Option Investor

Daily Newsletter, Thursday, 05/22/2003

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The Option Investor Newsletter                Thursday 05-22-2003
Copyright 2003, All rights reserved.                       1 of 3
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In Section One:

Wrap: One Over Par
Futures Markets: Upside Break
Index Trader Wrap: Oil and water
Market Sentiment: Daydream Believer
Weekly Manager Microscope: William Oates Jr.: Northeast Investors
Growth Fund (NTHFX)

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
      05-22-2003           High     Low     Volume   Adv/Dcl
DJIA     8594.02 + 77.60  8628.14  8509.22 1.79 bln 2128/1088
NASDAQ   1507.55 + 17.70  1512.80  1489.08 1.74 bln 2000/1255
S&P 100   469.38 +  4.18   471.27   464.88   Totals 4128/2343
S&P 500   931.87 +  8.45   935.30   922.54
W5000    8892.83 + 82.90  8921.00  8802.98
RUS 2000  415.09 +  4.36   415.29   410.46
DJ TRANS 2366.78 + 10.40  2372.02  2354.33
VIX        21.62 -  1.59    23.65    21.59
VXN        30.11 -  0.77    32.07    29.74
Total Volume 3,830B
Total UpVol  2,925B
Total DnVol    861M
52wk Highs  578
52wk Lows    42
TRIN       0.56
PUT/CALL   1.16

One Over Par

Traders spent the majority of the day more concerned with the
golf score of Annika Sorenstam than the direction of the markets.
Her score of 71 and one stroke over par was a strong performance
by the first women to play in a PGA event in 58 years. However,
I think the performance of the markets was much more impressive
but I am a trader, not a golfer. The Dow came within six strokes
of closing over 8600 once again and the Nasdaq rebounded back
over 1500.

Chart of the Dow Jones Industrials:

Chart of the NASDAQ Composite:

Combined chart of the SPX, RUT and the TMW.

Thursday was a lackluster day in terms of market news. The only
economic report was the Jobless Claims at 428,000 and the 14th
week over 400K. The prior week was also revised upward by +4000
to 421,000. Commentators tried to spin the gains for the week as
due to tornados wiping out some businesses in some Midwest towns.
I am sure there were some job losses due to those storms but what
about the other 13 weeks? The four-week average dipped slightly
as did continuing claims due to the easing off the 450,000 weekly
pace from April. Another factor impacting the growth of claims is
the summer worker flight and vacations. Many workers in dull jobs
and with kids home for the summer will quit for the summer and
look for new employment in September. Other companies facing many
workers leaving on vacation will slow terminations until after
the season is over. Both of these factors should slow the pace
of new claims but we are not really seeing it yet. 41% of the
jobless are now running out of claims before finding work. This
is the highest level on record. It is estimated that 1.4 million
workers currently have no benefits and another 1.1 million will
see their benefits expire in the next six months. Could be a
tough summer.

The biggest event in the market today was the passage of the
economic recovery package and the Bush announcement he would
sign it. Many traders thought this was already priced into the
market but dividend paying stocks found lots of ready buyers
as the day progressed. The dividend tax cut was definitely being
taken into consideration as a reason to buy stocks. Altria was
the big winner once again as the big win in court yesterday
opened the gate for dividend investors to buy a high yield
stock cheap. With the cloud clearing over the industry MO was
on fire gaining +2.75 and running their gains to $8 over three
days. That +25% bump has helped pull the Dow out of the dumps
almost single handedly.

The comments by Greenspan on Wednesday and Mark Olson today
helped to fuel the idea that the economy was poised to rise
sharply later this year and that another rate cut was likely.
Homebuilders roared back to life with BZH +2.67 and HOV +2.78
just a couple of examples. With bond yields still dropping and
the multiple comments about more Fed action ahead the prospect
of even lower mortgage rates is pushing the builders once again.

Technology shares rose on upbeat guidance from SNPS, which
gained +8.02 on the news. SNPS beat the street by +10 cents
and they said orders and revenue were strong on every count.
They said Wi-Fi, automotive and consumer products were strong
markets for their customers. They raised estimates +10% on
very strong bookings of future orders. The company makes chip
design software. Most techs rebounded from their slump with
the notable exception of MSFT. The company has been floundering
under rumors that one of its eight largest investors was shopping
74 million shares yesterday and today. MSFT is pegged on $24
while the rumors fly. MSFT traded 110 million shares on Wednesday
and 93 million today. Average volume is 59 million.

While most sectors were benefiting from the return of bullishness
there were some exceptions. The increase in the terrorist threat
level to orange has caused a substantial drop in vacation bookings.
Hotels, airlines and cruises are seeing cancellations just when
hopes were returning that the industry would see a post-Iraqi
rebound.  An analyst for PricewaterhouseCoopers did note that
hotel occupancy rates for the Memorial day weekend would be above
2001 and 2002 levels but the post-war bounce is clocking in lower
than expected.  Shares of Marriott (MAR) were only up 15 cents on
the session.

At least a few market commentators are starting to fret that the
market's bullishness is getting excessive.  The bullish percent
numbers for the major indices are quickly approaching or already
well past overbought.  With levels over 70 marking overbought
status the Dow Industrials bullish percent is at 73, the NASDAQ
100 is at 78 and the OEX and SPX are at 67.  Another more
traditional indicator of overbought-oversold, the VIX lost
another 6.8% today closing at 21.62.  Normally, when the VIX
trades near 20 it's a classic sell signal and a market top is not
far behind.  However, VIX reading is more art than science as the
indicator can reach extremes south of 20 before a market reversal
occurs.  This is a clear and present warning to keep your stops

Keeping these indicators in mind it remains tough to ignore the
impressive internals that underscore this market's strength.  We
continue to witness just how broad-based the rally really is with
the Russell 2000 and the Wilshire 5000 bouncing higher in perfect
step with the Industrials, the NASDAQ and the S&P 500.  Today's
closing numbers would indicate that traders are set to drive
prices higher before Friday's close ahead of the long three-day

Enter Very Passively, Exit Very Aggressively!

Jim Brown


Upside Break
Jonathan Levinson

Daily Pivots (generated with a pivot algorithm and unverified):

Figures rounded to the nearest point:

           R2     R1    Pivot   S1     S2
DJIA      8696   8645   8577   8526   8458
COMPX     1527   1517   1503   1493   1479
ES03M      943    937    929    923    916
YM03M     8687   8633   8564   8510   8441
NQ03M     1155   1143   1128   1116   1101

As expected, yesterday's inside day gave us a big move today in
the form of a flagpole rally, in which the markets shot up from
the open and never looked back, running to the day's highs before
entering an upwardly drifting range throughout the afternoon.
The pullback came in the last 15 minutes of the session.  Volume
was average on the COMPX and NYSE, with 1.73B COMPX shares and
1.78B NYSE shares changing hands.

QQQ:QQV chart

Volatility collapsed today, with the VIX dropping 1.59 to 21.62,
QQV –1.44 to 25.31 and VXN -.77 to 30.11.  Today's action
reversed the QQQ:QQV decline we had been watching in confirmation
of the anticipated trend change starting with Monday's QQQ

15 minute chart of the US Dollar Index

The US Dollar Index had a good session for a change, posting a
higher low and finishing above its session lows.  Note the
potential for a head and shoulders formation if the rise off
today's lows reverses.  The CRB took a 92 cent hit, driving that
index below the 240 pivot we've been watching, and gold got sold
as well, driving the June contract down 368.40 as of this
writing, a –3.80 change.  An astute reader remarked in the Market
Monitor that the wedding season in India generally lasts 3 to 4
months, which was a reference to Bob Pisani's comment yesterday
attributing the rise in gold prices to the Indian wedding season.
I believe that the better correlation is between the US Dollar
and the commodity, but disagreement is what makes a market.

Daily QQQ candles

For the third day this week, QQQ printed a star, closing near the
middle of its spiky range.  Today's range broke but could not
hold above the secondary ascending trendline.  Earlier this week,
I discussed the possibility of a "return to the scene of the
crime" rally, and this revisit to the trendline was just that.

QQQ 30 minute candles

Today's action actually set up a negative divergence on the
stochastic and topped out the MacD oscillator.  I've highlighted
horizontal resistance lines, as well as the downsloping neckline
of what could be a "hunchback" head and shoulders formation.  A
downside break of that neckline would imply an approximate $1.50
drop in QQQ, being the distance from the h&s head to its

On to the futures:

Daily candles NQ3M

As on the QQQ daily candles, the NQ contract shows us the
potential truncation of the stochastic downphase.  Given the
rollover on the shorter cycle stochastic (below), it's likely
that the longer cycle downphase will continue without giving the
bullish cross at which today's chart is hinting.

30 minute 20 day chart of the NQ3M

We see the same sell signal on the stochastic, and the MacD is
giving a bearish kiss, but has not yet crossed.  The same
hunchback head and shoulders is suggested, but it will take a
downside move from here to complete the right shoulder- for the
moment, the formation is only speculation.  In any event, the
horizontal s/r line at 1140 will act as resistance if it gets
challenged.  Note that 1136 is the neckline on the small head and
shoulders top completed two weeks ago, and so the 4 point range
between 1136 and 1140 should be formidable resistance tomorrow.

Daily candles ES3M

The ES cleared and held 925 resistance, and, like the NQ
contract, spiked above the secondary trendline before reversing
at the end of the day.  The cycle setup suggested by the
oscillators is the same as for the NQ, with the stochastic
downphase pausing but the shorter cycle (below) implying a
resumption of the trend.

20 day 30 minute chart of the ES3M

The ES traded weaker than the NQ, as suggested by the bearish
cross (admittedly early) on the MacD.  The right shoulder of the
head and shoulders hunchback may have peaked just after 3:30 in
the afternoon, and I note that the entire rise off Tuesday's low
appears to be a bear flag.  If so, then the horizontal resistance
line will be key tomorrow, and a breakdown will imply a downside
break below this week's lows.

Daily candles YM

The YM is more troublesome, due to the relatively lower low
posted in March, and its relative weakness compared with the ES
and NQ contracts during the ensuing bearish ascending wedge. The
 break above the 8500 level today was significant, but also
constitutes a "return to the scene of the crime" rally.  The
absence of heavier volume and the failure to break above the
trendline looks bearish to me, but tomorrow could change that.

20 day 30 minute chart of the YM

There's little to add on the short term YM chart.  The prospect
of a huge bullish push for tomorrow's session will be slim, in my
opinion, because of the long holiday weekend and worries of
possible terrorist activity.  Volume is the #1 weapon of bulls,
and without it, a strong advance through overhead resistance will
be difficult.  The high put to call ratios throughout today's
session may have been bulls hedging instead of outright
liquidating their long positions, but tomorrow will have to tell.
We'll be following the action in tomorrow's intraday Market
Monitor.  See you at the bell!


Oil and water

Weaker than forecasted jobless data looked to be just enough "bad
news" to have the major indexes posting gains in what seems to be
some recent duplication of "bad news" finding buyers after a

Just ahead of the three-day weekend (markets are closed on Monday
in observance of Labor Day) volumes were steady that the NYSE
with just over 1.4 million shares changing hands.  Advancers lead
decliners by a 2 to 1 margin at the big board, and the number of
new 52-week highs grew to yearly highs with 302 stocks making new
highs compared to 15 stocks setting new lows.

NASDAQ volume was the highest this week and matched Friday's 1.74
billion shares with advancers outnumber decliner by a 19 to 12
margin.  New 52-week highs for the NASDAQ rebounded to 143 after
holding at an equal 84 the past two sessions, while 13 stocks
traded new lows.

I think some of today's volume advance in the NASDAQ may
certainly have been due to a pickup in short covering, especially
by some traders looking to get flat, perhaps looking to take
tomorrow off and get a head start on the extended weekend.

I would be a bit surprised if we were to see volume levels on
either exchange much above the 1.1 billion mark tomorrow.

Here's a quick look at some of the volume, advance/decline and
new high/new low data for May.  Traders have asked to see this
data in tabular form, so that some references to potential trends
can be made.  I've also fielded several e-mail questions from
subscribers regarding a point and figure charting technique for
charting an indicator often referenced by Dorsey/Wright and
Associates regarding the new high/new low indications for both
the broad NYSE and NASDAQ composites.

Market Internals - Since May 1

In last night's market monitor, I tried to quickly discuss how
the new high/new low chart.  I've talked before about how the
markets tend to move like an "inchworm" or "snake."  If he "head"
is leading (52-week highs) compared to the tail (52-week lows)
then it is thought that the market has leadership and stands a
higher probability of advancing.  As noted the past couple of
sessions, we did see a rather marked drop-off in new 52-week
highs in the NASDAQ.

In this weekends "Ask the Analyst" column, I'm going to go into
further detail on how traders can monitor internals using the
point and figure charting system and perhaps better track how the
market internals are moving.  After a strong move up from the
bottom and what appears to have been a "rest" for the indexes
earlier in the week, what we will want to monitor for right now
in the new high/new low category is leadership.  What a BEAR
wants to see is a growing number of new lows and a lesser number
of new highs to show that bulls are becoming less aggressive.
Conversely, BULLS want to see what has been taking place since
March.  A growing number of new highs vs. new lows.  To measure
this, we'll build a ratio, then chart that ratio based on a 10-
day moving average.  I've added my own "twist" to things, and
added a 5-day moving average of this ratio.  Here's a quick look
at this type of market internal analysis.

NYSE and NASDAQ new high/new low rations - 5 & 10-day MA's

Traders will associate moving averages with momentum.  We'll hear
floor traders and market analysts discussing "healthy" or
"unhealthy" internals as it relates to the number of 52-week
highs and 52-week lows.  On a day-to-day basis it can be
difficult to interpret and should be followed over time.  One way
to do it is to build a ration where we simply take the number of
new highs and divide that number by the total of new highs and
new lows.  Again.. I'll go into greater detail in this weekend's
column, but one thing that has gotten some subscriber attention
in recent weeks is the higher "ratios."  Similar to the bullish
%, the highest the ratio can go is 100% and not unlike the
bullish %, and perhaps the VIX.X can be used as a contrarion

I've marked in pink, the dates where the 5-day average would have
crossed below the 10-day average.  If anything, we would only
interpret this type of "cross-over" as a near-term slowing in the
pace of momentum.  The 10-day average itself for both the NYSE
and NASDAQ look to remain constant and still show impressive

Now, this type of technique may help some of us better understand
the daily new high/new low readings and bring together the day-
to-day data.

My interpretation would only be this.  Bullish leadership
continues to be present in the markets (buyers willing to pay the
price for a 52-week high), but a slight waning in momentum is

Sector action was broadly positive today, with the Gold/Silver
Index (XAU.X) 73.83 -2.31% the only sector to fall more than 1%.
Financials lagged the gains found in the major indexes with the
S&P Banks Index (BIX.X) 292.79 +0.06% finishing just above
unchanged, with the KBW Bank Index (BKX.X) 798.49 -0.04% and
Securities Broker/Dealer Index (XBD.X) 461 -0.17% trading
fractionally lower.  Insurance stocks as depicted by the S&P
Insurance Index (IUX.X) 257.49 +0.44% were the better-performers
of the financials, but still lagged the 0.9% gains of the S&P 100
and S&P 500.  Perhaps I'm looking for reasons to be cautious, but
I would have looked for better performance from the financials in
today's more bullish session.

The Dow Jones US Home Construction Index (DJUSHB) 400.95 +4.57%
traded and closed at an all-time high today as lower interest
rates spurred by continued buying in Treasuries fall to multi-
decade lows.

The Biotechnology Index (BTK.X) 422.27 +4.12% added the bullish
spice necessary for the NASDAQ-100 Index (NDX.X) 1,131.45 +1.59%
and NASDAQ-100 Tracking Stock (AMEX:QQQ) $28.09 +1.44%

Dow Industrials Chart - 50-point box

Today's trade at 8,600 had me profiling a "bear credit spread" in
the Dow Diamonds (AMEX:DIA) $86.04 +0.98%.  It's my thought that
by June or July expiration, the Dow will close below the 8,600
level due to the higher levels of bullish% and thinking that the
market will eventually have some bullish risk being removed.  The
buying of a June $87 call "hedges" the selling of the $86 call
above $87, for 8,700 on the above chart.

Dow bulls still holding bullish positions can raise bullish stops
to the 8,400 level as today's 3-box reversal up builds a higher

I had a question as it relates to a potential "triangle" forming
in the Dow's chart.  While we can perhaps see a triangle type of
formation, it takes 5 columns of alternating X's and O's to truly
form a "triangle" that a point and figure chartist would then
look to trigger either the "bullish" or "bearish" triangle
pattern.  Since it would be impossible for the Dow PnF chart to
set a pattern of lower highs and higher lows and manage to build
5 columns in the process, we aren't really looking for the
triangle pattern in the Dow Industrials.

The basic premise behind a bear credit spread is to generate
"income" for the account, where the traders looks to sell some
premium at higher bullish risk levels.  This is the market
condition I think we're in right now.

Today's trade saw no net change in the very narrow Dow
Industrials Bullish % ($BPINDU).  Status remains "bull confirmed"
at 73.33% bullish (22 of the 30 stocks currently show a PnF chart
buy signal on their chart.)

Here is the option montage of the Dow Diamonds.  The DIA was
trading $85.90 bid at time of screen capture.

Dow Diamonds Options Montage -

I profiled a conventional "bear credit spread" for June.  Another
option would have been to establish a calendar spread where a
trader might look to sell the July $86 calls ($2.40 credit), but
then buy the June $87 calls ($1.30).  This strategy would
generate a credit of $1.10, but have the trader thinking he/she
might want near-term protection under a more bullish market
environment, but still looking for the Dow to trade below the $86
level by July expiration.  At JUNE expiration, should the Dow be
trading above the $86-$87 level, then the entire trade would most
likely be closed as June $87 call protection would be lost.

S&P 500 Index Chart - Daily Interval

Short-term bulls got the rebound they were looking for, despite a
weaker than forecasted weekly jobless report.  I'm going to
STRONGLY suggest that traders raise stops in yesterday's short-
term bullish trade to break even and stick with the PLAN of
taking profits should the 940 level be traded tomorrow.

I do think a bearish trader looking a MINIMUM 3-months expiration
out can establish 1/4 bearish position in the SPX, using
Tuesday's double-bottom sell signal as reason to be somewhat
bearish.  I'm profiling only partial positions bearish as I
haven't seen much of a slip in the bullish %.

Today's trade saw a net gain of 0.2% in the S&P 500 Bullish %
($BPSPX), so a net gain of 1 stock to a new buy signal was seen.
This has the bullish % edging up to 67.8%.  It was on Friday, May
16th that this indicator reached it highest reading of the
current bull cycle at 68.6%, so we can see that right now, there
has NOT been any meaningful damage done.

The 8.4-point gain in the SPX after a break above an "inside day"
still hints to me there are quite a few jittery BEARS that are
willing to cover positions on the slightest bit of renewed
bullishness.  This is what I think SHORT-TERM bulls can try and
take advantage of, but with a shorter-term bullish view only.

S&P 100 Index Chart - 5-point box

Both the SPX and OEX look almost identical.  I wanted to show the
OEX PnF chart on its conventional 5-point box scale (we usually
look at the 2.5 point box).  What I think this does is give a
slightly "different" look to things and keeps a trader "honest."
It would also show that an OEX decline back to 450 (while a
significant decline from 475) might be an area where the pattern
of higher lows continues to hold.

If you're trading the SPX (bullish or bearish) you might get a
50/50 type of feel about things.  At least I do, and why I don't
think traders can be overly bullish or bearish in their trade
management right now.

Today's action saw no net change in the narrower S&P 100 Bullish
% ($BPOEX) and status remains "bull confirmed" at 67%, which is
still the high reading for this bullish cycle.  No sign of
internal weakness and should keep a bear on their toes/claws!

NASDAQ-100 Index Chart - Daily Interval

Today's high in the NDX of 1,137.68 was right at the WEEKLY S1 of
1,137.  As a bear in the QQQ, I would want to see the NDX/QQQ
trade back lower tomorrow, then take out the recent lows for a
series of lower lows and now higher highs.  Bears are going to be
much more jittery with the QQQ/NDX on a move much above today's
highs after the strong rebound today.

Today's trade saw no net change in the NASDAQ-100 Bullish %
($BPNDX) and status remains "bull confirmed" at 78%.  This is
just off the current bullish high reading of 79% and still shows
internals holding together, though at a very high level of
bullish risk.

Jeff Bailey

WINNER of Forbes Best of the Web Award
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Note: Options involve risk. Risk disclosure:


Daydream Believer
- James Brown

"Oh, what can it mean.
    To a daydream believer
      And a homecoming queen."

The bulls in this market have got to be daydreaming.  Investors
continue to buy the dips and nearly every major market index is
in rally mode.  Bullish percent at overbought levels.  Who cares?
The VIX and VXN near 20 or at all time lows?  Doesn't matter.
Gold bullion rallies more than 15% from its April lows?  Let's
buy stocks!

Obviously I'm being facetious.  This is a nice change from the
last three years of a bear market but the more this market climbs
the sharper and more painful the correction is going to be.  Am I
suggesting everyone go short?  Hardly.  Trade what you see but
keep close tabs on your stops and don't let any one trade become
too big a slice of your trading capital.

The drop in mortgage rates to all-time lows and reinforcements
that the Fed is on guard and will do anything and everything they
can to keep the economy moving forward is giving investors
renewed faith in the future.  Another refinancing boom appears to
be underway and the congressional tax-cut package is close to
being signed into law.

The only thing missing from this recipe for success are growing
corporate profits and we already know that over half the S&P 500
has warned for the second quarter and summers are traditionally
slow making third quarter reports even worse.

Yes, I think Wall Street has lost itself in a daydream.  They're
fun while they last but sooner or later you have to wake up.


Market Averages


52-week High: 10353
52-week Low :  7197
Current     :  8594

Moving Averages:

 10-dma: 8615
 50-dma: 8370
200-dma: 8330

S&P 500 ($SPX)

52-week High: 1107
52-week Low :  768
Current     :  932

Moving Averages:

 10-dma:  935
 50-dma:  896
200-dma:  884

Nasdaq-100 ($NDX)

52-week High: 1351
52-week Low :  795
Current     : 1131

Moving Averages:

 10-dma: 1140
 50-dma: 1086
200-dma: 1009


The VIX is still falling closer to the "20" level while the VXN
is making new all-time lows.  Definitely not any investor fear
in the markets right now.

CBOE Market Volatility Index (VIX) = 21.62 -1.59
Nasdaq-100 Volatility Index  (VXN) = 30.11 -0.77


          Put/Call Ratio  Call Volume   Put Volume

Total          1.16        446,103       517,904
Equity Only    0.89        378,387       336,451
OEX            1.35         14,694        19,890
QQQ            2.78         21,985        61,045


Bullish Percent Data

           Current   Change   Status
NYSE          60.4    + 1     Bull Confirmed
NASDAQ-100    78.0    - 1     Bull Confirmed
Dow Indust.   73.3    + 3     Bull Confirmed
S&P 500       67.8    + 0     Bull Confirmed
S&P 100       67.0    + 1     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  1.41
10-Day Arms Index  1.09
21-Day Arms Index  1.15
55-Day Arms Index  1.23

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    1875      1877
Decliners     983      1181

New Highs     232       112
New Lows       22         6

Up Volume   1378M    1322M
Down Vol.    380M     400M

Total Vol.  1776M     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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William Oates Jr.: Northeast Investors Growth Fund (NTHFX)

William Oates Jr., president of Northeast Management & Research
Company Inc., has been primarily responsible for the day-to-day
management of the Northeast Investors Growth Fund (NTHFX) since
its inception on October 27, 1980.  He is also a trustee of the
Northeast Investors Growth Fund.  Assisting Oates in his duties
is Gordon C. Barrett, the fund's chief financial officer.

Oates' bio reads that he is also president of the Groton School
Board of Trustees and is a trustee and treasurer of The Roxbury
Latin School.  He is a member of The Harvard Club, The Somerset
Club and The Country Club in Massachusetts.  Oates holds a B.A.
Degree from Colby College and earned his M.B.A. Degree from the
Harvard Graduate School of Business Administration.

As lead portfolio manager, Oates is responsible for choosing the
fund's investments and handling its general business.  For these
services, Northeast Management and Research charges a management
fee.  For the fiscal year ended December 31, 2002, the Northeast
Investors Growth Fund paid a management fee of 0.57% (of average
net assets).  That is quite reasonable, but add another 0.74% of
other expenses and you get a total expense ratio of 1.31%.  That
includes 0.21% of interest expense relating to the fund's use of
leverage (more on that subject later).

The Northeast Investors Growth Fund has no sales charges (loads),
redemption fees or exchange fees, and may be purchased for a low
minimum initial investment of $1,000 ($500 for IRA's).  The fund
may be purchased directly from Northeast Investors Group (1-800-
225-6704) or through one of the leading retail fund supermarkets,
including Schwab, TD Waterhouse and Fidelity Retail FundsNetwork.
For complete fund information or to download a prospectus, go to
the www.northeastinvestors.com website.

Investment Style/Strategy

The Northeast Investors Growth Fund seeks to generate long-term
growth of both capital and "future" income for its shareholders.
In terms of strategy, Oates follows a flexible investment policy
that focuses primarily on the common stock of larger, well-known
U.S. companies, but permits him to also invest in foreign stocks
(ADR's), fixed income securities and money market instruments as
conditions warrant.

According to the fund's info sheet, common stocks as a percentage
of net assets was 112.4% at April 30, 2003 (meaning leverage as a
percentage of assets was 12.4%).  Note that investments made with
borrowed money can cause net asset value to increase faster in a
rising market, but it can also cause net asset value to decrease
faster in a falling market.  As we've already seen, leverage has
a cost.  In the case of this fund, interest expense was 0.21% of
net assets last year.  Without interest expense, the fund's total
expense ratio for fiscal 2002 would have been near 1.10%.

As of April 30, there were 53 holdings in the Northeast Investors
Growth portfolio.  Financial services, pharmaceuticals, banks and
integrated oil companies comprised the fund's four largest market
sectors.  More than 50% of the fund's assets at month-end were in
these four sectors.  The fund's five largest holdings at April 30
were GE (4.1), Microsoft (3.8%), State Street Corp, (3.8%), Exxon
Mobil (3.8%), and Citigroup (3.6%).

In security selection, Oates targets larger-size companies, which
have histories of consistent earnings and long-term appreciation.
He favors companies that are well-known, well-established leaders
in their relative industries, and continue to offer potential for
accelerated earnings and long-term revenue growth.  That means he
invests primarily in "growth" stocks.  However, Oates doesn't pay
up for that growth, preferring to buy growth stocks when they are
more reasonably priced.  Accordingly, the fund lands in the large
blend category per Morningstar and in the large core category per

Currently, the fund's style has drifted into the large-cap growth
style box.  That could be the result of the fund's winners rising
in relative price and/or the addition of more pro-growth holdings
in the current portfolio.  Accordingly, Oates' blend/growth style
can generate more risk than the average large-cap blend fund.  In
relation to his large-cap blend peers, Oates has indeed generated
above average to high risk, for a Morningstar "high" risk rating.

In the next section, we see how well Oates has performed compared
to the average large-cap blend fund and large-cap growth fund per

Investment Performance

While this fund's average investment style over the past 3 years
suggests a large-cap blend portfolio, this fund is pro-growth in
its long-term style and performance history.  For example, Oates'
annual total returns in years 1996, 1997, 1998 and 1999 ranked in
the first quintile of large-blend category.  Tech stocks and pro-
growth style funds were in favor those years.  But when tech and
growth fell out of favor, in 2000 and 2001, Oates' annual losses
were much greater than the average large-cap blend fund, ranking
in the category's bottom decile.

Above is a 3-year chart for the Northeast Investors Growth Fund
(NTHFX).  Oates' trailing 3-year annualized loss through May 21
of 15.4% exceeded the S&P 500 index's annualized loss by 3.5% a
year, ranking in the bottom quintile of the large-blend category
per Morningstar.

Though the fund has clearly been volatile over the past 3 years,
Oates still possesses a strong long-term performance record that
deserves consideration if you can accept significant share price
fluctuations in pursuit of higher long-term appreciation.  Oates'
10-year annualized total returns are rated as "above average" by
Morningstar in relation to other large-blend funds.  The fund is
also a Lipper Leader for total return and consistent return over
the trailing 10-year period relative to similar funds.

Below are trailing 10-year average annual returns as of April 30,
2003 versus various index and fund benchmarks.

  10-Year Annualized Return (Versus Blend Benchmarks):
  +9.3%  Northeast Investors Growth (NTHFX)
  +9.6%  Vanguard 500 Index Fund (VFINX)
  +8.1%  Morningstar Large-Cap Blend Fund Average

  10-Year Annualized Return (Versus Growth Benchmarks):
  +9.3%  Northeast Investors Growth (NTHFX)
  +9.9%  Vanguard Growth Index Fund (VIGRX)
  +7.1%  Morningstar Large-Cap Growth Fund Average

You can see that Oates' trailing 10-year numbers have kept close
to the S&P 500 and S&P 500/BARRA Growth indices, while outpacing
both the average large-blend fund and average large-growth fund.

Over the past 15 years, Oates has generated an annualized return
of 11% for long-term shareholders.  It's hard to stay the course
when the fund takes a dive like it did in 2000-2002 but over the
long term, Oates has delivered strong, consistent returns versus
similar funds.  Like many of Janus' growth-oriented funds, Oates'
style is better suited to risk-hearty investors.


If you're looking for a U.S. equity portfolio that contains blue-
chip names, such as Wal-Mart and Microsoft, then you may wish to
take a look at the Northeast Investors Growth Fund, managed since
1980 by William Oates, Jr.  His aggressive blue-chip portfolio is
more risky than the typical large-cap blend fund, and is probably
better thought of as a large-cap growth fund.

Oates' use of leverage increases annual operating expenses of the
fund, but it gives the fund more upside potential assuming we are
in an uptrend.  If you decide to pursue this fund further, please
make sure you read the prospectus carefully and understand/accept
the risks and costs associated with leverage.  To download a fund
prospectus, go to www.northeastinvestors.com.

Steve Wagner
Editor, Mutual Investor

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The Option Investor Newsletter                 Thursday 05-22-2003
Copyright 2003, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.

To view this email newsletter in HTML format with embedded
charts and graphs, click here:

In Section Two:

Dropped Calls: None
Dropped Puts: RYL
Daily Results
Call Play Updates: AMGN, DISH, OHP
New Calls Plays: QLGC
Put Play Updates: AIG, GS, JCI, LLL, MTG
New Put Plays: None


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




Ryland Group Inc - RYL - close: 58.60 change: +3.55 stop: 59.01

The entire homebuilding sector produced a huge rally on news that
mortgage rates dropped again to all-time lows and that the
congressional tax-cut bill was close to being signed.  Many
analysts now believe that the final make up of the tax cut bill
will be very beneficial to homeowners and thus home builders.
Plus, there's speculation that home construction stocks might up
their dividends with the dividend tax cut as part of the
congressional package.  This was terrible news for our bearish
play and we're going to call it quits before the pain gets any

Picked on May 19th at $54.85
Change since picked:   +3.75
Earnings Date       04/23/03 (confirmed)
Average Daily Volume =   633 thousand
Chart link:


Please view this in COURIER 10 font for alignment

CALLS    LAST      Mon    Tue   Wed   Thu

AMGN     61.87   -2.04   0.76  0.53  1.17  Bounce From Support
DISH     32.24   -0.65  -0.03  0.51  1.14  Good start
MEDI     34.23   -0.48   0.42 -0.93  1.45  long-term, no update
OHP      36.70   -0.66   1.32  0.15  0.15  Out of spotlight
QLGC     45.13   -1.52  -0.30  0.41  0.26  New, entry point


AIG      55.80   -2.09  -0.44  0.43  0.37  Patience & Caution
GM       33.61   -0.80  -0.28  0.20  0.07  long-term, no update
GS       76.03   -2.35   0.10  0.70  0.93  Danger zone
JCI      81.13   -0.96  -0.13 -0.37  0.80  Wait for Failure
LLL      42.55   -0.69  -1.29  0.05  0.66  Could bounce
MTG      45.05   -1.01  -0.12  0.41 -0.01  No participation
RYL      58.60   -1.00   0.21 -0.02  3.55  DROP, builders rally

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Amgen, Inc. - AMGN - close: 61.87 change: +1.17 stop: 59.75*new*

Proving that dip buying is still in vogue, the buyers stepped
into the breach yesterday, holding the line at the 50-dma
(currently $60.09) and keeping AMGN's uptrend intact.  With a
positive market and a solid 4% advance in the Biotechnology index
(BTK.X) today, the stock rebounded smartly, but lagged the
overall sector with only a 1.9% gain.  The bulls fell short of
testing the descending trendline connecting the recent highs
(currently $63.00), so we aren't out of the woods just yet.  As
we've noted before, buying the dips is the way to go with AMGN,
not chasing the breakouts.  Traders that followed that advice
earlier this week appear to have gotten a solid entry into the
play, and the next test will be to see whether the stock can
confirm the recent bounce with a close over that critical $63
level.  With both Stochastics and MACD starting to hinge upwards
again, early indications are that AMGN ought to be able to get
the job done.  Raise stops to $59.75, keeping them just below
both the long-term ascending trendline and the 50-dma.

Picked on May 11th at    $61.24
Change since picked:      +0.63
Earnings Date          07/22/03 (unconfirmed)
Average Daily Volume = 10.6 mln


EchoStar Communications - DISH - cls: 32.24 chg: +1.14 stop: 29.99

Thursday turned out to be a nice start to our fresh new call play
on OI.  The stock followed through on Wednesday's bounce at
support of $30.00 and its rising 50-dma.  A positive market
environment didn't hurt.  DISH also had some good news as the
company came to a voluntary agreement with 13 states regarding
customer processing, advertising disclosures and the like.  As is
typical when dealing with state investigators DISH had the
privilege of paying a $5 million settlement for its voluntary
compliance but this probably kept them out of a long and
expensive court battle.  Sounds like a good reason to celebrate.
We continue to like the stock at current levels but dips to
$31.00 wouldn't be a bad spot to consider new positions either.

Picked on May 21st at $31.10
Change since picked:   +1.14
Earnings Date       05/06/03 (confirmed)
Average Daily Volume = 3.3 million
Chart link:


Oxford Health - OHP - close: 36.70 change: +0.15 stop: 34.00

Stocks like OHP tend to be classified as "safer" stocks so when
technology stocks hog the spotlight, stocks like OHP tend to
under perform.  This happened today as OHP and its sector mates
all trade relatively sideways while technology issues charged
ahead.  The $170 million settlement between Aetna (AET) and
doctor's suing the HMO was big news today and we may see
additional settlements in the future.  Dips to $35.00 for OHP
still appear to be the best entry points for new plays.  No
change in our stop loss.

Picked on May 20th at $36.51
Change since picked:   +0.20
Earnings Date       05/05/03 (confirmed)
Average Daily Volume = 857 thousand
Chart link:


QLogic Corp. - QLGC - close: 45.13 change: +0.26 stop: 43.00

Company Description:
Somebody has to make the equipment that lets your computer talk
to all its peripheral equipment, and QLGC does it well.  A
leading designer and supplier of semiconductor and board-level
input/output (I/O) management products, QLGC has been providing
SCSI-based connectivity solutions to this market sector for over
12 years.  QLGC's I/O products provide a high performance
interface between computer systems and their attached data
storage peripherals, such as hard disk and tape drives, removable
disk drives and RAID (redundant array of independent disks)
subsystems.  The company is also the market share leader in Fibre
Channel host bus adapters, a market segment that is receiving
tremendous attention from investors.

Why we like it:
In a bold display of bullishness, the dip buyers have been in
force lately and there are some encouraging chart patterns being
built.  After surging through its December highs near $45 in
early May, QLGC found resistance near $48 and succumbed to profit
taking with the rest of the market.  But this time things appear
to be different.  Instead of breaking any meaningful support
levels, the latest drop seems to have just been some mild profit
taking, and the bulls are back to their old tricks.  After
falling back near the $44 support level on Monday, QLGC spent a
couple days confirming that old resistance was newfound support.
The bears took one more shot at the downside yesterday at the
open, but after that dip near the $43.50 level, it was a steady
upward climb.  There are still some overhead congestion areas
that need to be cleared, but with daily Stochastics just turning
up from oversold and MACD trying to turn bullish from above the
zero line, QLGC looks like a good candidate for a solid bullish

The first obstacle will be for an advance through the 10-dma at
$45.93, and then we'll be targeting a near term move to the $47-
48 level that provided resistance earlier in the month.  If QLGC
really gets moving, then a trade at $50 looks like a good point
to harvest some gains and count this one as a success.  The ideal
entry at this point would be on a mild pullback into the $4.00-
44.50 area and then a rebound.  Traders looking for bullish
confirmation first will want to see price move above $46 on
increasing volume before playing.  Initially, we're placing our
stop at $43, which is below yesterday's intraday low and the top
of the April 30th gap up.  If the stock closes below that level,
it will be clear that the apparent new support at $44 has failed.

Suggested Options:
Shorter Term: The June 45 Call will offer short-term traders the
best return on an immediate move, as it is currently at the

Longer Term: Traders looking to capitalize on a rally back to the
May highs and above will want to look to the July 47 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-42 QLC-FV OI=1009 at $3.70 SL=2.00
BUY CALL JUN-45 QLC-FI OI=6607 at $2.05 SL=1.00
BUY CALL JUL-45 QLC-GI OI=3848 at $3.30 SL=1.75
BUY CALL JUL-47 QLC-GW OI=2900 at $2.15 SL=1.00

Annotated Chart of QLGC:

Picked on May 22nd at    $45.13
Change since picked:      +0.00
Earnings Date          07/29/03 (unconfirmed)
Average Daily Volume = 6.78 mln

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American Intl Group - AIG - cls: 55.80 chg: +0.37 stop: $58.00

While the bullish rally refuses to give up bears need to be
patient with the under performance AIG is offering them.  Or we
could just sit out altogether and wait for a breakdown, which
isn't a bad idea.  Shares of AIG have been trading mostly
sideways since we were triggered on Tuesday.  Should the
insurance group and AIG spike higher then a failed rally near
$58.00 would make an attractive entry point for new bearish
positions.  In the mean time we're still very cautious.  The
rising 50-dma may soon become another obstacle for the bears to
overcome.  However, bearish traders might take some courage at
the news yesterday.  A U.S. Senator is submitting legislation
that would put a $108 billion cap on litigation settlements for
all insurance companies' asbestos exposure.  The markets hate
uncertainty and this would remove any "unknowns" about how big
the risks are for asbestos litigation payouts from insurance
companies.  Naturally, this is a very bullish development (albeit
a costly one) for the sector as a whole and shares of AIG failed
to respond.

Picked on May 20th at $54.94
Change since picked:   +0.86
Earnings Date       04/24/03 (confirmed)
Average Daily Volume = 7.2 Million
Chart link:

Goldman Sachs - GS - close: 76.03 change: +0.93 stop: 77.00

There certainly hasn't been a lack of volatility in our GS play,
with the up and down oscillations in the stock.  Tuesday's
intraday violation of the $74 support level looked like the
breakdown we were waiting for, but those pesky dip-buyers pushed
GS back over that level by the close.  And they've continued
buying over the past two days, raising the likelihood of another
test of resistance before the week is out.  But the trend of
lower highs and lower lows remains intact, keeping us cautiously
optimistic that it is going to come out all right in the end.
Given the recent trading pattern, it is becoming increasingly
clear that the way to play is to take entries on the failed
rallies, not chase the breakdowns lower.  With that in mind,
aggressive traders will have their eye on the descending
trendline connecting the recent highs (currently $76.70) on
Friday.  A reversal from that level looks like the best setup for
a new entry, although those with a more cautious approach may
want to wait for the reversal to extend price back under the 20-
dma (currently $75.74) before taking the entry.  We also need to
keep a watchful eye on the XBD index, as if it is able to rally
through the $465 resistance level again, it will likely provide
the impetus for GS to take out our $77 stop as well.

Picked on May 8th at    $74.06
Change since picked:     +1.97
Earnings Date         06/19/03 (unconfirmed)
Average Daily Volume = 4.34 mln


Johnson Controls - JCI - cls: 81.13 change: +0.80 stop: 83.00*new

As convincing as Tuesday's intraday break below the $80 level
appeared, we're getting a bit concerned with our JCI play.  The
stock has been recovering after investors digested the bearish
brokerage comments on the auto parts sector and decided that a
rebound from the 200-dma (currently $80.00) looked like a dip to
buy, not a reason to sell.  While this rebound could easily fail
below the $82 level, it seems prudent to err on the side of
caution, especially after seeing today's volume exceed that seen
on Wednesday's mild decline.  So we're tightening up our stop to
$83, which is just above the 20-dma ($82.56).  A rollover from
below the $82 resistance are can be used for aggressive entries,
but we'd prefer to see some volume backing such a move before
considering new entries.  Should JCI close above $83, it would
now imply another run towards the recent highs above $85, and
would negate the bearish chart pattern that initially attracted
us to the play.

Picked on May 18th at   $81.61
Change since picked:     -0.48
Earnings Date         07/15/03 (unconfirmed)
Average Daily Volume = 629 K


L-3 Communications -LLL - close: 42.55 change: +0.66 stop: 45.00

As seems to be the recent pattern, dip buyers are showing up just
after important support levels are violated.  That certainly
seems to be the case with our LLL play, as the stock broke down
decisively through the $43 support level on Tuesday, found
support at the 50-dma (currently $41.53) and actually managed a
decent rebound on Thursday.  But with the lack of strength from
the DFI index (advancing only 0.25%), LLL couldn't get anywhere
near resistance in the $43.00-43.50 area.  If today's broad
market rebound continues, a push up to and rollover near that
violated support could make for a nice entry, provided broken
support now acts as newfound resistance.  Maintain stops at $45,
just above the 200-dma.

Picked on May 20th at   $41.94
Change since picked:     +0.61
Earnings Date         07/22/03 (unconfirmed)
Average Daily Volume = 1.39 mln


MGIC Invest. Corp. - MTG - close: 45.05 change: -0.01 stop: 47.00

Considering the strength and breadth of the broad market rebound
on Thursday, our MTG play certainly seems to be a pocket of
relative weakness.  With the major indices up nearly 1%, and the
Dow Jones Home Builders index ($DJUSHB) surging an astounding
4.7% to end above the $400 level for the first time ever, MTG's
1-cent loss really highlights the lack of buying enthusiasm.
While bulls will argue that the recovery to close back over the
200-dma (currently $44.74) on each of the past two sessions is
bullish, we're drawn to the ascending trendline from the March
lows.  That line (now at $45.40) was broken on Tuesday and has
served as resistance since then.  Even if the bulls can extend
the current bounce, there's some solid resistance at $46
(reinforced by the down-sloping 20-dma at $46.03) that ought to
present a firm obstacle.  Traders looking for an entry into the
play will want to watch for the next rally failure, ideally near
$45.50, but possibly as high as $46.  We're still keeping a
rather loose stop up at $47, as we don't want to be stopped out
prematurely.  Traders looking for a momentum entry will still
need to wait for a trade under $44 before playing.

Picked on May 15th at    $45.21
Change since picked:      -0.16
Earnings Date         07/15/03 (unconfirmed)
Average Daily Volume = 1.07 mln
Chart link:



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Contact Support
The Option Investor Newsletter                 Thursday 05-22-2003
Copyright 2003, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.

To view this email newsletter in HTML format with embedded
charts and graphs, click here:

In Section Three:

Play of the Day: CALL - AMGN
Traders Corner: Does Size Matter? Hell Yes!


Amgen, Inc. - AMGN - close: 61.87 change: +1.17 stop: 59.75

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: (Sunday's Update)
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.

Play of the Day Comments:
It would appear that AMGN has almost completed its sideways
consolidation and with the markets about to rebound from its
recent pull back buyers could be ready to push AMGN to new 52-
week highs.  All the excitement over DNA's cancer drug only
brings more attention to the strength shown in the biotech
sector.  A dip to $60.00 or a move over $62.50 both looks like
entry points to go long.

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= 6606 at $2.95 SL=1.50
BUY CALL JUN-65 YAA-FM OI=16887 at $0.60 SL=0.00
BUY CALL JUL-60 YAA-GL OI=42141 at $4.00 SL=2.00
BUY CALL JUL-65 YAA-GM OI=27882 at $1.40 SL=0.70

Annotated Chart of AMGN:

Picked on May 11th at    $61.24
Change since picked:      +0.63
Earnings Date          07/22/03 (unconfirmed)
Average Daily Volume = 10.5 mln

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Does Size Matter? Hell Yes!

By Mike Parnos, Investing With Attitude

Does size matter?  Hell yes!!  If you don't believe me, just ask
my ex-wives, my ex-girlfriends, the Seven Dwarfs and Shaquille

Beyond the obvious, in life – and for our purposes – let's focus
on the size of your brokerage account.   That's what dictates how
many contracts you trade and how much risk you allow yourself to

Within the Couch Potato Trading Institute's massive international
student population, we have those who trade 50 contracts per
position and those who trade five.  Diversification is important.
It protects us from ourselves.  Though our strategies are
conservative, our priority is always to conserve our trading
capital.  That's why the length and circumference of our trading
account matters.  Let's examine how we calculate the number of
contracts to trade in each position.

In my older style of trading, I had a system to determine how much
to risk on a given trade.  However, in my new style, the
risk/reward ratio & probability of profit are much different.  How
does one determine how much to risk (how many contracts) on a
given trade.  I'd love to hear your thoughts on this.

A lot will depend on your account size.  For the sake of argument,
let's take the hypothetical trades #1-4 (see below) in this
month's CPTI portfolio.  Now, you'll obviously have to adjust
these for your risk tolerance.   Basically, let's figure out what
we'd have to do to risk a maximum of $5,000 on each of the four

1. The SPX iron condor.  The difference between the strikes is $15
in each spread.  Only one spread is really at risk, so our
exposure per contract is $1,500 less the $290 credit = $1,210.  A
four-contract position would involve a risk of $4,840.

2. The BBH iron condor.  The difference between the strikes is $5
in each spread.  Since only one spread is really at risk, our
exposure per contract is $500 less the $135 credit = $365.   A 12-
contract position would involve a risk of $4,380.

3. TOL bear call spread plus.  The difference between the strikes
is $5.00.  Our exposure per contract is $500 less the $140 credit
= $360 plus the $15 cost for the 10 additional $30 calls.  Total
exposure is $375 per contract.  A 12-contract position would
involve a risk of $4,500.

4. COF iron condor.  The difference between the strikes is $2.50
in each spread.  Since only one spread is really at risk, our
exposure per contract is $250 less the $100 credit = $150.  A 30-
contract position would involve a risk of $4,500.

Your actual risk for the four positions above is actually $18,220.
However, to carry those trades, your account size would have to be
$37,720.  Why?  The additional $19,500 would be held as
maintenance requirement for the second credit spread in the three
condors.  SPX ($1,500 x 4 = $6,000), BBH ($500 x 12 = $6,000), COF
($250 x 30 = $7,500).

What happens to all this maintenance money during the life of the
option?  Nothing too exciting other than earning money-market
interest. That's assuming the maintenance is in the form of cash.
Some brokerages allow maintenance to be in the form of other
marginable securities like stocks, bonds, CDs, Treasuries, mutual
funds, etc.

Can you provide the calculations on the ROI of an iron condor,
i.e. your June SPX play listed in OI this past Sunday.  Thank

I figure it on a basis of Return on Risk.  Other monies that are
being held for maintenance purposes are NOT at risk and are still
resting comfortably in one's brokerage account earning "money
market" interest (however small).

In the current SPX iron condor, we took in a credit of $1.35 from
the 1010/995 bear call spread and $1.55 of credit from the 895/880
bull put spread for a total credit of $2.90.

The difference between the strike prices is $15.  We have just
taken in $2.90, so our risk is $15 less the $2.90 credit --
$12.10.  To figure out our return on risk, we divide our credit of
$2.90 by the $12.10 that is at risk.  If the trade is successful,
the resulting return on our risk is 23.9669%.


The Question Is . . .
Why did the Siamese twins go to England?


June Position #1 – SPX Iron Condor – Currently at 944.30
We sold 5 contracts of SPX June 995 calls and 5 contracts of SPX
June 895 puts.  For protection we bought 5 contracts of SPX June
1010 calls and 5 contracts of SPX June 880 puts.  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.

June Position #2 - BBH Iron Condor – Currently at $104.19
We sold 10 contracts of BBH June $100 puts and BBH June $110
calls.  For protection we bought 10 contracts of BBH June $115
calls and BBH June $95 puts.  Total credit of $1.35.

No Go: What can I tell you?  We had to abort entering this
position because, Monday morning, BBH gapped to $110 and an entry
was no longer practical.  In this coming Sunday's column I will
dream up another hypothetical CPTI position to replace the BBH

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:

New To The CPTI?
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.

The Answer Is . . .
Why did the Siamese twins go to England?
So the other one could drive.

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

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