Option Investor

Daily Newsletter, Sunday, 12/28/2003

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The Option Investor Newsletter                   Sunday 12-28-2003
Copyright 2003, All rights reserved.                        1 of 3
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In Section One:

Wrap:              Some Have a Beef with Milk
Futures Market:    Rip Snortin' Flat
Index Trader Wrap: Lights On But Nobody Home
Ask the Analyst:   Rebalancing makes sense
Coming Events: Earnings, Splits, Economic Events

! Holiday Schedule Notice

There will only be three sections to the OI newsletter this weekend.
OptionInvestor will resume coverage of its plays, sentiment,
posture, and additional columns on Tuesday, December 30th, 2003.

Thank you and happy holidays!

Market Wrap

Some Have a Beef with Milk
by Keene Little

In what is typically one of the lightest, if not the lightest,
trading days of the year, today matched expectations for a quiet,
go-nowhere market. The Mad Bulls, not to be confused with the Mad
Cows, are still refusing to let this market drop. Of course they
had very little strength today to push it much higher either. But
for the week, the DOW closed up almost 65 points and the SPX up a
little more than 7 points (that's equivalent to 70 points on the
DOW). A look at the more speculative indexes, the NDX closed up
almost 18 points for the week while the Russell 2000 closed up
about 8 points. So there was no rotation this week--looks like
basket buying where the fund managers essentially buy a basket of
stocks instead of selectively choosing stocks. The recent
rotation out of the speculative stocks into the blue chips was
put on hold this week. And all of these gains were essentially in
the first two days of the week as the trading on Wednesday and
Friday essentially negated each other.

The case of Mad Cow disease has been confirmed by a British lab
so now begins to long and costly task of figuring out whether or
not it's an isolated incident or not. In the meantime, cattle
futures are still limit down and expected to be that way into the
new year (the price is normally limited to a maximum price change
of 1.5 cents per day, but that was increased to 3.0 cents today
and the CME said they will likely let the price drop 5.0 cents on
Monday). There is expected to be a very large negative impact to
the beef industry, and it will ripple through our economy.

But because of the reduction in the cost of beef, there was an
analyst upgrade for McDonalds' stock based on the assumption
McDonalds will have lower costs. I question this as it seems
lower sales as consumers shy away from eating beef will have a
larger negative impact on McDonalds. Could it be the analyst was
trying to protect his company's portfolio which had a heavy
exposure to MCD? Nah, that would mean analysts are disingenuous
and that they might have ulterior motives, and I certainly
wouldn't want to be accused of mistrusting analysts' true
intentions since I know they have our best interests at heart (as
my tongue is pressed firmly against my cheek). In all seriousness
though, the analyst may be right. Through the Mad Cow scare in
the U.K., Britains continued to eat large quantities of beef and
so far I haven't heard of any huge consumer concerns, yet.

The story out of Italy today regarding Parmalat, the very large
dairy company, says the U.S. does not have a lock on corporate
malfeasance. The company filed bankruptcy as it moves to protect
itself after it was disclosed that they systematically falsified
their accounting. It also raises a significant question, as it
did here after the Enron debacle, about the international
auditing firm, Grant Thornton, who has been doing Parmalat's
books since 1999. European bourses were closed today so there was
no way to gauge how European stocks will react to this news.

There were no economic reports today but in other news China
lifted its tarrifs on steel imports. U.S. Steel was up on the
news, as was Alcoa  was the earthquake in Iran. Initial
projections were for thousands, if not 10,000, deaths in the city
of Bam in central Iran. There was no reaction in the market
though. Crude oil and gold did not trade today and the bond
market closed up for the day (yields down).

In other sectors, the gold and gold/silver indexes topped the
list of gainers with a 3.1% and 2.6% gain, respectively. All
other gainers were by less than 1% and it's hard to discern
anything from that. There were very few losers today, the largest
being the biotech index but that was only -0.2%. Interestingly
the transportation index was down today while the airline index
was up, but all in all, it was a pretty quiet day.

The SPX and NDX pushed to a new high for the week today (barely),
but again these highs were not confirmed by the DOW. It seems the
DOW and the NDX are swapping positions lately as to who is
leading to the upside. The SPX can't decide who to follow.
However, because the SPX seems to be the most "consistent", I'm
using its daily chart below to help me determine what the market
is doing. The action in the market the past two half-day sessions
has been difficult to decipher as to where the market might be
headed. On Tuesday I had mentioned that I thought the market
might have peaked, but that the SPX and NDX would look better
with one more minor new high. Today we got the one more minor new
high in both of those while the DOW hung back and waited. So, my
expectations for the market have now been satisfied. Does this
mean we're heading down next week? Unfortunately, the price
pattern is not as clear as I would like in order to be able to
make a more confident call about direction on Monday. However,
based on what I see so far, I'm leaning to the downside.

The charts below show some details of what I'm seeing. We've been
in these ascending wedges which are typically bearish in their
outcome. As the ascending wedge is topping, you look for bearish
divergences between new price highs and the corresponding
oscillator highs. As of today's highs we have that. The reason
it's difficult to be confident in this analysis though is because
of the light volume. I'm not sure how much that might skew the
results of these oscillators.

I would like to have seen a clean Elliott Wave pattern (5 waves
up) to today's high, followed by a clean 5 waves down. We had
neither and I therefore have to guess at the current EW count. I
don't like to guess at the count and then make predictions based
on that. So while I'm comfortable saying the market has seen its
highs, it wouldn't surprise me in the least to still see a poke
higher. Considering this Monday is typically bullish, which will
be especially true if we have no evil-doer activities, I have a
hard time predicting we'll see a down day on Monday. So, whenever
I'm in a quandary as to where we are, I have found it's much
better to remain flat and wait for clarity in the price pattern.
Much better to be sorry I missed a trade than to be sorry I'm in
a trade.

Let's look at the major indexes, starting with the big picture
and working in closer:

The SPX 500 (SPX) weekly chart:

I showed the DOW weekly chart on Tuesday and mentioned that the
fibonacci target, based on an A-B-C correction to the move down
from January 2000, would be 10,403 where wave-C = 162% of wave-A,
a very common fibonacci relationship in A-B-C corrections. The
DOW has so far reached almost 10,376 so 27 points shy of this
target (less than 0.3% off). The SPX has overshot its 1089 target
by 9 points as of today's high (0.8%). This close to these
targets after a 15-month rally is pretty amazing. So have we
topped here? I can't say for sure, but the evidence for that is
building quickly. Note the ascending wedge we've been in since
the March low.
The SPX daily chart:

The SPX continues to find resistance around the 1096.51 area. If
it can break free of this, there is fibonacci resistance between
here and 1101. If it drops below the upper line of the ascending
wedge, there is a good chance the rally is over--the coffin lid
gets closed. Breaking below 1068 and we start nailing the coffin
closed, and a break below 1031 padlocks the coffin closed. The EW
term for an ascending wedge is an ending diagonal--it is an
ending pattern to the overall move. So we've got an ending
diagonal on the weekly chart for wave-C of the A-B-C. Now we have
another ending diagonal for the final 5th wave of that wave-C.
Check out the 60-min chart to see what we have there as well.
The SPX 60-min chart:

The final push up from December 10th has formed another ending
diagonal. So we've got an ending diagonal on the 60-min chart
finishing up an ending diagonal on the daily chart which is
finishing up the ending diagonal on the weekly chart. These
nested ending diagonals are bearish to the nth degree but we're
still waiting for price to tell us it's over. After breaking
down, price will retrace to the beginning of an ending diagonal.
Therefore we should expect price to drop back to at least the
March 2003 low. As for this last ending diagonal, the upper line
of the ascending wedge on this 60-min chart held back price
today. For now we watch the lower line of this ending diagonal.

The DOW 60-min chart:

The uptrend line for the rally from December 10th held up the
decline in the DOW today. After a small throw-over on December
23rd from this ending diagonal it has fallen back inside. It
could make another rally high from here (10,403 is that long-term
fibonacci resistance target), but if it drops further below this
uptrend line, that will be a strong signal the rally is over. My
guess going into the weekend is that the DOW topped with that
throw-over on the 23rd. But this coming Monday is typically
bullish in this holiday period and therefore I'm on guard as to
any bearish thoughts.

The NDX 60-min chart:

The uptrend line from December 17th held up the decline today
while the high on December 3rd held the rally. Can you say
squeeeeeeze? I believe the battle of the lines will determine the
next move in this index, and the market, and therefore needs to
be watched closely. My guess, as shown by the blue arrow is that
the rally is complete, but will be watching action carefully
here. The bearish EW count on the NDX is predicated on price
staying below the December 3rd high, so if the NDX violates this,
but Nasdaq does not, I'm not sure what to make of that but I'll
cross that bridge if and when I come to it.

The price action from Tuesday through Friday is unfortunately too
muddy to make a confident call in what to expect early next week.
We are entering a typically bullish week or so, but the EW
picture tells me we either topped or are extremely close to
topping. Bullish bets would be risky. The longer we go sideways,
like we have the past two half-sessions, the greater the
likelihood we'll see a push to new highs. If that happens, we
might see inter-market divergences where not all the indexes push
to a new high. With the flip-flopping between the DOW and NDX,
I'm not sure who would make the next push higher although I
suspect the DOW would only because I think institutions are going
to try to get out of the more speculative stocks in anticipation
of a January correction. It's easier to get out of the smaller
stocks before a decline gets underway.

While still wary of a rally next week, I'm still cognizant of
what I mentioned Tuesday--with everyone expecting a rally, we may
not see it. The expected rally around Christmas has effectively
not happened. Between Wednesday and Friday, the market lost a
little bit of ground. Any new money coming into the market next
week, that causes some buying to happen, may just be the
opportunity institutions are looking for to sell into. It will be
a time to be very careful about your positions, long or short.

I don't see any economic reports coming out Monday or Tuesday so
we'll be on our own. We will probably continue to see light
volume until after New Year's, so be careful in your trading. In
these light volume days we see program trades kick in and move
the market out of nowhere. I've seen the market move quickly in
one direction so that an institution can sell or buy it at a
better price which quickly moves it in the other direction. Stops
can quickly be triggered and then price moves right back to where
it was.

Good luck in your trading next week. Be careful--we're close to a
top, if not already there, and I expect some volatile action, if
not Monday/Tuesday, then certainly after New Year's. Have a great
weekend and I'll see some of you in the Futures Monitor bright
and early Monday morning.

Keene Little

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Rip Snortin' Flat
Jonathan Levinson

The indices made a break for freedom Friday but failed, closing
mixed in shallow negative territory on very light volume.  With
commodity futures markets closed, we had little to go on.  Bonds
finished in positive territory, and gold futures did not trade
the precious metals indices closed higher.

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


Note regarding pivot matrix:  The support, pivot and resistance
levels above are derived from the high, low and closing price
levels by a simple mathematical formula.  They are not intended
to be predictive of market turning points or to serve as targets,
but rather represent the range retracement levels as generated by
the pivot algorithm.  Do not think of them as market "calls"
or predictions.  Like any technically-derived indicator or price
level, the pivot matrix values should be regarded as decision
points at which to evaluate current market conditions.  Visit us
in the Futures Monitor for our realtime views of the various
markets covered here.

10 minute chart of the US Dollar Index

The US Dollar Index appears to have been flat on Friday, but the
strength in the miners indicates further dollar weakness.

Daily chart of February gold

February gold did not trade on Friday, but the HUI added 7.16 to
close at 236.99 and XAU was higher by 2.56 at 106.77.

Daily chart of the ten year note yield

The ten year note yield (TNX) dropped 3.7 basis points to close
at 4.15%, extending Tuesday's punishment for bond bears further
as the daily cycle downphase extended.  Bollinger support lowered
to 4.091%, an insignificant drop from Tuesday's level.  The bond
continues to trade in toping territory, with yields in range for
a daily cycle bottom.

Daily NQ candles

The NQ finished bullish for the weak but went out at the low of
the day on Friday for an ugly gravestone doji print, dropping
2.50 at 1444.  The year high at 1461 was not tested, with an
intraday high at 1454.50. Volume was just 535M shares, a nothing
day.  The daily cycle upphase is still running, but the 30 minute
below gave a sell signal that should abort this upphase if it
plays out to the bottom of its range.

30 minute 20 day chart of the NQ

I've left trendlines off the chart because Prophet has yet to
clear the 1.5 day horizontal gap off the chart.  By my reckoning,
the uptrend is not yet over, but it's close, with the 30 minute
cycle rolling over from a lower oscillator high against the
higher price high.  Below 1437, it should be a quick trip to the
significant 1425-30 support level.  NQ continues to underperform,
and that weakness bodes ill for the broader equity markets.  Upside
resistance was clarified today, and extended from 1455-61.

Daily ES candles

The ES touched a new 52 week intraday high today at 1097 but
closed at 1093.50.  With 357M NYSE shares traded, today's .50
gain on a weak doji star is a great day to simply ignore.
Nothing happened today.  The oscillators are still very toppy,
waiting for any excuse to cycle lower.  Bearish or bullish, we
expect a correction, and hope that the impetus is merely
technical and not external or news-driven.

20 day 30 minute chart of the ES

As on the NQ, Prophetcharts makes our work more difficult today,
but it looks to me as if the uptrend is still intact.  Bearish
divergences and a tidy 30 minute cycle rollover have us watching
1092 support, followed by 1090, 1088 and 1085 to the downside.

Daily YM candles

GE kept grinding out new lows throughout the quiet session, but
YM still closed higher by 15 points at 10293.  Rising support is
being tested here, followed by 10220.  The oscillators are topped
out and due for a correction on the daily cycle.

20 day 30 minute chart of the YM

The YM distinguished itself again by holding its 30 minute cycle
upphase into the close.  Any weakness on Monday will kick off the
downphase, and the price is clearly tiring here, printing a
hunchback head and shoulders pattern.  A break below 10274 should
kick off the downside festivities.  10325 is the upside
resistance to watch, but I doubt if we'll see it tested anytime

Strength in metals, bonds and equities remains the theme, all
hinging on weakness in the dollar.  I expect that we're at a
significant turning point, but will wait to see the dollar bounce
before I let myself believe it.

Have a safe and happy holiday weekend, and we'll see you on Monday morning.


Lights On But Nobody Home
Jonathan Levinson

The SPX printed a new year high Friday above 1098, closing higher
by 1.85 at 1095.89, while the Dow closed higher by 19.48 at
10324.67 and the Nasdaq +3.91 at 1973.14.  Volume was at the non-
existent end of light, with 357M NYSE shares and 536M Nasdaq
shares traded.

The indices had a great week, considering the mad-cow outbreak,
terror threats, Parmalat bankruptcy and overall geopolitical
malaise.  The Dow added .5%, the SPX .7% and the Nasdaq 1.1%,
bringing their year-to-date gains to 23.8%, 24.6% and 47.7%

The volatility indices remained low, optimism remained high, and
the Dow and SPX alternated pushing toward new highs as the Nasdaq

Weekly COMPX candles

The COMPX closing print at 1973 is just below the now broken
rising wedge support line, the first closing break of that line
since the March lows.  This break should be the start of a
significant correction projecting back to the March lows, but
again, the weekly close was still higher.  The light volume makes
the weekly of dubious significance in any event, and a break back
above 1980-85 should repair the damage.   However, with the
oscillators on sell signals following a long, drawn out bearish
divergence, any further weakness will be preliminary confirmation
that we have seen the top of the rally.

Weekly INDU candles

The Dow has been a veritable wrench in the technical works, and
the positive close this week left a doji bottom at the now-
vanquished upper wedge resistance line.  This level is now
support at 10200, and the weekly cycle oscillators, still on
weakening bearish divergences, actually ticked up within
overbought territory.  Any further strength will set them to
trending bullishly.  For months, these oscillators have been
telegraphing a bearish end to this rising bear wedge.  They still
are, but the bulls are close to turning it around.

Daily OEX candles

Turning to our primary trading vehicles, the OEX added .77 on
Friday to close at 542.78.  The rising channel resistance line
was not touched on this latest upleg, and the daily closing
print, a gravestone doji, suggests that it won't be.  The daily
cycle oscillators are configured as bearishly as one could want
without actually printing sell signals and any weakness on
Monday, however mild, will be sufficient to kick off the long
awaited correction.  With the weekly cycles very extended to the
upside, I expect the pullback here to have solid downside
amplitude.  First support is at 535, but first significant price
confluence is way below at 529, followed by 525.

20 day 30 minute chart of the OEX

Note that the rollover depicted on the 30 minute chart is not as
pronounced as it appears, because Prophetcharts has left in the
Wednesday gap.  The uptrend is still failing, but it's not as
extended as it looks.  Nevertheless, the 30 minute cycle
oscillators are printing a strong bearish divergence, and suggest
that the next move will be lower.  A break below 541 should get
the ball rolling.

Daily QQQ candles

The daily QQQ has become a veritable dog's breakfast, appearing
to be resolving itself within a bullish rising triangle.
However, the bearish oscillator divergences don't mesh with that
interpretation, while the pattern of rising lows does.  That
said, this week has left a series of doji tops at 36, which is
looking like an electric fence.  A sustained break above that
level targets 36.20 as the bears' last stand, above which the
bulls should break into a victory sprint.  The daily cycle
oscillators are weakening, however, and any further weakness
should kick off the next daily cycle downphase.

20 day 30 minute chart of the QQQ

QQQ broke below rising wedge support, even allowing for the
horizontal chart gap from Wednesday.  The 30 minute cycle
oscillator gave us a bearish divergence here as well, but the
downphase is well advanced, leading me to wonder if there isn't
one last 30 minute upphase left in the weakening daily cycle
upphase.    The resistance levels discussed above are the numbers
to watch, and the bearish interpretation requires that 36.20 not
be exceeded.

Best holiday wishes, and we'll see you on Monday.

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Rebalancing makes sense

I keep hearing expectations for a pullback in the first quarter
of 2004, but I've been hearing about a pullback for several
months, where the pullback just hasn't come.  Is there a reason,
other than "stocks have move up a lot this year," for me to
believe that stocks are due for a pullback in early 2004?

Hey!  I'm like you.  I've heard stocks were going to pull back,
and I first heard of this in April after the major indices
started seeing a nice rebound from their spring lows!

I (Jeff Bailey) do think we could see a nice pullback on some
profit taking in early 2004, as for the first time in 3 years,
the major equity indices are showing gains, which may see some
profit taking take place for equities.

To try and show what might take place, I'm going to show our
"Beetles Balanced Benchmark" portfolio we set up at the end of
last year.  While it makes more sense for investors to rebalance
their portfolios on a quarterly basis, there is often-times some
end of year rebalancing that takes place by mutual funds, as fund
managers may look to lock in some gains after the first of the
year, which will create a capital gain consequence for their
shareholders, for mutual fund shares held in a non-tax deferred

This weekend's column isn't necessarily written for the purposes
of predicted a market pullback, but more importantly, is written
to show investors how simple it is to rebalance you portfolio,
where the act of rebalancing forces a longer-term investor to buy
low and sell high.

Here's the "Beetle's Balance Benchmark" portfolio we put together
at the end of last year, where we took a hypothetical $10,000 and
divided that $10,000 in $1,000 increments across 10 different
asset classes.

Beetle's Balanced Benchmark - 12/31/02 to 12/26/03 Close

With no real strategy involved, we set up a very basis
hypothetical portfolio at the end of last year, where we could
follow various asset classes throughout the year.  With three
trading days left in 2003, the "Beetle's Balanced Benchmark"
currently shows a 19.3% gain, which does NOT include any interest
payments received from the bond portion of the portfolio, or
dividends received from the equity (stock) portion of the

One of the most difficult tasks an investor faces is "when do I
take profits?"

The simple discipline of rebalancing a portfolio does this for an
investor and does not take into consideration "market timing" or
trying to predict bottoms and tops.

As we look at the above portfolio, and the P/L % column, which is
calculated off of the December 21, 2002 closing values of the
various securities, which I felt represented various asset
classed, we see that the Pacholder High Yield Fund (PHF), which
is a closed-end "junk bond fund" was the best performer among our
fixed income securities, while the U.S. Dollar Index (dx00y)
showed a 13.98% decline, as the dollar fell against a weighted
basked of 6 major foreign currencies.  While we might still have
the original $999.94 cents in our account, those dollars may have
lost roughly 13.98% of their purchasing power for foreign goods
we might purchase in a year's time.

But look at what happened in the equity portion of the account.
Holy Cow what a year!  While gold equities aren't necessarily a
true hedge for a falling dollar, look at that 63.31% gain for the
AMEX Gold Bugs Index ($HUI.X).  While we might not buy the $HUI.X
has our "hedge," Newmont Mining (NYSE:NEM) $47.69 has gained
64.27% this year, when benchmarked to its 12/31/02 close of
$29.03.  Many traders and investors think of Newmont Mining as a
"sector bellwether" for gold stocks.

While the bulk of an investor's investment capital may be in a
tax deferred account, there is still a lot of an investor's
capital in taxable accounts.

It would be my thinking, that based on an investor's tax
situation and advice from their accountant, some investors may be
looking to lock in some capital gains to offset losses taken
earlier this year, but more likely, after such bullish gains are
found this year, there may be some investors waiting until after
December 31, to take profits, where capital gains taxes may not
have to be paid until April 15, 2005.

One thing we might look for, is if we were to think of a
"Balanced Fund" or "Hybrid Fund" as they are known in the mutual
fund world, is that the fund manager of that fund, not wanting to
kick out an overly large capital gains tax to his/her mutual fund
clients this late in the year, might be holding a balanced set of
assets similar to the "Beetle's Balanced Benchmark" portfolio.

If the reallocation of assets was performed in early 2004, here's
what a simple rebalancing would have the portfolio looking like.

You will note that if not for some rounding due to fractional
shares, the portfolio value would still be roughly 11,928.37,
where the portfolio is once again equally weighted against the 10
various asset classes, but the #Shares of each asset class is
fine tuned (up or down) as the portfolio is bought back into

Beetle's Balanced Benchmark - 12/26/03 Rebalancing

I should first note that the "Basis" was derived from Friday's
close (12/26/03) and does not reflect what the true cost basis
basis would be for each asset class, but by bringing the "Cost"
column of each asset class back to an equal amount, it has forced
the portfolio, or asset manager to sell some of the outperforming
asset classes (take profits), and redistribute those profits to
some of the under performing asset classes (buy low, sell high).

At a MINIMUM this type of activity should be done once a year by
investors in their longer-term portfolios.

As you can probably see, this disciplined type of reallocation of
assets is NOT market timing, but is a very systematic way where
you a portfolio manager looks to bring the RISK of various asset
classes back in line, with YOUR longer-term goals and objectives.

The above portfolio is not to be thought of as "the classic"
portfolio for every age of investor, as a younger investor with a
longer time horizon to retirement may well take on greater risk
early in their investment years than those that are nearing

However, the above reallocation of assets may give some thought
as to various mutual fund managers reallocation their funds in
similar fashion, where profits are taken in certain asset classes
and reallocated in the first quarter of 2004.

Jeff Bailey

COMING EVENTS for the week of December 29, 2003

Earnings Calendar

Symbol  Co               Date           Comment      EPS Est

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


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


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


------------------------- THUSDAY -----------------------------


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


Upcoming Stock Splits In The Next Two Weeks...

Symbol  Co Name              Ratio    Payable     Executable

NEOG    Neogen Corporation        5:4      Dec  31st   Jan   2nd
KSWS    K-Swiss Inc               2:1      Dec  31st   Jan   2nd
ACET    Aceto Corporation         3:2      Jan   2nd   Jan   5th
AAP     Advance Auto Parts Inc    3:2      Jan   2nd   Jan   5th
JCI     Johnson Controls, Inc     2:1      Jan   2nd   Jan   5th
CLBK    Commercial Bankshares Inc 2:1      Jan   2nd   Jan   5th

Economic Reports This Week

There isn't much on the economic calendar between Christmas
and New Year's.  Those economists still on the job will be
watching Tuesday's Chicago PMI, Existing Home sales and the
Consumer confidence report.


Monday, 12/29/03
Help-Wanted Index (DM)   Nov  Forecast:   N/A  Previous:     37

Tuesday, 12/30/03
Chicago PMI (DM)         Dec  Forecast:   N/A  Previous:   64.1
Consumer Confidence (DM) Dec  Forecast:   N/A  Previous:   91.7
Existing Home Sales (DM) Nov  Forecast:   N/A  Previous:  6.35M

Wednesday, 12/31/03
Initial Claims (BB)    12/27  Forecast:   N/A  Previous:    N/A

Thursday, 01/01/03
- Markets Closed for New Year's Day -

Friday, 01/02/03

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


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The Option Investor Newsletter                   Sunday 12-28-2003
Sunday                                                      2 of 3

In Section Four:

Leaps:          Holding Pattern
Traders Corner: I'm Not My Brother (In-Law's) Keeper, Fortunately!


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Holding Pattern
By Mark Phillips

It may sound like a broken record, but the price action this week
is what we ought to expect for the duration of the year -- slight
gains or slight losses, but with no significant change to the
overall bullish trend.  Mutual fund and hedge fund managers have
had a very good year (finally) and they don't want to allow
anything to screw that up.  Bonuses are riding on that performance.

It is my opinion that we've seen the highs for the year for all the
major indices - DOW, S&Ps and NASDAQ.  We aren't likely to see much
strength or weakness between now and January 1st.  However, if I'm
wrong and we see a rally through the 2002 highs, then I'll have to
do some serious re-evaluation after the first of the year.

The overall market picture remains much as it has for the past
several months.  Price action looks over-extended to the upside,
with weekly Stochastics still buried in overbought, the VIX at
16.66 isn't far off of its recent multi-year lows and all of the
bullish percent readings (with the exception of the NDX) are in
some bullish condition, either bull correction or bull confirmed.
The NDX is the one lone pocket of weakness in the BP view, as it is
solidly in Bear Confirmed and does appear ready to break lower.
But for the most part, we're still mired in a market that refuses
to sell off - even for a healthy bout of much-needed profit taking
-- despite the numerous technical reasons why it should.

The uptrends in price on all the major indices are still clearly
intact and we haven't yet seen any real internal weakening in the
market.  No matter how I look at it, this has the feel of a market
that is being artificially propped up into the end of the year, to
keep the pros bonuses intact.  The real test will come in early to
mid-January, after the fresh retirement money has been allocated
and investors and managers alike will have to decide whether to
harvest some significant profits after what has been a very
positive 2003.  To all of you that benefited from the persistent
rise of the past 10 months, be sure to send a letter of thanks to
Greenspan and Bernanke for keeping the liquidity train running.  It
will eventually be in as dire a need of help as the Amtrak, but for
right now it is swinging like the New Years Eve party on the train
at the end of the movie Trading Places.  Is there any way we can
put Greenspan in the gorilla suit to share the cage with a real
lovestruck gorilla?  Now I'd actually pay good money for admission
to that event!

As I've noted in recent weeks, I've increased my reading regimen
significantly over the past couple months and what I've found is
that there are some credible arguments on both sides of the aisle.
The bulls make the case that with low inflation, low interest rates
and an improving economic picture, the major indices are in
position to make a continued strong upward push.  The bears make a
good contrary argument, beginning with the inflation issue.  The
primary question is "how can inflation be benign if food, energy
and healthcare costs are running higher at breakneck speed?  The
answer is simple -- the government doesn't look at those pieces of
data in determining the degree of inflation that exists.  Well now,
isn't that reassuring.  Our real costs for the necessities of life
may be going up, but that doesn't really affect the quality of life
of the average American.  Riiiiiiigggght!

There's an uglier side to this inflation picture though and it is
hidden within the currency issue.  The definition of inflation is
that it takes more money to buy a given good or service.  That's
pretty simple, wouldn't you agree?  So if the dollar index (DX00Y)
has dropped 27% since early 2002 and nearly 12% just since August,
wouldn't it make perfect sense that the price of good and services
denominated in dollars should have seen similarly significant
rises?  But that hasn't been the case, as many prices have
declined, while the majority of them have been essentially flat.

Could it be that the dreaded Deflation monster really is alive and
well and the Fed has managed to successfully hide it through
inflation of the money supply?  As long as they can stimulate
inflation through the increase in the money supply, perhaps they
can mask or overwhelm any deflationary effects until such time as
true economic growth kicks in -- or so they hope.  I don't have any
real answers on that front, but I'm an analytical guy by nature.  I
see the reality of rising commodity and precious metals prices in
concert with the falling dollar and think inflation.  Then I see
the periodic government reports that tell me job growth is
improving, the economy is improving and inflation is mild to
nonexistent.  I've learned through experience that whenever the
facts I can observe disagree with official government
pronouncements, I should go with the observable facts as they are
far more accurate and reliable.

That said, the shell game may be sustainable right through the 2004
presidential election and I feel there will be a lot of effort
exerted in that direction over the next 10 months.  If I'm correct
in that belief, we can look forward to a continued strong element
of artificiality throughout much of the next year.  I think by mid-
January we should see some normalcy come back in, but I'm not
expecting a major downdraft unless we have a major negative
exogenous event to trigger it.  It could come in the form of a
major terrorist event, a sharp decline in the dollar, a trade war,
a real as-yet-unanticipated military conflict, a real energy crisis
or any number of other scenarios that my imagination is incapable
of conjuring up.  But absent such an event, I would look for
reasonably normal ebbs and flows within the market, keeping the
illusion of a new bull market alive until the election.

There's no doubt in my mind that a major correction in the overall
market is coming because of the extreme imbalances that still
exist, but whether it is coming next week, next month, or a year
from now is impossible to say.  My market view calls for new lows
across all the major indices before this secular bear market has
run its course to completion.  The drop from the highs in 2000 to
the lows in October 2002 was simply the first of three downward
phases and the next one will be the most protracted and the most
painful in terms of size.  Let me restate that.  The next downward
leg of the bear market will be larger than that experienced from
2000-2002.  But since it isn't likely to kick off anytime in the
next month or possibly not until 2005, I think we have to keep our
focus on what the charts are telling us in the here and now.  So
far, there is nothing there that tells us of an imminent plunge, so
we'll continue to nibble at pullbacks in strong stocks, looking for
bullish plays.  At the same time, we'll attempt bearish plays on
stocks/indices that look overextended.

As I've mentioned in recent weeks, the remainder of this year is
effectively a throwaway in terms of trading.  Volume should
continue to be light, as many of the pros have already punched the
time clock for 2003.  The next catalyst will be the fund flows in
early January and watching to see if the institutions dump into
that surge in liquidity or if we have another upward leg in store.
I think the key to which way things go will lie in the monthly
chart of the SPX that I've been showing occasionally in recent
months.  A breakout that negates the bearish divergence and up we
go.  If the monthly Stochastics finally roll over and give a sell
signal before we see SPX=1175 and the bears get the nod.

There are no new plays this week (either Watch List or Portfolio),
as I'm looking to finish things up early and spend some time with
all the extended family that is currently in town.  Here are the
updates to our current plays.


WMT - Still looking weak, shares of WMT began to tip over just
below the 20-dma again last week and with daily Stochs dipping over
again, I'm expecting WMT to finally make a thrust down to the $50
level.  Each trader must decide how to manage any open trades, but
my recommendation will be to exit if/when the $50 level is touched.
From a price action standpoint, WMT has been a nice little play,
moving roughly $5 in our favor from the point of entry.  At the
same time, the options have performed very poorly.  I looked at
volatility (both historical and implied) this week and both have
risen since inception of the play.  I'm at a loss to explain how
the options have failed to keep pace with the price action in the
underlying stock.  By all rights, the gain on the play right now
should be on the order of $3, rather than the measly fractional
gains shown.  Something very fishy appears to have been at play
when we initiated the play, so hopefully those of you that played
along, entered at a different point in time and got a better fill.
Our primary focus at this point is to prevent the play from going
strongly against us and the $54 stop should do that job quite
nicely.  The incomprehensible manner in which the options have
moved has me looking to aggressively exit on a drop just to the top
of our target zone.

SBUX - There just isn't much to report on SBUX.  The stock is
holding up well, but so far has been unable to make any significant
upward progress for the past month.  Price continues to hold above
the 50-dma and then there is strong support down at the $30 level,
also the site of the 100-dma and the midline of the long-term
rising channel.  Any pullback and rebound from above $30 can be
used for new entries into the play.

QQQ - Pushing right back up to resistance at $36, the QQQ is
proving the validity of my reticence in entering the play on a
breakdown move.  After another bounce from that ascending trendline
(connecting the lows from 9/30 and 11/21), it is now possible to
see that the pattern may be more of a bullish wedge, with a
horizontal top just over $36.  With that possible formation, we'd
know we're wrong in our bearish position with a break above $36.25.
So conservative traders may want to use a tighter stop (say $36.50)
than our official $38 stop.  My perspective is still somewhat
colored by the fact that the NDX Bullish Percent is bear confirmed,
pointing to down as the path of least resistance.  Before we can
say this play is working in our favor, QQQ will need to break and
close below the 100-dma, currently at $34.11.

DJX - Anticipating the imminent arrival of the jolly old fat man,
bulls pushed the DOW to yet another new 52-week high on Wednesday
at 103.75, before falling back near the $103 level at the close.
Clearly, I pulled the trigger on this play at far too low a level.
Since clearing the $100 level, the DJX has had a strong nearly 400
point rally and Wednesday's pullback from the highs is the first
sign of acknowledgement by market participants of the very
overbought condition.  I'm still sticking by my guns, expecting
that we should head lower from here, despite the bullish historical
tendencies during this time of the year.  If our position can
survive its stop through the first week of January, then we should
be able to enjoy the normal January drop.  Maintain stops at $104
and if that level is exceeded, we'll look for another entry at a
higher level.

Watch List:

SMH - The Semiconductor sector has really given up its leadership
role in recent weeks, but we've got to give the bulls the
appropriate respect after they managed to successfully defend the
$475 level as support.  Next up is the $500 level, which has been
acting as a price magnet for several weeks now.  On the SMH, that
equates to the $41 level, where prices stalled out on Wednesday.
Fresh from taking over-eager entries on both the QQQ and DJX plays,
I'm going to maintain my discipline and keep our entry target at
$42-43.  Remember to wait for the rally attempt to fail before

NEM - I think it is fair to say that not much of merit happened in
the gold market this past week.  While the price of gold did inch
higher to a new contract closing high of $412.80 (basis the
February futures contract) and the dollar index (DX00Y) edged to a
new multi-year low just above 87.50, the action in the gold stocks
remained muted and well below the highs posted at the beginning of
the month.  This is good news for us, as NEM is shedding some of
the excessive gains accrued in anticipation of higher gold prices.
NEM seems to be stabilizing just above the $46 level, with support
coming in from the 50-dma, now just under $45.  So, do we raise the
entry target and get in near current levels, risking a potential
breakdown to our initial target at $40?  Or do we stick with our
guns and risk missing the play...AGAIN?  My personal preference is
to do both, entering a half position near the 50-dma and then look
to round out to a full position on a sharper drop back near our
preferred entry target at $40.

QCOM - Are we ever going to get a break?  Dancing just out of range
of entry for 6 weeks now, QCOM once again looks like it is going to
run away without us.  Short-term momentum traders can play the
near-term strength, but those with a longer-term focus need to be
looking for the viable pullback entry.  In QCOM's case, that would
be a pullback and rebound from the bottom of the rising channel,
now at $46.60.  The problem is that a trade at $48 would create a
PnF Sell signal now.  So we're confronted by a situation where the
stock is too extended to buy here, but a pullback to a solid
support level would generate a bearish signal on another view.  I
think the most prudent course of action is to place QCOM on hold.
The stock ran away from us and needs to pull back and build a new
base before we can consider entering the play.

EK - I actually like the action in shares of EK from this past
week, as the stock pushed up to the $25 level near the 100-dma,
confirming the bull flag pattern we've been observing over the past
several weeks.  Look for a breakout over $25.25 to set the stage
for a move to the top of the gap near $27, at which point we might
actually get an opportunity to play.  We'll only play on a failed
rally through that level and with volume getting very weak, we
aren't likely to see our entry setup until sometime in early
January, at the earliest.

HD - It appears we have plenty of time to wait with our play on HD,
as the stock seems to have gone to sleep between the 50-dma and
100-dma.  We don't even want to consider new entries in the middle
of the range of the past several months.  A failed rally attempt
near the top of that range ($38) and the top of the long-term
descending channel is the only way to play.  We've got this one in
the cue and now it is just a matter of waiting for price action to
set up in our favor.

SNDK - The market offered up a bit of volatility last week, but the
net result wasn't very impressive.  SNDK is still sitting near the
$60 level, trying to build some support near that 38% retracement
of the rally from the Spring lows.  Look for a dip to the 50%
retracement ($51.84) and the 200-dma ($50.58) to set up our
preferred entry.  Remember, SNDK is an aggressive, bottom-fishing
play, but with our upside target of a break to new recent highs, I
think the risk is warranted.

Radar Screen:

GENZ - I figured last week would be a waste of time in terms of
trading, and GENZ certainly proved that, trading in a VERY narrow
range just above the $48 level.  As I mentioned last week, I'm
cooling on the idea of a play here in either direction.  I'm
willing to keep watching it, but if we haven't seen something
viable set up by mid-January, then we'll drop it in favor of
something that is easier to read on the chart.  But right here,
GENZ is drifting between strong resistance at $52 and strong
support at the 200-dma, denying us a viable play.

Closing Thoughts:
As noted last week, I'm penning this column Wednesday (Christmas
Eve) afternoon, so as to have the weekend free to spend with my
family.  So unlikely as it may seem, if Friday's holiday-shortened
session holds some excitement in store, we'll simply have to
address that next weekend.

With the arrival of the year-end holidays, my trading year is done
and I am now turning my attention to the opportunities that lie
before us in 2004.  I realize that many of you will trade next week
and that is always a personal choice.  I just don't feel that the
rewards are sufficient to justify the risk of playing in a low-
volume and potentially volatile environment.  May I respectfully
suggest you join me in focusing on family and friends during the
holidays, so as to be fully recharged for the excitement that I'm
sure lies in wait for all of us beginning in January.

My Best Holiday Wishes to Everyone!


LEAPS Portfolio

Current Open Plays


SBUX  11/24/03  '05 $ 30  ZOS-AF  $ 4.30  $ 4.70  + 9.30%  $27.50
                '06 $ 30  WSP-AF  $ 6.40  $ 6.60  + 3.12%  $27.50

WMT   10/03/03  '05 $ 55  ZWT-MK  $ 5.10  $ 5.90  +15.69%  $ 54.00
                '06 $ 55  WWT-MK  $ 7.20  $ 7.40  + 2.78%  $ 54.00
DJX   12/09/03  '04 $ 96  YDK-XR  $ 5.70  $ 4.00  -29.82%  $104.00
                '05 $ 96  ZDK-RR  $ 7.10  $ 5.20  -26.76%  $104.00
QQQ   12/09/03  '05 $ 32  ZWQ-MF  $ 2.65  $ 1.90  -28.30%  $ 38.00
                '06 $ 32  WD -MF  $ 3.70  $ 2.90  -21.62%  $ 38.00

LEAPS Watchlist

Current Possibles


NEM    10/05/03   $40          JAN-2005 $ 40  ZIE-AH
                            CC JAN-2005 $ 35  ZIE-AG
                               JAN-2006 $ 40  WIE-AH
                            CC JAN-2006 $ 35  WIE-AG
QCOM   11/16/03   HOLD       JAN-2005 $ 50  ZLU-AJ
                            CC JAN-2005 $ 45  ZLU-AI
                               JAN-2006 $ 50  WLU-AJ
                            CC JAN-2006 $ 45  WLU-AI
SNDK   12/21/03   $50-51       JAN-2005 $ 45  XWS-AK
                            CC JAN-2005 $ 40  XWS-AJ
                               JAN-2006 $ 45  YSD-AK
                            CC JAN-2006 $ 40  YSD-AJ

SMH    08/24/03  $42-43        JAN-2005 $ 40  ZTO-MH
                               JAN-2006 $ 40  YRH-MH
EK     12/21/03  $27           JAN-2005 $ 25  ZEK-ME
                               JAN-2006 $ 25  WEK-ME
HD     12/21/03  $37-38        JAN-2005 $ 35  ZHD-MG
                               JAN-2006 $ 35  WHD-MG

New Portfolio Plays


New Watchlist Plays





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I'm Not My Brother (In-Law's) Keeper, Fortunately!

By Mike Parnos, Investing With Attitude

I saw Johnny, my ex-brother-in-law, over Christmas.  He has
limitations.  He thinks that polysyllabic is the name of a parrot.
In reality, he's a walking, talking reason why some species eat
their young.

Well, since his mother missed that opportunity, I find myself
across the dinner table from Johnny twice a year.   Normally, I
make the best of it by simply pretending he doesn't exist.  This
year, however, interaction was unavoidable.  After proudly telling
a charming story about bringing roadkill home for dinner, Johnny
asked me what I do.  I explained that I teach individuals and
groups of people how to make money trading options.

Option Traders Are Made, Not Born
"Mike," he asked, "can you teach me to trade options?"

Remember, as a kid, when we tried to make things out of Playdough?
An ashtray?  A bowl?  A vase?   The clay was fresh, moldable and
would take any shape we could create.  But, if you left the clay
out of the can too long, it would become brittle and useless.
Let's just say that Johnny's clay has been out of the can way too

Plus, considering that it was only a few years ago that he started
walking upright, I thought it unlikely he could grasp the concept
of options.  But, in the spirit of the season, I made the effort.
I tried to explain the concept of a "call" option.  I used a real
estate example, a stock example and any number of other examples.
I like to think I have infinite patience.  I was wrong.  I began to
feel like a salmon swimming upstream.  The undercurrent was just
too much.

"Johnny," I said, "listen closely, I am a lot like a call option.
I have the right, but not the obligation, to teach you to trade
options.  I choose not to exercise this right."

"Now I get it," he said.

"Sure you do, Johnny.  Sure you do."

What's In Store For 2004?
To the legion of CPTI students who "get it" and don't bring home
roadkill for dinner, I want to wish you, and your families, a
happy, healthy and profitable 2004.   As in 2003, we'll aim for
consistent profits.  We'll continue to explore new strategies,
refine previously strategies, and together use knowledge and
discipline to have another exceptional and inspirational year.

Thank you for your continued emails, your smiles, your questions
and your perseverance.  For me, that's what makes it all

Hi Mike,
I wanted to ask you about increasing the spread on the long term
QQQ play. On a $30 to $40 QQQ spread, a 10 point spread or $13,500
on a 10-contract play it would cost more to get in a $25-$45 or
over $20,000.  If one had the money would it not be better the go
to the $21,300 spread rather than the $13,500? Or am I missing
On the larger spread, wouldn't you would begin making money on your
sold near term options much quicker.  Thanks for your response.

Hi William,
There are two ways you can look at increasing the spread (or long
trading range) on the QQQ ITM Strangles.

1.  The negative:  Increasing the ITM LEAPS spread will tie up more
money and your monthly return on investment would be significantly
lower.  If you have extra money, I'd lean towards getting
additional contracts and bringing in more premium.  With the QQQs,
you don't have to increase the range so dramatically.  The $1
strikes will give you the flexibility to create a range of $12,
$14, $16, etc.  There are no rules etched in stone.  It's a
personal decision.  Though I'm comfortable with a $10 pt. range,
you may prefer a $14 point range.

2.  The positive is that you will have to re-establish the range
less frequently.  Each time we have to create a new range (when the
QQQs go too far in a direction), it costs us an additional $2.00.
It may take us a month or two to replace that two bucks.  If we
create a larger range, we may be able to tolerate a large move
without changing the LEAPS range.

Another small positive is that, the further you go into the money
with the long term LEAPS, the less time value you would have at
risk.  It's not significant, though.  I doubt it would be more
beneficial than using the extra money to buy additional contracts
and generating more premium.
Hope that helps.  Have a great holiday!

Dear Mike,
Do you have to worry about being assigned when you trade an index?
What is the total risk?  Also, how does a cash settlement when the
price of the stock finishes in the money inside one of the credit

Dear M,
It's not impossible for you to be assigned an index, but it
shouldn't happen unless you are very deep in the money and with
virtually no time premium remaining in the option -- a VERY
unlikely scenario – especially using the strategies we discuss here
at the CPTI.

A cash settlement works like this.  Let's use our December SPX
quickie trade as an example.  We took in $2.30 x six contracts =
$1,380.  The bear call spread was 1090/1105.   The final settlement
number was 1091.61.  That was $1.61 ($161 per contract) above our
short call.  On Monday morning, that $161 x 6 contracts = $966 will
have been deducted from our brokerage account.  Our profit was
$1,380 minus $966 = $414 (less commissions).

Your exposure is the difference between the strike prices in the
spread.  In the above quickie we had a 1090/1105 bear call spread
and a 1055/1040 bull put spread.  Your exposure is $15 x 6
contracts = $9,000.  Your actual risk is the difference between the
strike prices less the total credit you received when you put on
the spread ($9,000 - $1,380 = $7,620).

Dear Mike
When I'm looking up options, why are some available in May while
options for another stock may be available in June?  Thanks.
When you look at an option chain, you will always see options
available for the current month and the following month.  As of
Monday, you'll be able to trade January and February options in
stocks that are optionable.  The other months you see on the option
chain are part of a stock's option cycle.  There are three
different cycles.  January-April-July-October,  February-May-
August-November, and March-June-September-December.  Depending on
which cycle has been assigned to a particular stock, those are the
months that will appear on its option chain.  LEAPS are always
available to be traded (if they are offered on that stock). The
other months are opened as they become the "following" month.

Position #1 - NDX – (NASDAQ 100 Index) – Iron Condor – 1443.90
We sold 5 NDX January 1500 calls and bought 5 NDX January 1525
calls for a credit of $3.70 (x 5 = $1,850).  Then we sold 5 NDX
January 1325 puts and bought 5 NDX January 1300 puts for a credit
of $2.40 (x 5 = $1,200). The total credit was $6.10.  Maximum
profit range: 1325 – 1500.  Potential profit: $3,050.

Position #2 – SOX (Semiconductor Index) – Iron Condor – 498.69
We sold 10 SOX January 530 calls and bought 10 SOX January 540
calls for a credit of $1.40 (x 10 = $1,400).  Then we sold 7 SOX
January 440 puts and bought 7 SOX January 425 puts for a credit of
$1.35 (x 7 = $945).  Our total credit was $2,345.  Maximum profit
range: 440 – 530.  Potential profit: $2,345.

Position #3 – XAU (Gold/Silver Index) – Iron Condor – $106.77
We sold 10 XAU January $95 puts and bought 10 XAU January $90 puts
for a credit of $.60 ($600).  Then we sold 10 XAU January $110
calls and bought 10 XAU January $115 calls for a credit:  $.60
(600).  Our total credit was $1.20 ($1,200).  Maximum profit range:
$95 – 110.  Potential profit: $1,200.

Position #4 -- QQQ Diagonal Calendar Spread -- $35.85
I'm a glutton for punishment, but there's a little voice telling me
that we should be positioned to take advantage of a pullback in the
market.  We tried this in November – January and we ended up losing
a dime.  Sooner or later we're going to be right.  So, let's give
it another try.  We're going to start out risking a buck and we
have two additional months to sell against the March long puts to
reduce our cost basis while we wait.  It's a cheap speculation.
We'll consider this an ongoing position.
Buy 10 QQQ March $34 puts for $1.20
Sell 10 QQQ January $33 puts for $.20
Total debit: $1.00 ($1,000)

QQQ ITM Strangle – Ongoing Long Term -- $35.85
We bought 10 contracts of the 2005 QQQ $39 puts and 10 contracts of
the 2005 QQQ $29 calls for a total debit of $14,300.   We're going
to make money by selling near term puts and calls every month.
Here's what we've done so far:
October: Oct. $33 puts and Oct. $34 calls – credit of $1,900.
November: Nov. $34 puts and calls – credit of $1,150.
December: Dec. $34 puts and calls – credit of $1,500.
January: Jan. $34 puts and calls – credit of $850.

Note:  We haven't included any of the proceeds from this long term
QQQ ITM Strangle in our profit calculations.  It's a bonus!  And
it's a great cash flow generating strategy.

OEX Credit Spread Boogie – 540.26
We sold 2 December OEX 520 calls @ $9.00 and bought 2 December OEX
545 calls @ $1.55.  Total credit of $7.45 ($1,490).  Exposure
$17.55 ($3,510).  Rolled out to five contracts of the January
535/505 bull put spread.  In the process we took in an additional

New To The CPTI?
Are you a new Couch Potato Trading Institute student?  Do you have
questions about our educational plays or our strategies?  To find
past CPTI (Mike Parnos) articles, look under "Education" on the OI
home page and click on "Traders Corner."  They're waiting for you

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

Couch Potato Trading Institute Disclaimer
All results reported in this section are hypothetical. While the
numbers represented here may have been achieved or beaten by our
readers, we make no representation that any individual investor
achieved these exact results. The tracking for the plays listed in
this section uses closing prices for the day the newsletter is
published and it is not meant to imply that any reader actually
received those prices or participated in these recommendations. The
portfolio represented here is hypothetical and for investment
education purposes only. It is only an illustration of what type of
gains a knowledgeable investor might receive utilizing these


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The Option Investor Newsletter                   Sunday 12-28-2003
Sunday                                                      3 of 3

In Section Five:

Covered Calls: Trading Basics: More Q&A With The Editor
Naked Puts: Options 101: What's In A Dollar Anyway?
Spreads/Straddles/Combos: A Great Year Comes To An End!


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Trading Basics: More Q&A With The Editor
By Mark Wnetrzak

This week's questions concern strategy selection and the
techniques used in choosing candidates for this section.

Attn: Markw@OptionInvestor.com
Subject: Covered calls vs. naked puts

Hi Mark:

Is it a basic rule (risk wise) that selling a naked put is
exactly the same thing as selling a covered call?  As a rule
a trader would prefer the naked put versus the covered call,
aside possibly from collecting a dividend, etc.?

Thank you,


Hello GM,

Yes, the naked put strategy and covered-call strategy are very
similar and are essentially equivalent.  However, there are a
few differences to consider: naked puts generally require a
smaller initial investment (approx. 25% collateral versus 50%
of the stock's purchase price); the naked put writer can simply
use the collateral of his present portfolio to initiate the
position as opposed to buying stock; uncovered option trading
requires a higher trading-experience level of approval by most
brokerages; the covered-call strategy can be used in most IRAs;
and covered-call writers receive dividends (provided the stock
isn't assigned) where put writers do not.

In calculating the potential return on investment, the "naked"
put has an advantage over the covered-call strategy due to the
lower initial investment and the lower cost of commissions.  In
comparing ITM covered-calls and OTM naked-puts (where the strike
price is below the current stock price), the naked-put writer
can generally sell a put at least one or two strikes lower than
the covered-call writer and achieve the same, if not superior,
return on investment.

Both strategies require a slightly-bullish-to-neutral outlook
and offer limited downside protection, but do not protect for
a protracted downturn or catastrophic drop in the underlying
equity.  As you know, there is risk of loss in all trading

Good Luck,

Mark W.

Attn: Mark - CCs Editor
Subject: Selling covered calls

(Note: Edited for brevity/clarity)

I have been following your selections for covered call strategy
the last couple months and your performance has been excellent.

Two questions please:

1) What criteria, without much detail, do you look for in your
stock selections.

2) What is your opinion of [using] stop losses on the underlying
stock at [the sold] strike price minus premium received?

Thank you,


Hello MO,

At the OIN, we use a two-pronged approach to find a variety of
covered-call candidates to supplement your search for profitable
positions: technical scans and premium scans.  I personally scan
through hundreds of charts each week searching for technically
strong stocks with robust inflated premiums.  I then sort through
several "over-priced" option premium lists, looking for stocks
with favorable technical patterns.  I use many of the techniques
in Stan Weinstein's book, "Secrets for Profiting in Bull and Bear
Markets."  Stan provides a simple, easy-to-use (layman's) approach
to technical analysis and his methods are helpful in identifying
both stock and overall market trends.

As far as "using stop losses on the underlying stock at the strike
price minus premium received."  That's certainly a viable approach
as long as it agrees with your portfolio goals (investment, stock
ownership, momentum trading, etc.), target time-frame (short-term,
long-term, etc.) and risk-reward tolerance.

The timing of an exit or adjustment is also important and here's a
link to some comments I recently made on that subject:


Hope that helps!

Mark W.


The following summary is a reasonable account of the positions
previously offered in this section.  However, no representation
is being made as to the actual performance of a position and in
fact, there are frequently large differences between the summary
results and those of our subscribers, due to the variety of ways
in which each play can be opened, closed, and/or adjusted.  In
addition, the summary might not be completely representative of
the manner in which the average trader would react to changing
conditions in a position and to the options market in general.
The editor of this section does not take actual positions in any
published plays and the summary comments are simply a service to
help new traders understand when positions might be opened and
closed.  In most cases, actions taken based on the commentary
would be far too late to be effective, thus it is not intended
as a substitute for personal trade management nor does it in
any way replace your duty to diligently monitor and manage the
positions in your portfolio.

Note:  Margin not used in calculations.

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

WIND     7.48    8.50  JAN  7.50  0.50    0.52*   6.5%
CE      13.50   14.47  JAN 12.50  1.80    0.80*   5.9%
TKTX    15.35   15.15  JAN 15.00  1.25    0.90*   5.5%
PCS      5.06    5.32  JAN  5.00  0.30    0.24*   5.5%
SKX      7.54    7.85  JAN  7.50  0.40    0.36*   5.5%
UTHR    23.20   23.22  JAN 22.50  1.75    1.05*   5.3%
NTIQ    12.53   13.20  JAN 12.50  0.85    0.82*   5.1%
SANM    12.56   12.36  JAN 12.50  0.70    0.50    4.6%
VTS     10.05   10.77  JAN 10.00  0.55    0.50*   4.6%
UAIR     6.20    6.20  JAN  5.00  1.40    0.20*   4.5%
MYGN    12.75   12.59  JAN 12.50  0.85    0.60*   4.4%
MYGN    12.76   12.59  JAN 12.50  0.95    0.69*   4.2%
CNH     15.27   16.17  JAN 15.00  0.95    0.68*   4.1%
CHTT    18.06   18.90  JAN 17.50  1.20    0.64*   4.1%
EMBT    15.98   15.83  JAN 15.00  1.65    0.67*   4.1%
RHAT    17.49   18.88  JAN 15.00  3.00    0.51*   3.8%
XING    10.66    8.88  JAN 10.00  1.35   -0.43    0.0%

* Stock price is above the sold striking price.


Thin trading marked a short market week as investors enjoyed
the Christmas holiday -- especially if they were bulls!  Now
is a good time for reflection and to be thankful for all our
blessings.  Wishing you much success and happiness in the New

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

NGEN    7.50  JAN  7.50  QEM AU  0.90  30      6.60  21  19.8%
NEOL   17.71  JAN 17.50  UOE AW  1.00  1420   16.71  21   6.8%
DGIN   25.08  JAN 25.00  UGU AE  1.10  324    23.98  21   6.2%
ACF    15.58  JAN 15.00  ACF AC  1.15  1745   14.43  21   5.7%
ELNK   10.33  JAN 10.00  MQD AB  0.70  6446    9.63  21   5.6%
RHAT   18.88  JAN 17.50  RCV AW  1.90  6474   16.98  21   4.4%
OSTK   20.90  JAN 17.50  QKT AW  3.80  27     17.10  21   3.4%

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).

NGEN - Nanogen  $7.50  *** New Patent = Rally Mode ***

Nanogen (NASDAQ:NGEN) develops and commercializes molecular
diagnostics products and tests for the gene-based testing
market for sale primarily in the United States, Europe and the
Pacific Rim.  By integrating microelectronics and molecular
biology into a core proprietary technology platform, Nanogen
seeks to establish the open-architecture design of its primary
products, the NanoChip Molecular Biology Workstation and the
NanoChip Cartridge (collectively, the NanoChip System) as the
standard platform for molecular identification and analysis.
The firm also develops specific reagents and other commercial
applications for the NanoChip System.  The company continually
conducts research and development by itself and also with its
subsidiary and third parties, to improve the NanoChip System
and to extend its technology to other applications such as
biodefense, forensics and drug discovery (protein kinases).
Earlier this month, Nanogen about doubled after the company
said it received a patent for a method to build nanodevices;
atom or molecule-sized electronic devices.  We simply favor the
break-out on heavy volume and speculators who believe the firm's
shares are destined to move higher can profit from that outcome
with this position.

JAN-7.50 QEM AU LB=0.90 OI=30 CB=6.60 DE=21 TY=19.8%

NEOL - NeoPharm  $17.71  *** Lateral Trend ***

NeoPharm (NASDAQ:NEOL) is a biopharmaceutical company engaged in
the research, development and commercialization of drugs for the
treatment of various cancers.  The company has built its drug
portfolio based on its two novel proprietary technology platforms,
the proprietary NeoLipid liposomal drug delivery system and a
tumor-targeting toxin platform.  NeoPharm has several promising
compounds in various stages of development.  The company's lead
compound is IL13-PE38, a tumor-targeting toxin being developed
as a new treatment for glioblastoma multiforme, a deadly form of
brain cancer.  NEOL has been consolidating since April and this
short-term position simply offers a method to participate in the
future movement of the issue with relatively low risk.

JAN-17.50 UOE AW LB=1.00 OI=1420 CB=16.71 DE=21 TY=6.8%

DGIN - Digital Insight  $25.08  *** Next Leg Up? ***

Digital Insight (NASDAQ:DGIN) is a provider of outsourced online
banking services to banks, credit unions and savings and loan
associations.  Digital offers outsourced solutions, mainly to
financial institutions, including online banking for a variety
of retail customers, online cash management for businesses,
online lending decision-making across multiple channels for
consumer loans and other complementary products and services.
As of December 31, 2002, approximately 3.6 million end users
were actively using the their Internet banking applications and
approximately 26,000 business end users were actively using its
cash management solution.  Shares of Digital Insight have made
another new 52-week high and have now topped the September high.
Investors who believe the bullish trend will continue can use
this position to target-shoot an entry point with a cost basis
closer to technical support.

JAN-25.00 UGU AE LB=1.10 OI=324 CB=23.98 DE=21 TY=6.2%

ACF - AmeriCredit  $15.58  *** Santa Clause Rally ***

AmeriCredit (NYSE:ACF) is a consumer finance firm specializing
in purchasing retail automobile installment sales contracts
originated by franchised and select independent dealers in
connection with the sale of used and new automobiles.  The firm
generates revenue and cash flows primarily through the purchase,
retention, subsequent securitization and servicing of finance
receivables.  To fund the acquisition of receivables prior to
securitization, AmeriCredit uses borrowings under its warehouse
credit facilities.  The company earns finance charge income on
the finance receivables and pays interest expense on borrowings
under its warehouse credit facilities.  AmeriCredit benefited
from the bullish Christmas season and has now made a new 52-week
high.  Traders can speculate on the near-term performance of the
issue with this conservative position.

JAN-15.00 ACF AC LB=1.15 OI=1745 CB=14.43 DE=21 TY=5.7%

ELNK - EarthLink  $10.33  *** Internet Providers ***

EarthLink (NASDAQ:ELNK) is an ISP providing reliable nationwide
Internet access and related value-added services to its customers.
The company was formed as a result of the merger of EarthLink
Network and MindSpring Enterprises.  Earthlink provides a variety
of Internet access and related services, including narrowband
access, wireless access, broadband or high-speed access and Web
hosting.  The company focuses on providing an experience for its
users through reliable access, customer service and support and
useful features such as e-mail, Web storage, spam filtering and
Pop-Up Blocker.  The Internet sector has performed very well
recently and investors who want a long-term position in an
industry-leading company can use this position to establish a
favorable cost basis in the issue.

JAN-10.00 MQD AB LB=0.70 OI=6446 CB=9.63 DE=21 TY=5.6%

RHAT - Red Hat  $18.88  *** Earnings Rally: Encore! ***

Red Hat (NASDAQ:RHAT) provides an enterprise-operating platform
based on open source technology for the IT infrastructure of the
Global 2000.  The company applies its technology to create its
enterprise operating platform, Red Hat Enterprise Linux, and
related layered infrastructure technology solutions, based on
open source technology.  Red Hat's enterprise solutions meet
the functionality requirements and performance demands of the
large enterprise and the third-party computer hardware and
software applications that are critical to enterprises.  The
company also creates additional products, including Red Hat
Linux and related tools, and open source software applications.
Red Hat's professional services offerings, principally directed
toward its large enterprise customers and strategic partners,
include technical support and maintenance, custom development,
consulting, training and education and hardware certification.
Investors were obviously pleased with Red Hat's earnings as the
stock continues to rally on heavy volume, making another 52-week
high.  This position offers a reasonable entry point for those
who agree with a bullish outlook for RHAT.

JAN-17.50 RCV AW LB=1.90 OI=6474 CB=16.98 DE=21 TY=4.4%

OSTK - Overstock.com  $20.90  *** Next Trading Range? ***

Overstock.com (NASDAQ:OSTK) is an online "closeout" retailer
offering discount, brand-name merchandise for sale primarily
over the Internet.  The company's merchandise offerings include
bed-and-bath goods, kitchenware, watches, jewelry, electronics,
sporting goods and designer accessories.  Overstock offers its
customers an opportunity to shop for bargains conveniently,
while offering an alternative inventory liquidation distribution
channel to its suppliers.  The company typically offers around
5,000 non-media products and over 100,000 media products (books,
CDs, DVDs, video cassettes and video games) in seven departments
on its Websites, www.overstock.com, www.overstockb2b.com and
www.worldstock.com.  OSTK has been in a lateral trading range
for almost a year and has recently rallied above resistance near
$18 on heavy volume.  We simply favor the technical support near
the cost basis in this position and investors who are interested
in a long-term portfolio position in the Internet retail segment
should consider this issue.  A more aggressive ATM position is
listed below in the supplementary section.

JAN-17.50 QKT AW LB=3.80 OI=27 CB=17.10 DE=21 TY=3.4%



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

OSTK   20.90  JAN 20.00  QKT AD  2.10  192    18.80  21   9.2%
GSIC   10.06  JAN 10.00  UGF AB  0.65  718     9.41  21   9.1%
EPNY    7.57  JAN  7.50  UEP AU  0.45  1814    7.12  21   7.7%
TKTX   15.15  JAN 15.00  UFT AC  0.90  473    14.25  21   7.6%
NAVR    5.83  JAN  5.00  QIG AA  1.05  11      4.78  21   6.7%
ZIXI    8.06  JAN  7.50  HQU AU  0.85  1851    7.21  21   5.8%
MMR    18.60  JAN 17.50  MMR AW  1.75  495    16.85  21   5.6%
X      35.72  JAN 35.00    X AG  2.00  3388   33.72  21   5.5%
TTMI   16.14  JAN 15.00  UKD AC  1.65  89     14.49  21   5.1%
ADAT   11.91  JAN 10.00  HAU AB  2.25  237     9.66  21   5.1%
NVDA   22.74  JAN 22.50  UVA AX  1.00  15693  21.74  21   5.1%
AKS     5.43  JAN  5.00  AKS AA  0.60  875     4.83  21   5.1%
SOV    23.39  JAN 22.50  SOV AX  1.55  9904   21.84  21   4.4%


Options 101: What's In A Dollar Anyway?
By Ray Cummins

Stocks soared to yearly highs this week, despite the continued
decline of the U.S. dollar against major world currencies.  Can
the value of the mighty greenback mean so little to the stock

This week, we continue our series on how changes in U.S. monetary
policies flow through to other economic variables and ultimately
to security prices.  Many components affect share values in the
equity markets and one of the most prominent concerns in recent
months has been the decline of the dollar relative to other world
currencies.  The relationship between the dollar and the Euro, or
the Japanese Yen, or the British Pound, is very important because
one currency must be converted to another for international trade
and foreign investments to occur.  This correlation; the value of
one currency against another, is known as the "exchange rate" and
over the past year, budget and trade deficits have contributed to
the dollar's decline in the equation.

The problems associated with a "falling dollar" are many, however
most critical is the fact that lower prices for exports and higher
costs for imports ultimately could lead to inflation.  In the past,
the overall general upward price movement of goods and services in
the economy has proven to be one of the more difficult problems to
resolve, thus the FOMC has recently (and rightfully) endorsed price
stability as a principal policy objective of the Federal Reserve.
Another, more immediate effect of the falling dollar is a concern
of the investment community because the devaluation trend encourages
foreigners to pull money out of the U.S. stock market.  Remember
that when foreign investors want to buy stocks in American markets,
they must first convert their native currency into U.S. dollars.
In short, they use their money to purchase our money to buy stocks
and if the bearish trend in stocks resumes, foreign investors will
endure even greater losses than their American counterparts.

Federal policy-makers and investors usually favor a strong dollar
but there are others who prefer the current situation because the
reduced cost of U.S. products to foreign customers stimulates new
demand.  Increased demand fuels domestic production, which leads
to more jobs for Americans, especially in the agricultural and
manufacturing sectors.  Since robust employment is one of the keys
to an economic recovery, many experts say the current weak-dollar
policy is beneficial in the short-term.  On the other hand, our
relative wealth as a nation is measured by the value of the dollar
and history suggests that a sound and stable currency is required
for sustained economic growth.  With that idea in mind, the real
question is: How detrimental, both to the American public and the
financial markets, will this strategy will be in long run?

One thing worth noting is the Fed has an incredibly difficult task
when choosing how to influence money and credit conditions in the
economy.  Even with the best decisions, there is no guarantee that
the economy will grow at a healthy pace, or that everyone will have
a job, or that the stock prices will perpetually rise.  Achieving
these goals depends on the actions of the American people because
we are solely responsible for the election of government leaders
and policy-makers.  On a more fundamental basis, we also determine
how much to work, spend, save and invest, whether it be with regard
to our skills and education, the family business or the stock market.
Indeed, if our recent economic woes recur in the coming years, the
nation as a whole may regret not looking closer at the real cause
of our troubles and taking action to stem the problem at its origin.

Happy Holidays!


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

PDLI    16.65   17.87  JAN 15.00  0.45    0.45*   3.4%   9.0%
SOV     23.70   23.39  JAN 22.50  0.90    0.90*   3.6%   8.5%
PLMD    26.45   25.83  JAN 22.50  0.50    0.50*   2.5%   7.6%
MERX    24.45   24.75  JAN 20.00  0.40    0.40*   2.2%   7.6%
SLXP    21.50   22.45  JAN 20.00  0.60    0.60*   2.7%   6.8%
JNS     15.91   16.06  JAN 15.00  0.35    0.35*   2.6%   6.6%
NPSP    32.64   30.80  JAN 30.00  0.80    0.80*   2.4%   6.2%
IPG     15.45   14.94  JAN 15.00  0.40    0.34    2.5%   6.0%
BLTI    14.01   17.19  JAN 12.50  0.30    0.30*   2.1%   5.9%
WEBX    20.18   19.50  JAN 17.50  0.30    0.30*   1.9%   5.7%
RMBS    30.66   26.14  JAN 20.00  0.40    0.40*   1.8%   5.3%
AAII    25.01   25.00  JAN 22.50  0.45    0.45*   1.8%   4.9%
EMMS    27.17   27.21  JAN 25.00  0.50    0.50*   1.8%   4.7%

* Stock price is above the sold striking price.


Investors enjoyed one of the best Christmas holidays in years
as all of the major equity averages contributed outstanding
performances in 2003.  Friday's session was understandably
docile but the "Santa Claus Rally" has certainly preformed up
to its reputation.  With stocks likely to consolidate in the
coming month, traders are cautioned to maintain a disciplined
approach to portfolio management.  The primary subject on the
"watch" list is NPS Pharmaceuticals (NASDAQ:NPSP), which is
perched precariously above its 30-DEMA and our sold strike at
$30.  Other issues of concern are Interpublic Group (NYSE:IPG)
and Rambus (NASDAQ:RMBS), in light of the recent volatile price
activity.  One play that (thankfully) did not make it into our
portfolio is Penn National Gaming (NASDAQ:PENN).  Shares of the
stock "gapped" down at the open Monday after the Pennsylvania
State Senate passed a spending plan over the weekend that did
not include legalizing gambling.  Penn National was expected to
benefit if the state turned to legalized gambling to shore up
its budget, but that doesn't appear likely in the near term.

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

THER   18.77  JAN 17.50  UKT MW 0.60 83   16.90  21   5.1%  12.7%
MERX   24.75  JAN 22.50  KXQ MX 0.60 41   21.90  21   4.0%  10.5%
BLTI   17.19  JAN 15.00  BQF MC 0.25 345  14.75  21   2.5%   7.3%
SHRP   32.39  JAN 30.00  SAU MF 0.55 99   29.45  21   2.7%   7.2%
IMCL   40.01  JAN 35.00  QCI MG 0.55 2212 34.45  21   2.3%   6.9%
ATVI   18.65  JAN 17.50  AQV MW 0.30 405  17.20  21   2.5%   6.6%
AAII   25.00  JAN 22.50  IUQ MX 0.30 112  22.20  21   2.0%   5.6%

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).

THER - Therasense  $18.77  *** An Unexplained Rally! ***

TheraSense (NASDAQ:THER) develops, manufactures and sells glucose
self-monitoring systems that reduce the pain of testing for people
with diabetes.  The company's first product, the Freestyle Blood
Glucose Monitoring System, received FDA approval in January 2000.
Therasense began selling FreeStyle in the United States later that
year and the company's direct sales force promotes the product to
healthcare professionals who advise patients on the monitoring and
management of their diabetes.  The company distributes and sells
FreeStyle in the United States to 10 national retailers, including
Walgreens, Wal-Mart and Rite Aid, through wholesalers, including
Cardinal Health, McKesson and AmerisourceBergen, and directly to
end users over the telephone and through its Website.  Shares of
THER rallied Friday on robust volume despite a lack of news to
explain the activity.  The technical indications support a bullish
outlook and traders who are optimistic about the company's stock
price in the near term should consider this position.

JAN-17.50 UKT MW LB=0.60 OI=83 CB=16.90 DE=21 TY=5.1% MY=12.7%

MERX - Merix  $24.75  *** Multi-Year High! ***

Merix Corporation (NASDAQ:MERX) is a manufacturer of electronic
interconnect solutions for use in sophisticated equipment.  The
company's main products are complex multi-layer printed circuit
boards, which are platforms used to interconnect microprocessors,
integrated circuits and other components that are essential to
the operation of electronic products and systems.  Merix focuses
on providing its solutions to manufacturers of technologically
advanced electronic products within selected high-growth markets
in the electronics industry, including communications, high-end
computing and test and measurement.  It provides its customers
with an integrated interconnect manufacturing solution including
quick-turn prototypes, pre-production and volume production of
printed circuit boards and backplanes.  The company also renders
design assistance and engineering services in the early stages of
product development.  MERX shares soared on 12/18 after the firm
posted a surprise quarterly profit, reversing a loss from the year
before, on robust product demand and increasing profit margins.
Investors who favor the outlook for the stock should consider this

JAN-22.50 KXQ MX LB=0.60 OI=41 CB=21.90 DE=21 TY=4.0% MY=10.5%

BLTI - Biolase  $17.19  *** Speculation Only! ***

BioLase Technology (NASDAQ:BLTI) is a medical technology company
that designs, develops, manufactures and markets advanced dental,
cosmetic and surgical lasers and related products.  The company's
principal products are water- and laser-based systems focused for
use in dentistry.  The company holds patents and has received
clearances from the United States Food and Drug Administration
for applications in other markets  such as dermatology.  BioLase
Technology also manufactures accessories and disposable products
for its water- and laser-based systems.  Lots of speculation on
this issue after some recent comments in IBD, and investors say
the company is a market leader with growing sales year-over-year
and renewed institutional interest.  The trend is bullish in the
short-term and traders can profit from additional upside movement
in the issue with this position.

JAN-15.00 BQF MC LB=0.25 OI=345 CB=14.75 DE=21 TY=2.5% MY=7.3%

SHRP - Sharper Image  $32.39  *** Specialty Retail Rally! ***

Sharper Image (NASDAQ:SHRP) is a specialty retailer of products in
the electronics, recreation and fitness, personal care, houseware,
travel, toy, gifts and other categories.  The firm's merchandising
philosophy focuses principally on proprietary Sharper Image Design
products and exclusive Sharper Image branded products and, to a
lesser extent, on third-party branded products.  The firm designs
and develops its Sharper Image Design products, while Sharper Image
branded products are designed by third parties or jointly designed
with the Company.  The company markets its merchandise primarily
through three integrated sales channels: The Sharper Image stores,
sharperimage.com and The Sharper Image catalog, which includes any
revenue from direct marketing activities and infomercials.  Shares
of SHRP were "sharply" higher Friday after the company announced
same-store sales were up 21% in December, due to strong performance
across the board, and raised its profit forecast.  Investors can
establish a relatively conservative cost basis in the issue with
this position.

JAN-30.00 SAU MF LB=0.55 OI=99 CB=29.45 DE=21 TY=2.7% MY=7.2%

IMCL - ImClone  $40.01  *** Premium-Selling Only! ***

ImClone Systems (NASDAQ:IMCL) is a biopharmaceutical company whose
mission is to advance oncology care by developing a portfolio of
targeted biologic treatments designed to address the medical needs
of patients with a variety of cancers. The company's lead product,
Erbitux, is a therapeutic antibody that inhibits stimulation of
epidermal growth factor receptor upon which certain solid tumors
depend in order to grow. In addition to the development of its
lead product candidates, the company conducts research in a number
of areas related to its core focus of growth factor blockers, as
well as cancer vaccines and angiogenesis inhibitors. IMCL has also
developed diagnostic products and vaccines for certain infectious
diseases.  Imclone has always been a popular issue among "premium
sellers" and the stock once again has favorable option prices due
to its potential for volatility.

JAN-35.00 QCI MG LB=0.55 OI=2212 CB=34.45 DE=21 TY=2.3% MY=6.9%

ATVI - Activision  $18.65  *** Improved Earnings Outlook! ***

Activision (NASDAQ:ATVI) is a global publisher of interactive
entertainment software products.  The company has two operating
segments: publishing and distribution.  Publishing relates to the
development (both internally and externally), marketing and sale
of CD, DVD, and cartridge-based interactive entertainment software
products owned or controlled by the company either directly, by
license or through its affiliate label program with third-party
publishers.  Activision's distribution business consists mainly
of operations in Europe that provide logistical and sales services
to third-party publishers of interactive entertainment software,
its own publishing operations, and manufacturers of interactive
entertainment hardware.  ATVI shares have been "on the move" since
mid December when the company raised its earnings outlook for the
holiday season on the strength of its new games.  U.S. Bancorp
Piper Jaffray followed the news with an upgrade of the firm and
ATVI's price trend has remained bullish since the announcement.

JAN-17.50 AQV MW LB=0.30 OI=405 CB=17.20 DE=21 TY=2.5% MY=6.6%

AAII - aaiPharma  $25.00  *** Drug Speculation ***

aaiPharma (NASDAQ:AAII) is a science-based specialty pharmaceutical
company focused on the commercialization of branded pharmaceutical
products that it develops or acquires.  The company has operations
both in the United States and in Europe and has recently acquired
three branded products: the M.V.I. and Aquasol family of products,
Brethine and the Darvon and Darvocet family of products.  AAII is
also developing its own proprietary drugs, as well as developing
improvements and line extensions to its many acquired products by
applying its scientific expertise and proprietary and in-licensed
drug-delivery technologies.  In early December, aaiPharma raised
its profit outlook, saying it expects earnings of $1.45 to $1.52
per share on revenue of $340 million to $355 million in the coming
year.  Both numbers exceeded analysts' expectations and investors
demonstrated their approval by driving the stock price up over 25%
in only one week.  Traders can profit from future bullish activity
in the issue with this position.

JAN-22.50 IUQ MX LB=0.30 OI=112 CB=22.20 DE=21 TY=2.0% MY=5.6%



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

FARO   25.23  JAN 22.50  QEJ MX 0.60 106  21.90  21   4.0%  10.9%
UTHR   23.22  JAN 22.50  FUH MX 0.65 20   21.85  21   4.3%  10.2%
MESA   13.00  JAN 12.50  EAQ MV 0.35 30   12.15  21   4.2%  10.0%
PSSI   12.68  JAN 12.50  PYQ MV 0.35 10   12.15  21   4.2%   9.7%
APPX   32.63  JAN 30.00  AQO MF 0.75 2249 29.25  21   3.7%   9.7%
MLNM   17.95  JAN 17.50  QMN MW 0.45 3140 17.05  21   3.8%   9.1%
ASPT   15.94  JAN 15.00  SQR MC 0.35 50   14.65  21   3.5%   8.8%
GTI    13.00  JAN 12.50  GTI MV 0.30 72   12.20  21   3.6%   8.7%
TNB    22.84  JAN 22.50  TNB MX 0.40 0    22.10  21   2.6%   6.3%



A Great Year Comes To An End!
By Ray Cummins

The major equity averages soared higher in 2003 with the Dow,
S&P 500, and NASDAQ up 24%, 25%, and 48%, respectively.

In light of the considerable annual gains, its no surprise that
stocks have been somewhat subdued in recent sessions and Friday's
activity was of little consequence.  The Dow industrial average
closed up 19 points at 10,324 with United Technologies (NYSE:UTX)
and International Business Machines (NYSE:IBM) among the blue-chip
leaders.  The composite technology index added 3 points to end at
1,973, with biotech and internet shares limiting its advance.  In
the broader market, steel, aluminum, and gold shares helped the
S&P 500 index add 1 point to end at 1,095.  Advancing issues led
declining shares 2 to 1 on the Big Board and nearly 3 to 2 on the
technology exchange.  Volume was trivial with 357 million shares
traded on the NYSE and 531 million shares crossed on the NASDAQ.
The bond market finished higher across the yield curve, with the
10-year note up 8/32, bringing its yield down to 4.15%.

Happy New Year!


Attn: Questions@OptionInvestor.com
Subject: Covered Calls With Leaps

Hi Guys,

Firstly, thanks for your information, company and good humor.
It makes a lonely traders night here in New Zealand feel much
less lonely and a lot more fun!

My question is regarding covered-calls, but using LEAPS as
security rather than stock.  Do you call these [positions]
credit spreads?

Anyway I would really appreciate some feedback as to your
suggested strategies for this type of play and the advantages
and pitfalls as against standard covered-call plays.

Happy Xmas from Aotearoa (that's New Zealand!)


Hello GR,

Your question was forwarded to me as it involves a common type
of spread and I decided to publish the reply for the benefit of
our readers.

Indeed, "using Leaps as security rather than stock" is a viable
alternative to owning the underlying shares in the combination
position you described and in reality, the strategy you are
utilizing is simply a calendar spread.

A calendar spread (also known as a horizontal spread), involves
the purchase of an option with one expiration date and the sale
of another option with the same strike price, but a different
expiration date.  The philosophy for using calendar spreads is
that time will erode the value of the short term option at a
faster rate than it will the long term option.  A spread which
is established when the underlying stock is at or near the strike
price of the options used is a neutral-outlook spread.  If the
underlying issue remains relatively unchanged until the short
term option expires, the neutral-outlook spread will make a profit.

A less neutral and more bullish type of calendar, or time spread
is initiated when the current value of the underlying issue is
below the strike price of the options.  This type of position
(often used with LEAPS) is speculative with low initial cost and
large potential profits.  Two favorable outcomes can occur: the
underlying stock moves higher in the short-term and the spread
is closed for a profit as the time-value erosion in the short
option produces a net gain or; the underlying stock consolidates,
allowing the sold option to expire and then eventually rallies
above the long option's strike price.

It is important to understand how a calendar spread profits from
the passage of time.  When opening a horizontal spread, we buy a
long term option and sell a short term option.  Both options have
the same exercise price, thus they have the same intrinsic value.
Regardless of the movement of the stock, time value will always
be less in the near term option.  As long as the underlying stock
price remains relatively close to the exercise price, the value
of the spread will be determined by the time premium of each
option.  At expiration, the time value in the short term option
will be very low relative to that of the long term option.

As you can see, a horizontal spread is completely dependent upon
the relative behavior of time-value decay in each of the option
positions.  Since the profitability of this strategy is solely
determined by the difference in time values of the options, it
is important for the underlying issue to remain near the strike
price; where time premium is theoretically the highest.  If the
stock price is at the high or low extreme, the time values of
both options will be low and the position will likely incur a
loss; the remaining credit will be less than the opening debit.

To the average trader, it would appear that this technique can't
lose.  One would simply buy the longer-term option and sell the
shorter-term option.  As both time values decayed, the spread
would gain value.  In reality, it's rarely that easy because the
underlying stock price does not remain constant.  A good way to
reduce the negative effects of stock price movement is to open
the position a few months before the short term option expires,
capitalizing on the ability to sell a second (and third, fourth,
etc.) option against the longer-term option.  This is the basis
for employing LEAPS with covered-calls and the objective is to
continue selling options until the cost of the long position is
zero.  Each month (at expiration), the position is adjusted or
"rolled" forward to the next period and ideally, the stock price
will be slightly below the sold strike when the near term option
expires.  If the sold options are "in-the-money" at expiration,
they must be repurchased to preserve the long term position.

Another method that is commonly used to increase the probability
of profit in this strategy requires an understanding of implied
volatility in option pricing.  When opening any type of spread,
it's important to take advantage of any premium disparities to
create the best possible position.  Professionals generally try
to open "time-selling" plays when there is excess value in the
sold option or a discount in the long option.  This allows them
to enter the position with a theoretical edge.  At the same time,
positions can be based more on technical indications than option
pricing, as long as the recent trend suggests a high probability
of a profitable outcome.

There is always the risk of early exercise in a calendar spread
and the degree of risk depends on which options are bought and
sold and the distance to the underlying.  The greater the time
value in the sold option, the lower the probability of it being
exercised.  If it does occur, a trader can fulfill the obligation
by simply purchasing the underlying issue and writing new options
to the restore the spread.  The important thing is to be notified
in a timely manner so the appropriate action can be taken before
the price of the underlying changes appreciably.

Good Luck!



There will be no "New Plays" today as the editor of this section
is away from the market, enjoying the holiday season with family
and friends.  The Spreads, Straddles & Combos section will return
on January 4, 2004.

Happy New Year!




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