Option Investor

Daily Newsletter, Sunday, 08/31/2003

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The Option Investor Newsletter                   Sunday 08-31-2003
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: Eighty-Seven Percent
Futures Market: Disinflation
Index Trader Wrap: Running with the Bulls
Editor's Plays: Go Long!
Market Sentiment: Bulls Runneth Over
Ask the Analyst: Gold and the Fed.  Too loose, too tight, or just right?
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 8-29         WE 8-22         WE 8-15         WE 8-08
DOW     9415.82 + 66.95 9348.87 + 27.18 9321.69 +130.60 + 37.12
Nasdaq  1810.45 + 45.13 1765.32 + 63.31 1702.01 + 57.98 - 71.59
S&P-100  503.36 +  5.94  497.42 -  0.88  498.30 +  4.50 +  0.16
S&P-500 1008.01 + 14.95  993.06 +  2.39  990.67 + 13.08 -  2.56
W5000   9770.46 +158.03 9612.43 + 64.92 9547.51 +154.78 - 61.43
RUT      497.42 + 11.91  485.51 + 13.59  471.92 + 17.98 - 14.14
TRAN    2683.24 + 41.68 2641.56 + 17.90 2623.66 + 44.63 - 16.88
VIX       19.49 -  0.78   20.27 +  0.07   20.20 -  1.09 -  1.49
VXN       29.52 +  0.05   29.47 +  0.26   29.21 -  2.82 -  0.45
TRIN       0.78            1.36            1.01            0.87
Put/Call   1.29            0.91            0.53            0.81
Avg Highs   408             720             338             189
Avg Lows     40              58              62              86

Eighty-Seven Percent
by Jim Brown

That is the win/loss percentage for the day after Labor Day
for the last eight years. Seven of those years have finished
positive. With the market trading near its recent highs it
will be a challenge to continue that streak. Greenspan did
not give the markets anything to hang their hat on and the
earnings warning season is just ahead. Conditions are no
different than any other year except that the markets are at
52-week highs.

Dow Chart

Nasdaq Chart

Friday was economically challenged with a mixed bag of results.
The NY-NAPM fell to 221.7 from 224.9 and ninth consecutive
monthly decline for business conditions in New York. The current
conditions fell to 43.6 from 46.2 and future expectations fell
to 57.1 from 62.5. Every material component declined. New York
remains in recession the rest of the country appears to be
keeping its head above water.

The Chicago PMI rose to 58.9 from 55.9 and handily beat analyst
estimates of 56.0. Order backlogs increased to 51.0 and the
first month of expansion in over seven months. Employment also
rose to 51.2 and the first expansion in seven months. Production
fell to 51.6 from 58.4 but remained in positive territory over
50. Overall this is the highest reading for this index since May
2002 and the best reading for payrolls since March 2000. While
output growth slowed it was attributed to the summer doldrums
more than a deterioration in conditions.

Personal income growth slowed in July to +0.2% and less than
consensus estimates at -0.3%. However, disposable income rose
strongly by +1.5% due to the tax rebate checks and the drop in
the tax rate. This prompted a jump in personal consumption of
+0.8%. Overall the +0.2% headline number was down from the
+0.4% for May and June and would indicate the continued rise
in unemployment is putting pressure on wages. With nearly nine
million people out of work there is no need for employers to
pay a premium for new hires. Signing bonuses have disappeared
and the shrinking work week is reducing overtime pay and extra
hour pay for part timers. This was the second time this year
that wages did not rise. That pushed the annual growth rate
for salaries down to +2.1% from 3.3% in January. The shrinking
wages indicate no danger of inflation and no fear that the Fed
should tighten in the near future.

The Risk of Recession fell to 5.7% in August and the lowest
level since the index was created. This is down from 27% in
January. The impact of the yield curve and the rising stock
markets continues to push the chances of an economic event
into obscurity. The risk of deflation is also waning and
inflation is at zero. With risks muted on all sides it would
appear we are in the sweet spot and ready for a monster
recovery. Unfortunately it just means the economy is flat and
while all the lights are green there is no gas in the tank.
The economic outlook is actually the best it has been in over
a decade and the path of least resistance is up. Only the
mountain states plus Texas, New Mexico and Arizona are still
showing a higher risk of recession. (26,500 homes for sale in
the Denver area compared to only 8,500 a couple years ago)

The Michigan Sentiment came in at 89.3 and below expectations
of 90.5. This was also below the initial reading for August of
90.2. While it may seem like we are splitting hairs here that
drop put us right back into the lower end of the range for the
last four months. This was the lowest reading since April.
Both the current conditions and future expectations components
fell. This is the lowest reading since the war but it is not
clear if it is due to a real drop in sentiment or a result of
the blackout on 54 million consumers. That makes it another
throw away number.

Next week we will not only be faced with a return of traders
from their vacations in a house cleaning mindset but we have
a flurry of serious economic reports. Tuesday begins with the
ISM, Challenger Layoff Report for August, (the Mass Layoffs
we had last week was for July) and the Semiconductor Billings.
Wednesday has Construction Spending, Beige Book and Vehicle
Sales. Thursday has Jobless Claims, Productivity, Factory
Orders and ISM non-mfg. Friday closes with nonfarm Payrolls.
Next week also starts the earnings-warning season for the 3Q
and as yet we have not really seen any rapidly expanding
recovery. Many of the earnings last quarter prefaced their
guidance with "based on expectations of a 2H recovery" and
that has not happened yet. Most importantly we will get
another mid quarter update from Intel on Thursday. Yes, back
to back updates. We will get to see if the positive guidance
or numerous cautions that followed the guidance will prevail.

The ISM is the most critical report on Tuesday with the reading
for July at 51.8 the first sign of economic expansion since
February. Traders will be very intent on seeing if that number
continues to increase or falls back into negative territory
under 50. With much of the July ISM a result of defense orders
everyone will want to see if the trend can continue.

The bottom line on the Greenspan speech was "if you want a
formula, you are out of luck." Analysts were looking for some
clue to the future moves by the Fed and Greenspan rejected the
idea that the Fed would give anybody a roadmap to economic
stability. He said external factors precluded a solely economic
set of triggers. He repeatedly mentioned the Russian debt
default as an instance where the Fed stepped in to increase
liquidity when the US economy really did not need it. It was
a protective action designed to head off any reaction to the
event. He stressed that only a very few economic conditions
were quantifiable and then it is based on an assumption that
the future will replicate the past. He said this requires a
risk-management paradigm attitude to policy making. Ok, Alan,
why didn't you just say, "It is my Monopoly game and I am the
bank. If you don't like it you don't have to play." The most
surprising thing was the lack of a sell off on the news after
all the posturing that this was the showdown at the OK Corral
by the bond junkies. I assume they decided even if the rules
had not changed for the better, at least they had not changed
for the worse.

Friday started out slow with a bounce at the open on the
positive PMI but then slowly lost ground after the Greenspan
speech. About 2:30 the indexes broke out of their range and
wandered higher with the Nasdaq posting a new 17-month closing
high at 1809. The Dow closed over 9400 and the S&P managed
to add +5 points and hold well over the psychological 1000
level. In all a fitting close to a bullish rebound from the
Tuesday drop.

Have you seen the 1999 pattern returning? We have been opening
higher, slipping intraday but then rallying into the close in
the last hour. This was a cash cow in the 1999/2000 time frame
as bears in denial of the bubble shorted the bounce at the
open and then were forced to cover at the close, which pushed
the indexes to another gap open. I could stand to see this
pattern stick around until January.

I am not going to dwell on this because it has been beaten to
death in the press for the last couple weeks. The VIX closed
on Friday at 19.49. It has traded under 20 several times over
the last two weeks and is trending very close to its current
historical lows. That should raise some eyebrows. Actually
"the" historical lows are in the 10.0 range. The debate over
when the VIX is in sell territory has taken on a new view over
the last week after a prominent analyst speculated in print
that we could see the historical lows soon and he was talking
about the 10.0 range. I contend that the pre-Internet trading
era was as different from today as horses and cars. Just
because your grandfather walked barefoot in the snow seven
miles to school uphill both ways before there were cars does
not mean your children are going to repeat that. Times have
changed. Before 1997 there were 50% fewer investors than there
are now and about 80% fewer traders. To buy a stock you had to
call your broker and verbally give him the order. There was no
such thing as day traders. There were not 20,000 boutique
hedge funds trading tens of thousands of shares of exchange
traded funds at the click of a button. If you wanted a chart
you got out your graph paper and plotted it yourself or
waited for the Investors Business Daily to pick your stock
to highlight. Futures trading was reserved for currency and
commodities and you had to be wealthy to trade them. Now
anybody with $2000 can daytrade them to his hearts content.
This is not your fathers market. A VIX of 10 was based on
stocks like IP $30, S $12, WY $25, BS $8, TX $30 and the
leading tech stock was IBM at $12. It is tough to get a
lot of volatility out of IBM at $12 and MSFT at $5. (split
adjusted) Just my two cents on the controversy but unless
hackers finally shutdown the Internet I think the only way
we are going to see 10 again is after a depression crash to
market levels your father would remember. Until that happens
I will continue to project 17.50 as the backup the truck put
signal and anything below 19 as a significant warning to
observant traders.

Long-term Chart of the VIX:

On a purely technical basis the markets ended right at strong
resistance. The Dow has strong resistance at 9450, Nasdaq 1812
and S&P 1010. The close has set up a potential gap open on
Monday and a gap over these resistance levels. All the indexes
are threatening to break out to new highs and Monday could be
critical. If we do break out we could trigger a new wave of
short covering and a new wave of pure buying if the breakout
is seen as confirmation of a new up leg in the markets. As in
most cases of seemingly impending breakouts the economic news
on Tuesday will control our eventual fate.

Chart of the S&P 500 Index:

Moving into next week we have some nice historical patterns
working for us. The first two post Labor Day trading sessions
typically are strong with Tuesday up 7 of the last 8 years.
That statistic and $4 will get you a cup of coffee at SBUX.
Trends are trends until they are recognized as trends and
then the institutions devise a way to capitalize on them.
If you knew that a specific day was going to be bullish just
before a normal period of weakness then odds are good you
would target that day to unload stock in front of that
weakness. That is unless you thought we were about to break
out to a new high. See how confusing it gets? Bullish sentiment
is almost off the scale despite analyst after analyst saying
there could be some weakness ahead. It is because they say in
the same breath that the target for the end of the year is
+10% to +15% higher than we are now. The "potential weakness
ahead" is their insurance against seeming irrational if their
+15% prediction does not come to pass. How all this play into
next week is unknown.

The new bullish reality is faced with that ISM on Tuesday and
it should control the week. If it is up again then the bears
may have to head for hibernation early. We can just agree to
skip the September/October crash and just move right into
the November rally. I say all this in jest but with the Nasdaq
setting new highs on a daily basis it may not be far from the
truth. There has got to be another round of profit taking in
our future, several rounds in fact but they could only be
nuisance dips like we saw last week. Swing traders will be
looking to short any new highs on Tuesday but they operate on
a different set of rules. Buy the dips until the trend changes
appears to be the current game plan for everybody else.

Enter Very Passively, Exit Very Aggressively!

Jim Brown


Jonathan Levinson

Equities and commodities rose on Friday, while treasuries and
dollars fell.  It was perfect market action to underline the
appearance of Chairman Greenspan.

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

10 minute chart of the US Dollar Index

The US Dollar Index continued its selloff, breaking the 98 level
but spending the afternoon trying to regain it.  Equities didn't
quite rally but they did gain, while treasuries sold off lightly,
gold advanced and the CRB added 1.85 to close at 243.63.
Strength in commodities came from wheat, copper, cotton, gold,
corn and heating oil futures. For the week, the US Dollar Index
printed a bearish doji star.

Daily chart of December gold

December gold gapped up Friday morning on the US personal spending
data at 8:30AM and the resilience of 370 support in overnight
trading.  The combination of a strong CRB and gold today looks
like the markets are smelling inflation, or "disinflation" in Ben
Bernanke's inimitable words.  Chairman Greenspan's iteration of
the artfulness of central banking and its transcendence of mere
rules and guidelines did nothing to quell the demand for gold,
which held the bulk of its gains through the session.  For the
week, December gold printed a bullish breakaway candle, breaking
above the pennant we've been following for months.  Friday's
session closed higher by 5.10 at 376.70, with a high of 378.40.

Daily chart of the ten year note yield

The ten year note yield (TNX) retraced part of Thursday's
decline, testing but failing to regain the ascending secondary
trendline.  It closed higher by 2.4 basis points at 4.454%, while
the thirty year yield gained 0.3 bps and the five year yield
gained 4.  The gain in the yield is bearish for treasuries, but
the failure to regain the trendline is not.  Greenspan's speech
no doubt added some distortion to Friday's trading.  However, the
higher yield is not inconsistent with the drop in the dollar and
the rise in gold and the CRB, as they all reveal different
aspects of inflation.  That said, a greater supply of dollars
should result in more buying for treasuries in addition to other
assets.  The lower dollar/higher yield could coincide with
foreign selling of US treasuries.

Chart of zero-maturity money supply

The effect of increasing the number of dollars is to increase the
price of commodities, reduce the value of savings, and lastly,
increase the price of equities.  We got that on Friday as well.

Daily NQ candles

The NQ printed a new closing high Friday, extending the up-phases
on the daily candles.  The NQ continues to adhere to the ascending
trendline.  Volume was light on Friday as traders lit out for a
long holiday weekend, and the end-of-month window-dressing by fund
managers was in effect.  Most traders, your faithful author
included, disbelieved the sustainability of Friday's move, but
playing devil's advocate, it's worth noting that higher equity
prices fits perfectly with the dollar weakness and commodity
strength seen this week.  A rally in money supply leads to a rally
in the prices of all things except dollars.  Whether this
ultimately leads to the price of a loaf of bread equaling the
price of a share of GE is not our concern.  Our job is to find the
bubbles being created by this tide of dollars and try to stay in
front of it.  This includes the NQ so far.  Whether it can be
sustained is another question.  For the week, the NQ printed a
bullish hammer within a bullish "three white soldiers" candle

30 minute 20 day chart of the NQ

Friday's advance has pulled the oscillators on the 30 minute
charts into a trending overbought configuration.  This is the low-
odds scenario, and confirms that the longer daily cycles above are
dominant.  Thursday's pullback brought the NQ to support within
the longer rising daily cycle, and this cycle drove the price back
up.  Often, the sharpest moves are terminal ones, and if the
longer cycles are completing a blowoff top, that would coincide
with the trending shorter cycles.  However, oscillators are
lagging indicators, and we won't know until they have rolled over,
which requires price to drop.  It's difficult to buy year highs,
but until we know that the longer downphase has commenced, it
remains a dip buyers' market on the NQ.  Again, it's difficult to
trust the light volume, end-of-month action this week, and I'm
looking forward to Tuesday for some clarity.

Daily ES candles

The ES underperformed the NQ again on Friday, rising .67% for the
NQ's .71%.  Fresh buy signals were not generated on the
oscillators, and the year highs weren't even close, let alone
exceeded.  This continues to look like performance-chasing or
"heatmapping" by managers as discussed last night.  The June highs
remain 7 points away.  Equities would look significantly more
impressive if the ES was participating.

In Friday's market wrap, Linda, Jane and I discussed the recent
phenomenon of frequently failing chart patterns.  There have been
an increasing number of failed patterns, for whatever reason.  I
note this because as the ES continues to chug along the top of its
range, it's printing what could be construed as a reverse head and
shoulders with a neckline at 1015.  Note that reverse h&s
formations occur at bottoms, and not tops, and for this reason the
pattern is flawed.  What remains is my belief that if the ES
breaks 1015, we could see fireworks to the 1050 area, which is not
only implied h&s target of such a move, but also a well-broadcast
e-wave target.

20 day 30 minute chart of the ES

A fine example of failed chart patterns is the rising wedge on
the 30 minute chart above.  According to Bulkowski, there was a
75% chance of that upside break's not occurring.  Stop losses,
anyone?  Like the NQ, the shorter cycle oscillators on the 30
minute chart are now trending as we wait for the topping phase on
the daily cycle oscillators to complete.  Forgetting the light
volume, end of month and potentially bearish chart patterns, the
ES printed a higher high and higher low on Friday, and it too
remains a dip-buyers' symbol.  But, as bears have learned, always
use stop losses.  The Thursday dip created a steady rising
trendline on the ES, and its support is now at 1004.  A break
below that level should have bulls thinking twice and aggressive
bears at ready, with confirmation on a break below 997.

Daily YM candles

Same picture on the YM as for the ES.

20 day 30 minute chart of the YM

For the week, we are left with a bearish candle pattern for the
US Dollar Index, bullish for gold, bullish for equities, and
mixed for treasuries.  The TNX printed an inverted hammer, which
is positive for the yield but it appears to be forming a rounding
top, with the daily rising trendline broken.  This is the one
potential fly in the ointment for our liquidity/inflation thesis,
but note the flip side of the coin.  An increase in money supply
creates liquidity with which to buy stocks, bonds, gold and other
commodities, other currencies, everything.  This meshes with
bonds rallying as well, as we saw earlier this year.

For Tuesday, we'll see whether equities, and gold for that
matter, can sustain this week's gains.  Have a great holiday and
see you at the bell!


Running with the Bulls
Jonathan Levinson

Light volume, end-of-month pre-holiday trading gave bulls the
edge Friday, as the Nasdaq and Dow transports pushed to new 12-
month closing highs.  The SPX lagged behind but still closed
comfortably above the 1000 level.  With the indices closing just
below their session highs, there will be plenty to cheer on
Tuesday, but whether it's by bulls or bears remains uncertain.

Daily COMPX candles

Friday's trading saw the COMPX consolidate Thursday's close above
1800, adding 10 points to close at 1810.45.  The small move took
place on light volume within the ongoing cycle up-phases on the
daily cycle oscillators.  This cycle has been dominant for the
past several months, and while the sensitive 10 day stochastics
are within topping territory, the laggier Macd is still in a
strong bull run.  Unless this week's overall light volume advance
gets proven on Tuesday to have been a blowoff top in the daily
cycle, bulls can continue to buy the dips above the steeply
rising trendline currently at 1790, with tight stops of course.
Bears will wait for a breakdown.

30 minute 20 day chart of the COMPX

The dominance of the rising daily cycle oscillators is proven by
the now-trending 30 minute cycle oscillators.  The most bearish
attribute of this chart, other than the double top printed on
Friday, is that the up-trend is too steep.  The bounce from
Tuesday's pullback has created a bearish ascending wedge, which
ordinarily would be a relatively high-odds short candidate,
waiting for a failure of the lower trendline.  However, we've
been seeing these patterns fail with increasing frequency, and an
upside break is easy to imagine given the recent action on the

The COMPX remains the strongest index, with the OEX and INDU
actually on daily oscillator sell signals.  My bearish
hesitation, and my warning for dip-buyers, is that the Nasdaq
leading in light volume, end-of-month trading is a sign of
performance chasing and "window dressing" for monthly fund
statements.  In other words, there are non-technical reasons for
doubting the sustainability of this week's rally.  There's
nothing to do but keep stops under longs, and watch for a
potential failure of that lower rising trendline off last
Tuesday's low.  Tuesday should resolve the uncertainty one way or
the other.

Daily INDU candles

The INDU is the weakest index, with the SPX in the middle.
Again, the "bluest" of the blue chips lagging the more
speculative Nasdaq does not reflect well on the current rally,
but we will trade what we see in any event.  The year highs were
not tested in Friday's trading, and the pattern of the advance
appears as a weaker rising wedge on the 30 minute candles below,
taking a gentler rising angle than that on the COMPX.  If there's
going to be a failure, the INDU appears to be telegraphing it the
clearest.  The daily cycle oscillators remain on sell signals,
though the decline thus far has been minor.

Traders should watch the lower 30 minute support line at 9360.
With an 80 point range within the wedge, there's room to scalp
bounces with a tight stop underneath, while bears can wait for a
failure at 9440, hopefully on a blowoff opening on Tuesday.  A
breakdown of this formation projects to 9240 support if the
pattern fulfils.

20 day 30 minute chart of the INDU

Daily OEX candles

Like the INDU, the OEX continues to lag the COMPX, but not as
badly.  The daily cycle oscillators are still on sell signals,
but another up day could change that.  Descending trendline
resistance at 504 has capped every advance since June, and it
will take a great deal of commitment from bulls to reverse the
oscillator downphase, take out that trendline and challenge the
year high above 510.  On the 30 minute chart, we see the steeper
rising bear wedge, narrowed to a 2.5 point range between 501.50
and 504. Resolution is due, and despite the strength at Friday's
close, the onus remains on the bulls within this bearish chart

The VIX broke back below 20 on an intraday basis this week.
During recent years, the relatively few such occurrences have
lined up well with significant tops in the market.  As also
occurs at such tops, observers note that things are somehow
different this time, that the indicator is broken, et cetera.
Upgrades are fast and furious, bullish sentiment abounds, and all
agree that the indices are going higher.  These are all
characteristics of the current market, but whether it needs to
progress further or not remains to be seen.  All can agree that
the prevailing conditions are dangerous for bulls and bears

20 day 30 minute chart of the OEX

Daily QQQ candles

The QQQ remains the pride and joy of bullish traders, and no
wonder.  What is a clear bear wedge for the INDU and OEX is a
mere pullback and resumption of the steep uptrend below the
middle rising trendline, with the Qubes never falling far enough
away from the primary rising channel to actually break into a new
wedge.  The oscillators are pinned in overbought, trending higher
under the influence of the rising-though-toppy daily cycle
oscillator.  The rising trendlines have narrowed to less than a
20 cent range, and Tuesday promises to be a significant session
in determining where we go next.  A break below 33.10, confirmed
by a failure of 33.00, targets Fibonacci support below 32.70,
with an ultimate target of 30 on a bear wedge breakdown.
However, such a move could arrest the ongoing up-phase on the
daily oscillators, which would have traders viewing the rising
"channel" as a "bear wedge" projecting to significantly lower

20 day 30 minute chart of the QQQ

If I sound ambivalent, it's because I am.  On the one hand, the
price action has been very bullish, particularly on the COMPX and
QQQ.  On the other, there are chinks in the bullish armor.  While
these may constitute a "wall of worry," the bulls are within
areas where even conservative bears will be willing to try again.
Breadth, sentiment and volatility remain extreme, and next week
should go a long way toward separating the wheat from the chaff.
I'm hoping for a blowoff upside move at the open to permit me to
join those conservative bears, but will be watching the
trendlines posted above as primary decision points.  And,
whatever happens, whichever direction we target, tight stops and
extreme caution will be the rule.

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Editor's Plays

Go Long!

I am not sure what but shorts are definitely not working.
Every historical trend we have seen for years has gone down
in flames and the bad news bears are even learning how to
buy good news.

I have tried to go short for at least five straight weeks
to no avail. Does that mean we should just blindly go long
as the market tries to break out to new highs? Not hardly!
I cannot even close my eyes and hold my nose and go long at
these levels without hedging my bets. Since directional
plays are not working let's strangle this bull because
about the only thing we can be sure of today is the market
should be more than 200 points away from 9400 by September
19th. It is just the direction we are not sure about.

This is going to be a quick play tonight. It does not take
a lot of explanation to say go long with insurance.

Buy Sept DJX-96 CALL $0.50 (Monday est)
Buy Sept DJX-93 PUT  $1.00 (Monday est)

The plan is simple. The put is the expected direction.
This is September but then the historical August dip did
not appear either so we are going to buy insurance. The
$96 call should rise to $1.50 with the Dow at 9600. This is
our get out of jail free card. If the Dow hits 9600 we stop
out and lose a few cents. Actually, if it hits 9600 I would
trail the stop, close the put and let the call run.

If the Dow runs into ISM or Jobs trouble next week and the
long awaited sell off appears then the $93 put should double
at $92 and be close to $4 if we retest 9000 again.

This plan requires a 200 point directional move over the
next three weeks. Anything over that is profit.

DJX Chart


Play updates:

SMH Puts - August 24th.

Unbelievable. The chip stocks appear to be bullet proof even
after Intel went out of their way to tone down their guidance
for four consecutive days. The SMH is almost back to its post
guidance high of 37.80 and the stop loss at 38.00. Intel will
update guidance again next Thursday. If we are still in the
play I do not expect that guidance to be as positive.



Breakout! The Nasdaq new high is helping inject value into the
Powerball portfolio. The CMVT call has rocketed to $4.30 and
EMC $3.10. Once the little guys catch fire in the last quarter
we could be rocking.

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

Powerball Chart


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

Good Luck

Jim Brown


Bulls Runneth Over
- J. Brown

What's wrong with this picture?  The Dow Jones Industrial Average
is at a new 52-week high.  So is the NASDAQ Composite.  Gold is
near new relative highs and oil is at new multi-year highs.  Has
the bullish stampede gotten out of hand?  Everything is running
higher.  You've probably heard it before.  The herd (of
investors) tends to be right in the middle of major trends but
wrong at either end.  When everything looks bullish, and it does,
it's time to take a step back and re-evaluate your risk.  That
doesn't mean trying to pick a top and hurt your account by
shorting bullish breakouts.  Trying to call a top or a bottom can
be equally disastrous to your financial health.  I am merely
urging some caution.

Historically we are about to step into the weakest month of the
year for the equity markets.  I know, if you had a dollar for
every time we've heard that in the last month; but it's true.  We
are quickly approaching some major mid-quarter corporate updates.
Plus, we're only six weeks from the Q3 earnings season that start
in early October. That means the next four weeks could be full of
earnings warnings.  Given that the third quarter is typically the
weakest of the year, no wonder September has a bad reputation for

I would like to point out that the VIX is once again under its
historical "sell" signal for the markets at 20.  Yet we all know
that markets at extremes can continue to trade at extremes.  Jim
goes into more detail on his view of the VIX in the wrap this
weekend.  This column has been harping on it so long everyone
should already know that it is a big warning sign.  Another
warning sign that many investors fail to follow is the bullish
percent index.  They remain at or near multi-year highs.  I
suspect we have more upside ahead of us but when everything
starts to roll over as the rally runs out of steam the profit
taking could be painful.


Market Averages


52-week High:  9499
52-week Low :  7197
Current     :  9415

Moving Averages:

 10-dma: 9379
 50-dma: 9196
200-dma: 8612

S&P 500 ($SPX)

52-week High: 1015
52-week Low :  768
Current     : 1008

Moving Averages:

 10-dma:  999
 50-dma:  989
200-dma:  920

Nasdaq-100 ($NDX)

52-week High: 1344
52-week Low :  795
Current     : 1341

Moving Averages:

 10-dma: 1311
 50-dma: 1261
200-dma: 1116


Investors remain fearless and the volatility indices continue to
sink.  The VIX has dropped back below its normal "sell" signal of
20 and the VXN has just rolled back under the 30 mark and appears
ready to make new lows.

CBOE Market Volatility Index (VIX) = 19.49 -0.44
Nasdaq Volatility Index (VXN)      = 29.52 -0.79


          Put/Call Ratio  Call Volume   Put Volume

Total          1.29        379,558       491,007
Equity Only    1.15        325,491       375,463
OEX            1.14         12,003        13,709
QQQ            9.81         22,750       223,233


Bullish Percent Data

           Current   Change   Status
NYSE          70.9    + 0     Bull Confirmed
NASDAQ-100    75.0    + 1     Bear Correction
Dow Indust.   80.0    + 0     Bull Correction
S&P 500       78.0    + 1     Bull Correction
S&P 100       82.0    + 0     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  0.97
10-Day Arms Index  0.92
21-Day Arms Index  0.99
55-Day Arms Index  1.08

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    1804      1724
Decliners     938      1297

New Highs     214       263
New Lows        7         7

Up Volume    794M      822M
Down Vol.    313M      326M

Total Vol.  1142M     1194M
M = millions


Commitments Of Traders Report: 08/26/03

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

There is no significant change in the long or short positions
for the large S&P futures contracts.  We continue to see the
commercials or "smart money" inch up their short positions while
retail traders inch up their long positions.  Since they both
tend to take the opposite sides of the market, this is normal.

Commercials   Long      Short      Net     % Of OI
08/05/03      395,633   450,988   (55,353)   (6.5%)
08/12/03      399,414   456,767   (57,353)   (6.7%)
08/19/03      404,665   455,381   (50,716)   (5.9%)
08/26/03      410,378   472,987   (62,609)   (7.1%)

Most bearish reading of the year: (111,956) -  3/06/02
Most bullish reading of the year:   18,486  -  6/17/03

Small Traders Long      Short      Net     % of OI
08/05/03      159,971    72,951    87,020    37.4%
08/12/03      158,821    71,040    87,781    38.2%
08/19/03      162,034    87,064    74,970    30.1%
08/26/03      170,424    76,967    93,457    37.8%

Most bearish reading of the year:  (1,657)- 5/27/03
Most bullish reading of the year: 114,510 - 3/26/02

E-MINI S&P 500

In contrast we're seeing the commercials add strongly
to their long positions in the e-minis.  The latest reading
shows the most bullish position in a very long time.
Just as expected the small traders has loaded up on short
positions and this marks the strongest net short position
for months.

Commercials   Long      Short      Net     % Of OI
08/05/03      310,662   249,004     61,658    11.0%
08/12/03      306,014   217,233     88,781    17.0%
08/19/03      296,971   235,779     61,192    11.5%
08/26/03      338,766   234,841    103,925    18.1%

Most bearish reading of the year: (354,835)  - 06/17/03
Most bullish reading of the year:  103,925   - 08/26/03

Small Traders Long      Short      Net     % of OI
08/05/03       56,663    95,919   (39,256)  (25.7%)
08/12/03       62,534   106,403   (43,869)  (26.0%)
08/19/03       90,428   125,980   (35,552)  (16.4%)
08/26/03       52,131   120,853   (68,722)  (39.3%)

Most bearish reading of the year: (68,722)  - 08/26/03
Most bullish reading of the year: 449,310   - 06/10/03


Commercials remain net short on the NASDAQ 100 futures
while small traders are still swinging for the fences
with heavy net longs.

Commercials   Long      Short      Net     % of OI
08/05/03       32,813     52,383   (19,570) (23.0%)
08/12/03       34,374     53,015   (18,641) (21.3%)
08/19/03       32,107     53,665   (21,558) (25.1%)
08/26/03       33,991     55,849   (21,858) (24.3%)

Most bearish reading of the year: (21,858)  - 08/26/03
Most bullish reading of the year:   9,068   - 06/11/02

Small Traders  Long     Short      Net     % of OI
08/05/03       22,188     7,783    14,405    48.1%
08/12/03       23,957     7,871    16,086    50.5%
08/19/03       25,607    10,134    15,473    43.3%
08/26/03       26,108     8,864    17,244    49.3%

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


The flurry of short positions for the DJ Industrials
two weeks ago have mostly evaporated, meanwhile the
small trader has eliminated a few short positions as well.

Commercials   Long      Short      Net     % of OI
08/05/03       23,981     9,264   14,717      44.3%
08/12/03       24,942     9,878   15,064      43.3%
08/19/03       21,088    18,984    2,104       5.3%
08/26/03       24,586    10,386   14,200      40.6%

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
08/05/03        5,716    10,422   (4,706)   (29.2%)
08/12/03        6,933    13,248   (6,315)   (31.3%)
08/19/03       15,717     9,143    6,574     26.4%
08/26/03       14,115     5,592    8,523     43.2%

Most bearish reading of the year:  (8,777) - 10/12/01
Most bullish reading of the year:   8,523  -  8/26/03


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Gold and the Fed.  Too loose, too tight, or just right?

In some recent commentary, you have written that some economists
and stock market analysts feel the Federal Open Market Committee
is doing a good job with interest rate policy as long as gold
stays between $300 and $400 per ounce.  Where does this come
from, and how might it tie in with some of the bullish vertical
counts you've been coming up with for gold futures, which you
said were "hinting at $418."

The first that I heard of this type of rule was a couple of weeks
ago when Steve Forbes was a guest on CNBC's "Squawk Box" when he
mentioned that all an investor had to do was monitor gold prices
and as long as gold was trading between $300/oz. and $400/oz.
then gold was telling the investor that the Fed was doing a good
job with interest rate policy.  I'm not sure if Steve Forbes
picked this up on his own, or if it has some type of historical

For those of you who know me, or have followed some of my
writings over the past couple of years, you probably know that I
always suggest back testing anything.

Me being the curious one, and not accustomed to taking things for
granted, just because somebody said something, I found Mr.
Frobes' comments quite interesting.

The most interesting part of his brief comments were very basic.
His assumptions were that gold is a hedge against inflation.
With that in mid, if gold were to trade above $400 per ounce,
then that would be a signal from the MARKET that the Fed was too
easy or accommodative to the markets and had its Fed policy on
interest rates to low.  If gold were to trade below $300 per
ounce, that that would be a signal from the MARKET that the Fed
was to tight with its interest rate policy, trying to limit
inflationary pressures, which could harm an economies growth.

This is too simplistic was my (Jeff Bailey) thinking.  Nothing is
that simple.  Here, I'll disprove Mr. Forbes' comments right now!

Gold Prices - Monthly Intevals (1990-current)

All I did was place horizontal lines at $300 and $400 to define
Mr. Forbes' range.  I added a midpoint line at $350 to provide a
level of equilibrium.

Hmmmmm, I thought.  All be darned if in the last 10-year years,
gold has really tended to trade within a $300 to $400 price
range.  And to think I didn't vote for Mr. Forbes when he last
ran for President!

There have been some criticism toward Fed Chairman Alan Greenspan
the past year or so.  Some critics of Mr. Greenspan say he, and
perhaps the FOMC were responsible for sending the U.S. economy
into the recent recession, which recent economic data suggests
the economy is finally recovering from.

I went back as far as the Federal Reserve's web site had posting
 dating back to 1996, and tried to match gold prices against what
the Fed was doing with its interest rate policy.  Was the Fed
simply looking at gold prices to then influence its policy, or
was the Fed looking at a lot of different economic data, trying
to weigh the balance between economic growth and inflation?

I think it fascinating what the Fed was seeing, or thought it was
seeing on both the economic and inflation front at various
meetings since 1996.  I tried to show some various inflection
points in what gold was doing, which supposedly is a good
indicator of inflation.

I started making these observations from the January 30-31, 1996
FOMC minutes.

Ugh!  That was some tough reading, but if any of us think the
Fed's job is easy, you should read what they were doing with
currency swaps and actually setting rules and limits on how many
Austrian schillings or Netherlands guilders the Fed could
buy/sell in order to maintain a fed funds rate of 5.5%.

As you and I read some of the brief notes and any Fed action
taken, we might try and apply the $300-$400 rule that Mr. Forbes
mentioned, and test the Fed.  At the same time, we could perhaps
imagine that the S&P 500 Index (SPX.X) is a reflection of the
economy during these periods.  The thought here is that while
gold prices might me a good indicator of how good/poor the Fed is
doing at its job, what impact the Fed's decisions are having on
the stock market, which is supposed to be a reflection of the

I'm going to do this (look at the SPX) in a minute, but lets
study the February 2000 comments, where I make note it was at
that point, when the Fed got rather aggressive with their
tightening of interest rates and raised the fed funds rate by 100
basis points (1%) in the span of 4 months, that some Fed watchers
say Mr. Greenspan and the FOMC maid some mistakes.

When looking at the above chart of gold, if we were following the
"too tight below $300 level" was it wise for the Fed to be
tightening rates?  The one thing I remember most about that time
was wage inflation being a concern as labor markets were tight.
Young students just coming out of college with an electrical
engineering degree were getting $60k-$75k offers, with little or
no professional job experience!  A friend of mine had been with
his current employer for 5-years, and new hires out of college
with the same degree as he had were making $15K per year more
than him.  Fellow co-workers of his were leaving to work for
competitors in order to get comparable new hire salaries.  As it
turn out, my friend may have outsmarted some of his old co-
workers as he is still employed with high seniority.

But I digress.

Then do you see what the Fed started doing roughly 8-months
later?  Cut, cut, cut, cut.  Suddenly the economy was showing
sharp declines in multiple economic categories and the Fed was
aggressively easing.

One might think that by February 2002, when gold moved back above
$300 that the Fed was back on track and doing a good job.

Do you see how gold moved above $300 in February 2002, then
advanced to $325?  Then see that little pullback and kiss at that
$300 level?  I didn't have enough room on the chart, but that
test at $300 came in August of 2002 and has been working its way
higher, almost in increments of $25 ever since.

Also not marked on the gold chart is when gold first jumped from
that $300 level kiss to $350.  That took place in December 2002,
and looks as if the gold market responded to another 1/4-point
cut from November.

In recent comments, Fed Chairman Alan Greenspan has said the Fed
is willing to keep its fed funds rate at low levels for however
long it takes to see a steadily improving economic recovery take
hold.  If we believe the Fed is doing a good job as long as gold
stays between $300 and $400, can the Fed leave its fed funds rate
at the current 1% rate?  While gold has been moving up, it still
looks like there's some time until gold were to move above $400.

I'm trying to find prior Fed action to 1996, but it is notable
that despite gold trading $400 in January/February 1996 and the
Fed actually easing on its fed funds rate, gold didn't make the
inflationary response move higher.  Did it?

As promised, lets take a look at the S&P 500 Index (SPX.X) on a
monthly interval chart.  I can only show SPX data back to 1993,
but it will match the same horizontal scale with the gold chart.
I've set the moving averages to 6 months (about 120 trading days)
and 12 months (240 trading days).

S&P 500 Index Chart - Daily Intervals

I couldn't match all the various dates with the Fed's action and
comments from their meetings, but over the past 10-years, it has
been rather true that as long as gold stays between $300 and
$400, the Fed may indeed be doing its job to the MARKET's
satisfaction when trying to provide steady economic growth with
modest inflation.

Everyone, even Alan Greenspan and the FOMC can make mistakes or
misjudge economic signs.  In May 1998 the Fed mentioned it saw
signs of inflation and might have to tighten/raise interest
rates.  That didn't sit well with the MARKETS and maybe, just
maybe, if the Fed hadn't uttered those words with gold hovering
at the $300 level, the SPX might not have fallen.  Here's a link
to those comments

 and these may be worth noting and the economy and the SPX look
to be improving.

The difference we may be seeing today is that right now, gold is
trading happily at 375 and it would appear the Fed is doing a
good job.

I would continue to monitor gold prices, and the technicals
currently in play look to have gold holding the potential for
$400 (current trend, point and figure bullish count, very low fed
funds rate).

Should gold near the $400, we might expect the Fed to make a
tightening move.  If the Fed doesn't as it sees no sign of
inflation, and gold continues higher as if the MARKET is trying
to tell the Fed "you'd better tighten as inflation is coming and
may turn into hyper inflation if you don't act soon," and the Fed
still doesn't act, then we might expect the SPX to act as it did
when gold was below $300, the Fed was not doing its best job, and
was tightening when the gold MARKET was trading below $300.

I will admit that the last 10-years may not be enough historical
information to draw some of the conclusions stated in this
article.  Some may think we should go back to the 1930's and
study these models, or even the 1970's during the Carter
Administration when inflation was running high.

But we should also remember just how far technology has brought
forward the speed and faster flow of information compared to the
1930's and even the 1970's during times of deflation and

You can see how quickly the Fed may have realized its "mistakes"
from the spring of 2000, when it aggressively began cutting

Eventually the Fed will raise its target on fed funds rates.
What would your reaction be?  Better yet, what will the MARKET's
reaction be?

In May of 1998, the Fed did nothing but say it saw signs of
inflation and hinted at a rate increase.  Where was gold?  It was
trading at the low end of the $300-$400 range at $300.  While the
Fed saw inflation, gold certainly didn't seem to be seeing it.
The SPX was obviously heating up and corrected on the Feds
comments and sent fed funds lower in anticipation the Fed would
follow through on its observation that inflation may need to be
tamed with a rate cut.

For gold, press reports mention that there are still very large
short positions unwinding in the commodity and this unwinding of
bearishness can have price moving outside of ranges.

One way I think a trader/investor can differentiate an overly
bullish move or bearish move in gold is with the Treasury bond
market.  The bond market is much larger than the gold market and
just as the gold market may be efficient at predicting inflation,
so is the bond market.

I can't remember the exact dates, but it was in 2000 when gold
was falling lower from $300 and Treasury YIELDS started turning
lower, while the Fed was raising rates, that we thought,
"something's up" or down as the case would be.

Should gold move above $400.00, we'll be keeping a very close eye
on the Treasury market.  If gold moves above the $400 level, a
normal move in gold (without excessive short covering) we should
expect Treasury YIELDS to follow, as their higher YIELD should
also be predicting inflation and future Fed tightening.

Conversely, lets say Treasury YIELDS stay where they are at, and
3-months from now, gold is trading $412.  It would be my opinion
at that time that we're probably seeing gold "artificially"
boosted by short-covering or more extreme levels of speculation.

We could also keep an eye on other commodity products, where
their prices should rise under more inflationary times.

Jeff Bailey


Earnings Calendar

Symbol  Company               Date           Comment      EPS Est

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


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

CRHCY  CRH PLC               Tue, Sep 02  Before the Bell      N/A
MBG    Mandalay Resort Group Tue, Sep 02  After the Bell      0.63
ROP    Roper Industries      Tue, Sep 02  After the Bell      0.53
SNY    Sanofi Synthelabo     Tue, Sep 02  Before the Bell      N/A
TI     Telecom Italia        Tue, Sep 02  -----N/A-----        N/A

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

GLH    Gallaher Group PLC    Wed, Sep 03  Before the Bell      N/A
HNZ    H.J. Heinz Company    Wed, Sep 03  Before the Bell     0.51
HOV    Hovnanian Enterprises Wed, Sep 03  After the Bell      1.90
JWa    John Wiley & Sons     Wed, Sep 03  Before the Bell     0.38
Q      Qwest Communications  Wed, Sep 03  Before the Bell    -0.08
SIGY   Signet Group          Wed, Sep 03  Before the Bell      N/A
TTWO   Take-2 Inter Software Wed, Sep 03  Before the Bell     0.17
COO    The Cooper Companies  Wed, Sep 03  After the Bell      0.54
TOT    Total                 Wed, Sep 03  -----N/A-----       1.48

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

ACDO   Accredo Health        Thu, Sep 04  Before the Bell     0.32
ABS    Albertson's           Thu, Sep 04  Before the Bell     0.43
DLM    Del Monte Foods       Thu, Sep 04  -----N/A-----       0.09
DEO    Diageo PLC            Thu, Sep 04  Before the Bell      N/A
EDP    Electricidade PortugalThu, Sep 04  -----N/A-----        N/A
IPR    International Power   Thu, Sep 04  -----N/A-----        N/A
LR     Lafarge               Thu, Sep 04  -----N/A-----        N/A
MDZ    MDS Inc.              Thu, Sep 04  Before the Bell      N/A
NSM    National SemiconductorThu, Sep 04  -----N/A-----       0.12
PLL    Pall Corp.            Thu, Sep 04  -----N/A-----       0.40
SZE    Suez SA               Thu, Sep 04  -----N/A-----        N/A

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

RANKY  Rank Group Plc.       Fri, Sep 05  Before the Bell      N/A
TKP    Technip               Fri, Sep 05  Before the Bell     0.37

Upcoming Stock Splits In The Next Two Weeks...

Symbol  Company Name              Ratio    Payable     Executable

JBHT    J.B. Hunt Transport Serv  2:1      Aug  29th   Sep   1st
RCII    Rent A Center             5:2      Aug  29th   Sep   1st
AFP     United Capital Corp       2:1      Aug  29th   Sep   1st
JCOM    J2 Global Communication   2:1      Aug  29th   Sep   1st
CHDX    Chindex International Inc 2:1      Sep   2nd   Sep   3rd
HOTT    Hot Topic Inc             3:2      Sep   2nd   Sep   3rd
PFB     PFF Bancorp Inc           7:5      Sep   5th   Sep   8th
RBKV    Resource Bankshares Corp  3:2      Sep   5th   Sep   8th
PSUN    Pacific Sunwear of CA Inc 3:2      Sep   5th   Sep   8th
CWTR    Coldwater Water Inc       3:2      Sep   8th   Sep   9th
POOL    SCP Pool Corporation      3:2      Sep  12th   Sep  15th
CBAN    Colony Bankcorp Inc       5:4      Sep  15th   Sep  16th
HNBC    Harleysville National Corp5:4      Sep  15th   Sep  16th

Economic Reports This Week

It's a full week of economic reports to launch the back to school
season.  Wednesday, Thursday and Friday are all packed just as
Wall Street professionals return from the Labor Day holiday ready
to do some business.


Monday, 09/01/03

Tuesday, 09/02/03
ISM Index      (DM)     Aug  Forecast:    53.5  Previous:     51.8

Wednesday, 09/03/03
Auto Sales  (NA)        Aug  Forecast:    5.8M  Previous:     5.8M
Truck Sales  (NA)       Aug  Forecast:    7.8M  Previous:     8.1M
Construction Spnding(DM)Jul  Forecast:   0.40%  Previous:    0.30%
Fed's Beige Book  (DM)

Thursday, 09/04/03
Initial Claims  (BB)  08/30  Forecast:    395K  Previous:     394K
Productivity-Rev. (BB)   Q2  Forecast:   6.30%  Previous:    5.70%
ISM Services  (DM)      Aug  Forecast:      62  Previous:     65.1
Factory Orders  (DM)    Jul  Forecast:   0.80%  Previous:    1.50%

Friday, 09/05/03
Nonfarm Payrolls  (BB)  Aug  Forecast:     15K  Previous:     -44K
Unemployment Rate  (BB) Aug  Forecast:   6.20%  Previous:    6.20%
Hourly Earnings  (BB)   Aug  Forecast:   0.30%  Previous:    0.30%
Average Workweek  (BB)  Aug  Forecast:    33.6  Previous:     33.6

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


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The Option Investor Newsletter                   Sunday 08-31-2003
Sunday                                                      2 of 5

In Section Two:

Watch List: More Bullish Breakouts
Call Play of the Day: PGR
Dropped Calls: BSX
Dropped Puts: WLP


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Watch List

More Bullish Breakouts

Borg Warner - BWA - close: 71.22 change: +1.07

WHAT TO WATCH: We're not sure what it is with the auto parts
group but stocks in this industry are doing very well.  BWA just
broke to a new 52-week high and what looks like a new all time
high.  Shares are bouncing strongly from the $68 level and that
looks like a good place to stick a stop loss.  We'd consider a
target near $75 but with no overhead resistance who knows how far
it can run.



Lear Corp - LEA - close: 55.55 change: +0.79

WHAT TO WATCH: Lear is another auto-parts maker but they focus on
interiors.  Almost a month ago Barron's suggested that LEA might
rise to the $65 level with strong growth prospects.  So far so
good.  The pull back and bounce from the $54 level looks like a
good entry point for bullish positions.



Kimberly Clark - KMB - close: 51.11 change: +0.30

WHAT TO WATCH: Cyclical stocks have been getting a lot of
attention these days and while some might argue that KMB is a
consumer non-durable goods company they are rising nonetheless.
The strong steady trend of higher lows from its early August low
looks promising for shareholders.  So too does the breakout over
its simple 50-dma and the $51 mark.  Short-term bulls might want
to target a move to the $54-55 level.



Abbott Labs - ABT - close: 40.30 change: +0.48

WHAT TO WATCH: We're not wild about drug stocks right now.  The
DRG drug index has been the big loser these last several weeks.
However, showing some signs of life is ABT.  The stock is
fighting to breakout above its simple 200-dma.  While there are
plenty of congested trading levels above it, patient traders
might want to watch it for a move to the $45 area.  If you don't
like the way ABT looks check out LLY, which is in a similar



Legg Mason - LM - close: 71.83 change: +0.89

WHAT TO WATCH: The XBD broker dealer index is trying hard to hit
new highs.  The same can be said for shares of LM.  The stock is
trading close to new highs and with its trend of higher lows, a
new high is not a bad bet.  Bulls might want to consider bounces
from the $70 level or moves above $72 as entry points.


RADAR SCREEN - More stocks to watch

GDW $86.27 - We're not wild about the financials right now but
shares of GDW are bouncing from the $85 level and could be worth

ADP $39.91 - The $40 level is major resistance for this stock and
a breakout could fuel a quick run to the $45 area.

GTK $42.38 - Hitting all times highs is nothing new for this
stock and the bounce from $40 looks buyable, just use a good stop

DISH $37.05 - We've had our eye on DISH for months but it
continues to trade sideways between $34 and $37.50.  Still
watching for that upside breakout.

COH $58.04 - The upcoming Q4 shopping season should be a good one
for COH and investors are liable to buy the stock ahead of its
best quarter.

EDMC $61.16 - School and education stocks have been strong for
months and the rising channel is still in place for EDMC.

ITW $72.29 - Tool maker ITW is making new 52-week highs and the
bounce above $70 looks tempting.  Can it run to $77.50?

WY $59.50 - The strength in WY is impressive but we were
reluctant to go long the stock just shy of $60.


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Call Play of the Day:

Progressive Corp. - PGR - close: 70.74 change: +0.60 stop: 68.40

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.


Boston Scientific - BSX - cls: 60.10 chg: -2.59 stop: 61.99

If you read our update on Thursday night you know we considered
closing the play after Morgan Stanley's bearish comments on
Tuesday.  However, as of Thursday night the stock was still above
its simple 50-dma and the $62 level where it had bounced before.
Unfortunately for shareholders more concerns over BSX's next
clinical study results for one of its drug-coated stents sent the
stock reeling.  Merrill Lynch tried to step in and defend the
stock, which probably helped it close above $60.  We have been
stopped out at $61.99.

Picked on August 21 at $66.50
Change since picked:    -6.40
Earnings Date        07/22/03 (confirmed)
Average Daily Volume:    2.78 million
Chart =


Wellpoint Health Ntwk - WLP - cls: 78.00 chg: +1.11 stop: 77.51

It's hard to be bearish when the whole market is moving higher.
The healthcare-insurance group was a leading group to the
downside just a week or two ago.  We chose to open bearish plays
on WLP but only if it traded below support and hit our trigger at
$74.95.  That happened on Monday but in the same sessions shares
(and the market) rebounded from its intraday lows.  It's been a
steady climb since.  Today's move took it right to previous
support now minor resistance of $78.00 and it was enough to hit
our stop at $77.51.

Picked on August 25 at $74.95
Change since picked:    +3.05
Earnings Date        07/22/03 (confirmed)
Average Daily Volume:     1.3 million
Chart =


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 08-31-2003
Sunday                                                      3 of 5

In Section Three:

New Calls: PCAR, PGR
Current Put Plays: ESRX, LEH, XL
New Puts: None



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Cabot Microelect. - CCMP - close: 65.19 change: -0.90 stop: 62.50

Company Description:
Cabot Microelectronics is a supplier of high performance
polishing slurries used in the manufacture of advanced integrated
circuit (IC) devices, within a process called chemical mechanical
planarization (CMP).  CMP is a polishing process used by IC
device manufacturers to flatten many of the multiple layers of
material that are built upon silicon wafers and necessary in the
production of advanced ICs.  CMP enables IC device manufacturers
to produce smaller, faster and more complex IC devices with fewer

Why we like it:
Well apparently you can't win all the time!  CCMP got off to a
good start on Thursday, ramping up above $66 and seemingly well
on its way towards the top of its channel.  Thursday's rally
above $66 seemed particularly encouraging in light of the UBS
dowgrade and a relatively flat performance for the Semiconductor
index (SOX.X.).  But in a sort of delayed reaction, CCMP dropped
back on Friday, diverging from the SOX and retracting roughly
half of the gains from Thursday.  On a positive note, the $64.50
level did hold as support and dips to that level still look
viable for dip entries into the play.  The stock is still well
within the rising channel (see chart) and a deeper dip that finds
willing buyers above the bottom of that channel can still be used
for more aggressive entries.  The SOX is still inching higher and
should help to propel our play higher, especially if the bulls
return in force next week to push the SOX through the $460 level.
Maintain stops at $62.50.

Suggested Options:
Shorter Term: The September 65 Call will offer short-term traders
the best return on an immediate move, as it is slightly in the

Longer Term: Aggressive traders looking to capitalize on an
extended rally will want to look to the October 70 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.  More conservative
long-term traders will want to use the October 65 Call.

BUY CALL SEP-65 UKR-IM OI=1798 at $3.00 SL=1.50
BUY CALL SEP-70 UKR-IN OI= 965 at $1.05 SL=0.50
BUY CALL OCT-65 UKR-JM OI= 552 at $4.70 SL=2.75
BUY CALL OCT-70 UKR-JN OI= 819 at $2.55 SL=1.25

Annotated Chart of CCMP:

Picked on August 27th at    $64.45
Change since picked:         +0.74
Earnings Date             10/23/03 (unconfirmed)
Average Daily Volume =       883 K
Chart =


Electronic Arts - ERTS - close: 89.97 chg: +0.91 stop: 84.75

Company Description:
Electronic Arts (EA), headquartered in Redwood City, California,
is the world's leading interactive entertainment software
company. Founded in 1982, Electronic Arts posted revenues of $2.5
billion for fiscal 2003. The company develops, publishes and
distributes interactive software worldwide for video game
systems, personal computers and the Internet. Electronic Arts
markets its products under three brand names: EA SPORTS(TM), EA
GAMES(TM), and EA SPORTS BIG(TM). (source: company press release)

Why We Like It:
(This is the original update from Thrusday)
We've had our eyes on ERTS for a while now but the appropriate
entry point seemed to elude us.  Now with the GSO software index
breaking out to new one-year highs we think it may be time to
give ERTS another look.  Not only is the stock one of the leaders
in the group but the recent bounce from $86.00 was a move off old
resistance.  We'll certainly agree that the stock is overbought
but the bears can't seem to get a strong enough grip to slow it
down.  Of course it could be bears trying to cover that might be
boosting the stock price.  As of August 8th, the latest short
interest report showed 7.02 million shares held short or almost 5
percent of the float.  Traders will also note that ERTS is at all
time highs and way overdue for another split announcement.  They
last announced a stock split in August of 2000 near the $85

In addition to the technical strength of the share price we also
like the fundamental reasons to buy ERTS.  A P/E of 40 may be a
little high for some investors but ERTS is a software company
with rising revenues and growing net income.  Looking back to the
July 23rd earnings report we see that ERTS beat estimates by 10-
cents.  Since their earnings report Bank of America has raised
its price target on ERTS from $80 to $95 and Dougherty & Co
raised their price target from $85 to $100.  Plus, we're quickly
approaching the Q4 holiday sales season, which is a big one for
ERTS now that video game sales out pace movie revenues.

More conservative traders might feel better by using a trigger to
go long the stock above $90.00.  We'd suggest $90.05, 90.25, or
whatever suits your fancy.  Our play is a little aggressive as
we're suggesting new bullish positions now with the stock still
under resistance of $90.  Plus, our initial stop loss at $84.75
is a little wide.  Looking at the intraday chart one could
probably get by with a stop just under $86.00.

! Friday Update: Our new call play in ERTS is off to a good
start.  Shares continued their bounce from the $86 level and
midday the stock broke the $90 mark.  Unfortunately the stock was
unable to close above this psychological level.  Moderate to
aggressive bulls can continue to target entries at current
levels. More conservative traders can either look for more
momentum above $90 or maybe a dip and bounce back near the $88

Suggested Options:
Bullish traders can choose from September, October and December
options.  There are only three weeks left for the September calls
so our preference is probably for the October strikes.

BUY CALL SEP 85 EZQ-IQ OI=2259 at $5.80 SL=3.35
BUY CALL SEP 90 EZQ-IR OI=3334 at $2.50 SL=1.25
BUY CALL SEP 95 EZQ-IS OI=1510 at $0.80 SL= -- higher risk
BUY CALL OCT 90 EZQ-JR OI= 308 at $4.40 SL=2.25
BUY CALL OCT 95 EZQ-JS OI= 140 at $2.30 SL=1.15
BUY CALL DEC 95 EZQ-LS OI= 108 at $4.80 SL=2.50

Annotated Chart:

Picked on August 28 at $89.06
Change since picked:    +0.91
Earnings Date        07/23/03 (confirmed)
Average Daily Volume:     3.3 million
Chart =


Gilead Sciences - GILD - cls: 66.68 chg: +0.47 stop: 62.49

Company Description:
Gilead Sciences is a biopharmaceutical company that discovers,
develops and commercializes therapeutics to advance the care of
patients suffering from life-threatening diseases worldwide. The
company has seven marketed products and focuses its research and
clinical programs on anti-infectives. Headquartered in Foster
City, CA, Gilead has operations in the United States, Europe and
Australia. (source: company press release)

Why We Like It:
The biotech bounce is still alive and GILD is doing its best to
participate.  Investors are in a bullish mood and the last few
months of positive biotech news and clinical trial results have
sent shares of some of the major stocks soaring.  GILD is still
slowing rebounding from an early August FDA warning about some of
its advertising but the stock looks ready to retest the $70
level.  Technically the stock's MACD just produced a new buy
signal while its momentum and stochastic oscillators are already
pointing higher.  We like how shares have broken back above the
$66 mark and found new intraday support there.  For the moment
we're keeping our stop below the simple 50-dma.

Keep an eye on the BTK biotech index.  The group may have bounced
but the index has not yet broken its trend of lower highs.
Bullish investors need to see it above the 460 level.

Suggested Options:
There are only three weeks left for September options so short-
term traders should be careful.  Our preference will be for the
October 65's and 70's.

BUY CALL SEP 65 GDQ-IM OI=4058 at $3.20 SL=1.60
BUY CALL SEP 70 GDQ-IN OI=4685 at $1.05 SL=0.50
BUY CALL OCT 65 GDQ-JM OI=  75 at $4.90 SL=3.00
BUY CALL OCT 70 GDQ-JN OI= 147 at $2.55 SL=1.25

Annotated Chart:

Picked on August 19 at $65.32
Change since picked:    +1.36
Earnings Date        07/31/03 (confirmed)
Average Daily Volume:    3.31 million
Chart =


L-3 Communications -LLL - cls: 51.09 chng: +0.28 stop: 49.25*new*

Company Description:
As a leading supplier of sophisticated secure communication
systems and specialized communication products, LLL provides
critical elements of virtually all major communication, command
and control, intelligence gathering and space systems.  The
company's high data rate communication, avionics, telemetry and
instrumentation systems and components are used to connect a
variety of airborne, space, ground-based and sea-based
communication systems.

Why we like it:
After just barely surviving a test of our aggressively tightened
stop at $48.90 early last week, our LLL play gathered its
strength and finally delivered on the expected breakout over the
$50.50 level.  Thursday's session delivered that breakout and
with positive action in the broad market again on Friday, the
stock inched higher for its first close over $51 since early
October of last year.  Adding emphasis to the breakout was the
increasing volume, which fell just shy of the ADV on Friday - an
impressive feat given the light overall market volume.  Dips to
the $50 level now look like favorable dip-buying entry points,
especially with the 10-dma ($49.94) resting just below there to
reinforce that support.  Next resistance is at $51.75, so we're
hesitant to advocate new entries on further strength.  The
momentum entry was on Thursday's breakout.  Once through that
level of resistance, we'll turn our attention to the $54 level,
which will be stronger resistance and is our initial exit target.
Based on the way LLL found support at the 20-dma ($49.30) last
week, it seems safe to raise our stop to $49.25, just below that

Suggested Options:
Shorter Term: The September 50 Call will offer short-term traders
the best return on an immediate move, as it is currently slightly
in the money.

Longer Term: Aggressive traders looking to capitalize on an
extended rally will want to look to the October 55 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.  More conservative
long-term traders will want to use the October 50 Call.

BUY CALL SEP-50 LLL-IJ OI=1438 at $2.15 SL=1.00
BUY CALL OCT-50 LLL-JJ OI=2851 at $3.00 SL=1.50
BUY CALL OCT-55 LLL-JK OI= 919 at $0.90 SL=0.40

Annotated Chart of LLL:

Picked on August 3rd at    $49.90
Change since picked:        +1.19
Earnings Date            10/22/03 (unconfirmed)
Average Daily Volume =      902 K
Chart =


Omnicom Group - OMC - close: 78.10 chg: +0.55 stop: 74.49

Company Description:
Omnicom is a leading global marketing and corporate
communications company. Omnicom's branded networks and numerous
specialty firms provide advertising, strategic media planning and
buying, direct and promotional marketing, public relations and
other specialty communications services to over 5,000 clients in
more than 100 countries. (source: company press release)

Why We Like It:
There appear to be a number of developing reasons for investors
to turn bullish on advertising stocks.  The general economy is
improving, we're starting the fall sports/tv line up, we'll soon
see ads for the 2004-2005 political season, and there is going to
be a free for all among the drug giants with the new ED drugs
hitting the U.S. market soon.  This hasn't been lost on shares of
OMC.  The breakout over $75-76 from a multi-week consolidation
looks like a great place to gauge new entries.

Shares of OMC have been trading right on track.  The pull back to
retest the $75 level was a great spot to initiate new bullish
positions.  The stock continues to bounce and a test of $80.00
probably isn't far away.  Short-term traders who took advantage
of the dip might want to consider taking some profits as OMC
approaches or trades at the psychological $80 level.  We actually
believe that OMC will eventually break out above the $80 mark and
trade to the $85 level of resistance as seen on its weekly chart.

Suggested Options:
Currently OMC has September, October and January calls to choose
from.  With only three weeks left for the September options our
preference for new positions would be the October 75s and 80s.

BUY CALL SEP-75 OMC-IO OI= 1443 at $3.80 SL=1.80
BUY CALL SEP-80 OMC-IP OI= 1652 at $0.95 SL=0.45
BUY CALL OCT-75 OMC-JO OI= 1440 at $5.10 SL=3.00
BUY CALL OCT-80 OMC-JP OI= 1872 at $2.30 SL=1.15

Annotated Chart:

Picked on August 19 at $76.67
Change since picked:    +1.43
Earnings Date        07/29/03 (confirmed)
Average Daily Volume:     881 thousand
Chart =


SPX Corp. - SPW - close: 49.35 change: +0.52 stop: 47.50*new*

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

Why we like it:
As noted on Thursday, SPW is continuing on its path of higher
lows and higher highs, with the $47.60 level (backed up by the
20-dma (now at $47.60) reinforcing that support and providing the
impetus for last week's rebound.  Friday's volume was
exceptionally light (only a third of the ADV), but that didn't
stop the bulls from posting another gain and bringing the stock
that much closer to a test of the key $50 resistance level.  The
dips last week near the 20-dma were the best shot at dip-buying
entries and the next likely entry will come on a bonified
breakout over $50.  We'll need stronger volume to accomplish that
task, but with traders starting to come back on Tuesday from a
long summer, we might just see that early next week.  We can now
raise our stop just slightly to $47.50, just under the 20-dma,
last week's intraday lows and the ascending trendline.  Our
initial target is still the $53 resistance level, where
conservative traders may want to book some gains.  Above there is
our aggressive target of $56, and if achieved, we will advocate
exiting any open positions with a tidy gain.  Remember, the key
to this play will be whether we get a surge of buying volume next
week.  Without it, SPW will have a hard time clearing that $50

Suggested Options:
Shorter Term: The September 47 Call will offer short-term traders
the best return on an immediate move, as it is slightly in the

Longer Term: Aggressive traders looking to capitalize on an
extended rally will want to look to the October 50 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.  More conservative
long-term traders will want to use the October 47 Call.

BUY CALL SEP-47 SPW-IW OI= 663 at $2.60 SL=1.25
BUY CALL SEP-50 SPW-IJ OI=3800 at $1.00 SL=0.50
BUY CALL OCT-47 SPW-JW OI=  41 at $3.50 SL=1.75
BUY CALL OCT-50 SPW-JJ OI=2800 at $2.05 SL=1.00

Annotated Chart of SPW:

Picked on August 14th at    $48.14
Change since picked:         +1.20
Earnings Date             10/27/03 (unconfirmed)
Average Daily Volume =       908 K
Chart =


United Technologies - UTX - cls: 80.25 chg: +0.50 stop: 75.99

Company Description:
United Technologies Corp., based in Hartford, Connecticut, is a
diversified company that provides a broad range of high
technology products and support services to the building systems
and aerospace industries.  It's four main business segments are
Otis, Carrier, Pratt and Whitney, and Flight Systems.
(source: company press release)

Why We Like It:
(This is the Thursday night play description)
The combination of an improving economy and higher defense
spending is going to translate into more business for companies
like UTX.  One look at the stock price and you can see that it's
no secret.  Shares have improved strongly and recent action put
UTX at two-year highs.  Giving the stock an extra boost has been
the recent blackouts.  A UTX spokesman said they are seeing more
interest in their fuel cell and microturbines power products.

We like the recent breakout above the $77 level and how shares
ran up to $80 before pulling back to retest $77 as support.  The
stock is knocking at the $80 level again and we're going to set a
TRIGGER at $80.05 to go long the stock.  Conservative traders can
use a tight stop under $77.00 but we're going to give it just a
little extra room and put our stop at $75.99 for now.

The old highs for the stock are near $87.50 from May 2001.  If
UTX can break $80.00 we'll aim for the old highs.

! Friday update: Sure enough with the markets drifting higher
shares of UTX traded up and through the $80 mark to hit our
trigger of $80.05.  If by chance UTX pulls back we'd look for a
bounce near $78 as another entry point.

Suggested Options:
There are just three weeks left for the September options on UTX
so our preference would be for the October or November strikes.
However, we're going to list a couple of September calls for the
more aggressive traders.

BUY CALL SEP 75 UTX-IO OI=1013 at $5.70 SL=3.35
BUY CALL SEP 80 UTX-IP OI=2355 at $1.65 SL=0.85
BUY CALL SEP 85 UTX-IQ OI=  35 at $0.20 SL --  higher risk
BUY CALL OCT 75 UTX-JO OI= 210 at $6.50 SL=4.00
BUY CALL OCT 80 UTX-JP OI= 766 at $3.00 SL=1.65
BUY CALL OCT 85 UTX-JQ OI= 498 at $1.05 SL= --
BUY CALL NOV 80 UTX-KP OI=1186 at $4.00 SL=2.20
BUY CALL NOV 85 UTX-KQ OI=  21 at $1.75 SL=0.90

Annotated Chart:

Picked on August 29 at $80.05
Change since picked:    +0.15
Earnings Date        07/17/03 (confirmed)
Average Daily Volume:     2.1 million
Chart =


PACCAR - PCAR - close: 85.37 change: +1.13 stop: 82.45

Company Description:
PACCAR is a global technology leader in the design, manufacture
and customer support of high-quality light-, medium- and heavy-
duty trucks under the Kenworth, Peterbilt, DAF and Foden
nameplates. It also provides financial services and distributes
truck parts related to its principal business. In addition, the
Bellevue, Washington-based company manufactures winches under the
Braden, Gearmatic and Carco nameplates. (source: company press

Why We Like It:
It's back!  PCAR was a big winner for us a week ago when we
closed it for a big gain.  We would have rather picked it up
again on a bounce from the $80 level but $82.50 was a close as it
got before dip buyers stepped in and lifted the share price.  Now
that the stock closed back above the $85 mark we're going to aim
for a quick move to $90 and get out.  The stock is extremely
overbought and due for more profit taking but until the trend
changes we'll play what we can get.

If you remember from the previous play on PCAR the company is
doing great.  The company beat estimates by 8 cents with revenues
up 12 percent.  Net income jumped some 68 percent.  Management
said things were improving in the heavy-duty truck orders
department and the entire sector is on fire right now.  On May
29th, 2003 PCAR had a 3-for-2 stock split in the $60-65 range.
Shares are significantly above that level and management could
announce another split at any time.

We're going to start the play with a stop at $82.45.

Suggested Options:
Remember there are only three weeks left for September options.
Our preference will be for the October or November.  However,
keep in mind that we're just looking for a quick move to $90.  If
you're nimble enough the Septembers could work for you.

BUY CALL SEP 80 PAQ-IP OI=278 at $6.20 SL=4.00
BUY CALL SEP 85 PAQ-IQ OI=465 at $2.35 SL=1.00
BUY CALL SEP 90 PAQ-IR OI=151 at $0.60 SL --  higher risk!
BUY CALL OCT 85 PAQ-JQ OI= 90 at $3.90 SL=2.00
BUY CALL OCT 90 PAQ-JR OI=135 at $1.65 SL=0.85
BUY CALL NOV 85 PAQ-KQ OI= 13 at $5.00 SL=3.25
BUY CALL NOV 90 PAQ-KR OI=  7 at $2.70 SL=1.50

Annotated Chart:

Picked on August 31 at $85.37
Change since picked:    +0.00
Earnings Date        07/24/03 (confirmed)
Average Daily Volume:    1.15 million
Chart =


Progressive Corp. - PGR - close: 70.74 change: +0.60 stop: 68.40

Company Description:
Traditionally a leader in non-standard, high-risk personal auto
insurance, PGR has moved into standard-risk and preferred auto
insurance, as well as other personal use vehicle coverage, such
as motorcycles and recreational vehicles.  The company's
property-casualty insurance products protect its customers
against collision and physical damage to their vehicles and
liability to others for personal injury or property damage.

Why we like it:
Throughout the impressive rally from the March lows, PGR had one
heckuva ride, vaulting from the $50 area to as high as $76 before
running out of steam.  Since then, the obligatory profit taking
has occurred, pulling the stock back to the $64 area (an almost
perfect 38% retracement of the February-June rally) before the
buyers reappeared.  The stock launched nearly vertically out of
its $64 base a couple weeks ago, consolidated in a tight, flat
coil just under $70 and then proceeded to break out on Friday.
That flat coil looks an awful lot like a bullish continuation
flag, and since the initial move from $64-70 spanned $6, we can
look for a move of similar magnitude on this breakout from the
pattern.  That should have us targeting a move into the $75-76
area.  Adding to the bullish picture is the way PGR broke out
over the 50-dma ($69.49) and appears to be finding support at the
10-dma ($69.57).

There are a couple ways to play this one.  The conservative
approach would be to look for a mild pullback to the $69.50-70.00
area and enter on a rebound.  Those who like to enter on strength
can jump aboard on a rally through $70.75 (just above Friday's
intraday high), looking for a solid momentum run towards our $75
target.  Look for initial resistance to be found near $73, but if
the stock moves strongly like it did in early August, holding out
for a move up to the $75 level looks like a good bet.  Due to the
fact that the stock is just starting to break out of its
consolidation pattern, we can set a tight stop at $68.40, just
under the top of the gap from 8/19.

Suggested Options:
Shorter Term: The September 70 Call will offer short-term traders
the best return on an immediate move, as it is slightly in the

Longer Term: Aggressive traders looking to capitalize on an
extended rally will want to look to the October 75 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.  More conservative
long-term traders will want to use the October 70 Call.

BUY CALL SEP-65 PGR-IM OI=1047 at $6.00 SL=4.00
BUY CALL SEP-70 PGR-IN OI= 209 at $1.85 SL=0.90
BUY CALL OCT-70 PGR-JN OI=  39 at $2.90 SL=1.50
BUY CALL OCT-75 PGR-JO OI=  84 at $0.80 SL=0.40

Annotated Chart of PGR:

Picked on August 27th at    $70.74
Change since picked:         +0.00
Earnings Date             10/15/03 (unconfirmed)
Average Daily Volume =       823 K
Chart =

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Express Scripts - ESRX - close: 64.81 change: +0.32 stop: 65.75

Company Description:
Express Scripts provides health care management and
administration services on behalf of clients that include health
maintenance organizations, health insurers, third-party
administrators, employers and union-sponsored benefit plans.  The
company's fully integrated pharmacy benefit management services
include network claims processing, mail pharmacy services,
benefit design consultation, drug utilization review, formulary
management, disease management, medical information management
services and informed decision counseling services through its
Express Health Line division.

Why we like it:
After getting off to a good start early last week and breaking
solidly below support at $63, our ESRX play did an about face and
came bouncing strongly back to major resistance at $65.  Posting
a higher low just above $61 and rallying on strong relative
volume is not a good sign, and the only thing in our favor right
now is the fact that ESRX was unable to close above $65.  The
mood of investors after the long weekend will be the key.  A
rollover near this level can be used for aggressive entries,
while a continued bullish move will very quickly stop us out of
the play at $65.75.  At this point, we'd prefer to see a break
back under $63 before considering new positions and we'd like to
see it come on strong volume.  This close to major resistance,
there's little point in focusing on downside targets.  Let's get
back under $63 and then we can start evaluating the likelihood of
a decline to $60 or below.

Suggested Options:
Short-term traders will want to focus on the September 65 Put, as
it will provide the best return for a short-term play.  Traders
with a more conservative approach will want to utilize the
October 65 contract, as it should not be as susceptible to time
decay issues in the near term.

BUY PUT SEP-65 XTQ-UM OI= 763 at $2.20 SL=1.00
BUY PUT OCT-65 XTQ-VM OI=  22 at $3.70 SL=2.25
BUY PUT OCT-60 XTQ-VL OI= 132 at $1.80 SL=0.90

Annotated Chart of ESRX:

Picked on August 24th at   $63.48
Change since picked:        +1.33
Earnings Date            10/22/03 (unconfirmed)
Average Daily Volume =   1.41 mln
Chart =


Lehman Brothers - LEH - close: 65.73 change: +0.42 stop: 67.25

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

Why we like it:
Last week was not favorable to the bears, as every seeming dip
was eagerly bought, albeit on light volume.  After grossly
underperforming the Broker/Dealer index (XBD.X) for the past
couple months, LEH is threatening to actually find some upside
traction.  This new buoyant behavior is being helped by the
positive action in the XBD index, which appears on the cusp of a
breakout attempt at major resistance at $580.  If the index is
successful in that breakout attempt, then it will be very
difficult for the bears to keep LEH from going along for the
ride, despite the concerns about potential damage to the
company's bottom line from the recent bond debacle.  After
failing to break back under the $63 support level, LEH rebounded
on throughout most of the week, and Friday's close back over the
50-dma ($65.31) is not encouraging to the bears.  Aggressive
traders can consider new entries on a break back under the 50-
dma, but only if it comes on strengthening volume.  The better
approach for new entries will be to wait for a break back under
the $63 level.  While we're maintaining our stop at $67.25, more
conservative traders may want to use a tighter stop at $66.25,
just above horizontal resistance that has held for more than a

Suggested Options:
Short-term traders will want to focus on the September 65 Put, as
it will provide the best return for a short-term play.  Longer-
term traders looking for a move down towards the $60 level or
below will want to utilize the October 60 contract, which
although it is currently out of the money, should provide enough
time to achieve profitability before time decay has a pronounced

BUY PUT SEP-65 LEH-UM OI=3035 at $1.30 SL=0.60
BUY PUT OCT-65 LEH-VM OI=4745 at $2.55 SL=1.25
BUY PUT OCT-60 LEH-VL OI=6211 at $1.15 SL=0.50

Annotated Chart of LEH:

Picked on August 24th at    $64.41
Change since picked:         +1.32
Earnings Date             09/18/03 (unconfirmed)
Average Daily Volume =    2.97 mln
Chart =


XL Capital Ltd. - XL - close: 75.75 change: +0.28 stop:

Company Description:
XL Capital Ltd. provides insurance and reinsurance coverages and
financial products and services to industrial, commercial and
professional service firms, insurance companies and other
enterprises on a worldwide basis.  Insurance business written
includes general liability, other liability, professional and
employment practices liability, environmental liability,
property, program business, marine and energy, aviation and
satellite, as well as other product lines.  Reinsurance business
written includes treaty and facultative reinsurance to primary
insurers of casualty and property risks, as well as life
reinsurance, primarily European term assurances, group life,
critical illness coverage , immediate annuities in payment and
disability income business.

Why we like it:
It seems like we can't buy a winning bearish play in this market,
and XL is just the latest example.  After giving us a very
convincing volume-backed breakdown under the $75 level last
Friday, the stock found support just above $73.50 (the top of the
April gap) and quickly rebounded back to that key $75 level.  It
took most of the week, but XL finally managed to gain some upside
traction on Friday, and this brings the stock within striking
distance of the descending trendline from the June highs.  That
trendline currently rests at $77, and is lined up nicely with
horizontal support turned resistance.  A rollover in this area
looks like a favorable setup for new entries into the play, as
momentum entries to the downside are a bit risky due to the known
support in the $72.50-73.50 area.  Providing backup resistance is
the 30-dma ($77.41), which hasn't been broken since late June.
XL should be unable to move above resistance at the $77, and the
30-dma, so we're lowering our stop to $77.50 this weekend.  If
that resistance is broken, it will likely take place on
increasing volume and that will have us wanting to be out of the
play post haste!

Suggested Options:
Aggressive short-term traders will want to focus on the September
75 Put, as it will provide the best return for a short-term play.
Traders with a more conservative approach will want to utilize
the October 75 contract, as it should not be as susceptible to
time decay issues in the near term.

BUY PUT SEP-75 XL -UO OI= 325 at $1.55 SL=0.75
BUY PUT OCT-75 XL -VO OI= 789 at $2.60 SL=1.25
BUY PUT OCT-70 XL -VN OI=  96 at $1.10 SL=0.50

Annotated Chart of XL:

Picked on August 21st at   $75.92
Change since picked:        +0.17
Earnings Date            10/30/03 (unconfirmed)
Chart =



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The Option Investor Newsletter                   Sunday 08-31-2003
Sunday                                                      4 of 5

In Section Four:

Leaps: Summer Is Over
Traders Corner: Become A Member Of The "Chain" Gang?
Futures Corner: Swing Trade Model Setup
Futures Corner: The Good the Bad and the Put/Call Ratios


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Summer Is Over
By Mark Phillips

Remember back in your youth, the dread with which you received
that statement?  It meant the end of playing outside until dark,
no homework and doing pretty much what you wanted all day, every
day -- with the brief pauses to take care of the obligatory chores
of course.  Oh how times have changed!  Here I am testing the
upper limits of my 30's, awaiting the imminent arrival of my first
child and the end of summer does nothing but put an ear-to-ear
smile on my face.

You all know the reason why, as I've been harping on it for weeks
now.  This incessant, mind-numbing trading range, where the DOW
and the S&Ps have to be checked for a pulse several times a day,
as volume is so ridiculously low.  It happens every year, but I
have to say I can't ever remember seeing markets that were so
choppy and untradable.  But next week should bring a welcome
change as all those professional traders that have been off on
vacation will come back with one of two things on their mind.
Either they'll be looking to dump profitable long positions into
the normally bullish first week of September or they'll hold their
collective noses and buy stocks in sufficient quantities to break
the DOW and S&Ps out to new highs for the year.  I think the
latter scenario has much lower odds of actually coming to pass,
but who cares what I think.  At this point, I wouldn't even mind
being wrong, just so long as we move.  Sure we've been in a
roughly 5.5% range for the past 2 1/2 months, but with the
exception of the decline off the June 17th high and the rally off
the early August low, there has not been enough of a trend to take
a position trade and not get chopped out in the noise.

That's why I'm so thrilled that we're moving out of summer and
into September.  Regardless of which way things go, I feel quite
certain that a month from now, the DOW will not be between 9000-
9500 and the S&P 500 will not be between 960-1015.  The NASDAQ is
another story altogether, as both the NDX and COMPX markets pushed
to fresh 52-week highs.  In fact, those indices are trading at
their best levels since last April.  Since the October lows, the
NDX is up a whopping 66% and the COMPX has staged a 62% gain.
That's just pretty doggone impressive!  This is one of those times
where I feel the irrepressible urge to toot my own horn.  Does
anyone remember the comments I made back in January about the
NASDAQ markets being poised to outperform the rest of the market?
Well, compared to the 30% rise in the SPX and the 29% rise in the
DOW, there's no question that the NASDAQ's are the clear leaders.
Of course, that's what we would expect given the much more severe
beating Technology stocks took during the first leg of the bear
market that began in March of 2000.  Truth be told, I'm actually
quite surprised the NASDAQs have been able to rise this far, as I
really thought COMPX 1600-1650 would be a firm ceiling.  So much
for my guru status!  GRIN

So where do we go from here?  My best answer for that question is
contained in my Trader's Corner article from last Monday.  I
expect some more bullishness early next week, possibly extending
throughout the week.  But that's pretty much all my bearish stance
will be able to endure.  You see, another full week of
bullishness, beginning with the markets already extended and
priced to perfection, the VIX below 20 and investor sentiment
skewed much too far into the bullish camp, I can only see one
scenario whereby the market can sustain another leg up.  That
would be a return to the insanity that got us here in the first
place, the "buy every dip" momentum trading frenzy that drove the
entire market to its dizzying heights in early 2000.

Could it happen?  Certainly.  I must always concede that the
extremely unlikely can happen.   I mean come on -- Larry Flynt in
the California governor's race?  I've even heard that there's a
woman in the race who has promised "a date" to any contributor
that donates $5000 to her campaign!  I never cease to be amazed by
the lunacy of California politics, and I think living with this
lunacy helps me to come to terms with the reality that the market
can do anything.

This week, I see no useful purpose of discussing the VIX, market
sentiment, economics, bullish percents, volume or chart patterns.
After the last 3 weeks of light volume action, which is just the
icing on the cake of the past 10 weeks, I find it difficult to
provide any meaningful analysis beyond that contained in last
Monday's article and that which we've beaten to death here for the
past several weeks.  Any further discussion on my part would be
either redundant or blind guesswork, neither of which is of any
benefit to you.

So let's just keep it brief this week and dive right into the
plays.  I suspect we'll have a lot more to talk about next week
and I know I'll feel a lot better about analyzing the markets when
volume swells back to more normal levels.


DJX - I don't know if I really believed it when I first postulated
that we'd have to wait until after Labor Day for an end to this
trading range, but here we are with the last trading day of August
behind us, and the DOW is right there at the top of its range of
the past 3 months.  Price continues to creep higher on weak volume
and the VIX continues to decline.  There's no question in my mind
that we're at a critical juncture.  Ever since clearing the 38%
retracement of the entire bear market decline in early June, the
DJX has been bouncing between the 38% and 50% retracement levels,
with an inability to breach either.  We're now nearing that 50%
retracement again, which also happens to coincide with the
descending trendline from the May-2001 and March-2002 highs.  This
is a very strong resistance level and either the bulls will be
turned back or they will manage to breakout. If successful in the
breakout attempt, then I would give high odds to their ability to
continue up until reaching the 62% retracement, coincidentally
right at the psychologically significant DOW 10,000.  Based on the
fundamentals, technicals and sentiment, I believe we are on the
right side of this market with our bearish play.  But if proven
wrong, we have placed our stop ($95.50) at THE correct spot, just
above a confirmed breakout over resistance.

Weekly Chart of the DJX

BBH - Much like the rest of the broad market, the Biotechnology
sector appears to be stuck in limbo, unable to break out above
firm resistance, yet so far unable to really break down either.
Our BBH play ended the week almost exactly where it was when we
initiated coverage a week ago.  I could make a bullish case
(continuing pattern of higher lows) or a bearish case (lower
highs), or I could even point out the possibility of a H&S top
over the past 2 months.  The simple truth remains that we
initiated the play at a good technical level (not great, but good)
and I would much rather be on the bearish side of this sector
right here.  The key confirmation we still need though is a break
of the pattern of higher lows, as well as a breakdown from the H&S
pattern.  The latter will require a decline under $127, while the
former will need to see the BBH fall under $124.  Until both of
those occur, we're still in this light-volume trading range.
Subsequent failed rallies below $135 still look favorable for new
entries, and we'll keep our stop at $138 until it is either hit or
the BBH closes below $124.

GM - I'm starting to think I ought to just leave this stock alone.
This is the third time we've attempted to play the downside in GM
over the past year or so, and each time I play it (no matter how
careful I am) I seem to enter just before a sharp move higher.  We
entered the Portfolio play last Thursday on the rally failure
right at $40, and last week the bulls sent the stock soaring into
Friday's close.  Ending the day above $41 is not a good sign, as
that is right at strong resistance and a new 11-month closing
high.  This could just be a rally into next Wednesday's release of
the August sales results, but the above average volume over the
past 2 days should be causing the bears some heartburn this
weekend.  Fundamentally, GM has more problems than the California
governor's race has candidates, but that won't stop the bulls from
trampling our play if they so desire.  We'll keep our stop at $42,
as a trade at that level would represent a new PnF Buy signal on
the longer-term 2-point box size.  That would be a very clear
signal that I'm dead wrong about GM, at least for now.

LEH - Pretty much any bearish trade got damaged to some degree
last week, as the persistent bearish sentiment continued to hold
firm.  The Broker/Dealer index (XBD.X) is on the cusp of a
breakout and we'll want to watch the $580 level carefully over the
next week.  Our LEH play couldn't help going along for the ride
with the rest of the sector and what looked like a breakdown in
progress early in the week was transformed into a pending breakout
attempt by the end of the week.  Friday's close placed the stock
above its 50-dma for the first time in over two months, and it
seems inevitable that we'll see another test of the $66 resistance
level early next week.  While a rollover from this area still
looks like a favorable entry, more conservative traders may want
to wait and see if they can get a better entry up in the $68-69
area, where the stock will find its next resistance.  Should the
XBD be successful in a breakout move over $580, I would recommend
standing aside from new bearish entries, as it could really light
a fire under LEH.  Better to stand aside than to get burned.  Our
stop on the play remains at $70, as that is the level that would
generate a new PnF Buy signal.

Watch List:

WMT - With the Retail index (RLX.X) still pushing to new highs for
the year and WMT holding near the $59 level, I'm in no hurry to
initiate a play here.  Let's wait to see how next week's expected
bullishness plays out in both the stock and the sector and we
should be much better able to gauge the viability of a bearish
trade entry near the descending trendline.  Remember, we aren't
looking to enter into strength buy on a reversal from resistance.

QQQ - Another week and another new closing high for the NASDAQ.
The QQQ is right up against strong resistance in the $33-34 area
and the PnF bearish resistance line is at $33.  But still the
market continues to climb.  This is precisely why I decided to
wait for weakness before considering an entry.  This is a much
more aggressive play than our DJX play, primarily due to the
greater relative strength of the NASDAQ over the DOW.  The other
side of the coin is that entries taken up here can use a much
tighter stop.  With weekly Stochastics having once again turned up
in a short-cycle reversal, I'm content to wait for the solid entry
point that I believe occurs only if the QQQ falls back through our
$31.50-32.00 entry zone on a closing basis.  Until then, we remain
safe on the sidelines, able to marvel at the NASDAQ's amazing

SMH - So you thought after that big bearish reversal a week ago
Friday that there was no way the SMH could get back to those
levels?  Guess again!  In fact, the SMH managed a very healthy
rebound last week, ending Friday's session above $37 and at a new
52-week high.  Sure there's the issue of the rally taking place on
declining volume, but there certainly doesn't seem to be much
selling interest in this area of the market.  With INTC on deck
for another mid-quarter update next week, there's likely to be
enough of a catalyst to get the SMH up into our target area of
$39-40.  We want to wait for the pop and then the subsequent
failure before playing.  The bulls are still feeling frisky, so
let's be patient.

Radar Screen:

HD - I'm just not sure what to make of the price action in HD, as
it has been chopping in a very narrow range after the earnings
related excitement 2 weeks ago.  Given the fact that the stock
continues to trade weakly, while competitor LOW charges to new
highs, I'm still inclined to keep this one on the Radar Screen.
But the lack of any real price weakness has me questioning the
viability of a long-term bearish play, looking for any significant

FNM - Now that's more like it!  While I like the bearish prospects
for FNM, I had a distinct feeling there was a short-covering rally
attempt lurking under the surface.  The stock launched higher on
Monday and after a brief mid-week rest, continued right up to the
$65 resistance level.  In all candor, I expect the stock to break
above that resistance and move up to at least $67-68.  This
rebound is setting us up for a new bearish entry, but I believe
we're a bit premature, especially with weekly Stochastics just now
starting to turn up after a multi-month decline.  I'll keep the
stock on the Radar Screen, but I suspect it will take a few weeks
before it is ready to transition onto the Watch List.

Closing Thoughts:

Next week, we ought to see volume come back into this market and I
suspect by the time September options expiration rolls around
we'll know for sure if the market is truly feeling bullish or
bearish.  I still feel very strongly that the upside is limited,
but on a breakout above the critical resistance levels we've been
looking at these past several weeks, I'll grudgingly admit to
being on the wrong side of the market.  That doesn't mean that
I'll commit my own money to the long side, but I'll definitely
pull it away from the short side.  It reminds me of the saying,
"If at first you don't succeed, try again.  After that, give up.
There's no use being a fool about it!"  I've been looking to play
the decline in this market since May, and I've been pretty
disappointed with the results.  The market appears to be resting
at a critical juncture right now.  If you want to have a position
for the expected decline, then next week is probably the time to
initiate it.  But by all means, please use a hard stop on any
positions.  Remember, the market can do anything!

Have a great extended weekend!


LEAPS Portfolio

Current Open Plays



DJX    07/31/03  '03 $ 92 DJV-XN  $ 3.80  $ 3.20  -15.79%  $95.50
                 '04 $ 92 YDK-XN  $ 8.20  $ 7.80  - 4.88%  $95.50
BBH    08/22/03  '05 $125 XBB-ME  $14.60  $13.50  - 7.53%  $138
                 '06 $120 YEE-MD  $15.50  $14.50  - 6.45%  $138
GM     08/21/03  '05 $ 35 ZGM-MG  $ 4.30  $ 4.30  + 0.00%  $42.00
                 '06 $ 35 WGM-MG  $ 6.80  $ 6.60  - 2.94%  $42.00
LEH    08/22/03  '05 $ 65 ZHE-MM  $ 9.80  $ 9.10  - 7.14%  $70.00
                 '06 $ 60 WHE-ML  $10.00  $ 9.50  - 5.00%  $70.00

LEAPS Watchlist

Current Possibles



WMT    08/03/03  $60           JAN-2005 $ 55  ZWT-MK
                               JAN-2006 $ 55  WWT-MK
QQQ    08/10/03  $31.50-32.00  JAN-2005 $ 30  ZWQ-MD
                               JAN-2006 $ 30  WD -MD
SMH    08/24/03  $39-40        JAN-2005 $ 35  ZTO-MG
                               JAN-2006 $ 35  YRH-MG

New Portfolio Plays


New Watchlist Plays





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Become A Member Of The "Chain" Gang?
By Mike Parnos, Investing With Attitude

Deductive reasoning is a wonderful skill.  It helps us make
decisions.  It allows us to take the pieces of a puzzle, assemble
them and hopefully come up with a finished product.

The ability to reason is what sets us (at least some of us) apart
from the rest of the animal kingdom.  Though the skill seems to be
used sparingly in how many live their lives, at the Couch Potato
Trading Institute is based on the gathering of information and
making logical (usually) trading decisions.

The Option Chain
There is a piece of information that is easy to access, but often
goes used in making trading decisions.  It can be found resting
peacefully at www.cboe.com.  There's an option chain for every
stock or index that trades options.  Basically, it keeps track of
the daily volume of contracts traded, a current bid and ask, and
the cumulative open interest of every option and strike offered.

Where Are The Big Bets Being Placed?
There are some high rollers out there.  If you've ever taken the
time to look at an option chain, you'll notice huge amounts of
open interest.  Most of the high open interest figures are in
near-term months.   But, if you scroll down the chain, you'll
occasionally notice some large numbers that seem out of place.
Paying attention to these numbers, and trying to interpret them,
can often give us some insight to future market movement.

Today (Friday) at about noon, I noticed that 10,000 contracts of
the QQQ March 2004 $27 puts had been traded at $.95.  The bid/ask
led me to believe that this was a purchase of puts rather than a
sale. But, there are a number of other interpretations.

Let's speculate a little about possible scenarios for this
situation as well as a few others you might come across during the
scan of an option chain.

Ten thousand contracts is a huge bet – especially by my standards.
I usually feel a 20-contract position is extravagant.  That size
of trade ($950,000) is certainly out of my league, but is chump
change for many institutions.

Possibility #1:
What is described above could simply be a big down bet.  But,
there is no guarantee.   With all of the simple and complex
options strategies out there, it can be very difficult to
ascertain the purpose behind a trade or the method to their

What if an institution sees a bleak future for the market?
Perhaps they own 1,000,000 shares of QQQ and they anticipate a
dramatic downturn in the market sometime between now and next
March.  $.95 would be relatively cheap insurance to protect those
million shares from a drop below $27.   The cost of the insurance
would work out to $.135 per month.

Possibility #2:
What if the purchase of the 10,000 contracts was the second leg of
a bull put spread?  The institution could have sold the $32 puts
yesterday or last week.  We never really know.  Maybe they are
selling at-the-money near term puts on a monthly basis – using the
$27 put as protection for each month's ATM sale.   If that is the
strategy, their protective put only costs them $.135 per month.

Possibility #3:
What if was a sale of 10,000 puts -- naked?  When institutions
place large trades, they can deal directly with the market makers.
Maybe they worked out a deal.  Perhaps this is actually a bullish

If we were talking about a stock, as opposed to an index, a naked
trade may be a way of fulfilling a buyback announcement of its own
stock.  Buyback announcements rarely have deadlines.  Companies
will continue to sell naked puts, and generate investment profits,
until the stock dips and closes below the strike and the shares
are actually assigned.

Possibility #4:
In past columns we discussed “strangles” where both puts and calls
are purchased or sold, but at different strike prices.  This trade
may be a “sell strangle” where puts and calls are sold at
different strike prices. If this was a sale of 10,000 contracts,
it may be the first leg of a "sell strangle."  In that case, a
similar sale of 10,000 March $37 calls may show up in the near
future – or may already have been made earlier.  That would mean
the big bettor believes that the QQQs will stay above $27 and
below $37.  That wouldn't be a bad trade either.

As part of a good related strategy, as aggressive traders they can
make trades within the context of the sell strangle as the QQQs
fluctuate up and down between now and March expiration.

As the QQQs move up to potential resistance near $37 they could
lock in profits by buying back the $27 puts, etc.  Then they could
move up their strike and sell the $31 puts and take in more
premium.   The same can be done on the call side if the market
heads back down.  It takes an alert and somewhat nimble trader,
but can be exceptionally profitable.

It's challenging to try and figure out what's going through the
minds of the big bettors.  We'll never know for sure, but
speculation is fun and it stimulates thought.

The open interest, and corresponding changes in open interest, in
an option chain is but one clue.  It may help you select a
strategy, or it may suggest you avoid a strategy you were
considering.  Keep in mind that option chain clues are but one
indicator.  Look at the trading range and see if it is consistent
with the option chain.  Check to see if there are any
distinguishable chart patterns.  Check the trading volume.  Where
are the short and long term moving averages?

In Thursday's column, we'll continue our discussion of option
chains and the interpretation of the information they provide.

SEPTEMBER POSITIONS – Remember that September is a FIVE- WEEK
option cycle.  Expiration is Friday, September 19th.

September Position #1 – SPX Iron Condor – SPX @ 1008.01
S & P 500 Index = SPX
We sold 10 contracts of SPX 1040 Sept. calls and bought 10
contracts of SPX 1050 Sept. calls for a net credit.  Then we sold
10 contracts of the SPX 950 Sept. puts and bought 10 contracts of
the SPX Sept. 940 puts.  Our net credit was $2.70 (a total credit
of $2,700).  We have a huge maximum profit range of 950 to 1040.
More aggressive investors may have narrowed the range a bit and
take in more money.   At 1008.01, we're in good shape – for now.

September Position #2 – COF Sell Straddle – COF @ $53.40
Capitol One Financial = COF
We sold 10 contracts of COF Sept. $50 calls @ $2.35 and also sold
10 contracts of COT Sept. $50 puts @ $2.50 for a total credit of
$4.85 ($4,850).  We will make some profit if COF finishes anywhere
between $45.15 and $54.85.  The closer COF finishes to $50, the
more money we'll make.  Our bailout points are the parameters of
our profit range.  Maximum potential profit is, again, $4,850.
COF moved up a bit, but at $53.40 we're still comfortably in
profit territory.

September Position #3 – HPQ (Hewlett Packard) Bear Put Spread –
(Replacement) – HPQ at $19.93 .
HPQ is weak and may return to the $15 range.  So, we sold 10
contracts of the HPQ Feb. 2004 $20 puts @ $2.25 and we sold 10
contracts of the HPQ Feb. 2004 $15 puts @ $.40.  Total debit of
$1.85.  Potential max profit of $3.15.  In reality, if HWP makes
the move down, it will probably happen on the coattails of a
market move down.  It shouldn't take until February.  I'd gladly
accept a profit of $800-900 and close the position early if the
opportunity presented itself.

September Position #4 (Replacement) – OEX – Bearish Calendar
Spread – OEX @ $503.36
Maybe Friday was a reversal day.  The market has run up pretty
fast and perhaps it's time to give some gains back.  Let's see if
we can take advantage of this with a calendar spread.
Buy 8 contracts of OEX November 470 puts @ 10.60
Sell 8 contracts of OEX September 470 puts @ 2.20
Total debit of $8.40.  As the market retreats, we will sell near
term puts against the November long 470 puts to further lower our
cost basis.  This position may take a few months to come 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 click on "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


Swing Trade Model Setup
By Jim Brown

I have procrastinated in posting this model because of the very
low volume we have been seeing lately. The indicator setups have
been very unreliable when the ES trades in a 2-3 point range for
hours. Hopefully that is behind us and beginning in September we
will see some volatility or at least some directionality creep
back into the market.

The Swing Trade Model is very simple but also must be very flexible.
It is not a system. It is a set of chart indicators that when taken
with known support, resistance, current events and news will add
to our trading decisions. This set of indicators is not to be
followed blindly. It is dependent on volume and directionality.
Without either it, like any other system it is worthless.

The Setup:

I am using a 500-tick chart as the main chart. This tends to take
out some of the volatility on those days where it is choppy. The
concept behind a 500 tick chart is that 500 trades must take place
for each candle. Unlike a time chart where the candle paints every
five minutes whether a trade occurs or not the tick chart applies
equal weighting to each candle. Do you really want to risk the
same money on a candle with 10-20 trades as you would one with 500
trades? No, that is a thin candle and may not represent the real

On the 500-tick chart I am using four indicators.

CCI (30,1)
MACD (8,18,6)
SAR (0.02,0.2)
Keltner Channel (21,3.5)

The primary indicators are the MACD and the Parabolic SAR. The
MACD everyone should be familiar with but the SAR, which stands
for "Stop and Reverse" is rare. The SAR calculates a trailing
reversal point based on the high/low of the previous candles.
The SAR will give false readings on a slowly trending market
due to the lack of range in the prior candles. For this reason
we use the other two indicators to confirm.

A cross on the MACD and a reversal on the SAR will give us
direction but the CCI must confirm by printing a second candle
on the opposite side of the zero line. Because I want a strong
confirm I want that second candle to be touching the red 45
line on the chart. The reason for the second candle on the
45 line is called the CCI dance. Because the CCI paints with
every tick it can cross the center line and even touch the
45 line but close completely back on the other side of zero
if the price direction changes. Essentially the confirmation
can disappear completely any time before the final tick. By
waiting for the second candle to touch the 45 line we normally
have a good confirm.

The problem with getting all three indicators to confirm is
the CCI is usually late by about two points. If honored it
will keep you out of a lot of choppy trades as it normally
only reverses 3-4 times a day. The other indicators can
reverse multiple times each day and in each move.

No indicator by itself is foolproof. No combination of known
indicators is foolproof. That is why we will still have to
use judgment when entering and exiting with any setup.

The CCI comes into play as an excellent exit tool. In the
example chart below the MACD crossed and recrossed several
times (but did not move back above zero) during this long
down day. The SAR reversed numerous times because the rate
of decline was so slow. However, the CCI never reversed above
the zero line until the next morning. This makes the CCI an
excellent indicator for exiting the trade.


We will enter a trade when the MACD crosses, preferably from
an extreme swing away from the center line. In addition the
SAR must reverse and the CCI must paint the second candle
across the center line and touching 45. In some instances,
like the chart below, where there was a serious spike or
dip to support/resistance we will enter the trade on the
MACD and SAR alone if the CCI appears to be moving to cross
the center line quickly.

We will stay in the trade until the CCI recrosses the center

Keltner Channel:

The channel is more of a guideline for continuous support and
resistance. If we had a spike/dip from one side to the other
then we could expect a reversal signal soon. It is a comfort
indicator for me as it normally encompasses about 10 points
and that is about all the ES can correct intraday without a
corresponding reversal. In the example chart if the ES bounced
off the bottom of the channel and quickly touched the top then
I would expect that bounce to retrace before continuing up.
Also, a casual move across the center blue line could indicate
a change in direction and should be an alert.


Many readers cannot trade in pre/post market and therefore most
signals will only be during regular market hours unless there
is a seriously compelling reason for the rest of us.

Most volatility occurs at and within 15 min of the open. It is
dangerous to enter a position before the open unless there is
a clear trend in place. 25% of the day's volume occurs in the
first hour and this creates serious spikes in price in the
first 30 min. Caution should be observed.


On the initial entry the stop loss should be in the 1.25 to 1.75
point range away from the entry price. This will be determined
on a case by case basis depending on the support and resistance
levels in place at the time and the speed of the market.

After the initial exit we will trail the stop around 2.5 points
behind the price depending on support and resistance both in
our path and behind us. If there is a significant level passed
then we could linger the stop behind that level for a slightly
longer period for additional safety.


Once in a trade I will take a 1/4 position exit at +2 points.
I will set the stop at 50 cents away from the entry price. From
that point we have a free trade. There is no way we can lose
money on the rest of the position.

On a normal signal I will plan on exiting 1/2 of the position
in the +4 to +5 range. After reviewing several months of trades
there are very few swing trades that went for more than +5 points.
Whether that was because I pulled the trigger early to exit or
the move just ran out of steam the results appeared to be the

take 1/4 at +4 and let the remaining 1/2 position run.

On the last 1/4 the plan is to stay in the trade with a trailing
stop until the CCI reverses. Once we are out of the 3/4 position
the stop should trail about -2.50 points from the price unless
significant support/resistance is approaching.

The ideal exit would be:

1/4 at +2.00
1/2 at +4.00
1/4 at +6.00 or greater.
Average +4.00 or greater.

The concept on the last trailing 1/4 is to recover the points
missed on the first 1/4 by exiting early for insurance and also
to profit from any major runner.


When an entry/exit is known in advance it will be posted in the
monitor like this:

Swing Trade Entry Point Alert
Go SHORT with an ES trade at 1010.00, stop 1012.00

When an entry is not known in advance and is based on rapidly
changing market conditions the entry will be posted like this
to save time:

Swing Trade Entry Point Alert
Go SHORT now

Once the entry is posted I will go back and correct it to the
actual price and add the stop. Normally it is done within the
next 15-20 seconds. Sometimes it could be later depending on
market conditions.


When I go back and add the price to the signal it is not the
price at the time I initiated the signal but the price at the
time the signal appeared on the monitor.

If the ES was 1000.00 and I rushed an entry with a "go SHORT
now" message and the ES was trading at 999.50 when the message
appeared then the post would be corrected to say "go SHORT at
999.50, stop 1001.00". It would not say 1000.00 because there
was no way you could have executed at 1000.00.  Where the price
was when I was typing the initial message is immaterial to the
monitor. The price when it appears is the price that matters.

Position Size:

I think the best position size for monitor trades is something
in a four contract increment because of the 1/4 position exits.

This does not mean you cannot trade the signals with fewer
contracts. This creates a problem for the exits.

This is my suggestion:

If you are trading 1 contract take the second exit.
If you are trading 2 contracts take the first and second exit.
If you are trading 3 contracts take the first and second exit
with two contracts on the second exit.

Momentum Model Preference:

Because the Momentum Model has far more traders than the swing
model the preference for attention will always be given to the
Momentum Model. In a critical entry environment like an opening
spike the initial plan will be to establish a momentum position
first then establish a swing trade position.

Depending on market conditions the entire initial move may be
missed by the swing model as managing the initial entry and
stop loss can cover 4-6 points in a fast market.

The same will be true on exiting a momentum position. If we are
nearing a critical level which demands decisions and rapid
evaluation the swing signals will be ignored until the exit
for the momentum model passes.

The Momentum Model is auto traded by many readers by their
broker and without their daily input. It is incumbent on us to
manage their positions first because they are not able to do so.
How would you want us to trade your money?

General considerations:

Since this is not primarily an indicator driven "system" trade
there will always be decisions made in the heat of battle to
enter/exit based on prevailing market conditions, news events
and program trades.

I will try to maintain a running commentary on what I see in
our path and where I see the next entry/exit but the nature of
day trading futures prevents a complete and perfect scenario
in every case.

When possible the exits will be posted in advance but traders
should learn from the model and be prepared to enter/exit on
their own when they feel prudent to do so if no signal is issued.

Traders should also evaluate every situation according to their
own market bias and only enter trades that match their bias.
We will never agree on everything and I will always enter too
early or too late for somebody.

The Futures Monitor is not meant to be a trading vehicle. It is
a training tool for new traders and a window on the markets for
those with experience. If you enter trades suggested on the
monitor then you take full responsibility for those trades and
accept our complete disclaimer. Futures trading is not for
everyone. If you decide it is not for you then by all means do
not trade the signals.

The Futures Monitor depends on thousands of interconnecting
pieces of Internet technology working together flawlessly for
about eight hours a day. While Bill Gates would like to think
this is possible we all know that there will be challenges with
ISPs, cable routers, dial up connections, sunspots, server
errors, viruses, hackers and just plain operator error. We
will strive to eliminate as many of these on a daily basis as
possible but perfection will never be achieved. We will all
need to deal with the challenges as they arise. By using the
monitor you accept that periodic errors may occur. If you
experience an error the fastest way to get it resolved is to
send an email to it@OptionInvestor.com. Do NOT send it to me
because I cannot fix it.


The Good the Bad and the Put/Call Ratios

Put/Call ratios are funny animals. They tell us the degree of buying or
selling pressure by monitoring the volume of puts and calls, then we
flip the numbers around and interpret them opposite to what they are
telling us. In this way Put/Call ratios are used as gauges of market
sentiment, as they measure bullishness or bearishness by comparing the
number of puts and calls traded. We interpret them upside down because
when put volume becomes excessive in relation to call volume, it is an
indication of excessive bearishness in the market, which can telegraph
a market bottom and is usually bullish. But on the other side, when
call volume becomes excessive in relation to put volume, it is an
indication of excessive optimism and bullishness in the market, which
is usually bearish. This is why the Put/Call ratio is called a
contrarian indicator.

What I would like to examine here is the theory that in order to get a
good feel for market sentiment you should not look at only one ratio
but examine different Put/Call ratios.

The Chicago Board Options Exchange (CBOE) trades two types of options,
equity options (options on individual stocks) and index options
(options on indexes). The CBOE reports volume for the combined total of
the two categories, reports volume for Equity options only and reports
volume for the OEX only. A Put/Call Ratio is then computed by dividing
daily put volume by call volume in each of the three categories.  We
will be looking at the three Put/Call ratios: the OEX Put/Call ratio,
the Equity only Put/Call ratio and the total ratio, commonly referred
to as the CBOE Put/Call ratio.

Equity option volume accounts for approximately 85% of CBOE volume
whereas the OEX option volume represents about 3.5% of total volume and
about 22% of total index volume. The equity and CBOE Put/Call ratios
usually look the same but the OEX ratio marches to a different drummer.

The theory I would like to explore goes like this. The majority of put
volume represents bets against individual stocks by the small ndividual
investors - the so-called "dumb money" that is usually wrong. On the
other hand, since many institutions and professional traders (the
"smart money") use the OEX options for hedging, when the OEX Put/Call
ratio diverges from the OEX cash index, the CBOE Put/Call ratio and the
equity only Put/Call ratio, it can be a sign that "smart money" is
moving counter to the trend. This makes the OEX ratio a non-contrarian

Here is a chart of the OEX and the 10MA of all three Put/Call ratios:
the CBOE (index and equity), equity only and OEX only, from January
2000 to December 2001. Daily volatility in the ratios necessitates
smoothing with the 10MA.

Please take note that since mainstream technical analysis uses the
ratios as a contrarian indicator, (the Put/Call ratios have low
readings at market tops and high readings at market bottoms) the ratio
charts are displayed upside down, higher readings on the bottom and
lower readings on the top.

The theory I am testing here can be summed up as follows:

CBOE and Equity ratios (Contrarian) high ratio = bullish/market bottoms
low ratio = bearish/market tops
OEX ratio (Non-contrarian)          high ratio = bearish/market tops
low ratio = bullish/market bottoms

On September 1, 2000 OEX reached a high of 843 only 3 points short of
the all time high of 846 reached back in March. The OEX Put/Call was at
an extreme high (first red circle), almost 2.00. The contrarian
interpretation of a reading of 2.00 is bullish and a market bottom. Did
the OEX option traders know something the retail trader didn't? Looks
like it because the OEX subsequently shaved off 300 points from
September 1 to March of 2001. The drop was devastating and dramatic. If
you had been reading the OEX ratio with the contrarian formula you
would have positioned yourself for a market bottom instead of a top.

The next example came in January 2002. The OEX made a double top at 600
in December 2001 and subsequently confirmed this formation in January
2002 but there seemed to be bid under the market and prices retraced
back up to 595. Was this a false double top signal? Looking at the CBOE
or equity Put/Call ratio would not have given you a clue because they
were in normal ranges. One look at the OEX Put/Call ratio, but NOT
as a contrarian indicator, you would have realized that a market top
was in the making. This drop shaved off 220 OEX points.

Now let's examine the CBOE and Equity Put/Call ratio and see how well
they worked to predict market reversals. The first extreme I found on
the chart is marked with yellow circles. Using the ratios as a
contrarian indicator, these two extreme highs should have preceded a
market bottom.  And that is exactly what it did. In September 2001 the
OEX hit a low of 480 then traded at 600 two months later.

The next extreme highs of both the CBOE and equity Put/Call ratios (I
don't have it marked) were found in October 2002. OEX traded a low of
384 and one month later it hit 487.

Let's take a look at more recent examples.

Here is the same set of charts but from 2001 to August 2003.

In January 2001 OEX reached a bottom of 664, the OEX ratio was at an
extreme low. Normal Put/Call theory would have a trader reading this as
bearish and looking for a market top. But the opposite happened and by
February OEX had gained 61 points.

In July 2002 OEX reached a low of 384 when the OEX ratio was at an
extreme low. By late August OEX had gained 103 points.

The next extreme high I have marked on the chart is August 2003. Does
this mean we are at market bottom? Time will tell.

You may have noticed that the market bottoms marked by the OEX ratio we
have discussed have not given the same kind of gains as did the market
tops but this is understandable in the context of the bear market we
have just experienced.

One last point I would like to highlight is the yellow circle I have
drawn around the September 2000 CBOE and Equity Put/Call ratio extreme
lows. This extreme low took place at the same time as the OEX Put/Call
ratio was making an extreme high. The CBOE and Equity ratios were
showing an abundance of call buying and the OEX ratio was showing an
abundance of put buying. Who was right?

From this analysis my first thought is that the Put/Call ratios
extremes are darn good predictors of market turning points. But beware
of which ratio you are looking at. If using the CBOE or Equity Put/Call
ratio use them as a contrarian indicator but if you are using the OEX
ratio use it as a non-contrarian indicator.

Remember plan your trade and trade your plan

Jane Fox


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The Option Investor Newsletter                   Sunday 08-31-2003
Sunday                                                      5 of 5

In Section Five:

Covered Calls: Success With Covered-Calls
Naked Puts: Q&A With The Editor
Spreads/Straddles/Combos: Optimism Prevails In U.S. Equity Markets

Updated In The Site Tonight:
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Stock Option Principals




Trading Basics: Success With Covered-Calls
By Mark Wnetrzak

One of our readers submitted some great questions on our unique
approach to writing covered-calls.

Attn: questions@OptionInvestor.com
Subject: Selling Covered-Calls

Hello OIN,

I just started a trial subscription and one of the first areas
I looked through was covered-calls.  I must admit I was confused
by your approach to selling calls against long stock positions,
which appears to recommend options below the price of the stock.
The most obvious question is why???  Your time frame is a bit
strange as well; all of the plays are very short term, and some
of the stocks were not in up-trends, which is what I look for in
bullish plays.  The ones that were would likely be called away
the first month, so I wouldn't make much money on what could be
a large move.  Also, I didn't see any recommendations for exiting
the plays, so how would I know when to get out of a particular
stock when it turned south?  I do like your product overall and
I'll be able look through the other sections this week.  Please
comment on my questions so far.


Regarding "In-The-Money" Covered-Calls:

With the covered-call strategy, we favor a short-term approach,
based on the "total return" concept originated by option guru
Larry McMillan, which isn't predicated on forecasting a stock's
(or the market's) directional movement.  With this conservative
style, an investor considers the covered write combination as a
single entity and is not interested so much in stock ownership or
bullish movement in the underlying, but in obtaining a consistent
(monthly) return on investment.  In evaluating plays, we are only
interested in the stock price remaining above our cost basis for
the duration of the play; we are not concerned about the issue's
upside potential.  Since we use "in-the-money" call options, the
maximum gain is established upon entry.  Any additional upside
movement, beyond the sold option's strike price, is meaningless.
That does not mean, however, that selling covered-calls is always
a favorable technique.  Whether the covered write strategy is
applied short-term or long term, or even with LEAPS, it requires
a neutral to slightly bullish outlook on the underlying equity
and the overall market.  And, it is good advice to only purchase
stocks you wouldn't mind owning, as that is always a possibility
with this strategy.

Regarding the length of time necessary to be in the trade, you
can buy back the calls (American style options) any time you want
as long as your stock hasn't been assigned (called away), and
then sell the stock or even write new calls against it.  If you
aren't worried about keeping the stock, then having it called
away early is not a problem as it will actually increase your
target yield by providing the maximum return in a shorter time
frame.  Generally, professionals will vary the length of the sold
calls and use different strike prices to balance their portfolio
risk with the potential return on investment.  The approach you
take will depend on your personal preference and risk-reward
tolerance.  "New Insights on Covered Call Writing," by Lawrence
McMillan, is an excellent resource for traders who utilize this
technique and it explains all aspects of the covered write.  The
book is available in the OIN bookstore.

As far as position adjustments, technical analysis is used by
many traders to identify areas of recent buying support, which
can assist in establishing the correct exit points.  There are
various stop-loss methods an investor can employ in position
management: a fixed percentage of one’s overall portfolio, a
specific dollar amount, a violation of a technical trend-line,
etc.  Whether it is automatic or mental doesn't really matter,
the key is that the system is adhered to because the ability to
limit losses is paramount to generating profits in the long run.
In all cases, remember that the issues offered in this section
are provided to supplement your search for profitable trading
opportunities.  It is imperative that you perform your own due
diligence and, as with any investment, you must decide if the
published selections meet your personal risk-reward tolerance
and individual criteria for profitable covered-call plays.

Trade Wisely!


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

PLXT     5.25    5.50  SEP  5.00  0.60    0.35*   8.2%
WAVX     3.46    2.95  SEP  2.50  1.20    0.24*   7.7%
XOMA     8.09    9.37  SEP  7.50  1.30    0.71*   7.6%
PLUG     5.13    5.11  SEP  5.00  0.45    0.32*   7.4%
ENER    10.39   11.98  SEP 10.00  1.10    0.71*   6.6%
NWAC     8.30    8.97  SEP  7.50  1.40    0.60*   6.3%
EPNY     5.07    5.29  SEP  5.00  0.40    0.33*   6.1%
NEOF    12.45   13.03  SEP 12.50  0.90    0.95*   6.0%
WAVX     3.20    2.95  SEP  2.50  0.85    0.15*   5.5%
MCRL    12.60   13.58  SEP 12.50  0.65    0.55*   5.0%
USG     14.11   16.66  SEP 12.50  2.35    0.74*   4.6%
XOMA     9.45    9.37  SEP  7.50  2.25    0.30*   4.5%
VSAT    15.09   15.85  SEP 15.00  0.80    0.71*   4.3%
TKLC    15.46   17.48  SEP 15.00  1.15    0.69*   4.2%
ISIS     5.33    6.61  SEP  5.00  0.60    0.27*   4.1%
RFMD     8.07    8.83  SEP  7.50  0.90    0.33*   4.0%
SNIC    11.18   13.67  SEP 10.00  1.70    0.52*   4.0%
ADLR    13.96   14.24  SEP 12.50  1.90    0.44*   4.0%
GSIC    11.52   12.00  SEP 10.00  1.95    0.43*   3.9%
CREE    16.30   15.82  SEP 15.00  1.75    0.45*   3.4%

*   Stock price is above the sold striking price.


The bullish action in the major averages continues though there
is some worry over the lack of volume.  Probably the biggest
threat is for one to abandon a disciplined approach and strive
for higher profit potential (read greater risk).  Even McData
(NASDAQ:MCDTA) did us a favor and reported earnings before the
open on Monday.  Though they did beat analysts' expectations,
investors were not thrilled with their forecast for the third
quarter.  The stock opened well below its previous close on
Friday, thus there was no play available.  As we move into
September, closely monitor any positions that are not acting
as expected and act accordingly.

Positions Previously Closed: None


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

EMBT   10.25  SEP 10.00  MBQ IB  0.65  20     9.60  20   6.3%
CERS    7.62  SEP  7.50  CEQ IU  0.40  175    7.22  20   5.9%
FLML   28.49  SEP 25.00  FLU IE  4.40  591   24.09  20   5.8%
IBIS   10.70  SEP 10.00  UIB IB  1.00  187    9.70  20   4.7%
ITMN   19.01  SEP 17.50  IQY IW  2.00  1713  17.01  20   4.4%
CCRN   15.60  SEP 15.00  QCK IC  1.00  403   14.60  20   4.2%

Company Descriptions

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

EMBT - Embarcadero  $10.25  *** Breaking Out! ***

Embarcadero Technologies (NASDAQ:EMBT) provides software products
that enable organizations to effectively manage their database
infrastructure and manage the underlying data housed within that
infrastructure.  The company's database administration, enterprise
data architecture, enterprise data integration and performance
management products offer customers comprehensive solutions
for managing the database life cycle, which is the process of
creating, optimizing and managing the databases that support
critical business applications.  By simplifying management of
the database life cycle, Embarcadero's products allow their
customers to ensure the availability, performance and reliability
of their critical business applications and extract maximum value
from their corporate data.  Shares of Embarcadero rallied strongly
on heavy volume after the company announced an OEM agreement with
Insurity on Tuesday.  We simply favor the bullish move out of a
year-long base and investors who believe the rally will continue
can profit from that outcome with this position.

SEP-10.00 MBQ IB LB=0.65 OI=20 CB=9.60 DE=20 TY=6.3%

CERS - Cerus  $7.62  *** Bottom-Fishing: Part I ***

Cerus (NASDAQ:CERS) is developing medical systems and therapeutics
based on their proprietary Helinx technology for controlling
biological replication.  The company's most advanced programs
are focused on systems to enhance the safety of blood products
used for transfusion.  The Intercept Blood System is designed
to inactivate viruses, bacteria, other pathogens and white blood
cells.  Cerus also is pursuing therapeutic applications of Helinx
to treat and prevent serious diseases.  The company is developing
the Intercept Blood System for platelets, plasma and red blood
cells with Baxter Healthcare Corporation, its development and
commercialization partner.  The Intercept Blood System targets
and inactivates blood-borne pathogens, such as HIV and hepatitis
B and C, as well as harmful white blood cells, while leaving
intact the therapeutic properties of the blood components.  Cerus
has been forming a Stage I base since February and recent technical
signals suggest an accumulation phase has begun.  This position
offers a reasonable way to profit from the current lateral trend
at the risk of owning Cerus near $7.20.  Due diligence is a must!

SEP-7.50 CEQ IU LB=0.40 OI=175 CB=7.22 DE=20 TY=5.9%

FLML - Flamel Technologies  $28.49  *** Bristol-Meyers Deal! ***

Flamel Technologies (NASDAQ:FLML) is a biopharmaceutical company
engaged mainly in the development of two polymer-based delivery
technologies for medical applications.  The company's Micro-pump
technology is a multi-particulate technology for oral ingestion
of small molecule drugs with applications in controlled release,
tastemasking and bioavailability enhancement.  The company has
three major products based on its Micropump technology: Asacard,
a controlled-release formulation of aspirin for the treatment of
cardiovascular disease; Metformin XL, a controlled-release form
of Metformin that is in development for use for the treatment of
Type II diabetes, and Genvir, a controlled-release acyclovir for
the treatment of genital herpes.  In addition, FLML has developed
new herbicide delivery systems and has patented a biomaterial,
ColCys.  FLML shares have been in "rally mode" since the company
entered a licensing agreement with Bristol-Meyers (NYSE:BMY) for
Flamel's Basulin, a controlled-release form of insulin that is
about to enter phase II clinical trials.  The agreement calls for
Bristol-Myers to assume the cost of development and manufacturing
of the drug, in return for exclusive worldwide rights to it.  The
recent activity bodes well for FLML in the near-term and traders
who think the rally will continue should consider this position.

SEP-25.00 FLU IE LB=4.40 OI=591 CB=24.09 DE=20 TY=5.8%

IBIS - Ibis Technology  $10.70  *** On The Move! ***

Ibis Technology (NASDAQ:IBIS) develops, manufactures and markets
SIMOX-SOI implantation equipment and wafers for the worldwide
semiconductor industry.  SIMOX, or Separation by IMplantation of
Oxygen, is a form of silicon-on-insulator (SOI) technology that
creates an insulating barrier below the top surface of a silicon
wafer.  SIMOX-SOI products are well suited for many commercial
applications, including servers and workstations, portable and
desktop computers, wireless communications and battery-powered
devices such as laptop computers, personal digital assistants
(PDAs) and mobile telephones, integrated optical components and
harsh-environment electronics.  Sales of 300-millimeter wafers
accounted for approximately 44% of the company's total wafer
product sales in 2002.  Shares of Ibis Technology have rallied
above the July high on heavy volume, which suggests further
upside potential in the near-term.  Investors with a bullish
outlook for the stock can use this position to establish a
favorable cost basis in the issue.

SEP-10.00 UIB IB LB=1.00 OI=187 CB=9.70 DE=20 TY=4.7%

ITMN - InterMune  $19.01  *** Bottom-Fishing: Part II ***

InterMune (NASDAQ:ITMN) is a biopharmaceutical company focused
on developing and commercializing products for the treatment of
serious pulmonary, infectious and hepatic diseases.  ITMN has 3
marketed products, growing product revenues and advanced-stage
clinical programs addressing a range of diseases with attractive
markets.  They are Actimmune, Infergen and Amphotec.  Actimmune
is approved in the U.S. for two rare congenital disorders: chronic
granulomatous disease and severe malignant osteopetrosis.  The
company markets Infergen in the U.S. and Canada for the treatment
of chronic hepatitis C infections.  It markets Amphotec worldwide
for the treatment of invasive aspergillosis.  Here is another
stock that has been forming a Stage I base since February.  This
play offers a reasonable way to profit from the current lateral
trend at the risk of owning InterMune.  Alas, due-diligence is
still required.

SEP-17.50 IQY IW LB=2.00 OI=1713 CB=17.01 DE=20 TY=4.4%

CCRN - Cross Country  $15.60  *** Rally Mode? ***

Cross Country Healthcare (NASDAQ:CCRN) is a provider of healthcare
staffing services in the United States.  Approximately 80% of the
company's revenue is derived from travel nurse staffing services.
Other staffing services include the placement of clinical research
professionals and allied healthcare professionals such as radiology
technicians, rehabilitation therapists and respiratory therapists.
Cross Country also provides other human capital management services,
including search and recruitment, consulting, education and training
and resource management services.  Its active client base includes
over 3,000 hospitals, pharmaceutical companies and other healthcare
providers across all 50 states.  On Friday, shares of Cross Country
rallied above their July high on heavy volume which suggest a test
of resistance near $16.50 is forthcoming.  The stock appears poised
to move higher in the coming sessions and traders who believe the
issue is destined for a future rally can profit from upside movement
with this position.

SEP-15.00 QCK IC LB=1.00 OI=403 CB=14.60 DE=20 TY=4.2%



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

XOMA    9.37  SEP  7.50  MBU IU  2.20  1296   7.17  20   7.0%
GSPN    7.61  SEP  7.50  GLQ IU  0.40  982    7.21  20   6.1%
ATYT   15.10  SEP 15.00  QFY IC  0.65  1339  14.45  20   5.8%
AFCI   23.18  SEP 22.50  AQF IX  1.50  1200  21.68  20   5.8%
HEPH   21.26  SEP 20.00  QGQ ID  1.95  1123  19.31  20   5.4%
PLCE   20.76  SEP 20.00  TUY ID  1.45  1400  19.31  20   5.4%
AEIS   24.06  SEP 22.50  OEQ IX  2.20  149   21.86  20   4.5%
CBST   13.24  SEP 12.50  UTU IV  1.10  1105  12.14  20   4.5%
MENT   20.23  SEP 20.00  MGQ ID  0.75  188   19.48  20   4.1%
JNPR   17.21  SEP 16.00  JUX IQ  1.60  2535  15.61  20   3.8%
SNIC   13.67  SEP 12.50  QNI IV  1.45  230   12.22  20   3.5%


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

One of our readers asked for some guidance with premium-selling
strategies and information on my favorite trading techniques.

Attn: Contact Support
Subject: Selling Premium in Options

Hi Ray,

I've been an OIN reader for more than a year and done pretty
well with mostly call and put buying.  Now I want to expand my
trading portfolio with some short options and spreads.  Any
suggestions on how I should identify good "premium selling"
stocks would be much appreciated.  I'll still be reading the
newsletter plays but would also like to be able to pick my own
stuff from the lists in my charting scans.  Also, you never
mention how you like to trade...what do you think are the best
option strategies?

Thanks for your help and comments!


Hello VB,

The first thing I must say is "congratulations," because anyone
who has traded options for more than a year and still has money
in his (or her) brokerage account must be doing something right!
As far as choosing a viable premium-selling candidate, there are
a number of steps you can take, not directly related to technical
analysis, that will help ensure a high probability of a profitable
trade.  The first step is to identify expensive premiums using the
composite implied volatility of all equity options.  You should
also identify those situations when options are priced at levels
above where they have historically been known to trade in the past.
Then you can use probability analysis to establish the potential
for the underlying market to move the required distance to make the
position unprofitable.  Since that potential almost always exists,
it is also necessary to determine if the stock has displayed a
level of historical volatility that suggests it is likely to move
the required distance (to make the position unprofitable) in the
target time-frame.  The final step is to review the fundamentals
of the company to find out if there are any obvious reasons for the
option premiums to be inflated.  Since a large part of an option's
extrinsic value is based on a projection of the future volatility
of the underlying stock, there are very few instances where excess
premium exists without a fundamental basis.  From a theoretical
standpoint, the easiest way to profit with derivatives is to find
those few instances where the actual movement of the issue may
differ substantially from that which is forecast by the market and
then construct a strategy to profit from the incorrect pricing of
the options.

As far as the best strategy, that's a tough decision with lots of
different factors to consider.  No strategy is immune to losses and
even the most conservative approaches to option trading will not
guarantee consistent profits without diligent position management.
In addition, there are different types of investors and no single
approach to the market can work for everyone.  Suitability, which
involves matching an investors' risk-reward attitude and experience
level with the appropriate technique, is the key to determining how
well a strategy may fit a specific individual.  The most important
thing to remember is the investment objectives are more crucial
than the merits of the technique itself.  If the strategy is not
suitable for the investor then it shouldn't be used, no matter how
attractive it appears.

Concerning my favored techniques, I like premium-selling plays with
a high probability of success and limited risk such as OTM credit
spreads on broad indexes (OEX/SPX) and occasionally, on individual
issues.  I also sometimes speculate with synthetic positions if the
risk-reward outlook is attractive.  At the same time, I don't want
to limit my options portfolio to directional trading and in that
respect, debit straddles are attractive when the implied volatility
in options is near historical lows (as they are now).  In addition,
straddles are easily managed without continually monitoring the
underlying issue and its option prices, thus they are generally
appropriate for most traders.  When the underlying stock is in a
long-term bullish trend, I favor diagonal/calendar spreads (and
covered-calls on LEAPS) as well as selling cash-secured puts on
quality issues.

Regardless of what strategy you choose, the old adage "never put
all your eggs in one basket" holds true in all financial markets
and that's why professional traders usually limit their portfolio
exposure to no more than 15% in any one position.  This ratio is
also appropriate for most premium-selling and spread techniques
and diversity is a very important component of success for any
type of trading.  I hope that helps you narrow the search for
favorable strategies and when you find something that works, send
me a note so I can share your approach with other traders who read
the OIN.

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

AMSC    13.20   12.19  SEP 10.00  0.70    0.70*   6.5%  18.2%
CBST    12.72   13.24  SEP 10.00  0.50    0.50*   4.6%  14.3%
RIMM    24.61   28.48  SEP 20.00  0.75    0.75*   2.8%   9.1%
TIVO    10.91   10.90  SEP 10.00  0.30    0.30*   3.4%   8.7%
OVTI    43.77   44.26  SEP 35.00  0.95    0.95*   2.4%   8.5%
THER    13.93   14.25  SEP 12.50  0.55    0.55*   3.3%   8.5%
RIMM    28.74   28.48  SEP 25.00  0.60    0.60*   2.7%   7.8%
IDTI    13.10   13.95  SEP 12.50  0.35    0.35*   3.1%   7.6%
BLUD    23.12   25.00  SEP 22.50  1.00    1.00*   3.4%   7.5%
SEPR    21.76   26.92  SEP 17.50  0.50    0.50*   2.1%   7.3%
NFLX    28.80   33.33  SEP 25.00  0.55    0.55*   2.4%   7.2%
TKLC    13.73   17.48  SEP 12.50  0.45    0.45*   2.7%   6.9%
PHTN    28.90   32.57  SEP 25.00  0.65    0.65*   2.3%   6.8%
SRNA    18.77   19.40  SEP 17.50  0.40    0.40*   2.5%   6.5%
JDAS    13.90   16.70  SEP 12.50  0.40    0.40*   2.4%   6.4%
UTEK    25.75   29.32  SEP 22.50  0.55    0.55*   2.2%   6.3%
SEPR    23.49   26.92  SEP 20.00  0.45    0.45*   2.0%   6.2%
PDII    24.25   25.83  SEP 20.00  0.50    0.50*   1.9%   6.1%
BRCM    25.80   27.27  SEP 22.50  0.35    0.35*   1.7%   5.2%
AEIS    21.02   24.06  SEP 17.50  0.30    0.30*   1.5%   5.0%
PHTN    29.57   32.57  SEP 25.00  0.35    0.35*   1.5%   5.0%

*  Stock price is above the sold striking price.


Stocks ended on a decidedly bullish note Friday with all of the
major equity averages closing higher for the session, the week,
and the month of August.  Despite the anemic trading volume,
the activity suggests a positive bias in September, when most
institutional traders return to the market.  Although many of
the popular technical indications are favorable, we will remain
cautious until a new (primary) up-trend is well established and
we also suggest continued attentiveness to portfolio management.
American Superconductor (NASDAQ:AMSC) is the only issue on the
"watch" list.

Previously Closed Positions: None


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

GNTA   16.00  SEP 10.00  GJU UB 0.30 12425  9.70  20   4.7%  13.0%
RIMM   28.48  SEP 25.00  RUL UE 0.50 5135  24.50  20   3.1%   9.0%
NTAP   22.36  SEP 20.00  NUL UD 0.35 5121  19.65  20   2.7%   7.7%
FLML   28.49  SEP 22.50  FLU UX 0.30 362   22.20  20   2.1%   7.6%
BOBJ   27.05  SEP 25.00  BBQ UE 0.45 520   24.55  20   2.8%   7.4%
NFLX   33.33  SEP 27.50  QNQ UY 0.30 507   27.20  20   1.7%   5.8%
PSUN   33.55  SEP 30.00  PVQ UF 0.35 642   29.65  20   1.8%   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).

GNTA - Genta  $16.00  *** Genasense Speculation! ***

Genta Incorporated (NASDAQ:GNTA) is a biopharmaceutical company
with a diversified product portfolio that is focused on delivering
innovative products for the treatment of patients with cancer.  The
company's research platform is anchored by two major programs that
center on oligonucleotides (RNA/DNA-based medicines) and small
molecules.  Genasense (oblimersen sodium), the firm's lead compound
from its oligonucleotide program, is being developed with Aventis
and is currently undergoing late-stage, Phase 3 clinical testing.
The leading drug product in Genta's small molecule program is
Ganite (gallium nitrate injection), which the company intends to
launch this year for treatment of cancer-related hypercalcemia that
is resistant to hydration.  Genta has Phase III trials coming up,
which, if successful, could unlock a new market in chemotherapy
sensitizing agents.  Investors are speculating on the report and
the option premiums are inflated, suggesting the potential for
excessive volatility when the results are announced.  This is a
very speculative play and traders should perform due diligence in
the company and the upcoming events before opening a position.

SEP-10.00 GJU UB LB=0.30 OI=12425 CB=9.70 DE=20 TY=4.7% MY=13.0%

RIMM - Research In Motion  $28.48  *** Next Leg Up? ***

Research In Motion Limited (NASDAQ:RIMM) is a designer, builder,
and marketer of wireless solutions for the mobile communications
market.  Through development and integration of hardware, software
and services, the firm provides solutions for seamless access to
time-sensitive information and communications, including e-mail,
telephone, messaging and Internet- and intranet-based applications.
The company's technology also enables a broad array of third-party
developers and manufacturers around the world to enhance their own
products and services with wireless connectivity.  RIM's portfolio
of products includes a family of wireless handhelds, the BlackBerry
wireless e-mail solution, embedded radio modems and a suite of
software development tools.  Shares of RIMM consolidated this week
after reaching a 2-year high on 8/22, amid a rally in the wireless
group.  Traders who like the outlook for the issue can profit from
continued upside activity in its share price with this position.

SEP-25.00 RUL UE LB=0.50 OI=5135 CB=24.50 DE=20 TY=3.1% MY=9.0%

NTAP - Network Appliance  $22.36  *** Entry Point? ***

Network Appliance (NASDAQ:NTAP) is a provider of enterprise
network storage and data management solutions.  NetApp network
storage solutions and service offerings provide data-intensive
enterprises with consolidated storage, improved data center
operations, economical business continuance and efficient remote
data access.  The company's solutions meet the needs of archive,
reference, departmental/remote office, business internal and
business operations, and business-critical data with a common
product architecture and data management methodology.  Network
Appliance shares rallied in mid-August after the firm reported
better-than-expected fiscal first-quarter earnings and forecast
more growth in the current quarter.  The upside activity in the
stock was fueled by a quarterly net profit that was 67% above
the year ago results, due to better operating margins and new
business products.  Investors who wouldn't mind owning the issue
at a cost basis near $20 should consider this position.

SEP-20.00 NUL UD LB=0.35 OI=5121 CB=19.65 DE=20 TY=2.7% MY=7.7%

FLML - Flamel Technologies  $28.49  *** Bristol-Meyers Deal! ***

Flamel Technologies (NASDAQ:FLML) is a biopharmaceutical company
engaged mainly in the development of two polymer-based delivery
technologies for medical applications.  The company's Micro-pump
technology is a multi-particulate technology for oral ingestion
of small molecule drugs with applications in controlled release,
tastemasking and bioavailability enhancement.  The company has
three major products based on its Micropump technology: Asacard,
a controlled-release formulation of aspirin for the treatment of
cardiovascular disease; Metformin XL, a controlled-release form
of Metformin that is in development for use for the treatment of
Type II diabetes, and Genvir, a controlled-release acyclovir for
the treatment of genital herpes.  In addition, FLML has developed
new herbicide delivery systems and has patented a biomaterial,
ColCys.  FLML shares have been in "rally mode" since the company
entered a licensing agreement with Bristol-Meyers (NYSE:BMY) for
Flamel's Basulin, a controlled-release form of insulin that is
about to enter phase II clinical trials.  The agreement calls for
Bristol-Myers to assume the cost of development and manufacturing
of the drug, in return for exclusive worldwide rights to it.  The
recent activity bodes well for FLML in the near-term and traders
who think the rally will continue should consider this position.

SEP-22.50 FLU UX LB=0.30 OI=362 CB=22.20 DE=20 TY=2.1% MY=7.6%

BOBJ - Business Objects  $27.05  *** New 52-Week High! ***

Business Objects S.A. (NASDAQ:BOBJ) develops, sells and supports
business intelligence software for client/server environments,
intranets, extranets and the Internet.  The three main markets
for BI are enterprise, extranet and analytic applications.  For
enterprise, Business Objects products provide employees with
information to make better business decisions.  Deployments can
range from small workgroups to enterprise deployments exceeding
50,000 users.  For extranet, products allow organizations to
build stronger relationships by linking customers, partners and
suppliers via the world-wide web, and for analytic applications,
products offer packaged practice analytics, alerts driven by
business rules and workflow for specific business users, such as
sales managers or supply chain managers.  BOBJ's stock soared
Friday with the issue reaching a new 52-week high amid a rally
in the business software group.  Traders who agree with a bullish
outlook for the company can establish a relatively conservative
basis in the issue with this position.

SEP-25.00 BBQ UE LB=0.45 OI=520 CB=24.55 DE=20 TY=2.8% MY=7.4%

NFLX - Netflix  $33.33  *** New All-Time High! ***

Netflix (NASDAQ:NFLX) is an online entertainment service in the
United States that provides more than 600,000 subscribers access
to a comprehensive library of more than 11,500 movie, television
and other filmed entertainment titles.  The company's standard
subscription plan allows subscribers to have three titles out at
the same time with no due dates, late fees or shipping charges.
Subscribers can view as many titles as they want in a month and
they select these titles at the firm's Website (www.netflix.com)
aided by its proprietary CineMatch technology.  They receive them
on DVD by first-class mail and return them to the company at their
convenience using prepaid mailers.  Once a title has been returned,
Netflix mails the next available title in a subscriber's queue.
Shares of NFLX reached a new "all-time" high Friday and there is
no indication of a trend reversal in the near-term.  Traders who
share a bullish outlook for the stock can profit from continued
upside activity in the issue with this position.

SEP-27.50 QNQ UY LB=0.30 OI=507 CB=27.20 DE=20 TY=1.7% MY=5.8%

PSUN - Pacific Sunwear  $33.55  *** 3-For-2 Split Coming! ***

Pacific Sunwear of California (NASDAQ:PSUN) is a retailer of
everyday casual apparel, accessories and footwear designed to
meet the needs of active teens and young adults.  The company
operates three nationwide, primarily mall-based chains of retail
stores under the names Pacific Sunwear (also known as PacSun),
Pacific Sunwear (PacSun) Outlet and d.e.m.o. PacSun and PacSun
Outlet stores specialize in board-sport-inspired casual apparel,
footwear and related accessories catering to teenagers and young
adults.  d.e.m.o. specializes in hip-hop music-inspired casual
apparel and related accessories catering to teenagers and young
adults.  In addition, the company operates a Website that sells
PacSun merchandise online, provides content and community for
its target customers and provides information about the firm's
products.  In mid-August, PSUN reported that quarterly profits
surged 83% as sales jumped 23% on improved operating margins and
strong same-store sales.  The firm also declared a three-for-two
stock split with a record date of 8/25/03.  Investors seem to be
pleased with the news as the stock has continued a steady uptrend
which began in March.  Traders can speculate conservatively on
the future movement of the issue with this position.

SEP-30.00 PVQ UF LB=0.35 OI=642 CB=29.65 DE=20 TY=1.8% 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

IPXL   13.00  SEP 12.50  UPR UV 0.40 206   12.10  20   5.0%  11.9%
OSIP   38.01  SEP 35.00  GHU UG 0.95 386   34.05  20   4.2%  11.0%
PHTN   32.57  SEP 30.00  PDU UF 0.55 81    29.45  20   2.8%   7.6%
QCOM   41.33  SEP 40.00  AAW UH 0.80 6354  39.20  20   3.1%   7.6%
SEPR   26.92  SEP 25.00  ERQ UE 0.40 337   24.60  20   2.5%   6.6%
OTEX   37.12  SEP 35.00  QFT UG 0.55 20    34.45  20   2.4%   6.3%
INTC   28.59  SEP 27.50  INQ UY 0.45 20383 27.05  20   2.5%   6.3%
CNCT   18.74  SEP 17.50  UXU UW 0.25 53    17.25  20   2.2%   5.8%
SINA   31.02  SEP 25.00  NOQ UE 0.25 3100  24.75  20   1.5%   5.7%



Optimism Prevails In U.S. Equity Markets
By Ray Cummins

Stocks closed higher Friday, buoyed by positive data from the
manufacturing sector, which suggested an economic recovery is
finally underway.

The Dow Jones Industrial Average added 41 points to finish at
9,415 on strength in AT&T (NYSE:T), General Motors (NYSE:GM)
and Caterpillar (NYSE:CAT).  The NASDAQ Composite climbed 10
points to 1,810 with wireless shares among the best performers.
The broad Standard & Poor's 500 Index closed up 5 points at
1,008 with airline and biotechnology issues advancing, while
selling pressure emerged in oil service, retail and utility
stocks.  Volume was light with 950 million shares traded on
the NYSE and 1.19 billion shares swapped on the technology
exchange.  Winners doubled losers on the Big Board, however
the positive breadth was slightly less on the NASDAQ with
advancing issues outpacing declining shares 3 to 2.  Treasury
prices fell in the holiday-shortened session.  The 10-year note
was off 12/32 to yield 4.46%, while the 30-year government bond
slumped 1/8 to yield 5.22%.  Equity funds continued to receive
new cash with estimates of inflows near $1.7 billion during the
week ending August 28, compared with inflows of $2.6 billion in
the prior week.  Portfolios that invest mainly in U.S. stocks
had inflows of $1.5 billion versus inflows of $2.6 billion 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

ADI     39.51   41.00  SEP   30  35   0.65  34.35  $0.65   Open
BOW     38.57   43.31  SEP   30  35   0.60  34.40  $0.60   Open
MXIM    39.11   44.96  SEP   30  35   0.65  34.35  $0.65   Open
BBY     47.90   52.01  SEP   40  42   0.30  42.20  $0.30   Open
JCI     96.49   99.00  SEP   85  90   0.65  89.35  $0.65   Open
MBI     53.13   56.46  SEP   45  50   0.65  49.35  $0.65   Open
WMT     57.77   59.17  SEP   50  55   0.50  54.50  $0.50   Open
BSX     63.25   60.10  SEP   50  55   0.40  54.60  $0.40   Open
SNPS    66.53   68.21  SEP   55  60   0.50  59.50  $0.50   Open
ISIL    27.58   28.97  SEP   22  25   0.30  24.70  $0.30   Open
POWI    32.08   32.24  SEP   25  30   0.55  29.45  $0.55   Open
VIA     44.64   44.99  SEP   40  42   0.30  42.20  $0.30   Open

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

The new position in Lowe's (NYSE:LOWE) was not available near the
target credit, due to last Monday's "gap-up" at the open.


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

INTU    42.86   45.51   SEP   50  47   0.30  47.80  $0.30   Open
ESRX    62.23   64.81   SEP   75  70   0.60  70.60  $0.60   Open
DB      59.64   58.24   SEP   70  65   0.60  65.60  $0.60   Open
IFIN    28.42   29.89   SEP   32  30   0.50  30.50  $0.50   Open?
SAP     27.56   29.94   SEP   32  30   0.25  30.25  $0.25   Open?
AMGN    66.48   65.94   SEP   75  70   0.35  70.35  $0.35   Open
MEDI    34.58   34.70   SEP   40  37   0.25  37.75  $0.25   Open

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

Investors Financial Services (NASDAQ:IFIN) and SAP AG (NYSE:SAP)
are now on the "watch" list and both positions should be closed
on further upside activity.


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

MWD     48.54  48.79  SEP   40  45   4.45   44.45  0.55   Open
MGAM    24.97  27.12  SEP   20  22   2.30   22.30  0.20   Open
MUR     52.94  57.73  SEP   45  50   4.45   49.45  0.55   Open
CTSH    31.90  34.83  SEP   25  30   4.40   29.40  0.60   Open

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

Multimedia Games (NASDAQ:MGAM) was not available at the target
debit, however the risk/reward outlook (potential profit of 8%)
at a basis of $22.30 was acceptable for conservative traders.


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

HSY     69.64  69.90  SEP   75  70   4.10   70.90  0.90   Open

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

Hershey Foods (NYSE:HSY) is at a "key" moment and the next few
sessions will likely determine its trend for the near future.


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

SHPGY   22.77  23.31   JAN     30    17     0.00    0.15    Open
AVCT    27.83  29.32   SEP     30    25    (0.10)   1.30    Open?

Avocent (NASDQ:AVCT) has been a solid performer with a potential
profit of up to $1300 on $950 initially invested in less than one
month.  There was no opportunity to trade the synthetic position
in Devry (NYSE:DV) during the "gap-up" rally, and the subsequent
sell-off on news of lower quarterly profits was not conducive to
a new entry in a bullish play.


No Open Positions


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

GP      19.25  23.17   OCT-20C   SEP-22C   1.90    2.20    Open
MSFT    27.31  26.52   JAN-27C   SEP-27C   1.20    1.20    Open
NE      34.86  36.18   DEC-37C   SEP-37C   1.15    1.50    Open
ING     19.07  19.73   JAN-20C   SEP-20C   0.75    1.00    Open
NSM     22.77  29.14   JAN-20C   SEP-25C   3.90    5.30    Open
MDCO    26.17  28.50   JAN-30C   SEP-30C   1.50    1.90    Open
GNTA    13.95  16.00   OCT-12C   SEP-15C   2.00    2.40    Open?

Genta (NASDAQ:GNTA) has been a pleasant surprise, offering a nice
profit in less than one week.  National Semiconductor (NYSE:NSM)
has also exceeded our expectations, offering a potential gain of
up to $1.40 on $3.90 invested in less than one month.  The spread
in SPX Corporation (NYSE:SPW) was closed early for a profit.  The
recent position in Brady Pharmaceuticals (NYSE:BDY) was far more
bullish than we expected, but the brisk upside activity on the day
after the spread was offered left little opportunity to enter the
play at the target debit and required close attention to achieve a
profit before issue continued its sharp rally.  The position is no
longer being tracked in the summary.


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

SNE     30.74  32.95   OCT    30    30     3.75    4.35    Open
AMTD    10.00  10.85   OCT    10    10     1.45    1.25    Open
TRI     30.50  32.40   NOV    30    30     4.90    4.75    Open
ADBE    34.36  38.83   SEP    35    35     2.80    4.50    Open
BBY     50.08  52.01   SEP    50    50     4.05    4.90    Open

Adobe Systems (NASDAQ:ADBE) has performed better than expected,
offering up to $1.70 gain on $2.80 invested in only two weeks.
Straddles in Best Buy (NYSE:BBY) and Sony (NYSE:SNE) have also
achieved small profits, however the Overture (NASDAQ:OVER) play
has previously been closed to preserve trading capital.


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.

AMZN - Amazon.com  $46.32  *** Another Multi-Year High! ***

Amazon.com (NASDAQ:AMZN) is a website where customers can find
and discover anything they may want to buy online.  The company
lists millions of items in categories such as books, music, DVDs,
videos, consumer electronics, toys, camera and photo items, PC
software, computer and video games, tools and hardware, outdoor
living items, kitchen and house-wares products, toys, baby and
baby registry, travel services and magazine subscriptions.  At
its Amazon Marketplace, Auctions and zShops services, businesses
and individuals can sell virtually any product to millions of
customers, and with Amazon.com Payments, sellers are able to
accept credit card transactions in addition to other methods of
payment.  The company operates a U.S.-based Website: amazon.com,
and four internationally focused Websites: www.amazon.co.uk,
www.amazon.de, www.amazon.fr and www.amazon.co.jp.

AMZN - Amazon.com  $46.32

PLAY (conservative - bullish/credit spread):

BUY  PUT  SEP-40.00  ZQN-UH  OI=10614  ASK=$0.25
SELL PUT  SEP-42.50  ZQN-UV  OI=11891  BID=$0.50
POTENTIAL PROFIT(max)=11% B/E=$42.25

GS - Goldman Sachs  $88.49  *** Trading Range? ***

The Goldman Sachs Group (NYSE:GS) is a global investment banking
and securities firm that provides a range of services worldwide
to a substantial and diversified client base.  The firm operates
offices in over 20 countries with activities are divided into two
primary segments: Global Capital Markets, and Asset Management
and Securities Services.  The Global Capital Markets segment,
which represented 64% of the firm's 2001 net revenues, consists
of Investment Banking, and Trading and Principal Investments.
Goldman's Asset Management segment offers investment strategies
and advice across all major asset classes: global equity; fixed
income, including money market instruments; currency, as well as
alternative investment products.  The firm's Securities Services
activities include brokerage, financing services and securities

GS - Goldman Sachs  $88.49

PLAY (conservative - bullish/credit spread):

BUY  PUT  SEP-80.00  GS-UP  OI=3849  ASK=$0.25
SELL PUT  SEP-85.00  GS-UQ  OI=7315  BID=$0.80
POTENTIAL PROFIT(max)=12% B/E=$84.45

TTWO - Take-Two Int. Software  $29.81  *** On The Move! ***

Take-Two Interactive Software (NASDAQ:TTWO) is an integrated
developer, marketer, distributor and publisher of interactive
entertainment software games and accessories for the personal
computer, PlayStation, PlayStation2, Nintendo Game Boy Color,
Nintendo GameCube, Nintendo Game Boy Advance and the Xbox.  The
company publishes and develops products through various wholly
owned subsidiaries including Rockstar Games, Rockstar Studios,
Gathering of Developers, TalonSoft, Joytech, PopTop, Global Star
and under the Take-Two brand name.  The company maintains sales
and marketing offices in Cincinnati, New York, Toronto, London,
Paris, Munich, Vienna, Copenhagen, Milan, Sydney and Auckland.

TTWO - Take-Two Int. Software  $29.81

PLAY (less conservative - bullish/credit spread):

BUY  PUT  SEP-25.00  TUO-UE  OI=4161  ASK=$0.25
SELL PUT  SEP-27.50  TUO-UY  OI=308   BID=$0.55
POTENTIAL PROFIT(max)=14% B/E=$27.20

CTX - Centex  $75.42  *** Homebuilding Sector Slump? ***

Centex Corporation (NYSE:CTX) is a multi-industry company with
operates in six principal business segments.  Conventional Homes
operations involve the construction and sale of single-family
homes, town homes and low-rise condominiums, and the purchase and
development of land.  Investment Real Estate operations involve
the acquisition, development and sale of land, and the development
of industrial, office, retail and mixed-use projects.  Financial
Services operations involve the financing of homes, home equity
and sub-prime lending, and the marketing of insurance coverage.
Construction Products involves cement production and distribution,
and the production, distribution and sale of gypsum wallboard,
concrete, aggregates and recycled paperboard.  Contracting and
Construction Services involves the construction of buildings.
Centex HomeTeam Services is involved in pest and termite control,
lawn and landscape care, electronic security, alarm monitoring
and homewiring services.

CTX - Centex  $75.42

PLAY (conservative - bearish/credit spread):

BUY  CALL  SEP-85.00  CTX-IQ  OI=758   ASK=$0.15
SELL CALL  SEP-80.00  CTX-IP  OI=1885  BID=$0.55
POTENTIAL PROFIT(max)=9% B/E=$80.45

DNA - Genetech  $79.40  *** Premium-Selling Only! ***

Genentech (NYSE:DNA) is a biotechnology firm using human genetic
information to discover, develop, manufacture and commercialize
biotherapeutics for significant unmet medical needs.  The company
manufactures and commercializes 10 biotechnology products directly
in the United States.  These include Herceptin, Rituxan, TNKase,
Activase, Cathflo Activase, Nutropin Depot, Nutropin AQ, Nutropin
human growth hormone, Protropin and Pulmozyme.  The company also
licenses several additional products to other companies and its
product development efforts, including those of its collaborative
partners, cover a wide range of medical conditions, including
cancer, respiratory disorders, cardiovascular diseases, endocrine
disorders and inflammatory and immune problems.

DNA - Genetech  $79.40

PLAY (conservative - bearish/credit spread):

BUY  CALL  SEP-90.00  DNA-IR  OI=2720  ASK=$0.20
SELL CALL  SEP-85.00  DNA-IQ  OI=5588  BID=$0.60
POTENTIAL PROFIT(max)=9% B/E=$85.45


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

AVII - AVI BioPharma  $5.54  *** A Reader's Request! ***

AVI BioPharma (NASDAQ:AVII) is a unique biopharmaceutical firm
developing therapeutic products based on two major technologies,
its Neugene antisense and its Avicine cancer vaccine.  The firm's
principal products will target life-threatening diseases, with
initial applications in cardiovascular disease, pancreatic cancer,
polycystic kidney disease, drug metabolism and viruses.  A patent
estate, including 74 issued patents and 110 applications pending,
protects the company's technologies.  Each of its primary product
candidates, Resten-NG and Avicine, will address a large worldwide

AVII - AVI BioPharma  $5.54

PLAY (very speculative - bullish/debit spread):

BUY  CALL  DEC-5.00  QVI-LA  OI=1916  ASK=$1.50
SELL CALL  DEC-7.50  QVI-LU  OI=3053  BID=$0.50
POTENTIAL PROFIT(max)=150% B/E=$5.95

ERTS - Electronic Arts  $89.97  *** Master Of Video Games! ***

Electronic Arts (NASDAQ:ERTS) develops, markets, publishes and
distributes interactive software games that are playable by
consumers on platforms such as home videogame machines, personal
computers (PCs), hand-held game machines (Game Boy Advance) and
online platforms over the Internet.  Its products for playing on
consoles and handhelds are published under license from the makers
of these platforms and EA pays a fee to these console manufacturers
for the right to publish products on their platforms.  The company
has published games for over 42 different platforms.  The company
operates in two primary business segments: its EA Core business
that creates, markets and distributes interactive entertainment
software and its EA.com business that creates and distributes
interactive entertainment software that can be played or sold
online, ongoing management of subscriptions of online games and
Website advertising.

ERTS - Electronic Arts  $89.97

PLAY (conservative - bullish/debit spread):

BUY  CALL  SEP-80.00  EZQ-IP  OI=1338  ASK=$10.10
SELL CALL  SEP-85.00  EZQ-IQ  OI=2259  BID=$5.70
POTENTIAL PROFIT(max)=12% B/E=$84.45


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.

PRU - Prudential Financial  $36.41  *** Technicals Only! ***

Prudential Financial (NYSE:PRU) is a major financial services
institution.  Through its subsidiaries and affiliates, the firm
provides a range of insurance, investment management, securities
and other financial products and services to individual and
institutional customers in the United States and over 30 other
countries.  The businesses of Prudential Financial are separated
into two groups: the Financial Services Businesses and the Closed
Block Business.  The Financial Services Businesses is comprised
of the company's Insurance division, Investment division, and
International Insurance and Investments division, as well as the
firm's Corporate and Other operations.  The Closed Block Business
is comprised of the assets and related liabilities of the Closed
Block and other assets and liabilities.

PRU - Prudential Financial  $36.41

PLAY (conservative - bullish/calendar spread):

BUY  CALL  DEC-37.50  PRU-LU  OI=3859  ASK=$1.45
SELL CALL  SEP-37.50  PRU-IU  OI=2114  BID=$0.30


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

CLS - Celestica  $17.55  *** Probability Play! ***

Celestica (NYSE:CLS) specializes in providing a full range of
electronics manufacturing services, including design, assembly,
prototyping, testing, product assurance, supply chain management,
worldwide distribution and after-sales service, to its customers
in the information technology and communications industries.  The
company operates a global manufacturing network, with operations
in Asia, Europe and the Americas, providing a range of services
to original equipment manufacturers.  In 2002, the firm acquired
certain manufacturing assets of NEC Corporation in Miyagi and
Yamanashi, Japan.  It also acquired certain assets from Corvis
Corporation in the United States.

CLS - Celestica  $17.55

PLAY (speculative - neutral/debit straddle):

BUY CALL  OCT-17.50  CLS-JW  OI=1284  ASK=$1.25
BUY PUT   OCT-17.50  CLS-VW  OI=84    ASK=$1.20

NVDA - Nvidia  $18.17  *** A Big Move Coming? ***

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.

NVDA - Nvidia  $18.17

PLAY (speculative - neutral/debit straddle):

BUY CALL  OCT-17.50  UVA-JW  OI=764  ASK=$1.85
BUY PUT   OCT-17.50  UVA-VW  OI=681  ASK=$1.15




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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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