Option Investor

Daily Newsletter, Monday, 09/08/2003

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The Option Investor Newsletter                   Monday 09-08-2003
Copyright 2003, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Vote of Confidence
Futures Wrap: Flagpole Day
Index Trader Wrap: Higher Highs

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
     09-08-2003            High     Low     Volume Advance/Decline
DJIA     9586.29 + 82.95  9599.34  9503.41 1.62 bln   2012/ 814
NASDAQ   1888.62 + 30.38  1888.65  1863.88 2.02 bln   2115/1014
S&P 100   518.50 +  5.53   518.50   512.49   Totals   2960/3263
S&P 500  1031.64 + 10.25  1032.41  1021.39
RUS 2000  517.13 +  8.26   517.21   509.76
DJ TRANS 2761.68 + 14.39  2777.04  2743.36
VIX        18.79 -  0.58    19.54    18.79
VXN        29.55 -  1.15    31.38    29.50
Total Volume 4,058M
Total UpVol  3,350M
Total DnVol    655M
52wk Highs     913
52wk Lows       17
TRIN          1.14
PUT/CALL      0.67

Vote of Confidence
by James Brown

Investors continue to cast their vote confidently to the bulls as 
the S&P 500 notches a new 15-month high and the NASDAQ composite 
claims a new 18-month peak.  Most of the gains were concentrated 
in technology and biotech issues but the rally was once again 
very broad-based with nearly every sector closing in the green 
save for Retail and Gold.  Historically a weak season for the 
equity markets this September is proving to be anything but.

The Dow Jones Industrial average added almost 83 points to close 
at 9586.  The COMPX rose more than 30 points to 1888 and the SPX 
inched up one percent to 1031.  Contributing to the general mood 
in the U.S. were positive sessions for the Japanese, English and 
German exchanges.  The market internals for the U.S. were 
strongly positive with 20 stocks rising for every 8 losers on the 
NYSE and 21 winners for every 10 decliners on the NASDAQ.  New 
52-week highs were a little less than what we've come to expect 
at 463 between the two exchanges but they continue to stomp new 
lows, which rang in at 10.  Overall volume could have been 
stronger but up volume beat down volume by 3.9-to-1 on the NYSE 
and more than 6-to-1 on the NASDAQ exchange.

Chart of the NASDAQ Composite:


Chart of the S&P 500 Index:


Chart of the Dow Jones Industrials:


The weekend headlines were all about the President's request for 
another $87 billion to rebuild and defend Iraq and Afghanistan.  
Yet when Wall Street opened for business this morning it wasn't 
the ballooning deficit on investors' minds.  Instead traders were 
more concerned with grabbing their share of the ever-rising tech 
tidal wave that has swept away the bulls and bears in recent 
sessions.  Shares of IBM lead that charge today after Credit 
Suisse First Boston upgraded the stock from "neutral" to "out 
perform" while lifting their earnings estimates for 2004 and 
raising their price target from $87 to $102.  

CSFB believes IBM will be a great candidate to catch any "late-
cycle" I.T. spending and shares of Big Blue added 2.47% to close 
just under overhead resistance at $90.  But IBM wasn't the only 
news contributing to the 1.7% gain in the GHA hardware index.  
Research firm IDC raised its own forecast for the global PC 
market this morning.  The firm said Q2 PC shipments were nearly 
10% stronger than expected and they raised their estimates for 
all of 2003 by 8.3%.  

Semiconductor bears are probably still suffering from a wave of 
vertigo or is it dj... vu?  It was just last Thursday that UBS 
raised their outlook for the chip equipment sector.  Today it was 
Smith Barney's turn to lift their outlook on the industry from 
"market weight" to "over weight".  The analyst believes that the 
improving fundamentals and economic conditions can push industry 
revenue growth to 20 percent in 2004 and 30 percent in 2005, 
which is a four percent increase from current estimates.  
Semiconductors also got a boost this morning when Taiwan 
Semiconductor (TSM) said they expect Q3 shipments to rise 10 
percent over previous quarters and they see Q4 tracking inline at 
Q3 levels.  First Albany came out with several opinions today as 
well and one of them was to raise chip stocks Altera (ALTR) and 
Xilinx (XLNX) from "neutral" to "buy".

This fresh round of positive chip news was not lost on shares of 
Intel (INTC) which added 1.6% after launching two new Itanium 2 
chips, which will target low-end servers and put more pressure on 
Sun Microsystems' (SUNW) business.  Lastly, shares of 
communication chipmaker, RF Micro Devices (RFMD), sprang up over 
16 percent after raising its Q2 outlook based on strong customer 

Tech issues were also buoyed by EMC Corp (EMC) who received an 
"out perform" rating and a $16 price target from SoundView.  
Plus, Nextel Communicatoins (NXTL) reaffirmed its full-year 
guidance of $1 a share backed by growing revenues and subscriber 

Out performing the 2.84% gain in the SOX semiconductor index was 
the booming biotech index.  The BTK added 3.89% inspired by a 32 
percent gain in shares of Regeneron Pharmaceuticals (REGN).  REGN 
announced that French company Aventis would pay $125 million down 
and up to 50 percent of the profits for REGN's experimental VEGF 
Trap treatment to fight cancer.  The deal is estimated to be 
worth upwards of $500 million for REGN.  The VEGF trap treatment 
uses anti-angiogensis, which blocks blood vessel growth to the 
cancerous area.  Shares of Amgen (AMGN) and Genentech (DNA), the 
No. 1 and No. 2 biotech firms, respectively, were up strongly on 
the day.  DNA previous reported success earlier this year with 
their Avastin drug, which also uses anti-angiogensis to treat 
colon cancer.

Overshadowed by the big gains in biotech was a strong day for the 
DRG drug index.  Last Friday in the Market Monitor I outlined a 
bullish breakout of the descending channel in the oversold DRG.X 
and suggested that bullish traders who would prefer not chasing 
the tech train look here.  Barron's apparently agrees.  Over the 
weekend a Barron's article highlighted the low P/E's in the group 
combined with the 2% and 3% yields for big caps like Pfizer 
(PFE), Merck (MRK) and Johnson and Johnson (JNJ) making them 
tempting values, especially compared with to the tech sector.  
The news pushed Merck to the top gainer in the Dow Jones 
Industrials with a 3.1 percent gain.  

The FDA was in a giving mood today as well.  Barr Labs (BRL) 
rocketed 8.4% by the close after the FDA approved BRL's Seasonale 
Extended-Cycle oral contraceptive.  The new drug can reduce a 
woman's menstrual cycle to just four times a year.  Watson 
Pharmaceutical (WPI) also received an FDA approval for its 
generic version of the Percocet pain reliever produced by Endo 
Pharmaceuticals (ENDP).  By the end of the day WPI was up 7.2%, 
the DRG.X was up 1.94% and even ENDP added 3.8%.  

Last week we continued to suggest that traders needed to stay 
sharp because the rally has come so far now that analysts could 
start to downgrade stocks based on valuation concerns.  We 
started to see a couple of these opinions late last week and 
they've begun anew today.  This time the Retail sector was the 
main target.  Sanford Bernstein's retail analyst cut their 
ratings on Wal-Mart (WMT) and Target (TGT) from "out perform" to 
"market perform".  The research note was actually titled "Time to 
take some profits" as the analyst felt that these shares had 
already priced in a strong second half for 2003 and double-digit 
growth for 2004.  This came on the same day that WMT said their 
weekly same-store sales are on track to meet their September 
goals of 3-5 percent growth.  RBC Capital Markets chimed in with 
two downgrades of their own for Gap Inc (GPS) and Ann Taylor 
Stores (ANN) from "out perform" to "sector perform".  Lehman 
Brothers actually disagreed and felt that the retail sector was 
poised to perform well heading into Christmas after the stronger 
than expected back-to-school season.

Speaking of end-of-year projections, The S&P Investment Policy 
Committee raised their year-end forecast for the S&P 500 from 
1030 to 1085 or about +5 percent.  They're really stepping out on 
a limb since the SPX closed at 1031 today.  The outlook is based 
on improving economic conditions and rising corporate earnings.  
However, Smith Barney's institutional equity strategist, Tobias 
Levkovich, was less enthusiastic.  Tobias is targeting a year-end 
target of 1075 for the S&P 500 but forecasts 2004 will be bearish 
with a year-end target of 1025.  Levkovich believes that the 
markets will remain range bound and that contrary to popular 
belief we are not in a new bull market.

Whatever the long-term outlook is, short-term traders have to 
contend with the trend this week.  Honestly, I'm surprised to see 
the markets higher ahead of the September 11th anniversary and we 
could still see some profit taking in the next couple of 
sessions.  Yet until that occurs the best bet may be to just keep 
raising your stops on any current profitable positions.  Look for 
news on Nokia (NOK) tomorrow with their mid-quarter update and 
headlines from the Bear Stearns Healthcare conference, Lehman 
Brothers Financial Services conference, and the Merrill Lynch 
Media & Entertainment conferences which are all in session 


Flagpole Day
Jonathan Levinson

Equities ran up a short flagpole immediately at the cash open, 
and then traded in a narrow range for the duration of the 
session.  Bonds whipsawed to close in the red, and gold pulled 

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

Daily chart of the US Dollar Index


The US Dollar Index spent much of the session testing the low 97 
area after its steep selloff from Friday.  The CRB rose .39 to 
243.35, gold dropped, and the precious metals indices traded 
mixed but mostly negative.

Daily chart of December gold


December gold printed an inside day, a bearish harami candlestick 
pattern on the daily chart within its possible rising wedge 
formation.  It had a higher low of 374.80, an encouraging sign 
for bulls, but unease continues to mount as the contract remains 
unable to seriously challenge the 380 level.  The HUI gained .42 
to close at 198.77, while the XAU lost .09 to close at 93.36.

Daily chart of the ten year note yield


Treasury notes had a wild session, trading both sides of 
unchanged before a surprise selloff toward the end of their 
session left yields in the green across the curve, with the five 
year note yield higher by 3.8 basis points, the ten (TNX) +3.5 
bps to 4.389%, and the TYX up 2.9 bps.  The TNX printed a bullish 
harami, a positive inside day, but within the context of a 
decisive break below the secondary rising trendline.  I'm not 
prepared to think bearish thoughts about the ten year note on the 
basis of what may well prove to be a consolidation of Friday's 
gains.  The oscillators on TNX remain on sell signals, and the 
outlook remains so far bearish for the yield/bullish for bonds 
within this timeframe.

Daily NQ candles


The NQ did it again, adding another bullish candle and 52 week 
closing high after Friday's light pullback.  Old bullish 
expressions such as "backing and filling" have been coming 
increasingly to mind, as I relive the spring of 2000, 
recollections of Maria screeching "a new record" still fresh in 
my memory.  The VXN slipped back and closed below 30, with the 
VIX going out below 19.  The NQ's gains did nothing to violate 
the bearish ascending wedge on the daily candles, but it also 
caused the 10 day stochastic to begin trending in overbought as 
the Macd continues higher.

30 minute 20 day chart of the NQ


The NQ rocketed off Friday's closing levels from the moment of 
the cash open, reaching and holding the 1380 level.  The 
oscillators on the 30 minute candles reached overbought levels 
and have begun their downphases, so far with zero price traction.  
I expect tension to grow as the range narrows, with a 1280 target 
under this formation on a breakdown.  Nevertheless, an uptrend is 
bullish until it reverses, and the NQ went out at its high of 
1389 for a 23 point gain. 

Daily ES candles


The ES gained 8.50, or .83% compared with the NQ's 1.68%, but the 
cyclic picture is the same, with the previously dominant daily 
cycle oscillators now trending in overbought as the 30 minute 
cycle oscillators try to start their downphases.  Although I 
haven't highlighted it, note that the 30 minute oscillators are 
beginning these sell signals from lower highs, despite the higher 
highs in the price.  This is a bearish divergence, and could 
portent a pullback within the context of the bearish rising 
wedges.  As Mark Phillips put it, bulls need to use stops and 
bears need to use caution.

20 day 30 minute chart of the ES


1028 proved to be meaningful support intraday, with 1024 now 
trendline support under the bear wedge.

150 tick chart of the ES


Daily YM candles


Same story on the YM, with today's range almost exactly 100 
points between 9500 support and 9600 resistance.

20 day 30 minute chart of the YM


Today's trading should have been maximally demoralizing to bears, 
but it wasn't.  It took some extreme readings for the indices to 
print their new closing highs, and conventional wisdom would have 
bulls rethinking their buy orders on a VIX below 19 and TRIN.NQ 
below .35.  The breadth and sentiment measures are at levels that 
do not preclude higher highs, but they are separating the bulls 
from the Bulls.  That is to say, bulls buying current levels have 
to believe that there is a new bull market underway, while bears 
remain comfortable in the knowledge that it is a bear market 
rally approaching its peak, confirmed by readings that have 
tended to coincide with market tops during recent years.  
Regardless of personal bias, however, the price is the price, and 
that is what we trade.  Stops under long trades, caution, 
patience and tight stops above short trades continues to be the 


Higher Highs
Jonathan Levinson

New closing highs for the indices brought the VIX to a new 52 week 
closing low below 19 as the markets grew more overbought.  Every 
dip was bought, but bulls could not break away from what proved to 
be a tenacious intraday range.

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


Please note that I have not updated the weekly and monthly levels.  
Jeff Bailey returns tomorrow, and the Pivot Matrix will resume its 
regular schedule.  Thank you for your patience.

Daily COMPX candles


The only news on the daily COMPX is that the relentless uptrend 
has finally caused the 10 day stochastic to begin trending in 
overbought.  The cycle that it measures has now exceeded the time 
and breadth allotted to its upphase, but price continues to 
climb.  How long it will persist is no longer answerable on this 
timeframe, and we look to other timeframes for clues.  The longer 
10 week stochastic on the weekly candles (not shown) is trending 
in overbought, and the 10 month stochastic on the monthly candles 
is now overbought but not yet rolling over.

Looking at the shorter cycles, we see that a downphase is now due 
following a bearish divergence on the Macd, within the broader 
context of a bearish ascending wedge.  The wedge projects to 
1740.  Bulls are watching an upwardly trending market that is 
increasingly overbought.  It is not, in my opinion, a buy at 
current levels, for the simple reason that north goes up forever, 
and on ever timeframe I follow, the market is overbought.  It can 
continue higher, just as it has, but the odds do not favor it.  A 
pullback is due, and the bounce from that pullback will tell us 
volumes about whether this is a new bull market, which I doubt, 
or another bear market rally.

30 minute 20 day chart of the COMPX


Daily INDU candles


The INDU found support right at the rising daily trendline, and 
the 10 day stochastic is headed back up after the shallowest of 
pullbacks, looking for a new up-phase from here.  On the 30 
minute candles below, the INDU is struggling with resistance at 
9600, finding support from a higher low at 9500, and has next 
resistance within its bear wedge at 9620.

Note that the Macd on the 30 minute chart is topping from a much 
lower high, which is not bullish.  However, until the lower 
trendline at 9500 gets taken out, we can expect the price to 
continue working its way higher.  Extreme moves have a way of 
outlasting our expectations, and with the breadth and volatility 
levels seen today, I don't consider my choice of adjectives 

20 day 30 minute chart of the INDU


Daily OEX candles


The OEX appears to have found a home above 512, and as with the 
INDU, the OEX' oscillators are looking for the next leg up from 
current levels.  The bearish wedge on the 30 minute candles below 
is running out of racetrack, but given the gentleness of the 
rising slop and the room to run above the lower support line, the 
move could last longer than we hope before breaking out.

Note that these are bearish formations within an overbought, 
trending market.  We've seen more than our fair share of upside 
bear wedge failures through this rally, and nothing rules out the 
possibility of its occurring here.  However, bulls need to 
evaluate the likelihood of such a move.  The odds do not favor 
it, but that doesn't mean that it cannot happen.   Bears need 
caution as much as bulls need stops.

20 day 30 minute chart of the OEX


Daily QQQ candles


We have the same setup on the Qubes, but with the bearish Macd 
divergence more pronounced on the 30 minute chart.

20 day 30 minute chart of the QQQ

The markets are continuing with their ongoing trend.  As we 
learned in the spring of 2000, one rides a trend until it ends.  
That said, investing on the basis of the "Greater Fool Theory" is 
tricky business, and must be done with full knowledge of one's 
goals and risks.  I consider the risk to the downside to far 
exceed the upside potential of current levels.  If the Dow clears 
9600, there's a greeting party of stranded longs at 9800-10200, a 
range about which I recall Jim writing in fall 2001.  On the 
other hand, those toppy oscillators have run up from levels far 
below those currently trading.  Whether you agree with my bias or 
not, the trading strategy remains the same.  One last time:  
stops for bulls, caution (and tight stops) for bears. 


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The Option Investor Newsletter                   Monday 09-08-2003
Copyright 2003, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.

In Section Two:

Stop Loss Updates: GILD, PGR, RYL, SPW
Dropped Calls: None
Dropped Puts: XL
Play of the Day: Call - RYL 
Watch List: Big Board Stocks To Watch

Updated on the site tonight:
Market Posture: Bulls Claim Fourth September Win

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GILD - call
Adjust from $62.99 up to $64.75

PGR - call
Adjust from $70.00 up to $71.25

RYL - call
Adjust from $66.75 up to $67.25

SPW - call
Adjust from $48.00 up to $48.50




XL Capital Ltd. - XL - close: 77.00 change: +0.95 stop: 77.10

We noted over the weekend that it was make or break time for our 
XL play, as it had wedged itself right up against its descending 
trendline in preparation for either a breakout or rollover.  Well, 
breakout was the choice, as the stock surged over $77 at the open 
and after some consolidation throughout midday, closed right at 
that level.  After briefly violating our $77.10 stop early in the 
day, XL did manage to close below that level, but with the strong 
buying volume and close above the 20-dma, we're compelled to pull 
the plug tonight.  For traders that weren't stopped out on today's 
strength, we're recommending an exit from current positions on any 
intraday weakness tomorrow.

Picked on August 21st at   $75.92
Change since picked:        -1.08
Earnings Date            10/30/03 (unconfirmed)
Average Daily Volume =      821 K

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The Ryland Group - RYL - cls: 72.20 chng: +1.55 stop: 67.25*new*

Company Description:
The Ryland Group is a homebuilder and mortgage-finance company 
that has built more than 175,000 homes.  Additionally, the Ryland 
Mortgage Company (RMC) has provided mortgage financing and related 
services for more than 155,000 homebuyers. Currently, Ryland homes 
are available in more than 260 communities in 21 markets across 
the United States.

Why we like it:
Ask and you shall receive!  When we initiated coverage of RYL on 
Thursday, we voiced concerns about chasing the stock higher due to 
the fact that price was looking a bit extended in the near term, 
pressing well above the upper Bollinger band.  That caution was 
well placed, as the profit taking appeared first thing on Friday 
and RYL pulled back right along with the pullback in the overall 
Home Construction sector ($DJUSHB).  This is exactly what we 
wanted to see, as a dip back near the $69-70 area should provide 
an excellent entry into the play.  The 50-dma ($68.79) and 10-dma 
($68.05) should provide solid support for a bounce, backed up by 
the top of the bullish triangle pattern (near $68) RYL broke out 
of on Wednesday.  Traders preferring to enter on strength now have 
a defined resistance level to monitor near $72.15.  A breakout 
over that level can be used for new momentum entries.  Note that 
our stop remains at $66.75 for now, as that is just below the 20-
dma ($67.01), which should provide very strong support after 
holding up price for the last two weeks of August.

Why This is our Play of the Day
Bouncing back from Friday's setback, shares of RYL recovered all 
of the prior day's losses, plus a couple pennies, as the broad 
market and the Home Construction sector ($DJUSHB) look destined 
for tests of their June highs.  RYL certainly outperformed the 
$DJUSHB on Monday, as it crept just over Thursday's closing level, 
while the $DJUSHB fell far short of that.  We'll need to see the 
$DJUSHB over $465 to confirm sector strength, but for now we'll 
proceed with the premise that $480 is a viable goal, with the goal 
for our RYL play being $77-78.  Last week's dip and today's 
subsequent rebound from the $70.50 area was the entry for those 
looking for a pullback and it appears the next opportunity for 
entry will come on a breakout over $72.50 (just above today's 
intraday high).  We're raising our stop just slightly to $67.25, 
keeping it under the 20-dma (actually $67.25 tonight, but it will 
be above there tomorrow).  Until RYL stages a strong breakout 
above current resistance, it seems prudent to keep our stop below 
the horizontal top of the recently broken bullish triangle 
formation at $68.

Suggested Options:
Shorter Term: The September 70 Call will offer short-term traders 
the best return on an immediate move, as it is currently in the 
money.  Note that September contracts expire in two weeks.

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-70 RYL-IN OI= 858 at $3.40 SL=1.75
BUY CALL SEP-75 RYL-IO OI= 279 at $0.90 SL=0.45
BUY CALL OCT-70 RYL-JN OI= 990 at $5.10 SL=3.00
BUY CALL OCT-75 RYL-JO OI=1487 at $2.60 SL=1.25

Annotated Chart of RYL:


Picked on September 4th at  $72.18
Change since picked:         -1.53
Earnings Date             10/21/03 (unconfirmed)
Average Daily Volume =       998 K


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Watch List

Big Board Stocks To Watch

Merck & Co - MRK - close: 52.60 change: +1.60

WHAT TO WATCH: Patient traders willing to endure the ups and 
downs prone to shares of MRK might want to take a closer look.  
The DRG drug index has drastically under performed the broader 
markets since mid-June and MRK, a component, is a prime example.  
Now shares are bouncing off support near the $50 level giving 
investors a relatively low risk entry and easy stop loss 
placement.  The recent article in Barron's over the weekend 
highlights the low P/E's and high dividend yields for stocks like 
MRK.  This will only help attract buyers when profit taking 
eventually hits the tech sector and traders start looking for 
places to place their money.



Genentech Inc - DNA - close: 83.52 change: +2.77

WHAT TO WATCH: The big gains in the BTK biotech index have helped 
DNA break to new highs and a new triple top breakout on its 
point-and-figure chart.  Aggressive bulls could initiate new 
positions at current levels but keep in mind the BTK is now 
looking a little extended and in need of some consolidation.  
Patient traders might get another entry for DNA near $81.



Cigna Corp - CI - close: 48.75 change: -0.30 

WHAT TO WATCH: Despite the loss today in the face of broad market 
gains, shares of CI are a tempting watch list candidate.  The 
point-and-figure chart shows a clear bullish buy signal with 
overhead resistance up near $55.  Meanwhile the daily chart 
suggest traders should wait for a breakout above the $50 level or 
attempt to gauge a bounce off the 10-dma.



Deere Co - DE - close: 56.34 change: +0.76

WHAT TO WATCH: Deere was a big winner in August as shares rose 
strongly after the company beat estimates by 18 cents.  Volume 
poured into the stock and drove the share price to levels not 
seen since mid-1998.  The pull back has been rather mild 
suggesting there are not many willing sellers.  DE has found new 
short-term support at $55 and is attempting a bounce.  Aggressive 
traders can target bounces above $55 while more conservative 
traders may want to wait for a move back above $57 or $58.



Bulls Claim Fourth September Win

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would welcome you as a permanent subscriber.

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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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