of 5 days, ending right on
that mark on Friday.  The ascending trendline has now risen to
$9.30, the 20-dma is now at $9.48, and the last reaction low was
at $9.28.  Something has got to give soon, and while I'm hoping
for one more push up the charts, my tolerance for downside risk is
steadily decreasing, especially now that we have a nice gain on
the play (120% on the '04 LEAP and 80% for the '05 LEAP).  So I'm
raising the stop to $9.25 this weekend.  Without question, we'll
close the play on any push up near the $11 level.  The PnF chart
still gives a bullish price target of $15.50, but the strength of
the $11 resistance level hints to me that we may be running out of
steam over the near term.  Certainly, I wouldn't fault anyone for
just harvesting a gain here.  Remember how we choked down on our
ADBE play a few weeks back and finally just took our leave of the
play near $38?  Look at the stock today and you can see that it is
starting to weaken with Friday's close back under $36.  I'm
viewing EMC in much the same light.  Either it pushes higher and
we take a targeted gain or we get taken out on an aggressive
trailing stop  Either way, at this point we win!

AIG - Is anyone else getting nervous about our AIG play?  After
several failed breakout attempts, the stock is pushing back
towards the strong $58-59 resistance level, which is also the site
of the 200-dma.  Additionally, the broken ascending trendline from
the rally off the March lows is right there at $58.75 as well.  If
the bulls manage a breakout here, the last chance for the bears to
exert their influence will be near the top of the late January gap
just over $60.  Traders still looking for an entry can certainly
use a failed rally from one of these resistance levels to initiate
that position, but ONLY after signs of a failure.  For now, we're
maintaining our position with a $61 stop and we'll just wait for
price action to unfold, either proving us right or wrong.

Watch List:

NEM - I don't have anything new to report on NEM.  Gold prices
continue to recover, with NEM hugging its descending trendline.
I expect price action to release from this resistance area over
the next several weeks and drift back down towards its ascending
trendline (just below $25) at which point we'll start looking for
a new entry point.  For now, the play remains on HOLD.

AMZN - I'm just about at the end of my rope on AMZN, as the stock
continues its relentless surge up the chart in action reminiscent
of the Internet bubble of a few years back.  I still expect a
sharp retracement in the months ahead, but there is no sense
initiating a bearish position in the stock until it starts showing
signs of weakness.  A quick look at the action of EBAY (hitting
$100 on Friday for the first time since March of 2000) and YHOO
(trading at new 52-week highs) shows that investors are hungry for
these Internet stocks.  But AMZN still looks to me like it should
head much lower -- I just haven't been able to find a compelling
technical entry.  So, I'm changing the approach a bit this week.
I'd still like to see a rally failure for an entry point, but
realize we may have to catch a breakdown under recent support in
order to really have any confidence in the trade.  So the upper
entry target now moves to $35-36, while we'll also initiate a
position on a drop through the $32 level, which is just below last
week's intraday support.

DJX - The DOW is certainly getting closer to a bearish entry
point.  Either that or it is preparing for an impressive explosion
upwards.  But with the VIX down at 21, and the DOW Bullish Percent
hitting 70% on Friday, I can't help thinking there's not a lot
more upside left.  That lack of bullish energy was certainly
evident last week, with the DJX continually rejected from just
above the $87 level, right at the descending trendline from the
August, December and January highs.  Despite this inability to
break out last week, I'm not falling for an early entry.
Technically, I still think there is another upward push in store,
with the $88.50 level being the logical target in my mind.  That's
where we'll look to enter the play (preferably with the VIX under
20) and set a liberal stop at $91, just above the August and
December intraday highs.

GS - Uh-oh!  Despite all the fundamental factors that I feel
should be weighing on the Brokerage stocks, the Broker/Dealer
index (XBD.X) solidly breaking above the $465 level last week for
the first time since late May of last year.  GS hasn't broken
above its own descending trendline near $77.50, but if the XBD
continues its relentless rise, I expect that breakout to occur.
So why am I not dropping GS this weekend?  Because I want to force
price action to prove me wrong -- there's no risk in that, and we
still may get a solid entry out of the process.  A failure below
the April highs is still a viable (albeit aggressive) entry, but
if GS closes above $79, then we'll end up dropping the play from
the Watch List.

Closing Thoughts:

As cited above, conditions in the market are edging ever closer to
that important inflection point, with my expectation that the next
directional move will be to the downside.  However, we have not
yet reached that point, with the bulls still refusing to give up
any significant ground.  To me, that means we're still early to
start aggressively lining up in the bears' camp, although it
certainly makes sense to get ready to do so.  As I'm sure you can
infer from my commentary above, I've had a hard time interpreting
all the different and somewhat confusing cross-currents in the
market in the past couple weeks.  We've gone further to the upside
than I thought likely a couple months ago, but not far enough to
do any serious damage to the framework of an overall secular bear
market that has yet to see its conclusion.

My approach going into next week is to continue being aggressive
in harvesting gains on bullish positions, but still be rather
passive about entering new bearish plays.  We need to see a bit
more downside in the VIX and the Bullish Percent readings start to
tip over before getting more aggressive to the downside.  That is
typical how I tend to trade near inflection points in the market -
- protect gains aggressively and gingerly test the waters with new
positions that appear to have good potential during the next
trending market move.

Have a great week!


LEAPS Portfolio

Current Open Plays


EMC    03/12/03  '04 $  7  LUE-AU  $ 1.40  $ 3.10  +121.4%  $9.25
                 '05 $  7  ZUE-AU  $ 2.15  $ 3.90  +81.40%  $9.25

AIG    04/24/03  '04 $ 55  LAJ-MK  $ 5.60  $ 4.60  -17.86%  $61.00
                 '05 $ 55  ZAF-MK  $ 8.50  $ 7.60  -10.59%  $61.00
GM     05/13/03  '04 $ 35  LGM-MG  $ 4.10  $ 5.10  +24.39%  $38.00
                 '05 $ 30  ZGM-MF  $ 4.60  $ 5.30  +15.22%  $38.00
KO     05/15/03  '04 $ 40  LKO-MH  $ 1.70  $ 1.85  + 8.82%  $47.00
                 '05 $ 40  ZKO-MH  $ 3.85  $ 4.10  + 6.49%  $47.00

LEAPS Watchlist

Current Possibles


NEM    03/09/03   HOLD         JAN-2004 $ 25  LIE-AE
                            CC JAN-2004 $ 20  LIE-AD
                               JAN-2005 $ 25  ZIE-AE
                            CC JAN-2005 $ 20  ZIE-AD
AMGN   05/18/03   $59-60       JAN-2004 $ 60  YAA-AL
                            CC JAN-2004 $ 55  YAA-AK
                               JAN-2005 $ 60  ZAM-AL
                            CC JAN-2005 $ 55  ZAM-AK

AMZN   04/13/03  $32-33        JAN-2004 $ 30  LOH-MF
                               JAN-2005 $ 30  ZWE-MF
DJX    05/04/03  $88-89        DEC-2003 $ 84  DJX-XF
                               DEC-2004 $ 84  YDJ-XF
GS     05/04/03  $76.50-77.50  JAN-2004 $ 75  KGS-MO
                               JAN-2005 $ 75  ZSD-MO

New Portfolio Plays

GM - General Motors $36.30  **Put Play**

Now that didn't take very long!  My preference for our LEAPS plays
is to see what happened with GM last week.  We put the stock on
our Watch List and got an entry point early in the week and then a
nice move in our direction to round out the week.  We were looking
for a failed rebound in the $37.00-37.50 area, and Monday's
intraday high was $36.94 looked good enough to me.  Since the
stock closed fairly close to its intraday high, I gave it one more
day and since GM didn't get anywhere close to that level on
Tuesday, I decided to initiate the Portfolio position.  As it
turned out, the timing couldn't have been much better.
Inexplicably, GM took quite a tumble on Thursday, cracking
fractionally below the $35 level on Thursday on no news.  My
expectation at the time was that the stock would be pinned near
that level on expiration Friday and a continuation of the bearish
move would have to wait for next week.  Wrong!  Prudential gave GM
a push off that price level early on Friday with their downgrade
of the stock to Sell, with a price target of $22.  Concerns cited
by the firm included an ugly pricing environment in the North
American market and the fact GM's US market share is still under
pressure.  My favorite comment though was the concern listed about
GM's pension plan problems, with the expectation that the
underfunding will soak up all of the company's free cash for the
next 4-5 years.  That drove the stock all the way down to the
$33.80 level (the bottom of the 4/02 gap), before a decent midday
rebound back to the 50-dma, which provided afternoon resistance.
The combination of the close under the 50-dma and the strong
selling volume certainly hints that the downward move is underway.
I don't expect GM to just fall out of bed though, as the dip
buyers are still very active in this market.  Watch for a failed
rebound in the $35.00-35.75 area to provide yet another favorable
entry point.  Initial stops are set at $38, which is above the
highest point in April, as well as the declining trendline
($37.50) and the 200-dma ($37.66).

BUY LEAP JAN-2004 $35 LGM-MG $4.10
BUY LEAP JAN-2005 $30 ZGM-MF $4.60

KO - Coca Cola $44.64  **Put Play**

Nobody was more surprised than I to see the recent rally in shares
of KO through the $43 level.  But I believe the push up near the
$45 level was simply a gift of an entry point for the bears.  The
rally that began on May 7th was prompted by a Morgan Stanley
upgrade, where the firm cited their belief that the outlook was
improving, along with their expectation of better pricing power in
2004.  The bloom on that rose seems to be fading right at the
descending trendline though.  KO has been testing that 9-month
trendline (also testing the 200-dma just below $45) for the past
week and looks to have failed on Friday.  I may have jumped the
gun by initiating the Portfolio position on Thursday, but the
failure to actually trade the $45 level looked like a good entry
to me.  After Friday's slide back under the $44 level, with daily
Stochastics starting to roll down from overbought, it looks like
we caught a nice top.  That doesn't mean that another test of the
$45 level isn't possible, just that the odds favor the bears right
now, especially with the overall market looking close to a near-
term top.  There is strong historical resistance in the $45-46
area as well and that should keep KO under pressure.  Just to be
in the safe side, our stop will start out just above that
resistance zone at $47.

BUY LEAP JAN-2004 $40 LKO-MH $1.70
BUY LEAP JAN-2005 $40 ZKO-MH $3.85

New Watchlist Plays

AMGN - Amgen, Inc. $62.31  **Call Play**

Biotechnology stocks have certainly enjoyed an impressive bullish
run in recent months, with the Biotechnology index (BTK.X) having
finally pushed through the $380 resistance level that has kept it
rangebound for the past year.  Not only that, but last week's
rally propelled the index through its descending trendline that
began in late 2000.  By any measure, this sector appears to really
be on the mend, and to its credit is less susceptible to
fluctuations in the overall economy.  Health care is one of the
few areas of the economy that is still growing at a respectable
pace, and given our obsession with living longer and healthier
lives, that trend is projected to continue.  When thinking of
Biotechnology, you can't help but think of AMGN, one of the
largest and most well-established companies in this arena.  At
first, you might think I'm nuts for listing AMGN as a new Call
play with weekly Stochastics already having dropped out of
overbought territory, but a closer look shows that every drop out
of overbought since last September has only resulted in a mild
dip, resulting in an attractive entry point for the next leg up
the chart.  AMGN broke above its own long-term descending
trendline in March and has only continued that bullish trend.  The
trend may look a bit mature for new bullish entries, but a quick
look at the PnF chart shows a bullish price target of $72,
providing still more upside potential.  Note the ascending
trendline that has continued to support price action for the past
6 months.  That action should continue so long as AMGN continues
to deliver with revenue and earnings growth.  That trendline is
currently at $59.25, reinforced by the rising 50-dma at $59.64 and
should be a firm floor for the stock.  AMGN is not a fast mover,
as it moves a bit higher, pulls back, and then pushes to new
recent highs.  So our approach will be to target entries on the
next significant pullback for a ride up towards its PnF price
target.  Target entries on a pullback into the $59-60 area, and
set stops at $57, just below the strong support level built up
during the March/April consolidation before the breakout over that
long-term descending trendline, which is currently at $58.50.

BUY LEAP JAN-2004 $55 YAA-AK **Covered Call**
BUY LEAP JAN-2005 $55 ZAM-AK **Covered Call**


GD - $64.80 All right, I give up.  I got too stingy on the entry
into GD a month ago just above $52.  Right on timing and
direction, but just a bit too conservative in terms of entry
price.  Sometimes these things happen and our job as successful
traders is to not succumb to the urge to chase.  Not only is GD up
more than $12 from that missed entry, but it has now reached what
I thought was the most optimistic upside target of $65 for this
post-war rebound cycle.  Weekly and daily oscillators are topped
out and the stock is back at strong resistance.  GD could continue
higher from here, but this is no longer the sort of play that
makes sense for LEAPS players.  We'll drop the play for now and
come back to revisit it in the future when it presents another
compelling technical setup.


Our Profit Song - "Money, Money, Money By The Pound"
By Mike Parnos, Investing With Attitude

It's music to our ears.  Each month we, at the CPTI, take our
pound of flesh from the 500-pound gorilla known as the stock
market.  A pound here, a pound there and, before we know it we're
in Fat City.  The fatter, the better.

The song, "Money, Money, Money By The Pound," is from Disney's
wonderfully entertaining musical feature "Pete's Dragon."  The
song was based on a plot of an evil doctor who wanted to chop up a
lovable animated dragon (Elliott) and sell it by the pound for
enormous profit.   Needless to say, the doctor was foiled – but we
won't be.

Our CPTI profit machine keeps generating dollars – a pound or two
at a time.  Fat City, here we come.

This Month's Profit Summary
This option cycle (May) we're proud to add a solid $2,275 to our
piggy bank of profits.  Soon we're going to need a bigger piggy
bank.  It doesn't get much better than that.  The new total is
$24,385 - for seven months of relatively stress-free trading.

Out of the four positions, three were profitable (SPX, SMH, MSFT)
for a total of $2,875.  Our DJX position lost $600.  There's now
another $2,275. Is that a roll of bills in your pocket, or are you
just glad to see me?

It was exciting this month.  The market damn near ran away from
us.  But, that's why we build in room for error in our positions.
If the markets trade within reason (whatever that may be), we will
normally be able to pull out some profits – and not overdose on
Tums, Valiums, chocolate chip ice cream, phone sex, or have to
schedule any extra shrink appointments.

Review Of May CPTI Portfolio Positions

Position #1 -- SMH Baby Condor.  Friday's Close: $28.31
SMH is the Semiconductor Holder Trust.  We feel that semiconductor
stocks have moved up a little too far and too fast.  We created a
baby condor by selling the May SMH $25 puts and $27.50 calls.  For
protection, we bought the May $22.50 puts and $30 calls.  The net
credit is $1.05

Our maximum profit range is $25 to $27.50.  We're only exposed for
the 2 1/2 point difference between the strikes ($25/$22.50 or
$27.50/$30) less what we've taken in ($1.05) = $1.45.  Maximum
potential profit is $1,050.  Our safety range was $23.95 to

On Friday morning, SMH traded down to about $27.60.  There was
some support there from Thursday.  When SMH did not continue down
and began to bounce off that support, it was time to act.  We
bought back the short $27.50 call for $.30.  Since we took in
$1.05, we recorded a profit of $750.

Position #2 – SPX Iron Condor.  Thursday's Close: 946.31
We believe the market may be a bit extended so we gave it a big
sandbox to play in.  We sold the SPX May 825 puts and the May 950
calls.  Then we bought the SPX May 800 puts and May 975 calls for
protection.  The net credit was $2.95.  Our exposure is a little
more than usual – 25 points less the $2.95 we took in = $22.05.
That's why we're only doing five contracts. Our maximum potential
profit is $1,475.

SPX behaved nicely and expired Thursday below our 950 short May
call – but not before scaring the putting a few extra years on a
number of CPTI trader.  Isn't it nice when resistance levels
actually resist and the Valium kicks in?  We realized our maximum
profit of $1,475.

Position #3 – MSFT Minage-A-Qua – Friday's Close: $25.57
Microsoft just came out with respectable earnings and
unenthusiastic guidance.  We believe that MSFT will finish at or
around $25.

We sold the May MSFT $25 puts and calls for a credit of $1.80.  We
bought the $27.50 calls and $22.50 puts for protection at a cost
of  $.45 – yielding a net credit of $1.35.  Our maximum profit
occurs if MSFT closes right at $25.  Our profit range is from
$23.65 to $26.35.  Our risk is only $1.15 with the potential to
make $1.35.  Maximum potential profit is $1,350.

On Friday morning, MSFT dipped to $25.55 – right to a Thursday
support level.  Then, it began to bounce and, once again, it was
time to act.  We bought back the short $25 call for $.70.  We
originally took in $1.35, so our profit was $650.

Position #4 – DJX Minage-A-Qua – Friday's Close: $86.79
The DJX tracks the DOW.  It looks like the DOW is in a minor
uptrend with resistance at $86 and support at $82.   We sold 10
contracts of the May DJX $84 puts and bought the May DJX $80 puts.
Then sold 10 contracts of the May DJX $84 calls and bought the May
DJX $88 calls for a credit of $.80 for a total net credit of
$2.25.   We'll receive our maximum profit if the DOW closes right
at 8400.  However, we will be profitable if the DOW closes
anywhere between 8175 to 8625.  That's a 450-point range.  The
closer it finishes to 8400, the greater the profit.  Maximum
profit potential: $2,250.

Oh well, we can't be right all the time.  We're taking a little
hit on this one.  When the DOW dipped into negative territory for
about 20 minutes today, I decided that, we'd hang on if it
continued down, or we'd bail if it bounced back up.  Guess what!
We had to buy back the short DJX $84 call for $2.85.  That means
we took a $600 loss on this position.

June Position #1 – SPX Iron Condor – Currently at 944.30
Sell 5 contracts of SPX June 995 calls
Buy 5 contracts of SPX June 110 calls
Net credit of $1.35

Sell 5 contracts of SPX June 895 calls
Buy 5 contracts of SPX June 880 calls
Net credit of $1.55

Total net credit of $2.90.   We're giving the S&P 500 a 100-point
range.  We'll get our maximum profit of $1,450 if SPX closes
within a huge 895 to 995 range.  Our exposure is $12.10 ($15
points less the $2.90 credit).  If it works, it's about a 24%
return on risk.

The SPX trades only on the CBOE.  The net credit includes shaving
a little bit from each option price.  Hopefully, you'll be able to
submit the trades as a spread with a net credit.  Even if you come
within $.25 of the total net credit, it should still be a good

June Position #2 -  BBH Iron Condor – Currently at $104.19
Sell 10 contracts of BBH June $100 puts @ $1.55
Buy 10 contracts of BBH June $95 puts @ $.75
Net credit of $.80

Sell 10 contracts of BBH June $110 calls @ $.85
Buy 10 contracts of BBH June $115 calls @ $.30
Net credit of $.55

Total credit of $1.35.  We're giving BBH a 10-point range.  The
biotechs have been moving up and it looks like BBH is establishing
a new range.  There's support near $100.  We'll get our maximum
profit of $1,350 if BBH closes between $100 and $110.  Our
exposure is $3,650 ($5 points less the $1.35 credit).  If it
works, it's about a 36% return on risk.

Note:  For CPTI traders who are more patient and appreciate a
higher degree of safety, you can take in a credit of $1.00 on a
July $95/$115 iron condor with a 20-point range.  It's a two-month
exposure, but there's double the range.

June Position #3 – TOL – Bear Call Spread Plus – Currently at

Sell 10 contracts of June TOL $25 calls @ $1.40
Buy 20 contracts of June TOL $30 calls @ $.15
Net credit of $1.10

We're slightly bearish on the housing market and believe TOL will
finish below $25.  But, just in case we're wrong, we're buying 10
additional contracts of the $30 calls to protect ourselves.  You
might even be able to get the $30 calls for $.10 instead of $.15
on Monday.  Maximum potential profit is $1,100.

June Position #4 – COF Iron Condor – Currently at $44.84
Sell 10 contracts of June COF $47.50 calls @ $1.55
Buy 10 contracts of June COF $50 calls @ $.95
Net credit of $.60

Sell 10 contracts of June COF $40 puts @ $1.05
Buy 10 contracts of June COF $37.50 puts @ $.65
Net credit of $.40

Total credit of $1.00.   We're giving COF a $7.50 range.  This is
a credit card stock that appears to have topped out and there's
support around $40.  We'll get our maximum profit of $1,000 if COF
closes between $40 and $47.50.  The nice part is that our exposure
is only $1.25 ($2.50 less our $1.00 credit).  If it works, it's an
80% return on risk.

June Position #5 – QQQ ITM Baby Strangle – Currently at $28.70
Buy 10 contracts of the July QQQ $30 puts @ $2.05
Buy 10 contracts of the July QQQ $28 calls @ $1.80
Total debit of $3.85.

The QQQs have made a big move up.  It's either going to break
through resistance or bounce of and head back down.  Our objective
is for a $3-4 move in the next month.  One of our long options
will hopefully pay for almost the entire position.  That will
leave our other long option, which is now practically free, poised
for the bounce back as the QQQs reverse.

Our exposure is only $1.85 because we have $2.00 of intrinsic
value.  This worked quite well in the past for us.  It will take
some time to play out so be a little patient. For those who want
to review how this strategy works, go to:


Are you a new Couch Potato Trading Institute student?  Do you have
questions about our plays or our strategies?  Feel free to email
me your questions.  An excellent source for new students is the
OptionInvestor archives where we've been discussing strategies and
answering questions since last July.  To find past CPTI (Mike
Parnos) articles, look under "Education" and then click "Traders
Corner."  They're waiting for you 24/7.

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.
Mike Parnos
CPTI Master Strategist and HCP



Where is the Dow Going?
By Steve Gould

I remember when I was about 10 years old, my parents gave me this
mechanical alarm clock.  I would wind up the spring on the bell
and set the time for it to go off.  Of course, the more I wound up
the spring on the bell, the louder and longer it would ring.

Instead of winding up the spring on an alarm clock, the Dow is
winding up a spring on the next break out.  Every week now it is
getting tighter and tighter and tighter.  Soon, very soon, the
time is going to come and the bell is going to go off very loud
and very long.

Chart: Dow Hourly 5/16/2003

Here is an hourly chart of the Dow.  For the first two days after
the Dow reached its peak on the C wave, it looked like it was
starting the wave i of the wave 1 down.  Then on 5/14, the Dow
spiked up and has been fibrillating ever since.  The Dow never
breached the trend line and is trading within a narrow range.

The pattern the Dow is tracing out is a classic ending diagonal
pattern.  An ending diagonal has a distinctive meaning and
exhibits special characteristics.

Ending diagonals can appear in either the 5 wave of a 5 wave basic
pattern or in the 5 wave of a C wave.  In either case, they signal
the end of a larger pattern and a dramatic reversal in trend.

The Dow breached the trend line as the C wave/v wave peaked.  This
is called a throw over and is a characteristic of an ending
diagonal.  This is a good sign as it helps to identify the
pattern.  Another characteristic of an ending diagonal is that the
4 wave will penetrate into the territory of the 1 wave.  This
violates one of the hard and fast rules of Elliott Waves, but this
is one of the exceptions.

So what does this mean in terms of the Dow?  Very soon the alarm
is going to go off and the Dow is going to go down...decisively.
The pattern is rather clear and the outcome very predictable.
Ending diagonals typically precede large moves in the opposite
direction.  Since this ending diagonal is on the upside, the move
will be down.

Unless of course, it doesn't.  I was talking with a buddy of mine
and we were discussing this ending pattern.  He said that he has
only seen one time where this pattern failed to produce the
dramatic trend reversal.  It was in Gold.  Gold traced out a very
similar pattern and instead of heading down, it took an unexpected
upswing in price.  Of course, one time out of the hundreds of
patterns that he has seen does not make for a high percentage
trade, but it is something to be aware of.

Finally take a look at this comparison of the Dow and the VIX.

Chart:  Weekly Dow/Vix

I know this graph didn't copy well, but it does show the "big"
picture of what is going on.

The Dow and VIX form an inverse relationship.  In other words,
when the Dow goes down, the VIX goes up.  When the Dow goes up,
the VIX goes down.

Right now the VIX is at a low.  Only two times in the last 5 years
was it lower.  At those two times, the Dow went down dramatically.
We are at one of those points right now. Let's say that the Dow
meanders for a little while longer.  The VIX will decline even
further, setting the Dow up for an even bigger move to the
downside.  If history repeats itself, we are in for a very large
decline, very shortly.

The bottom line is I believe the Dow is setting itself up for a
huge imminent decline.


Corrections Part I
By Steve Gould

One of the beauties of Elliott Waves is its simplicity.  All you
have to do is know how to count to three and five. (For those
needing remedial help, Sesame Street is an excellent resource.)
But in simplicity comes complexity.  One would think that the
complexity would be in the five counts.  But no.  The complexity
is in the three count.

Elliott Waves fall into two categories.  Either the wave is in the
direction of the larger trend or it is not.  Waves in the
direction of the larger trend are called motive waves and they are
always a five count.  Waves counter to the larger trend are called
counter trend or corrective waves and they are never five counts.
They are always three counts.

Five waves are relatively easy.  They always subdivide into
another five wave.  Three waves are not so easy.  They subdivide
into no less than 14,824,749 different combinations.  Well, not
really, but it sure seems that way at times.

It is said that the best way to eat an elephant is to eat it one
bite at a time.  The best way to learn corrective waves is to
study them one bite at a time.

Corrective waves fall into four main categories. They are


It is best to start with a simple one.  Let's begin with zigzags.

Figure 1: Zigzags

On the left in figure 1 is a typical zigzag.  Zigzags have several
defining features.  Zigzags, like all corrective waves, are a
three wave pattern.  Note how the B wave does not fully retrace
the A wave.  Typically, wave B will retrace somewhere between 50-
75% of wave A.  Also note how the C wave extends beyond the top of
the A wave.

Looking at the chart on the right in figure 1, we can examine the
subdivisions more closely.  Note that the A wave is a 5 wave basic
pattern.  The B wave is a 3 wave corrective pattern and the C wave
is another 5 wave basic pattern.  The zigzag subdivisions are
therefore 5-3-5.

Chart:  Alcoa Zigzag Chart

Here is a weekly chart of Alcoa (AA) for the year 2000.  At this
juncture in time, Alcoa is undergoing a 4 wave correction.  Since
4 waves are counter trend waves, it will print out one of the many
A-B-C corrective patterns.  See how this A-B-C wave clearly shows
a zigzag pattern.

We can see that the A wave clearly subdivides into a 5 wave basic
pattern. Furthermore, the B wave retraces 50%, the C wave extends
past the peak of the A wave and the C wave subdivides into a 5
wave basic pattern.  Classic.

A rule of thumb for corrections is that the correction will end at
about the level of the last 4 wave.  In the Alcoa chart, you can
see the last 4 wave occurred in 1999 at around the $28 level.  The
A-B-C correction actually went a bit lower to the $23 level.

As a side note, notice the differences in wave A and wave C.  The
A wave lasted about 6 months and was a slow, steady, progressive 5
wave basic pattern.  The C wave, on the other hand, lasted only
about 3 months and was a sharp decline.  This illustrates what is
called the rule of alternation.  The rule of alternation states
that whatever happens in one type of wave will not be expected to
happen again in the next incarnation of the same type of wave.

In this particular case, wave A and wave C are the same type of
wave.  Both are 5 wave basic patterns within the 4 wave.  Since
the A wave was a long, slow, meandering 5 wave basic pattern, we
would expect the C wave to be a short, fast, sharp 5 wave basic
pattern.  This is exactly what Alcoa traced out.

Let's now take the second bite out of the elephant and discuss

At first glance, flats look a lot like zigzags, but they have
major fundamental differences.

Figure 2: Flat chart

On the left in figure 2 is a typical flat.  Flats have several
defining features.  Again flats, being a corrective wave, are a
three wave pattern.  Note how the B wave fully retrace the A wave.
Typically, wave B will retrace somewhere between 75-100% of wave
A.  Also note how the C wave only extends to the top of the A

Looking at the chart on the right in figure 2, we can examine the
subdivisions more closely.  Note that the A wave is a 3 wave
corrective pattern.  The B wave is another 3 wave corrective
pattern and the C wave is a 5 wave basic pattern.  The flat
subdivisions are therefore 3-3-5.

Chart: AMD Flat Chart

Here is a weekly chart of Advanced Micro Devices (AMD) for the
year 1994.  For six months within 1994, AMD underwent a wave 4
correction.  Again, since 4 waves are counter trend waves, it will
print out one of the many A-B-C corrective patterns.  See how this
A-B-C wave clearly shows a flat pattern.

We can see that the A wave shows the 3 wave corrective, the B wave
retraces 85%, the C wave extends about to the peak of the A wave
(actually a little bit past) and the C wave subdivides into a 5
wave basic pattern.

The B wave may seem like it is longer than it should be in
relation to the other waves, but remember that the C wave is
always a 5 wave basic pattern.  This labeling accurately labels
this flat and the subsequent 5 wave.  If instead, we ended the 4
wave at the 2 wave of the 5 blue circle wave, we would be forced
to have a very short 3 wave within the 5 blue circle wave.  This
would violate a rule that states that the 3 wave is never the
shortest wave.

One of the variations of the flat is where the C wave extends
significantly past the A wave.  It looks very much like a zigzag
but the A wave is still a 3 wave corrective pattern.

The other variation of note is called the expanded flat.  This is
where the B wave extends beyond the origin of the A wave and the C
wave extends past the peak of the A wave.  The next chart traces
out what an expanded flat would look like.

Chart: Expanded Flat

This type of correction takes a little getting used to when
labeling a chart.  The clues to use are the subdivision of the 1
wave must be a 5 wave basic pattern and the A-B-C waves must be a
3-3-5 pattern.  Take a look at the following chart.

Chart: Dow Labeled by the Program

This is a chart of the Dow at the beginning of the year.

This may be subtle, but think about how the 2 wave would be
labeled.  According to Elliott Wave rules, we need an A-B-C
pattern and within that pattern, the C wave must trace out a 5
wave basic pattern.  It is just not possible to follow all the
rules by labeling the 1 wave and 2 wave this way.  Now look at the
labeling in the next chart.

Chart: Dow Labeled Correctly9

By labeling the 2 wave as an expanded flat, we are better able to
resolve the 5 wave basic pattern within the C wave.  This label
more accurately depicts what is happening in the chart pattern.

You may be thinking, what does it matter?  We need to correctly
label all waves because each wave count is built upon the previous
wave labeling.  If our wave count is inaccurate, we could be more
prone to label future waves incorrectly with potentially
disastrous results.

Corrective waves are the hardest part of Elliott Waves because
there are so many different combinations.  We have just covered a
few of them.  We will cover more in future articles, but for now,
it would be instructive to look at charts and just try to identify
the ones we have studied so far.


Size Really Does Matter
by Alan Hewko

Abbreviations used in this article:

                                    Ticker $ move per index pt
ES = E-mini SP500   June futures  ES03M    $ 50 per ES pt
YM = E-mini Dow $5  June futures  YM03M    $  5 per YM pt
NQ = E-mini NDX 100 June futures  NQ03M    $ 20 per NQ pt

Title: Size Really Does Matter

This article shall discuss how one determines what SIZE to trade
with Index Futures Trades – that is, now many contracts or lots
provide for good money management given various market conditions.

For those new to futures trading, the amount of money required to
DAY-trade ONE futures contract can vary from :

$500 to approximately $1800-2000 per contract.

This will simply depend on the Futures Broker and/or the Clearing
Firm used and your arrangement with them. Please note, I referred
to day-trading and not taking a position home overnight.

A large money management error is to trade futures over-leveraged.
By that, if your account has $10,000 in it, and you are with a
broker who requires $1,000 per contract to daytrade, you are able
to trade 10 lots – but that does not mean you should be just
because you can. That would be a classic example of over-extending
your leverage. By the same token, if some unusual event occurs,
that does not mean you should not VERY carefully do that full
maximum trade. Example: MSFT CSCO DELL and GE all warn at the same
time at Monday’s Open: (grins), in that scenario it is OK to grab
that 7 or 8 lot ES Short.

Needless to say, how many contracts you put down on any given
Futures Trade is an extremely important Trade Tool.

SIZE does matter.

If your futures trade account is very small, and you can only do 1
or 2 contracts, that makes scaling into Entries and scaling out of
Exits more difficult.

Likewise, if your average size is 12 contracts; you may prefer to
Enter a position with the full 12 lot, and then scale out your
Exits 4 lots at a time.

I would compare this to Stock Option Trading: how many option
contracts is the right size for each position? Some traders simply
buy a 20 lot each and every time, others tie it to a dollar amount
perhaps buying $10,000 worth of options regardless of how many
contracts that will get them.

I wish to make one thought VERY clear:
In no possible way am I suggesting you over-leverage your Futures
Account Trading !!

Since most of you reading this come from a Stock Options trading
background and perhaps are somewhat new to futures I will make
this reference. Remember when you first starting option trading?
You paper traded for a bit, then did some very tiny sized option
trades. Maybe just buying 1 lots to gain some real-world
experience for a week, and then buying 2 to 5 lots for a month.
Slowly over a period of time, you increased your option trade size
to whatever became comfortable for you. Perhaps you have been
slowly learning futures and doing mostly 1 to 2 lots of size for a
month with some success.

For sake of discussion, assume a $50,000 futures account with
$1000 margin required to daytrade each contract.

Given your personal financial risk/reward issues, you decide the
right size for you is 5 contracts to daytrade ($5000 on the
table); and perhaps just a 1 lot if you decide to take a position

Very often in the Market we have seen for many months, there are
very few outstanding-bet-the-house type signals. Most are average
quality long or short signals. Therefore, most trade positions are
done on Average Size. That is, very often, you do the majority of
your trades with 5 contracts (using the above scenario).

However, and this is an extremely important point:
Everyone knows there are times that if your account is able to, it
is good risk/reward to do more size than Average.

A good recent example was this past week: Every futures trader
knew what a large area of resistance the ES 950 level is/was. Last
week, the first time it got close to there in the 948 area, and
you felt SHORT was the right trade but that you also felt this was
going to be a GREAT Entry area : then you might consider doing
DOUBLE the Average Size. (using the example here, that would be an
Entry of 10 contracts rather than the 5 lot you do on average).

Likewise, there are times when the tape is much less clear.
So instead of doing your Average size of 5 lot, you just do 2 or 3
contracts, or perhaps just 1 lot.

Another example:
ES is downticking from 945s and selling hard, and is now 936s.
You know ES 935-936 to be an area of large support and are Flat.
You buy 5 lot at 935s (Average Size).
You ponder doing a Double size entry, but decide to wait to
confirm that you are correct, and will ADD to the existing
position at 938; and do so.
You buy 5 more ES at 938 for a total size of 10 lots.

Another example:
Tape is chop between pivots of 941 and 943s. You sense no clear
breakout or breakdown is coming, but this is a SCALP situation.
Your entire goal for the Trade is only 1 ES point.
Your signal is very good and you are confident of the trade.
Rather than just doing an Average size entry of a 5 lot, there are
times to consider doing the 1 point ES SCALP for a Double Size of
10 lot.
Likewise, there are times of CHOP, when the signal is much less
certain and in that case you might only do the 1 pt ES SCALP on
one-half Average Size of 2 to 3 contracts.

I respect that much of this article is very basic.

I did however wish to let new futures traders know that Daytrade
margin does vary greatly from Broker to Broker, and also from
Clearing firm to Clearing firm.

Please PLEASE note I am NOT suggesting that anyone ever trade
futures over-leveraged.

However, the main thought I wished to leave you with is that
SIZE is a Trade Tool.

I would rather trade a much larger number on contracts for a
smaller goal on lower-risk signals.
Example: this past Friday near 9:45 AM provided an excellent Short
opportunity around ES 948-949 : taking that lower-risk Entry on
perhaps TRIPLE size *BUT* only going into the trade seeking 3-5
pts as the final goal are trades that I personally like. That one
trade would produce more overall profit than scalping Average size
all day long, or trading Average size and trying to catch home
runs of ES 8 to 10 points profit.

Trade Confidence and Size:

Some traders take the next trade on the same size they took their
last 10 trades without any thought for how good a win/lose streak
they are on.
Other traders if they are having a good trade day, or good trade
week, may slightly add to their size on following trades.
Some, if they are having a losing day, will trade very small size
until their personal trade confidence returns.

There is no one right or wrong method and everyone must decide
what is right for their personal trade style.


Just as with Stock or Stock Option Trading :
There are times to trade AVERAGE size
     (whatever that may be for YOU)
There are times to trade ABOVE-AVERAGE size
      (if some unusual event occurs, or the stock/index hits major
support or resistance)
There are times to trade LESS-THAN-AVERAGE size
       (when there’s a weak trade signal, or you think you are
right but certainly not sure).

Alan Hewko

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Contact Support
The Option Investor Newsletter                   Sunday 05-18-2003
Sunday                                                      5 of 5

In Section Five:

Covered Calls: Adjustment Strategies For Covered-Calls
Naked Puts: Q&A With The Editor
Spreads/Straddles/Combos: Equities Retreat: Is It Just A Necessary

Updated In The Site Tonight:
Market Posture: Higher Still

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Trading Basics: Adjustment Strategies For Covered-Calls
By Mark Wnetrzak

The recent upside activity in the market has made selling calls
on portfolio stocks a difficult strategy for some investors.

Attn: Covered-Calls Editor
Subject: Adjustment Strategies


I know you cannot give specific advice.  My question is a general
one.  I bought 1000 shares of a stock and I shorted the May calls.
Now the calls are $5 in the money and the trade is profitable.  My
question is: how to deal with a situation like this when expiration
is near?

Do I hold the trade until expiration and the stock will be taken
away; or buy back the calls back and sell the stock simultaneously
right now; or wait until near expiration on Friday and buy back the
stock and sell the stock?

Your comments are highly appreciated.

P.S.  Is there a book or article that deals with similar situations?

Thank You


Regarding Covered-Call adjustments:

Adam, remember we view the covered-call strategy as a single trade
targeting the higher probability of a low but reasonable return.
When the market becomes extremely bullish as it is now, one of the
drawbacks to plague CC writers is "seller's remorse".  If you are
extremely bullish on a company and do not want to lose the stock,
DO NOT sell covered calls.  Many investors discard the covered call
strategy because they cannot stand to limit their profits.  To the
conservative ITM covered-call writer, your present position could
simply be regarded as a successful trade.

Generally, there are several choices available to the covered-call
writer: One, do nothing, let the underlying stock be assigned after
expiration (called away) and accept the original profit; Two, after
evaluating the cost of extra commissions verses the increase in the
annualized return, close the position early if the call is trading
near parity (usually this needs to occur fairly quickly after the
entering the position); Three, an investor can attempt to increase
the potential profit by rolling the sold calls forward and/or up.

When closing a covered-call position, an extra option commission
must be taken into account.  To ensure a proper exit and avoid
excessive slippage (due to stock movement), a "net order" could
be used.  You would place an order to "sell the stock and buy-to-
close the calls for a net credit of $xx.xx" (a price reasonably
close to parity).  The goal is to produce a reasonable profit in
a shorter time frame so that the annualized return of the new
yield is at least equal if not greater than that of the original

Rolling-up or buying back the current calls and selling new calls
with a higher striking price (usually incurring a debit), is one
method to increase the profit potential at the expense of losing
downside protection.  The cost basis or break-even point will be
raised by the amount of debit required to roll-up (cost of buying
back the original calls less the premium of selling the new calls).
Many professional traders frown at putting more money on the table
(by increasing the cost basis) to increase the potential profit.

In an attempt to limit the debit of rolling up, investors may find
it advantageous to roll forward (and up) to a later expiration.
Moving to a future time frame or LEAP can more than offset the cost
of buying back the original calls.  Again, evaluating the annualized
return of the new position with the increased commission costs and
time frame is a must.  Generally, professionals do not roll up if
a 10% correction in the stock price cannot be withstood (though
this percentage may not be applicable to the more volatile stocks).

Timing the adjustment is also important.  Professionals will wait
for the time premium to dissipate from the written calls before
rolling forward and/or up.  Be advised that with deep in-the-money
calls, the time premium can disappear quickly and well before
expiration.  As long as there is time premium left in the calls,
there is little risk of early assignment (and you are earning time
premium by staying with the original position).  However, once the
option trades at parity or a discount, there is a significant
probability of exercise by arbitrageurs (floor traders who don't
pay commissions).

As always, you need to evaluate the risk-reward scenarios above and
make a decision that fits your trading plan based on your outlook
for the underlying equity and stock market.

Larry McMillan's book, "Options: As a Strategic Investment," is an
excellent resource for option traders.  In Chapter 2, he explains
the various strategies (and possible adjustments) involved in
writing covered-calls.

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 our subscribers, 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 editor of this section does not take actual positions in any
published plays and the summary comments are 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 in
any way replace your duty to diligently monitor and manage the
positions in your portfolio.

Note:  Margin not used in calculations.

Stock   Price   Last    Option    Price   Gain  Potential
Symbol  Picked  Price   Series    Sold   /Loss  Mon. Yield

AMR      5.47    6.58  MAY  5.00  0.70    0.23*  10.5%
TER     12.75   14.31  MAY 12.50  0.75    0.50*   9.1%
XICO     5.09    5.68  MAY  5.00  0.45    0.36*   8.4%
OSTE     8.39   13.60  MAY  7.50  1.30    0.41*   8.4%
GRP     12.52   13.60  MAY 12.50  0.45    0.43*   7.7%
IMMU     2.95    4.81  MAY  2.50  0.65    0.20*   7.6%
ASML     7.59    9.09  MAY  7.50  0.55    0.46*   7.1%
CYBX    23.87   22.55  MAY 22.50  2.05    0.68*   6.8%
ABGX    10.77   11.18  MAY 10.00  1.05    0.28*   6.3%
CAL      5.68   11.60  MAY  5.00  1.00    0.32*   5.9%
SEAC     7.80   10.44  MAY  7.50  0.75    0.45*   5.5%
OSIP    21.19   23.97  MAY 17.50  4.10    0.41*   5.2%
CCRD    11.05   13.48  MAY 10.00  1.50    0.45*   5.1%
IGEN    38.90   36.30  MAY 35.00  4.70    0.80*   5.1%
ALTR    15.78   17.61  MAY 15.00  1.45    0.67*   5.1%
IFX      8.17    8.20  MAY  7.50  1.00    0.33*   5.0%
CTLM     5.18    8.91  MAY  5.00  0.45    0.27*   5.0%
NEOL    13.50   15.56  MAY 12.50  1.80    0.80*   5.0%
UNTD    19.23   21.67  MAY 17.50  2.80    1.07*   4.7%
RINO    13.29   15.66  MAY 12.50  1.40    0.61*   4.5%
BMRN    12.06   11.25  MAY 10.00  2.35    0.29*   4.3%
COMS     5.17    5.62  MAY  5.00  0.45    0.28*   4.3%
PDE     15.17   18.72  MAY 15.00  0.60    0.43*   4.3%
MVSN    15.97   17.55  MAY 15.00  1.40    0.43*   4.3%
AAII    11.43   12.82  MAY 10.00  1.80    0.37*   4.2%
PLCE    13.34   13.28  MAY 12.50  1.40    0.56*   4.1%
UNTD    19.67   21.67  MAY 17.50  2.95    0.78*   4.1%
NEOL    13.60   15.56  MAY 12.50  1.65    0.55*   4.0%
MSCC    11.77   11.72  MAY 10.00  2.25    0.48*   3.7%
OVRL    18.02   16.97  MAY 17.50  0.95   -0.10    0.0%

MOSY     7.50    7.99  JUN  7.50  0.60    0.60*   6.3%
TER     13.06   14.31  JUN 12.50  1.40    0.84*   5.2%
MDR      5.08    5.85  JUN  5.00  0.40    0.32*   5.0%
FFIV    15.45   16.68  JUN 15.00  1.30    0.85*   4.4%
GNTA     8.78    9.88  JUN  7.50  1.70    0.42*   4.3%
MRVL    26.72   27.98  JUN 25.00  3.10    1.38*   4.2%
GP      17.99   19.20  JUN 17.50  1.40    0.91*   4.0%

*   Stock price is above the sold striking price.


"Bullishness" continued to prevail throughout the week with
only the Russell 2000 Index (RUTX) acting a bit worrisome on
Friday.  The May covered-call portfolio almost batted a 1000
with only Overland Storage (NASDAQ:OVRL) missing the mark as
it consolidated to its 50-dma.  Even our closed position in
Tommy Hilfiger (NYSE:TOM) rallied back to positive territory,
serving additional proof of Murphy's Law.  I should do some
research, but I think every time the portfolio has performed
exceptionally well in the past, that has signaled at least an
intermediate-term market top.  Just something to consider for
those suffering a bit of seller's remorse.

Positions Previously Closed: Tommy Hilfiger (NYSE:TOM).


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

NOR     2.67  JUN  2.50  NOR FZ  0.40  552     2.27  35   8.8%
ABGX   11.18  JUN 10.00  AZG FB  1.90  538     9.28  35   6.7%
IDNX    5.60  JUN  5.00  IDX FA  0.90  2372    4.70  35   5.5%
OVER   14.55  JUN 12.50  GUO FV  2.75  3404   11.80  35   5.2%
PLUG    5.39  JUN  5.00  PQL FA  0.65  419     4.74  35   4.8%
CELG   31.48  JUN 30.00  LQH FF  2.80  1433   28.68  35   4.0%
BRCM   21.40  JUN 20.00  RCQ FD  2.25  18944  19.15  35   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).

NOR - NorthWestern  $2.67  *** Cheap Speculation ***

NorthWestern Corporation (NYSE:NOR) is a service and solutions
company providing integrated energy, communications, heating,
air conditioning, ventilation, plumbing and related services and
solutions to residential and business customers throughout North
America.  The company owns and operates a regional electric and
natural gas utility in the upper Midwest of the United States.
The company distributes electricity in South Dakota and natural
gas in South Dakota and Nebraska through its energy division,
NorthWestern Energy (formerly NorthWestern Public Service).  The
company is also responsible for distributing electricity and
natural gas in Montana.  NorthWestern continues to wallow in
the mud of executive resignations, restatement of results, and
on Thursday, an informal inquiry by the SEC.  And the stock
rallied strongly on heavy volume?  Pure (and cheap) speculation
for those looking to bottom-fish in the utility sector.

JUN-2.50 NOR FZ LB=0.40 OI=552 CB=2.27 DE=35 TY=8.8%

ABGX - Abgenix  $11.18  *** Rally Mode! ***

Abgenix (NASDAQ:ABGX) is a biopharmaceutical company that is
focused on the discovery, development and manufacture of human
therapeutic antibodies for the treatment of a variety of disease
conditions, including cancer, inflammation, metabolic disease,
transplant-related diseases, cardiovascular disease and infectious
diseases.  Abgenix has proprietary technologies that facilitate
rapid generation of highly specific, antibody-therapeutic product
candidates that contain fully human protein sequences and that
bind to disease targets appropriate for antibody therapy.  Abgenix
developed its XenoMouse technology, a technology using genetically
modified mice to generate fully human antibodies.  It also owns a
technology that enables the rapid ID of antibodies with desired
function and characteristics, referred to as SLAM technology.
Abgenix continues to rally higher and the resistance area near
$9.50 (the AUG, NOV, and early APR highs) should now provide near
term support.  Investors can "target shoot" and entry point in
Abgenix with this position.

JUN-10.00 AZG FB LB=1.90 OI=538 CB=9.28 DE=35 TY=6.7%

IDNX - Identix  $5.60  *** On The Mend? ***

Identix (NASDAQ:IDNX) provides a broad range of fingerprint and
facial recognition technology offerings that facilitate the
identification of individuals who wish to gain access to
information or facilities, conduct transactions and obtain
identifications.  The company's products serve a broad range
of industries and market segments, most notably, government and
law enforcement, aviation, financial, healthcare and corporate
enterprises.  Identix' offerings can be classified into five
categories: technology, products, platforms, project management
services and fingerprinting services.  The current technical
outlook for Identix is recovering and our conservative position
offers excellent reward potential at the risk of owning this
industry-leading issue at a favorable cost basis.

JUN-5.00 IDX FA LB=0.90 OI=2372 CB=4.70 DE=35 TY=5.5%

OVER - Overture Services  $14.55  *** Buyout Potential? ***

Overture (NASDAQ:OVER) is engaged in the Pay-For-Performance
search on the Internet.  The company's search service is
comprised of advertiser's listings, which are screened for
relevance and accessed by consumers and businesses through
Overture's affiliates, a network of Web properties that have
integrated its search service into their sites or that direct
user traffic to Overture's own site.  In some cases, consumers
and businesses access the company's search listings directly
at its site.  The search listings are ranked by the advertisers'
bid; the higher the bid, the higher the ranking.  Advertisers
pay Overture the bid price for clicks on the advertisers' search
listing, click-through or a paid click.  As of December 31, 2002,
Overture and its wholly owned subsidiaries operated the search
service in the United States, United Kingdom, Germany, France
and Japan.  What's up with Overture Services?  The stock rallied
sharply on Friday on speculation of an acquisition by Yahoo!
(NASDAQ:YHOO).  Overture is an ongoing candidate for a buyout
or merger by larger companies trying to compete with Google.
We simply favor the abrupt technical change and traders can
speculate on the outcome of the rumors with this conservative

JUN-12.50 GUO FV LB=2.75 OI=3404 CB=11.80 DE=35 TY=5.2%

PLUG - Plug Power  $5.39  *** Fuel Cell Rally? ***

Plug Power (NASDAQ:PLUG) designs, develops and manufactures on-
site electric power generation systems utilizing proton exchange
membrane (PEM) fuel cells for stationary applications.  Plug's
initial product is a fully integrated, grid parallel 5-kilowatt
fuel cell system that operates on natural gas.  This initial
product is intended to offer quality power while demonstrating
the market value of fuel cells as a preferred form of alternative
distributed power generation.  The company's R&D facility contains
over 150 test stations where its conduct design optimization and
verification testing, rapid-aging testing, failure mode and
effects analysis, multiple technology evaluations, and endurance
testing in the company's effort to accelerate the development and
commercialization of its fuel cell systems.  Shares of several
fuel cell developers rallied this week on no news.  Plug Power has
been forging a Stage I base near $5 for almost a year and traders
can use the inflated premiums to establish a bullish, low-risk
position in the issue.

JUN-5.00 PQL FA LB=0.65 OI=419 CB=4.74 DE=35 TY=4.8%

CELG - Celgene  $31.48  *** Bullish Biotech!  ***

Celgene (NASDAQ:CELG) is a commercial-stage biopharmaceutical
company.  The company is primarily engaged in the discovery,
development and commercialization of small molecule drugs that
are designed to treat cancer and immunological diseases through
gene and protein regulation. Small molecule drugs are man-made,
chemically synthesized drugs that, because of their relatively
small size, can typically be administered orally.  The firm's
drugs are designed to modulate multiple disease-related genes,
including cytokines (which are proteins) such as Tumor Necrosis
Factor alpha, or TNF(alpha), growth factor genes such as those
that control angiogenesis, blood vessel formation and apoptosis
genes.  Because the company's drugs can be administered orally,
they have the potential to advance the standard of care beyond
current injectible protein drugs that inhibit TNF (alpha) and
other disease-causing cytokines.  Celgene expects to meet or
exceed 2003 financial targets, as its new cancer drug Thalomid
propels the company to profitability.  Celgene also recently
said it has discovered a new class of anti-cancer compounds and
is in the early stages of developing them in the lab.  This
position offers investors who wouldn't mind owning the stock,
a reasonable entry point near technical support.

JUN-30.00 LQH FF LB=2.80 OI=1433 CB=28.68 DE=35 TY=4.0%

BRCM - Broadcom  $21.40  *** Bottom Fishing ***

Broadcom (NASDAQ:BRCM) is a provider of highly integrated silicon
solutions that enable broadband communications and networking of
voice, video and data services.  Broadcom designs, develops and
supplies complete system-on-a-chip solutions and related hardware
and software applications for every major broadband communications
market.  Broadcom's diverse product portfolio includes solutions
for digital cable set-top boxes and cable modems; high-speed local,
metropolitan and wide area and optical networks; home networking;
Voice over Internet Protocol; carrier access; residential broadband
gateways; direct satellite and terrestrial digital broadcast; DSL;
wireless communications; SystemI/OTM server solutions, and for
broadband network processors.  Broadcom appears to be completing
a bottom formation with the move through resistance around $20.
Our opinion is simply that Broadcom is an industry leader and a
technology stock we would love to have in our long-term growth

JUN-20.00 RCQ FD LB=2.25 OI=18944 CB=19.15 DE=35 TY=3.9%



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   Option    Option  Last  Open   Cost  Days Target
Symbol Price   Series    Symbol  Bid   Int.   Basis Exp. Yield

ENMD    2.61  JUN  2.50  QMA FZ  0.35  180     2.26  35   9.2%
IPXL    8.00  JUN  7.50  UPR FU  1.15  247     6.85  35   8.2%
MEDX    5.00  JUN  5.00  MWM FA  0.40  430     4.60  35   7.6%
CTIC   10.21  JUN 10.00  CUC FB  1.00  1575    9.21  35   7.5%
AMT     7.66  JUN  7.50  AMT FU  0.65  835     7.01  35   6.1%
EXTR    5.33  JUN  5.00  EXJ FA  0.65  8006    4.68  35   5.9%
SEAC   10.44  JUN 10.00  UEG FB  1.05  143     9.39  35   5.6%
FCEL    8.09  JUN  7.50  FQG FR  1.00  413     7.09  35   5.0%
PLCM   12.76  JUN 12.50  QHD FV  0.90  106    11.86  35   4.7%
SKYW   14.95  JUN 15.00  UWQ FC  0.70  28     14.25  35   4.3%
T      18.12  JUN 17.50    T FW  1.40  6646   16.72  35   4.1%
ANPI   28.27  JUN 25.00  AUJ FE  4.40  1091   23.87  35   4.1%
SOHU   22.83  JUN 20.00  UZK FD  3.70  1473   19.13  35   4.0%


Options 101: Q&A With The Editor
By Ray Cummins

One of our readers has some questions about the differences in
the calculations for return on investment with covered-calls and

Attn: Naked Puts Editor
Subject: Profit Calculations

Hello Ray,

I have been looking at the plays in the naked puts and covered
calls sections and I noticed that some of the positions with
the same strike price will have different return on investment
numbers.  I always thought a covered call and a naked put were
basically the same strategy.  If you are doing one or the other
at exactly the same time, with the same cost basis, why would a
naked put have such a large profit with regard to covered calls?
I assume the numbers are correct, so then why would anyone sell
covered calls instead of naked puts?



Regarding the "return on investment" comparison with naked-puts:

The calculations are correct and they are based on the customary
collateral formulas used by online brokers such as E-trade, Schwab
and Ameritrade.  The reason such a disparity exists is because the
covered-call returns do not include the use of margin (buying the
stock at 50% of its actual price), whereas the naked-put collateral
requirements are often only 20% of the underlying issue's current
value.  Such is the case in the positions you often see duplicated
in the "Supplemental Candidates," where one play requires that you
purchase the stock outright, at full price, while another involves
only the commitment of cash (or portfolio securities) of a much
smaller amount.  Your assessment regarding the similar risk-reward
outlook in both covered-calls and naked-puts is accurate.  There
are no fundamental differences in the two strategies other than the
basic collateral requirements and commission costs, thus writing
cash-secured puts is (theoretically) the more favorable of the two

You asked, "Why would anyone do covered-calls?" since an equivalent
naked-put outperforms the covered-write.  Remember, our goal is to
provide a range of candidates in both strategies as there are many
novice investors who cannot sell "uncovered" options (due to the
requirement for a higher level of experience and account value) as
well as those who are simply looking for conservative strategies to
improve the performance of their individual retirement accounts.
Also, some investors aren't comfortable writing "naked" options and
many have yet to learn (as you have) that buying and selling stock
options outright can be more profitable than many strategies which
involve ownership in the underlying issue.

Finally, the duplication of a stock as a "New Play" in both sections
is rare and it is something we attempt to avoid (as we are trying to
provide a large selection of potentially profitable plays), but it
will happen occasionally when there is a shortage of good candidates
or we believe the position offers uncommonly favorable technical or
fundamental characteristics.  In most cases, duplicate positions are
listed only as a "supplemental" candidates (explained in that segment
of the newsletter) in one section when it is a primary candidate in
another portfolio.  Obviously, the Covered-Calls section of the OIN
can be used as a Naked-Put candidate list, even though we try to post
a variety of viable plays in both portfolios.

I hope this explanation helps you understand the difficulty we have
in producing these sections (for a variety of different traders) and
with any luck, you will eventually profit from some of the plays we

Good Luck!


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 our subscribers, 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 editor of this section does not take actual positions in any
published plays and the summary comments are 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 in
any way replace your duty to diligently monitor and manage the
positions in your portfolio.

Stock   Price   Last    Option    Price   Gain   Simple  Max
Symbol  Picked  Price   Series    Sold   /Loss   Yield  Yield

IMCLE   21.00   21.20  MAY 17.50  0.35    0.35*   4.4%  14.5%
WYNN    17.02   19.01  MAY 15.00  0.50    0.50*   5.0%  13.7%
KOSP    21.97   23.09  MAY 20.00  0.45    0.45*   5.0%  13.5%
APPX    24.30   27.77  MAY 20.00  0.35    0.35*   3.9%  13.2%
RMBS    15.75   14.96  MAY 12.50  0.55    0.55*   3.3%  10.8%
LSCC     8.54    8.53  MAY  7.50  0.25    0.25*   3.7%  10.3%
PHSY    30.20   37.27  MAY 27.50  0.70    0.70*   3.8%  10.1%
MSTR    30.35   29.82  MAY 25.00  0.50    0.50*   3.0%   9.9%
NFLX    19.55   23.79  MAY 15.00  0.60    0.60*   3.0%   9.6%
WYNN    16.22   19.01  MAY 12.50  0.40    0.40*   2.9%   9.5%
CYBX    23.87   22.55  MAY 20.00  0.25    0.25*   2.8%   9.2%
AVID    25.54   27.79  MAY 22.50  0.80    0.80*   3.2%   8.7%
EYE     11.96   15.75  MAY 10.00  0.35    0.35*   2.6%   8.0%
BOBJ    20.75   21.45  MAY 17.50  0.40    0.40*   2.5%   8.0%
OVTI    25.29   31.44  MAY 20.00  0.40    0.40*   2.2%   8.0%
SEPR    19.00   20.61  MAY 17.50  0.35    0.35*   3.0%   7.9%
JCOM    32.12   36.25  MAY 25.00  0.75    0.75*   2.2%   7.6%
SEPR    15.77   20.61  MAY 12.50  0.30    0.30*   2.1%   7.5%
VRTS    21.20   25.77  MAY 20.00  0.40    0.40*   3.0%   7.5%
XLNX    27.30   28.41  MAY 25.00  0.30    0.30*   2.6%   7.3%
GTRC    21.10   21.86  MAY 20.00  0.65    0.65*   2.9%   7.1%
SEPR    16.35   20.61  MAY 12.50  0.35    0.35*   2.1%   7.0%
BCGI    18.90   15.95  MAY 15.00  0.25    0.25*   1.8%   6.7%
RIMM    14.88   18.33  MAY 12.50  0.35    0.35*   2.1%   6.5%
JCOM    31.96   36.25  MAY 22.50  0.50    0.50*   2.0%   6.3%
ADTN    43.65   43.79  MAY 40.00  0.40    0.40*   2.2%   6.1%
MRVL    23.15   27.98  MAY 20.00  0.35    0.35*   1.9%   5.9%
NFLX    20.77   23.79  MAY 15.00  0.30    0.30*   1.8%   5.9%
BOBJ    18.31   21.45  MAY 15.00  0.35    0.35*   1.7%   5.8%
INTC    18.66   19.50  MAY 17.50  0.35    0.35*   2.2%   5.7%
ADRX    14.71   17.59  MAY 12.50  0.25    0.25*   1.8%   5.5%
CMCSA   31.73   31.26  MAY 30.00  0.40    0.40*   2.0%   5.1%
CMCSK   28.44   30.07  MAY 25.00  0.60    0.60*   1.8%   5.1%
GTRC    23.25   21.86  MAY 22.50  0.50   -0.14    0.0%   0.0%

ANPI    25.20   28.27  JUN 17.50  0.75    0.75*   3.2%   9.4%
OVTI    28.64   31.44  JUN 22.50  0.80    0.80*   2.7%   8.9%
NVDA    21.37   21.26  JUN 17.50  0.55    0.55*   2.3%   7.6%
CELG    27.42   31.48  JUN 22.50  0.70    0.70*   2.3%   7.5%
ITMN    23.89   25.76  JUN 20.00  0.60    0.60*   2.2%   6.9%
ARTI    22.75   21.28  JUN 20.00  0.50    0.50*   1.9%   5.3%
APPX    23.40   27.77  JUN 15.00  0.35    0.35*   1.7%   5.0%

*  Stock price is above the sold striking price.


Another month has come and gone and the recent bullish market
activity has offered very profitable opportunities for option
traders.  Our portfolio has enjoyed a wonderful success rate
in the optimistic environment, however the buying binge won't
last forever so it is important for traders to remain careful
in their position selection and attentive in their portfolio
management.  The only issue on the "watch" list is Artisan
Components (NASDAQ:ARTI) and the large decline Friday, on no
news, suggests this is a candidate for early exit.

Previously Closed Positions: Footstar (NYSE:FTS), which ended
the expiration period profitably.


The sale of uncovered puts entails considerable financial risk,
far more than the initial margin or collateral required to open
a position.  The maximum financial obligation for the sale of a
naked put is the strike price (of the underlying stock) that is
sold.  Although this obligation is reduced by the premium from
the sale of the option, a writer of puts should have the cash or
collateral equivalent of the sold strike price in reserve at all
times.  In addition, there is one very important rule when using
this strategy: Don't sell puts on stocks that you don't want to
own!  Why?  Because stocks occasionally experience catastrophic
declines, exponentially increasing the margin maintenance and
possibly causing a devastating shortfall in your portfolio.  It
is also important that you consider using trading stops on naked
option positions to help limit losses when a stock's price falls.
Many professional traders suggest closing the position when the
underlying share value moves below the sold strike, or using a
"buy-to-close" stop order at a price that is no more than twice
the original premium received from the sold option.


The Initial Margin is the amount of collateral you must have in
your account to initiate the position.  In specific terms, margin
refers to cash or securities required of an option writer by his
brokerage firm as collateral for the writer's obligation to buy
or sell the underlying interest if assigned through an exercise.
The Maintenance Margin is the amount of cash (or securities)
required to offset the changing collateral requirements of the
written options in your portfolio.  As the price of the option
and the underlying stock changes, so does the maintenance margin.
With (short) put options, the margin requirements can increase
when the underlying stock price declines and also when it rises
significantly.  The reason is the manner in which the collateral
amount is determined (with the formula listed above) and traders
should always consider not only the initial margin requirement,
but also the maximum margin needed for the life of the position.
Option writers occasionally have to meet calls for additional
margin during adverse market movements and even when there is
enough equity in the account to avoid a margin call, the need
for increased collateral will make that equity unavailable for
other purposes.  Please consider these facts carefully before
you initiate any "naked" option positions.

For more information on margin requirements, please refer to:



The Maximum Monthly Yield (listed in the summary and with each
new candidate) is the greatest possible profit available in the
position.  This amount, expressed as a percentage, is based on
the initial margin requirement as determined by the Board of
Governors of the Federal Reserve, the U.S. options markets and
other self-regulatory organizations.  Although increased margin
requirements may be imposed either generally or in individual
cases by various brokerage firms, our calculations use the widely
accepted margin formulas from the Chicago Board Options Exchange.
The Simple Monthly Yield is based on the cost of the underlying
issue (in the event of assignment), including the premium from
the sold option, thus it reflects the maximum potential loss in
the position.


Sequenced by Maximum Yield (monthly basis - margin)
Stock  Last    Option    Option Last Open Cost  Days Simple  Max
Symbol Price   Series    Symbol Bid  Int. Basis Exp. Yield  Yield

USG    11.85  JUN  7.50  USG RU 0.35 571   7.15  35   4.3%  11.2%
ANPI   28.27  JUN 22.50  AUJ RX 0.80 308  21.70  35   3.2%  10.8%
CTIC   10.21  JUN  7.50  CUC RU 0.25 609   7.25  35   3.0%   9.5%
IMCLE  21.20  JUN 15.00  QCI RC 0.50 549  14.50  35   3.0%   9.2%
APPX   27.77  JUN 22.50  AQO RX 0.65 812  21.85  35   2.6%   8.7%
ITMN   25.76  JUN 22.50  IQY RX 0.60 149  21.90  35   2.4%   6.8%
SOHU   22.83  JUN 17.50  UZK RW 0.35 195  17.15  35   1.8%   6.2%
SFA    20.29  JUN 17.50  SFA RW 0.35 257  17.15  35   1.8%   5.4%
NVDA   21.26  JUN 17.50  UVA RW 0.30 3556 17.20  35   1.5%   5.2%

Company Descriptions

LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even
point, DE-Days to Expiry, SY-Simple Yield (monthly basis - without
margin), MY-Maximum Yield (monthly basis - using margin).

USG - USG Corporation  $11.85  *** Asbestos Speculation! ***

USG Corporation (NYSE;USG) produces a range of products for use
in new residential, new non-residential and repair and remodel
construction, as well as products used in certain industrial
processes.  Its operations are organized into three operating
segments: North American Gypsum, which manufactures Sheetrock
brand gypsum wallboard and related products in the United States,
Canada and Mexico; Worldwide Ceilings, which manufactures ceiling
tile in the United States and ceiling grid in the United States,
Canada, Europe and the Asia-Pacific region, and Building Products
Distribution, which distributes gypsum wallboard, drywall metal,
ceiling products, joint compound and other building products
throughout the United States.  The company and 10 of its United
States subsidiaries are currently in voluntary reorganization
under chapter 11 of the United States Bankruptcy Code.  Stocks
of firms that are burdened by asbestos litigation have soared in
recent weeks on reports that a bill to create a $108 billion fund
for asbestos claims will soon be introduced in Congress.  The
trust fund theoretically would pay asbestos-related medical costs
and cap liability for defendant companies.  Traders who want to
speculate on the outcome of this "potential" legislation should
consider this position.

JUN-7.50 USG RU LB=0.35 OI=571 CB=7.15 DE=35 TY=4.3% MY=11.2%

ANPI - Angiotech  $28.27  *** Stent-Coating Maker ***

Angiotech Pharmaceuticals (NASDAQ:ANPI) is engaged in the fusion
of medical device technologies and pharmaceutical therapies.  The
company's first product was a drug-coated stent.  Angiotech's goal
is to develop other products to enhance the performance of medical
devices and biomaterials through the use of pharmatherapeutics.  In
September 2002, the company and Cohesion Technologies, Inc. agreed
to a merger in which Cohesion will merge with a wholly owned
subsidiary of Angiotech, with Cohesion continuing as a wholly owned
subsidiary of the company.  Angiotech shares rallied at the end of
February after announcing a strategic alliance with Baxter and a
submission by its partner Boston Scientific, of the first module of
Boston's PMA application for its TAXUS paclitaxel-eluting coronary
stent system.  A 12-month study on a Boston Scientific drug-coated
coronary stent, Taxus II, is expected to bolster already strong
sales of the newly introduced device in Europe.  Friday's rally to
a new 52-week high suggests further upside potential and traders
can profit from that outcome with this position.

JUN-22.50 AUJ RX LB=0.80 OI=308 CB=21.70 DE=35 TY=3.2% MY=10.8%

CTIC - Cell Therapeutics  $10.21   *** Break-Out! ***

Cell Therapeutics (NASDAQ:CTIC) develops and commercializes novel
treatments for cancer.  The firm's lead product is called arsenic
trioxide (Trisenox), which was acquired in January 2000.  Trisenox
is marketed for patients with a type of blood cell cancer, called
acute promyelocytic leukemia, who have relapsed or failed standard
therapies.  The company is also developing a new way to deliver
cancer drugs more selectively to tumor tissue in order to reduce
the toxic side effects and also improve the anti-tumor activity of
existing chemotherapy agents.  In addition, the firm has identified
a novel drug target, lysophosphatidic acid acyltransferase (LPAAT-_)
that, when inhibited, has been shown to reduce tumor cell growth in
preclinical models.  Despite the lack of public news, CTIC shares
vaulted to a 52-week high on heavy volume during Friday's session.
The break-out from a 2-month trading range (near $8-$9) suggests
further upside potential in the short-term and this conservative
position offers a way to participate in the future movement of the
issue with relatively low risk.

JUN-7.50 CUC RU LB=0.25 OI=609 CB=7.25 DE=35 TY=3.0% MY=9.5%

IMCLE - ImClone  $21.20  *** Drug Stock Speculation! ***

ImClone Systems (NASDAQ:IMCL) is a biopharmaceutical company whose
mission is to advance oncology care by developing a portfolio of
targeted biologic treatments designed to address the medical needs
of patients with a variety of cancers.  The company's lead product,
Erbitux, is a therapeutic antibody that inhibits stimulation of
epidermal growth factor receptor upon which certain solid tumors
depend in order to grow.  In addition to the development of its
lead product candidates, the company conducts research in a number
of areas related to its core focus of growth factor blockers, as
well as cancer vaccines and angiogenesis inhibitors.  IMCL has also
developed diagnostic products and vaccines for certain infectious
diseases.  IMCL's shares rallied in early March amid optimism that
new data about the firm's experimental cancer drug Erbitux will be
released shortly and prove positive.  The rally continued after the
biotech firm received a $60 million cash payment from Bristol-Myers
Squibb under the companies' amended March 2002 agreement to develop
Erbitux.  In early May, IMCL moved higher on news that Bristol-Myers
will tighten its control over the company after the resignation of
Harlan Waksal, the biotech firm's chief executive, and Robert
Goldhammer, chairman.  After a brief consolidation, IMCL shares
rebounded this week amid reports of their plan to regain compliance
with NASDAQ listing requirements.  Investors appear to be happy with
the news and traders wouldn't mind owning IMCLE at a cost basis near
$15 should consider this position.

JUN-15.00 QCI RC LB=0.50 OI=549 CB=14.50 DE=35 TY=3.0% MY=9.2%

APPX - American Pharmaceutical  $27.77  *** Premium Selling! ***

American Pharmaceutical Partners (NASDAQ:APPX) is a specialty
pharmaceutical company that develops, manufactures and markets
injectable pharmaceutical products.  The firm produces over 100
generic injectable pharmaceutical products in more than 300
dosages and formulations. Its primary focus is in the oncology,
anti-infective and critical care markets.  The company makes
products in all of the three basic forms in which injectable
drugs are sold: liquid, powder and lyophilized (freeze-dried).
Despite a recent downgrade by UBS Warburg, APPX continues to be
a popular stock among speculative traders and the inflated option
premiums offer a good opportunity for investors who wouldn't mind
owning the issue at a substantially reduced cost basis.  Due
diligence is a "must" with this issue.

JUN-22.50 AQO RX LB=0.65 OI=812 CB=21.85 DE=35 TY=2.6% MY=8.7%

ITMN - Intermune  $25.76  *** Shorts Cover The Rally! ***

InterMune (NASDAQ:ITMN) develops and commercializes products for
the treatment of serious pulmonary and infectious diseases and
cancer.  The company has the exclusive license rights in the U.S.
to Actimmune injection for a wide range of indications, including
chronic granulomatous disease, osteopetrosis, idiopathic pulmonary
fibrosis, cancer, mycobacterial and systemic fungal infections,
and cystic fibrosis.  The company has active development programs
underway for these indications, several of which are in mid- or
advanced-stage human testing, known as clinical trials.  InterMune
recently announced that data from a Phase II trial of pirfenidone
suggests it may be more effective than prednisone, an popular
anti-inflammatory glucocorticoid drug, in patients with idiopathic
pulmonary fibrosis.  Last week, InterMune said results of trials
of its Actimmune drug "continues to support the potential survival
benefit" of the drug for patients with IPF (idiopathic pulmonary
fibrosis).  The stock rallied on the report and "short covering"
helped the issue move to a 5-month high.  Investors who want to
participate in the future performance of ITMN should consider this

JUN-22.50 IQY RX LB=0.60 OI=149 CB=21.90 DE=35 TY=2.4% MY=6.8%

SOHU - Sohu.com  $22.83  *** All-Time High! ***

Sohu.com (NASDAQ:SOHU) is an Internet portal in China.  The firm's
portal consists of sophisticated Chinese language Web navigational
and search capabilities, 15 main content channels, Internet-based
communications and community services, and a unique platform for
e-commerce and short messaging services.  Each of the company's
interest-specific main channels contains multi-level sub-channels
that cover a range of topics; news, business, entertainment, sports
and careers.  The firm also offers free Web-based e-mail.  Sohu.com
offers a universal registration system, and the company's portal
attracts consumers and merchants alike.  One of the key features is
a proprietary Web navigational and search capabilities that reflects
the cultural characteristics and thinking and viewing habits of the
People's Republic of China Internet users.  Internet use is growing
exponentially among foreign countries and China enjoys the largest
population in the world.  Investors who want to participate in the
country's Internet explosion should consider this position.

JUN-17.50 UZK RW LB=0.35 OI=195 CB=17.15 DE=35 TY=1.8% MY=6.2%

SFA - Scientific-Atlanta  $20.29  *** Elevator Going Up! ***

Scientific-Atlanta (NYSE:SFA) is a provider of end-to-end networks
used by programmers and cable operators and a provider of worldwide
customer service and support for the cable TV industry.  The firm's
products include satellite communications equipment that transports
programming from its source to geographically distributed headends,
optical communications products that transport information within
metropolitan areas to individual neighborhoods and radio frequency
electronics products that provide local neighborhood connectivity
to each consumer's home.  Its products include integrated computer
systems and software at the cable operators' head-ends that manage
video and data services for large networks.  Products that reside
in the consumer's home include digital interactive set-tops and
high-speed cable modems.  Shares of Scientific-Atlanta are on a
"moon-shot" trajectory and one of the few ways to play the bullish
trend conservatively is by selling an "out-of-the-money" put.  Our
position establishes a cost basis near $17 for investors who favor
the outlook for Scientific-Atlanta.  The bid listed below is $0.05
higher than the published prices at the CBOE, thus investors should
"target" a slightly better entry point in SFA with this position.

JUN-17.50 SFA RW LB=0.35 OI=257 CB=17.15 DE=35 TY=1.8% MY=5.4%

NVDA - Nvidia  $21.26  *** An Old NASDAQ Favorite! ***

Nvidia (NASDAQ:NVDA) designs, develops and markets graphics and
media communication processors and related software for personal
computers (PCs), workstations and digital entertainment platforms.
The company provides an architecturally compatible top-to-bottom
family of unique, performance 3-D graphics processors and graphics
processing units that set the standard for performance, quality
and features for a broad range of desktop PCs.  Nvidia's graphics
processors are used for a wide variety of applications, including
games, digital image editing, business productivity, the Internet
and industrial design.  Its graphics processors are designed to be
architecturally compatible backward and forward between computer
generations, giving its original equipment manufacturers (OEMs),
customers and end users a low cost of ownership.  Shares of NVDA
soared recently on news that the company expects revenue for its
fiscal second quarter to grow 12% to 18% from the first quarter
on increased Xbox sales.  In addition, Nvidia plans to launch a
new high-end graphic chip for computers (NV35) and investors are
bullish on the company's outlook.  This position offers a low
risk method to profit from the current upside activity in the

JUN-17.50 UVA RW LB=0.30 OI=3556 CB=17.20 DE=35 TY=1.5% MY=5.2%



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 Maximum Yield (monthly basis - margin)
Stock  Last    Option    Option Last Open Cost  Days Simple  Max
Symbol Price   Series    Symbol Bid  Int. Basis Exp. Yield  Yield

RNWK    7.93  JUN  7.50  QRN RU 0.45 100   7.05  35   5.5%  12.3%
VECO   18.69  JUN 17.50  QVC RW 0.60 15   16.90  35   3.1%   7.6%
FDRY   13.77  JUN 12.50  OUJ RV 0.40 506  12.10  35   2.9%   7.5%
ILXO   16.13  JUN 15.00  IUE RC 0.50 700  14.50  35   3.0%   7.5%
SRNA   19.71  JUN 17.50  NHU RW 0.50 63   17.00  35   2.6%   7.0%
DRIV   18.20  JUN 15.00  DQI RC 0.35 669  14.65  35   2.1%   6.9%
ISPH   15.15  JUN 10.00  JPU RB 0.25 2498  9.75  35   2.2%   6.6%
CA     19.98  JUN 17.50   CA RW 0.40 4277 17.10  35   2.0%   5.9%
OSIP   23.97  JUN 20.00  GHU RD 0.40 868  19.60  35   1.8%   5.8%
SNDK   29.09  JUN 25.00  SWQ RE 0.50 1211 24.50  35   1.8%   5.4%
VRTY   18.85  JUN 17.50  YQV RW 0.40 87   17.10  35   2.0%   5.3%



Equities Retreat: Is It Just A Necessary Consolidation?
By Ray Cummins

Stocks edged lower Friday after another round of negative reports
raised concerns about the health of the U.S. economy.

Worries about the record decline in the Producer Price Index and
falling housing starts weighed heavily on investors, helping to
pull the blue-chip Dow industrials 34 points lower to 8,678.  The
technology segment fared no better with the NASDAQ down 12 points
to 1,538 on weakness in semiconductor and computer hardware shares.
The broader S&P 500 index slid 2 points to 944, just one day after
reaching a new 9-month high.  Trading volume totaled a robust 1.5
billion on the NYSE and 1.75 billion on the NASDAQ.  Breadth was
positive on the Big Board with winners barely outnumbering losers.
On the NASDAQ, decliners outpaced advancers by a 3 to 2 ratio.  In
the bond market, government treasuries enjoyed new gains with the
the 10-year note up 6/32 to yield 3.51% while the 30-year long bond
edged up 1/32 to yield 4.48%.  On the fund flow front, Trim Tabs
estimated that all equity funds had outflows of $300 million over
the week ending May 14 compared with outflows of $200 million in
the prior week.  Equity funds that invest primarily in U.S. stocks
received an infusion of $200 million versus inflows of $400 million
during the prior week.


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 our subscribers, 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 or to the options market in general.
The editor of this section does not take actual positions in any
published plays and the summary comments are 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 in
any way replace your duty to diligently monitor and manage the
positions in your portfolio.


Symbol  Pick   Last   Month LP  SP  Credit  CB     G/L   Status

AZO     76.38  84.00   MAY  65  70   0.55  69.45  $0.55  Closed
BSTE    42.33  51.32   MAY  30  35   0.50  34.50  $0.50  Closed
GILD    44.15  47.45   MAY  37  40   0.30  39.70  $0.30  Closed
OIH     54.58  62.35   MAY  45  50   0.55  49.45  $0.55  Closed
MDT     46.90  48.55   MAY  42  45   0.35  44.65  $0.35  Closed
NBR     41.11  43.55   MAY  35  37   0.30  37.20  $0.30  Closed
BBBY    39.52  39.99   MAY  35  37   0.30  37.20  $0.30  Closed
PFCB    42.47  42.38   MAY  35  40   0.55  39.45  $0.55  Closed
GENZ    39.82  43.16   MAY  35  37   0.30  37.20  $0.30  Closed
IVGN    31.45  36.14   MAY  27  30   0.30  29.70  $0.30  Closed
SEE     41.62  44.08   MAY  35  40   0.50  39.50  $0.50  Closed
BZH     71.80  76.38   JUN  60  65   0.55  64.45  $0.55   Open
CECO    60.52  60.53   JUN  50  55   0.50  54.50  $0.50   Open
FDC     40.22  41.11   JUN  35  37   0.30  37.20  $0.30   Open
RCII    65.35  65.85   JUN  55  60   0.50  59.50  $0.50   Open
ADTN    45.05  43.79   JUN  35  40   0.45  39.55  $0.45   Open
KLAC    42.49  40.61   JUN  35  37   0.30  37.20  $0.30   Open
LLTC    36.34  35.25   JUN  30  32   0.30  32.20  $0.30   Open
ROST    40.09  39.49   JUN  35  37   0.40  37.10  $0.40   Open

LP = Long Put  SP = Short Put  CB = Cost Basis  G/L = Gain/Loss


Symbol  Pick   Last   Month LC  SC  Credit  CB      G/L   Status

CAM     49.39   52.30  MAY  60  55   0.45  55.45   $0.45  Closed
DRYR    67.40   75.00  MAY  75  70   1.10  71.10  ($0.90) Closed *
HCA     37.70   32.97  MAY  45  42   0.25  42.75   $0.25  Closed
VAR     49.04   52.48  MAY  60  55   0.60  55.60   $0.60  Closed
OIH     54.58   62.35  MAY  65  60   0.50  60.50  ($1.85) Closed
BAC     71.34   74.16  MAY  80  75   0.60  75.60   $0.60  Closed
OEX    440.97  475.72  MAY 480 475   0.55 475.55  ($0.17) Closed
WLP     76.80   81.05  MAY  90  85   0.50  85.50   $0.50  Closed
SYK     66.35   65.10  MAY  75  70   0.65  70.65   $0.65  Closed
INTU    37.24   42.42  MAY  45  40   0.40  40.40  ($2.02) Closed *
NVLS    27.21   29.08  MAY  32  30   0.25  30.25   $0.25  Closed
NBR     39.21   43.55  JUN  45  42   0.30  42.80  ($0.75) Closed *
PG      90.15   90.32  JUN 100  95   0.40  95.40   $0.40   Open
GS      75.00   76.70  JUN  85  80   0.60  80.60   $0.60   Open
MMM    122.81  125.45  JUN 135 130   0.50 130.50   $0.50   Open

LC = Long Call  SC = Short Call  CB = Cost Basis  G/L = Gain/Loss

With the recent rally in oil service shares, our Holdrs (AMEX:OIH)
position endured a closing debit and Nabors Industries (NYSE:NBR)
has quickly achieved "early-exit" status.  Dreyer's (NASDAQ:DRYR)
was closed on Tuesday (the summary reflects the loss on that date)
as the issue rallied amid speculation that regulators are near an
approval of Nestle's takeover of the company.  Intuit shares rose
after a favorable earnings report, forcing an early departure from
the bearish play.  Spreads in McKesson (NYSE:MCK), GlaxoSmithKline
(NYSE:GSK), International Game Technology (NYSE:IGT), and L-3
Communications (NYSE:LLL) have previously been closed to limit
potential losses.


Symbol  Pick   Last  Month  LC  SC   Debit   B/E   G/L   Status

BGEN    35.67  39.55  MAY   30  32   2.20   32.20  0.30  Closed
GILD    44.04  47.45  MAY   37  40   2.25   39.75  0.25  Closed
SLM    115.05 112.76  MAY  105 110   4.50  109.50  0.50) Closed
AXP     38.46  40.62  JUN   32  35   2.20   34.70  0.30   Open
GENZ    41.47  43.16  JUN   35  37   2.20   37.20  0.30   Open
BSX     46.91  48.70  JUN   37  40   2.25   39.75  0.25   Open
MERQ    35.75  37.32  JUN   30  32   2.25   32.25  0.25   Open

LC = Long Call  SC = Short Call  B/E = Break-Even  G/L = Gain/Loss


Symbol  Pick   Last  Month  LP  SP   Debit   B/E   G/L   Status

WMT     52.98  52.92  MAY   60  55   4.30   55.70  0.70  Closed
CCMP    42.68  44.51  MAY   50  45   4.30   45.70  0.70  Closed

LP = Long Put  SP = Short Put  B/E = Break-Even  G/L = Gain/Loss

The position in Boston Scientific (NYSE:BSX) has previously been
closed to limit potential losses.


Stock   Pick   Last   Expir.  Long  Short  Initial  Max.    Play
Symbol  Price  Price  Month   Call   Put   Credit   Value  Status

OVRL    15.99  16.97   MAY     17    15     0.10    1.00   Closed
DCTM    16.09  18.87   MAY     17    15    (0.30)   2.25   No Play
SMH     26.43  27.81   AUG     30    22     0.10    1.20    Open
SLAB    30.17  26.82   JUL     30    22     0.10    0.00   Closed
MRVL    26.72  27.98   JUN     30    22    (0.20)   0.50    Open

The speculative position in Silicon Laboratories (NASDAQ:SLAB) has
suffered from the issue's renewed downtrend and it may be prudent
to close the play before the stock tests support near the sold put
at $22.50.  Documentum (NASDAQ:DCTM) did not offer the target entry
price, but the position was very profitable for traders who paid a
small debit to initiate the play.  A similar situation exists with
our new position in Marvell Technology (NASDAQ:MRVL).  The target
price was available in the Semiconductor Holdrs (AMEX:SMH) and the
position has achieved a favorable profit.


Stock   Pick   Last   Expir.  Long  Short  Initial  Max.    Play
Symbol  Price  Price  Month   Put   Call   Credit  Value   Status

QQQ     25.51  28.70   MAY    24     27     0.10    0.00   Closed

As previously noted, conservative traders should have exited this
position when the issue closed above recent resistance near $27.


Stock   Pick   Last     Long     Short    Current   Max     Play
Symbol  Price  Price   Option    Option    Debit   Value   Status

BMET    28.52  28.78   JUL-30C   JUN-30C  (0.70)   0.40     Open
ESI     29.11  28.34   OCT-30C   JUN-30C   1.35    1.60     Open
OCR     27.07  27.32   JUN-27C   MAY-27C   0.60    1.00    Closed
MO      32.13  33.30   JUN-27P   MAY-27P   0.95    0.45    Closed
FILE    13.75  15.45   JUL-15C   JUN-15C   0.10    0.20     Open
IBM     87.57  87.55   JUL-90C   JUN-90C   0.25    1.20     Open
GDT     39.98  41.13   OCT-45C   JUN-45C   1.45    1.55     Open
NSM     21.80  24.00   JAN-25C   JUN-25C   2.10    2.40     Open

Among the new positions, Guidant (NYSE:GDT) was the most difficult
issue, requiring an initial debit that was higher than expected as
the stock gapped higher at the open during Monday's bullish session.
Biomet (NASDAQ:BMET) closed near maximum profit and the longer-term
play in ITT Educational Services (NYSE:ESI) is also performing well.
Positions in Altria Group (NYSE:MO), which previously achieved a
small profit, and Omnicare (NYSE:OCR), which finished the expiration
period with a gain, were not available at the suggested entry prices.
The "Reader's Request" time spread in Action Performance (NYSE:ATN)
was not available due to a sharp decline in the stock price prior to
the opening bell on 4/28/03.


Stock   Pick   Last   Exp.   Long  Long  Initial   Max     Play
Symbol  Price  Price  Month  Call  Put    Debit   Value   Status

LNC     29.88  32.21   MAY    30    30    3.00     3.70   Closed


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.


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.

BSX - Boston Scientific  $48.70  *** Stent-makers Rally! ***

Boston Scientific (NYSE:BSX) is a global developer, manufacturer
and marketer of less-invasive medical devices.  The firm's unique
products are offered by two major business groups, Cardiovascular
and Endosurgery.  The Cardiovascular segment 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 - Boston Scientific  $48.70

PLAY (conservative - bullish/credit spread):

BUY  PUT  JUN-37.50  BSX-RU  OI=4516   ASK=$0.85
SELL PUT  JUN-40.00  BSX-RH  OI=13628  BID=$1.10
POTENTIAL PROFIT(max)=11% B/E=$39.75

PNC - PNC Financial Services  $47.52  *** Bullish Banker! ***

PNC Financial Services Group (NYSE:PNC) is a bank holding company
and its operating businesses engage in regional community banking;
wholesale banking, including corporate banking, real estate finance
and asset-based lending; wealth management; asset management and
global fund processing services.  The company provides financial
products and services nationally and in its primary geographic
markets in Pennsylvania, New Jersey, Delaware, Ohio and Kentucky.
It also provides certain banking, asset management and global fund
processing services internationally.  PNC Financial's corporate
legal structure consists of two subsidiary banks, with their
subsidiaries and over 70 active non-bank subsidiaries.  PNC Bank,
National Association (PNC Bank), headquartered in Pittsburgh,
Pennsylvania, is PNC Financial's principal bank subsidiary.

PNC - PNC Financial Services  $47.52

PLAY (conservative - bullish/credit spread):

BUY  PUT  JUN-42.50  PNC-RV  OI=476   ASK=$0.25
SELL PUT  JUN-45.00  PNC-RI  OI=2094  BID=$0.50
POTENTIAL PROFIT(max)=14% B/E=$44.70

UNH - UnitedHealth Group  $95.41  *** Bullish Sector! ***

UnitedHealth Group (NYSE:UNH) forms and operates markets for the
exchange of health and well being services.  Through its family
of businesses, the company helps people achieve optimal health
and well being through all stages of life.  The firm's revenues
are derived from premium revenues on insured (risk-based) products,
fees from management, administrative and consulting services and
investment and other income.  It conducts its business primarily
through operating divisions in the following business segments:
Uniprise; Healthcare Services, which includes the UnitedHealthcare
and Ovations businesses; Specialized Care Services, and Ingenix.

UNH - UnitedHealth Group  $95.41

PLAY (conservative - bullish/credit spread):

BUY  PUT  JUN-85.00  UHB-RQ  OI=1669  ASK=$0.55
SELL PUT  JUN-90.00  UHB-RR  OI=2401  BID=$1.10
POTENTIAL PROFIT(max)=14% B/E=$89.40

WLP - WellPoint Health  $81.05  *** Low Risk = Low Reward! ***

WellPoint Health Networks (NYSE:WLP) is a managed healthcare firm.
As a result of the January 2002 completion of its merger with
RightCHOICE Managed Care, the company has over 12 million members.
The company offers a broad spectrum of network-based managed care
plans, including preferred provider organizations (PPOs) and health
maintenance organizations (HMOs), as well as point-of-service (POS)
and other hybrid plans and traditional indemnity plans.  In addition,
the Company offers managed care services, including underwriting,
actuarial services, network access, medical cost management and
claims processing.  The firm also provides an array of specialty and
other products, including pharmacy, dental, workers' compensation
managed care services, utilization management, life insurance,
preventive care, disability insurance, behavioral health, COBRA and
flexible benefits account administration.

WLP - WellPoint Health  $81.05

PLAY (very conservative - bullish/credit spread):

BUY  PUT  JUN-70.00  WLP-RN  OI=1157  ASK=$0.25
SELL PUT  JUN-75.00  WLP-RO  OI=1256  BID=$0.60
POTENTIAL PROFIT(max)=8% B/E=$74.60

ANF - Abercrombie & Fitch  $27.25  *** Mediocre Outlook! ***

Abercrombie & Fitch Company (NYSE:ANF), through its subsidiaries
as specialty retailers, operates stores selling casual apparel,
personal care and other accessories for men, women and kids under
the Abercrombie & Fitch, abercrombie and Hollister Co. brands.  As
of February 2, 2002, the company operated 491 stores in the United
States.  A&F's stores and point-of-sale marketing are designed to
convey the principal elements and personality of each brand.  The
store design, furniture, fixtures and music are carefully planned
and coordinated to create a shopping experience that is consistent
with the A&F lifestyle.

ANF - Abercrombie & Fitch  $27.25

PLAY (conservative - bearish/credit spread):

BUY  CALL  JUN-32.50  ANF-FZ  OI=329  ASK=$0.15
SELL CALL  JUN-30.00  ANF-FF  OI=423  BID=$0.45
POTENTIAL PROFIT(max)=14% B/E=$30.30

GM - General Motors  $34.41  *** Another Downgrade! ***

General Motors (NYSE:GM) is a diversified automotive business
with interests in communications services, locomotives, finance
and insurance.  GM's automotive business designs, manufactures,
and/or markets vehicles primarily in North America under the
Chevrolet, Pontiac, GMC, Oldsmobile, Buick, Cadillac, Saturn and
Hummer nameplates, and outside North America under the Vauxhall,
Opel, Holden, Isuzu, Saab, Buick, Chevrolet, GMC, and Cadillac
nameplates.  GM's communications services relate to its Hughes
Electronics Corporation subsidiary, which includes its digital
entertainment, information and communications services, and
satellite-based private business networks.  GM also is engaged
in the design, manufacturing and marketing of locomotives and
heavy-duty transmissions.  The firm's financing and insurance
operations are conducted through the General Motors Acceptance
Corporation, which provides a broad range of financial services.

GM - General Motors  $34.41

PLAY (conservative - bearish/credit spread):

BUY  CALL  JUN-40.00  GM-FH  OI=18719  ASK=$0.20
SELL CALL  JUN-37.50  GM-FU  OI=17356  BID=$0.50
POTENTIAL PROFIT(max)=14% B/E=$37.80

JCI - Johnson Controls  $81.61  *** Sector Slump! ***

Johnson Controls (NYSE:JCI) is engaged in automotive systems and
facility management and control.  In the automotive market, the
company is a major supplier of seating and interior systems, and
batteries.  For non-residential facilities, Johnson Controls also
provides building control systems and services, energy management
and integrated facility management.  Johnson Controls conducts its
business in two operating segments: Controls Group and Automotive
Systems Group.  The Controls Group is a global supplier of control
systems, services and unique integrated facility management to the
non-residential buildings market.  The Automotive Systems Group
makes automotive interior systems for OEMs (original equipment
manufacturers) and automotive batteries for the replacement and
original equipment markets.

JCI - Johnson Controls  $81.61

PLAY (less conservative - bearish/credit spread):

BUY  CALL  JUN-90.00  JCI-FR  OI=18   ASK=$0.20
SELL CALL  JUN-85.00  JCI-FQ  OI=137  BID=$0.95
POTENTIAL PROFIT(max)=17% B/E=$85.75


These candidates offer a risk-reward outlook similar to credit
spreads, however there is no margin requirement as the initial
debit for the position is also the maximum loss.  Since these
positions are based primarily on technical indications, traders
should review the current news and market sentiment surrounding
each issue and make their own decision about the outcome of the

WMT - Wal-Mart  $52.92  *** Same Play -- Different Month! ***

With annual sales of $218 billion, Wal-Mart Stores (NYSE:WMT)
operates more than 2,800 discount stores, Super-Centers and
Neighborhood Markets, and more than 515 SAM'S CLUBS in the U.S.
Internationally, the firm operates over 1,200 units and employs
1.3 million associates worldwide.  Last year, Wal-Mart associates
raised and contributed $196 million to support communities and
local non-profit organizations.  FORTUNE magazine recently named
Wal-Mart the third "most admired" company in America and one of
the 100 best companies to work for in the U.S.  According to a
recent study, Americans say Wal-Mart is the company they think of
first in supporting local causes and issues, and that is one of
the main reasons people shop at Wal-Mart.

WMT - Wal-Mart  $52.92

PLAY (conservative - bearish/debit spread):

BUY  PUT  JUN-60.00  WMT-RL  OI=1165   A=$7.20
SELL PUT  JUN-55.00  WMT-RK  OI=13176  B=$2.65
POTENTIAL PROFIT(max)=11% B/E=$55.50


A calendar spread (or time spread) consists of the sale of one
option and the simultaneous purchase of an option of the same
type and strike price, but with a future expiration date.  The
premise in a calendar spread is simple: time erodes the value of
the near-term option at a faster rate than the far-term option.
The positions in this section are speculative (out-of-the-money)
spreads with low initial cost and large potential profit.

BRCM - Broadcom  $21.40  *** LEAPS & Covered-Calls ***

Broadcom (NASDAQ:BRCM) is a provider of highly integrated silicon
solutions that enable broadband communications and networking of
voice, video and data services.  Broadcom designs, develops and
supplies complete system-on-a-chip solutions and related hardware
and software applications for every major broadband communications
market.  Broadcom's diverse product portfolio includes solutions
for digital cable set-top boxes and cable modems; high-speed local,
metropolitan and wide area and optical networks; home networking;
Voice over Internet Protocol; carrier access; residential broadband
gateways; direct satellite and terrestrial digital broadcast; DSL;
wireless communications; SystemI/OTM server solutions, and for
broadband network processors.

BRCM - Broadcom  $21.40

PLAY (conservative - bullish/calendar spread):

BUY  CALL  JAN04-25.00  LGJ-AE  OI=2798  ASK=$2.65
SELL CALL  JUN03-25.00  RCQ-FE  OI=1282  BID=$0.35

SRNA - Serena Software  $19.71  ** Cheap Earnings Speculation! **

Serena Software (NASDAQ:SRNA) is the Enterprise Change Management
(ECM) industry leader.  For over twenty years Serena has focused
exclusively on providing application change management solutions
to the world's leading enterprises, and today its products are in
use at over 2,750 customer sites, including 42 of the Fortune 50.
Serena leads the way in ECM by offering a single point of control
to manage software code and Web content changes throughout the
enterprise, from the mainframe to the Internet.  This ensures the
application's availability and speeds time to market, while also
reducing development costs.  With headquarters in California, the
firm serves customers worldwide through local offices and an
international network of distributors.

SRNA - Serena Software  $19.71

PLAY (very speculative - bullish/calendar spread):

BUY  CALL  AUG-22.50  NHU-HX  OI=154  ASK=$1.05
SELL CALL  JUN-22.50  NHU-FX  OI=80   BID=$0.35

VRTY - Verity  $18.85  *** The Long Road To Recovery! ***

Verity (NASDAQ:VRTY) is a provider of infrastructure software
that powers corporate portals and e-commerce sites, as well as
e-business applications.  The firm develops, sells and supports
infrastructure products for corporate intranets, extranets,
corporate portals, business applications, online publishers,
e-commerce providers and original equipment manufacturer (OEM)
toolkits for independent software vendors.  Verity's products
are organized under Enterprise Business Portal Products, which
includes Verity K2 Enterprise, Verity K2 Catalog, Verity K2
Spider, Verity Gateways and Verity Publisher, and OEM and Custom
Application Development Tools, which includes Verity K2 Developer,
Verity Profiler Kit, Verity Export, Verity Filter SDK, Verity
KeyView Developer's Kit and Verity KeyView Pro.

VRTY - Verity  $18.85

PLAY (conservative - bullish/calendar spread):

BUY  CALL  SEP-20.00  YQV-ID  OI=414  ASK=$1.60
SELL CALL  JUN-20.00  YQV-FD  OI=291  BID=$0.45


Based on analysis of the historical option pricing and technical
background, these positions meet the fundamental criteria for
favorable volatility-based plays.

NXTL - Nextel Communications  $13.60  *** A Reader's Request! ***

Nextel Communications (NASDAQ:NXTL) is a provider of wireless
communications services in the United States.  The company's
service offerings include digital wireless service; Nextel
Direct Connect, its long-range digital walkie-talkie service;
wireless data, including e-mail and text messaging, and Nextel
Online services, which provide wireless access to the Internet,
an organization's internal databases and other applications.
The firm's all-digital packet data network is based on Motorola's
integrated digital enhanced network wireless technology.  The
firm's handsets offer a wide range of features that may include
built-in speakerphone, additional lines, conference calling, an
external screen that allows customers to view caller ID, voice
activated dialing for hands-free operation, a voice recorder for
calls and memos, an advanced phonebook that manages contacts and
datebook tools to manage calendars and alert users of business
and personal meetings.

NXTL - Nextel Communications  $13.60

PLAY (moderately aggressive - neutral/credit strangle):

SELL CALL  JUN-15.00  FQC-FC  OI=11899  BID=$0.35
SELL PUT   JUN-12.50  FQC-RR  OI=3919   BID=$0.40
UPSIDE B/E=$15.80 DOWNSIDE B/E=$11.70


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

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

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Option Investor Inc
PO Box 630350
Littleton, CO 80163

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