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Daily Newsletter, Thursday, 01/22/2004

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The Option Investor Newsletter                Thursday 01-22-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Volume Still Strong
Futures Markets: Flat Squeeze
Index Trader Wrap: See Note
Market Sentiment: Looking Tired


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      01-22-2004           High     Low     Volume Advance/Decline
DJIA    10623.18 -  0.44 10660.88 10607.40 2.27 bln   1683/1558
NASDAQ   2119.01 - 23.40  2152.12  2119.01 2.36 bln   1216/2013
S&P 100   566.21 -  2.43   569.84   565.71   Totals   2899/3571
S&P 500  1143.94 -  3.68  1150.51  1143.01
W5000   11164.78 - 37.80 11232.92 11160.00
RUS 2000  591.73 -  5.75   600.61   591.53
DJ TRANS 3080.32 + 16.70  3090.07  3063.73
VIX        14.71 +  0.37    14.87    14.01
VXO (VIX-O)15.01 +  0.58    15.34    14.39
VXN        21.74 +  1.03    21.78    20.42
Total Volume 4,953M
Total UpVol  1,642M
Total DnVol  3,218M
Total Adv  3339
Total Dcl  4007
52wk Highs 1040
52wk Lows     8
TRIN       1.52
NAZTRIN    1.41
PUT/CALL   0.92
************************************************************

Volume Still Strong

Volume on Thursday was nearly five billion across all markets
and stretched the string of high volume days to 13. Declining
volume was unfortunately the highest since Sept-24th and
twice the up volume. Still the Dow held its ground and clung
to its 52-week highs. The Nasdaq saw some profit taking in
front of Microsoft earnings but even that was muted.

Dow Chart


Nasdaq Chart



The economics were about as mixed as the markets. The Jobless
Claims fell -1,000 to 341,000 and pushed the four-week average
to a new post-recession low of 345,000. Analysts had wanted
to see a little bigger drop in claims but had hedged their
bets with a consensus estimate of 349,000. Obviously they
were pleased as the numbers show a consistent improvement
although very slow decrease. Continued claims under 350K
have in the past led to an increase in jobs by about +150K
per month. With the Nonfarm Payrolls due out in two weeks
hopes are going to be running high.

Those claims may be about to increase according to the
Monthly Mass Layoffs which came in today at 1,929. These
layoffs will cut 192,633 workers and was up substantially
from the 1,438 and 138,543 workers from last month. This
is a December number and I suggested last month we could
see an increase at year end and into January as companies
trim the sails going into the new year. Manufacturing
still accounted for the majority of the cuts with 34% of
the total. This is a trend that should continue as long
as jobs continue to be outsourced overseas.

There have been several high profile comments recently that
suggest the "lost" jobs from December's Jobs report will be
found. Fed President Bob McTeer said he was shocked and went
on record that he felt they would be found in the January
report. Treasury Secretary John Snow echoed those exact
comments this week that the report "must" be in error and
the inaccuracies will be corrected and the lost jobs found
by January's report. This is just a sample of the posturing
we are seeing and it suggests the jobs will be found
regardless of whether they exist of not. It is an election
year.

With the economics mixed the markets were left to trade on
stock news. The biggest news of the morning was news of a
massive layoff by Eastman Kodak. They are cutting -15,000
workers over the next three years as they close plants and
reduce manufacturing square footage by about one third.
The company is moving out of traditional film and into
the digital camera market. Investors liked the announcement
and pushed the stock up +10% to $31.02 and a six month high.
This helped the Dow overcome weakness from INTC, T, DD, KO
and Boeing. EK gained +3.49 and the next largest Dow gainer
was CAT at +0.60.

Lucent was the target of some serious selling on volume of
more than 200 million shares after Smith Barney cut them
to a sell. Smith Barney said traditional wireline suppliers
had seen their stocks rise well above fundamentals in the
last month and were due for a correction. The analyst said
capex spending in the sector would likely be flat with
declining spending in the switched circuit markets being
offset by increases in VOIP equipment and routers.

AT&T complicated the picture for the telecom sector when it
announced earnings that were soft from weak customer demand
and heavy pricing pressure. AT&T said it saw further sales
declines for 2004. Revenues dropped -12.8% as long distance
continued to be eroded by consumers switching to LD free
cell phones and VOIP. Consumer revenues fell -18.9%. T fell
-$.85 cents on the news and below its $21 support level to
rest on the 50 DMA at 20.39.

After the close the 800lb gorilla announced earnings and the
futures market dropped sharply. Microsoft reported earnings
of 34 cents and beat estimates by +4 cents but nobody seemed
to care. After hours investors keyed on the 14 cent headline
number and recoiled from the 20 cent charge for stock based
compensation. This charge was well over any estimates at
nearly 60% of gross earnings. Other problems appeared to
be a drop in subscription revenue and a lower unearned
revenue number. Revenue was up slightly over the prior
quarter and Microsoft said PC demand continued to exceed
expectations. They also said they were seeing early signs
of an IT recovery. They guided slightly up for the current
quarter which is normally unheard of. Despite the good
guidance the number crunchers panicked and the stock sold
off slightly in after hours trading. From the action in
the futures you would have thought they had missed their
numbers with the S&P futures dropping -4.00 on the news.
This was a severe over reaction to the -50 cent drop in
the stock.

Part of that futures drop was attributed to some guidance
from other reporting techs. KLAC beat the street by +3 cents
and guided higher for the current quarter. They said orders
were up +50% from the prior quarter and felt they were in
the early stages of a sustainable upturn. They felt the
orders for the 1Q would increase by +15%. They beat the
street and raised guidance but the stock fell over -$1.00
in after hours trading.

MCHP announced earnings inline with estimates and guided
higher for the current quarter. They said their book-to-bill
ratio was 1.26 and raised their dividend. They said sales
of microcontrollers were at record levels. The stock was
trading down over -$1 in after hours. MCHP was one of the
three stocks rated five stars on Wednesday by S&P. (INTC
and TXN) They suggested each had the potential for another
+25% gain.

MSCC beat estimates by +2 cents and raised guidance. Income
increased +50% over the fourth quarter and margins increased
substantially. Book to bill was only +1.06 and sales only
increased +4%. While it appeared great for the company
investors were not as impressed. The stock was trading
down in after hours.

GNSS beat the street's estimates of +3 cents with a huge
jump to +8 cents profit. Sales were up +17% over the prior
quarter with gross margins increasing to 39.6%. Great news
but they had the misfortune of guiding inline with estimates
and the stock traded down in after hours.

AMGN accidentally released their earning on their website
just before the market closed and dropped substantially
due to missing estimates by -2 cents. They closed at $61.47
and well off their $63.46 intraday high. The earnings miss
was due to rising expenses and higher marketing costs to
fend off new competition from Abbot on Enbrel.

Corning posted earnings inline with estimates but the big
news was surging demand for LCD display panels used in PCs
and laptops. GLW said it expected to sell out of its LCD
glass despite boosting output to meet demand. This was the
second consecutive quarterly profit in more than two years.
You guessed it, GLW traded down in after hours.

Volume is strong, tech earnings are great and guidance is
mostly positive but techs are retreating. Good earnings are
being met with selling more often than not. PC sales are
now projected to be double digits through June (per MSFT)
and chip companies are trending flat to down. Small caps
have been on a roll but sold off -5.75 today. Seeing a
trend here?

This is normal post earnings depression like we have not
seen since the Internet bubble. We had a massive earnings
run on extremely optimistic expectations and those have
generally been met. Investors are simply taking their
profits. This is not the end of the world but it may be
the end of the vertical gains without any new catalyst.

Russell Chart


S&P Chart



The markets are very extended and several critical points
have been reached. The Dow hit 10660 today and within 13
points of the 2002 resistance highs at 10673. The S&P hit
1150.51 and only -1.50 points away from a +50% rebound
off the Oct-2002 lows. 1160 is the 50% retracement of the
drop from the Jan-2000 highs. 1173 is the 2002 resistance
highs. Getting crowded over 1150. The Russell 2000 hit
600.61 today and while that is still -14 points from the
all time high in March 2000 it has been the unofficial
target for over a month. The Nasdaq has failed at 2150
four times now and despite great earnings is threatening
to retest 2100. While these technicals tests are critical
they are all just signs of a tired earnings run. The Nasdaq
had no trouble breaking 2000 and the Dow is now well over
10000 on the strength of these expectations. It should not
be surprising to see some profit taking and consolidation
once those expectations were met.

Distribution or consolidation? Ask me again in a month.
The very strong volume patterns suggest we are seeing
some distribution at critical market levels. The down
volume is increasing but we are not yet seeing any real
selling imbalances. The new highs were over 1000 again
for the fourth consecutive today and showing no signs of
retreat. Until those numbers decline substantially we are
just consolidating. The last time they were below 800 on
the new 52-week highs was the week before Christmas.

While there is still significant resistance above us there
is also significant support below. The Nasdaq spend most
of the last two weeks fighting to get over 2100 and stay
there and it is going to take a lot more selling than we
saw today to fall below the 2085 level that we saw during
that fight. Should that level fail the 50 dma is right at
2000 and that has been support since March.

The Dow has successfully defended 10500 numerous times
and 10400 more than once. The 50 dma is currently at 10100
and that is more than -500 points away from today's close.
The S&P has very strong support at 1115-1120 and is well
above the 50 dma at 1085.

What all this gibberish means is that we could see several
days of selling without any serious harm. The problem as
I see it now is the lack of a motivating factor. Earnings
are coming in as expected and more than 50% of the S&P
will have reported by tomorrow. There should be no more
big upside surprises. The Fed meets on Tuesday and the
odds are good they will begin to condition the markets
for a rate hike. Nobody expects a hike before the elections
but they will likely begin to set the stage. This could
put pressure on the markets through Wednesday.

I believe we will see a gap down on Friday that will be
bought by traders looking for an entry point. That bounce
could fade by days end and leave us range bound through
the Fed meeting which ends on Wednesday. Once any reaction
to the Fed meeting is over I would look for a ramp into
the Jobs report on Jan-6th. We have been virtually assured
that it will show positive job gains. Potholes or stepping
stones into that Jobs report will be the GDP due out next
Friday and the ISM on Monday the 2nd. The big challenge
will be the GDP. The official estimate is for +4.5% growth
for the 4Q. The whisper number is already +6.5%. This is
a prime opportunity for a disappointment. With the recent
earnings and sales increases for the 4Q I suspect it will
be over 4.5% but not as high as the whisper. Since the
Fed will undoubtedly have the GDP numbers during their
meeting any overly strong number will influence their
rate stance. It is a catch-22. An inline number will be
seen as pleasing to the Fed but disappointing by traders.
A blowout number could cause a Fed reaction which would
disappoint traders. The best possible number would be
something just over 5% so the Fed is pleased but not
scared and traders can be pleased but not ecstatic.

Friday is going to be a tossup and a chance for traders
to begin positioning themselves for one more week of very
intensive earnings followed by a week of intensive
economics. After that it is time to coast until the April
earnings run begins. Now, that chapter in this investing
saga will be very interesting as we get to see if this
months guidance lived up to the hype.

Enter Passively, Exit Aggressively.

Jim Brown
Editor


***************
FUTURES MARKETS
***************

Flat Squeeze
Jonathan Levinson

In what will prove to have been either distribution at the highs
or consolidation of recent gains, the indices went net nowhere on
high volume, the NQ dropping slightly and the YM advancing, while
gold and the dollar declined against gains in treasuries.


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.

Daily chart of the US Dollar Index


The US Dollar Index got battered last night with Europe's open,
diving to the 85.60 level before bouncing to the 85.80's, where
it spent the better part of the day.  The slide from its dead cat
bounce last week continues, but gold continued to trade
listlessly while silver jumped.  The CRB advanced .42 to 269.67,
led by cocoa, silver and coffee futures. Natural gas led the
decliners on a smaller than expected drop in inventories
announced today.


Daily chart of February gold


February gold made it as high as 413.50 before retreating,
spending most of the session around 410-411 and closing at
410.10, with a low of 408.30.  The daily cycle downphase
continues to play out, while lower rising channel support holds.
March silver did much better, gaining 2.4% to close at 6.355.
The miners were down as well, XAU -1.94% and HUI -1.27%, and this
is the second day of side-by-side losses in gold and the US
Dollar.


Daily chart of the ten year note yield


Treasuries had a fine day, with the ten year note yield declining
1.68%, a 6.8 basis point move to close at 3.969%.  3.9% is double
bottom support, and given the shape of the daily cycle
oscillators, I expect that support to hold.  However, I note that
the Fed drained an eye-popping 19.5B via open market ops, and yet
bonds were bid higher.  In light of that, I'd be inclined to view
my cute little horizontal line on the yield chart with, say, a
grain of salt.  If a 19.5 billion dollar liquidity drain couldn't
keep bonds from rising over 1% today, I doubt if a double bottom
on a daily yield chart will either.


Daily NQ candles


The NQ was again the weakest link, dropping .84% or 13 points to
close at 1534.  The move was mostly sideways, but the broken
rising channel trendline held back the advance, just as the
primary rising channel supported the decline.  This was
sufficient to give bears a daily cycle downphase, with the Macd
one support level away from printing a confirming cross.  The
session low was 1532.50, right on the daily trendline and just
north of price confluence.  Any further selling would have very
bearish implications for the daily cycle, which has been looking
for a downphase for months now on the NQ.


30 minute 20 day chart of the NQ


MSFT announced earnings after the bell and let the dogs out, with
the NQ down 11 at 1523.50 as of this writing.  A 30 minute cycle
downphase was aborting as of the cash close (when this chart was
generated) and reconfirmed 1530 as first support, with key
confluence, trendline and fibonacci support below at 1518.  A
break below that level would qualify the current NQ weakness as
more than just a bullish reprieve, and would be the first sign of
trouble, signaling a test of 1496 and 1477 support.  Given the
very fragile state of the daily cycle oscillators, that should be
sufficient to support a bearish stance for the coming weeks.


Daily ES candles


ES lost 2.25 points to close at 1143.75, a small move to complete
a small day.  1141 was the print as of this writing, again no
breach in the bullish armor but coming ever closer to that lower
rising channel support line.  This line has been broken and is
now resistance on NQ.  1139-40 is first support, followed by
1130, 1121 and then 1115.


20 day 30 minute chart of the ES


A 30 minute cycle downphase succeeded in inflicting very little
damage on the ES, and the upphase had tentatively commenced as of
the cash close.  The MSFT selloff could undo that signal, but it
remains the case that the 30 minute oscillator, which tends not
to trend, is in bounce territory.  Nothing less than a break of
the rising channel in the 1137-40 area is required to suggest a
trending move on this timeframe.  Until the uptrend fails, ES
will continue to look bullish.  More realistic would be a weak
bounce here to fail from a lower high.  This would confirm the
onset of an overdue daily cycle downphase, and set us up for a
more vigorous test of 1130 and 1115 support.

100-tick ES


The aimless, gentle decline left the short cycle oscillators
perfectly chopped up and unreadable.


Daily YM candles


The YM was the only index to close green, although only slightly
so, leaving a doji star within the rising daily channel.  The
daily cycle downphase continues to flop along aimlessly, and
clearly this weakness is merely corrective so far.


20 day 30 minute chart of the YM



For the second consecutive session, we've seen the intermarket
relationships making little sense and diverging sharply from the
last recognizable pattern.  Today we had a weak dollar, mixed-to-
weak equities, weak gold, strong silver and strong bonds.  I'm
assuming that this is merely a stall at some kind of turning
point, and I intend to wait until a directional move restores
some semblance of clarity.  I don't expect gold and the dollar to
trade in lockstep for long, and with volatility so low, it's wise
not to set ones mind firmly on any particular outlook.  We need
to wait for the market to give us a cue.


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INDEX TRADER SUMMARY
********************

Check the Site Later Tonight For Jeff's Index Trader Article
http://members.OptionInvestor.com/itrader/marketwrap/iw_012204_1.asp


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****************
MARKET SENTIMENT
****************

Looking Tired
- J. Brown

The rallies in the major indices are truly starting to look
tired.  For the last three or four days we've done nothing but go
sideways as investors try and digest the deluge of earnings news.
If the markets can rally tomorrow they may be able to stretch the
winning streak to nine weeks in a row, a feat not seen since 1989
(on the S&P).  However, that all depends on how investors choose
to interpret Microsoft's mixed earnings news that came out
tonight after the closing bell.

The market's exhaustion is becoming more apparent in its
internals.  The NYSE saw a very narrow race in the A/D line but
advancing stocks nosed past decliners 1443 to 1419.  The NASDAQ,
which saw the brunt of the selling today, watched losers beat up
winners almost 20 to 11.  Down volume overpowered up volume on
both exchanges and total volume was heavy yet again.  As a matter
of fact some of the discussion among traders is how all this
heavy volume smells like distribution (smart money taking profits
and selling their winners to retail investors).

Despite the weakness today the major averages are still in a
strong up trend.  The question is whether or not investors are
once again ready to buy the dip or wait for a pull back in hopes
of a better entry point.

One sector really seeing a lot of profit taking is the disk
drives sector.  The DDX has fallen strongly for two days in a row
after STX offered its earnings warning mid-week.  The group looks
poised for more weakness tomorrow and the DDX doesn't have any
support until the 130 level.

The GHA hardware index has also fallen under profit taking and
the index broke support at 260 today while its MACD indicator
suggest a sell signal will appear very soon.  The Internets and
software stocks have held up better than their hardware-related
cousins.  However, everyone is watching the semiconductors.  The
SOX could be in bull flag consolidation but the index looks
poised for more weakness tomorrow and its MACD also looks pretty
weak.

Not surprising is the pull back in the NWX networking index.  The
whole group has been white-hot since the new year and was way
overdue for a bit of selling.  Another group that's been super
strong was the broker-dealers but the XBD finally felt some
profit taking today as well.

Hmm... I'm also noticing what could be short-term double-tops in
the DRG drug index and the OIX oil index.  There's no correlation
between the two other than a similar chart pattern.  We'll see if
there's any follow through on today's failed rallies.

The best performing sector today was the XAL airlines index.  The
XAL added 4% after AMR, the world's largest airline, jumped
almost 16% on a better than expected earnings report.

Also notable today was the failed rally in the XAU gold & silver
index.  The entire group posted an oversold bounce earlier in the
week but that bounce might be failing.


-----------------------------------------------------------------

Market Averages

DJIA ($INDU)

52-week High: 10660
52-week Low :  7416
Current     : 10623

Moving Averages:
(Simple)

 10-dma: 10543
 50-dma: 10129
200-dma:  9400



S&P 500 ($SPX)

52-week High: 1150
52-week Low :  788
Current     : 1143

Moving Averages:
(Simple)

 10-dma: 1133
 50-dma: 1085
200-dma: 1010



Nasdaq-100 ($NDX)

52-week High: 1559
52-week Low :  795
Current     : 1530

Moving Averages:
(Simple)

 10-dma: 1536
 50-dma: 1448
200-dma: 1307




-----------------------------------------------------------------

As expected the volatility indices bounced today but not by much
as the selling was mild across most of the market indices.

CBOE Market Volatility Index (VIX) = 14.71 +0.37
CBOE Mkt Volatility old VIX  (VXO) = 15.12 +0.69
Nasdaq Volatility Index (VXN)      = 21.74 +1.03


-----------------------------------------------------------------

          Put/Call Ratio  Call Volume   Put Volume

Total          0.92        886,395       812,495
Equity Only    0.74        783,191       581,852
OEX            1.50         14,300        24,419
QQQ           10.51         23,329       245,232


-----------------------------------------------------------------

Bullish Percent Data

           Current   Change   Status
NYSE          78.4    + 1     Bull Confirmed
NASDAQ-100    80.0    - 1     Bull Confirmed
Dow Indust.   93.3    + 6     Bull Confirmed
S&P 500       88.6    + 1     Bull Confirmed
S&P 100       87.0    + 2     Bull Confirmed


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

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


-----------------------------------------------------------------

 5-dma: 1.00
10-dma: 1.06
21-dma: 0.97
55-dma: 1.05


Extreme readings above 1.5 are bullish, and readings below .85
are bearish.  These signals don't occur often and tend be early,
but when they do, they can signal significant market turning
points.


-----------------------------------------------------------------

Market Internals

            -NYSE-   -NASDAQ-
Advancers    1443      1138
Decliners    1420      1960

New Highs     320       290
New Lows        7         5

Up Volume    846M      681M
Down Vol.   1369M     1589M

Total Vol.  2228M     2332M
M = millions


-----------------------------------------------------------------

Commitments Of Traders Report: 01/13/04

Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the
Chicago Mercantile Exchange and Chicago Board of Trade. COT data
can be found at www.cftc.gov.

Small specs are the general trading public with commercials being
financial institutions. Commercials are historically on the
correct side of future trend changes while small specs tend
to be wrong.

S&P 500

We don't have much more to report on for commercial traders this
week other than slightly increased positions on both sides of the
fence.  Small traders followed suit.


Commercials   Long      Short      Net     % Of OI
12/16/03      448,103   460,670    12,567     1.4%
12/22/03      400,066   405,240    (5,174)   (0.6%)
01/06/04      403,721   408,729    (5,008)   (0.6%)
01/13/04      405,558   411,361    (5,803)   (0.7%)

Most bearish reading of the year: (111,956) -  3/06/02
Most bullish reading of the year:   23,977  - 12/09/03

Small Traders Long      Short      Net     % of OI
12/16/03      172,947   113,704    59,243    20.7%
12/22/03      147,537    81,596    65,941    28.8%
01/06/04      142,844    83,518    59,326    26.2
01/13/04      149,057    90,571    58,486    24.4%

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


E-MINI S&P 500

The e-minis are seeing more action than the full contracts
represented above.  Commercial traders added more than 20K
contracts to both longs and shorts but they remain net bearish.
Small traders were more enthusiastic with a large increase in
long positions, outpacing the increase in short positions.
Contrarians might view this as a bearish development.


Commercials   Long      Short      Net     % Of OI
12/16/03      330,273   361,316    (31,043)   (4.5%)
12/22/03      128,801   213,021    (84,220)  (24.6%)
01/06/04      175,489   240,865    (65,376)  (15.7%)
01/13/04      196,858   263,845    (66,987)  (14.5%)

Most bearish reading of the year: (354,835)  - 06/17/03
Most bullish reading of the year:  133,299   - 09/02/03

Small Traders Long      Short      Net     % of OI
12/16/03     177,193     73,694   103,499    41.3%
12/22/03     125,248     43,482    81,766    48.5%
01/06/04     139,433     51,909    87,524    45.7%
01/13/04     191,241     62,711   128,530    50.6%

Most bearish reading of the year: (77,385)  - 09/02/03
Most bullish reading of the year: 449,310   - 06/10/03


NASDAQ-100

Ho-hum...commercial traders are still asleep at the wheel
in the NDX futures.  Meanwhile small traders have reduced
their outstanding shorts.


Commercials   Long      Short      Net     % of OI
12/16/03       61,343     73,153   (11,810) ( 8.8%
12/22/03       40,277     36,452     3,825    5.0%
01/06/04       42,892     37,801     5,091    6.3%
01/13/04       41,829     38,547     3,282    4.1%

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

Small Traders  Long     Short      Net     % of OI
12/16/03       28,676    15,197    13,479    30.7%
12/22/03       22,656    14,544     8,112    21.8%
01/06/04        8,035    17,911   ( 9,876)  (38.1%)
01/13/04        9,705    12,539   ( 2,834)  (12.7%)

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

DOW JONES INDUSTRIAL

There isn't much to report in the DJ futures either.
It looks like commercials are just shuffling money around but
the net result was a slightly more bullish stance on the Dow.
In mirror-like precision small traders have slowly become more
bearihs.


Commercials   Long      Short      Net     % of OI
12/16/03       23,509    13,880    9,629      25.8%
12/22/03       14,088     9,998    4,090      17.0%
01/06/04       15,697     9,497    6,200      24.6%
01/13/04       16,501     8,724    7,777      30.8%

Most bearish reading of the year: (8,322) -  1/16/01
Most bullish reading of the year: 15,135  - 10/16/01

Small Traders  Long      Short     Net     % of OI
12/16/03        9,497    19,633  (10,136)   (34.8%)
12/22/03        6,915     8,983  ( 2,068)   (13.0%)
01/06/04        5,713     8,105  ( 2,392)   (17.3%)
01/13/04        6,496     9,970  ( 3,474)   (21.1%)

Most bearish reading of the year: (10,136) - 12/16/03
Most bullish reading of the year:   8,523  -  8/26/03

-----------------------------------------------------------------


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The Option Investor Newsletter                  Thursday 01-22-2004
Copyright 2004, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: GILD
Dropped Puts: NONE
Call Play Updates: AMGN, APOL, DGX, ESRX, GENZ, MBI, MWD, MXIM, STJ
New Calls Plays: HSIC
Put Play Updates: ADBE
New Put Plays: QLGC


****************
PICKS WE DROPPED
****************

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


CALLS:
*****

Gilead Sciences - GILD - cls: 65.20 chng: -0.17 stop: 62.50

It took the patience of a saint and a full month to get the job
done, but GILD finally hit our lower target at $66 on Wednesday,
right at the top of that September gap.  We were expecting some
resistance to be found there and sure enough it was with the
stock pulling back today.  Normally, we might be tempted to hold
on through the ensuing consolidation and play for another leg
higher to the $68-70 area.  But with earnings only a week away,
it seems unlikely that the stock will be able to mount another
strong leg up ahead of that report.  With strong gains already
accrued, we're choosing to take the money and run.  More
aggressive traders can certainly hold for a rally into earnings
next week, but we would suggest that stops should be trailed just
behind the 10-dma, at the lowest.

Picked on December 21st at   $59.40
Change since picked:          +5.80
Earnings Date               1/29/04 (confirmed)
Average Daily Volume =     3.70 mln
Chart =



PUTS:
*****

None


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********************
PLAY UPDATES - CALLS
********************

Amazon.com - AMZN - close: 57.18 chg: +0.98 stop: 53.50*new*

Not a bad day for shares of AMZN.  The stock managed to out
perform the major averages and its peers in the INX internet
index.  AMZN popped higher at the open after EBAY's strong
earnings numbers last night but faded like many stocks today.
Fortunately, investors bought the dip and AMZN produced a slow
drift higher through most of the session.  We only have a couple
of trading days left before AMZN's Jan. 27th earnings
announcement.  We would not suggest new bullish positions at this
time and current players should watch their risk.  We are raising
our stop loss to $53.50.

Picked on January 14 at $55.01
Change since picked:    + 2.17
Earnings Date         01/27/04 (confirmed)
Average Daily Volume:       10 million
Chart =


---

Apollo Group - APOL - close: 72.78 change: -1.82 stop: 71.00

The market gives and the market takes away.  APOL was looking
strong earlier in the week, as it marched through the $75 level,
but today's big drop certainly gives us cause for concern.  This
could just be the pullback to test support in the $72.50-73.00
area, or it could be the start of a more significant decline.
With the break of the 10-dma ($73.00) today and the daily
Stochastics starting to turn bearish, we need to be on our toes.
A rebound from above the $72 level can be used for a fresh entry
into the play, but if that support gives way, then odds are
strong we'll see a test of the 20-dma ($71.22) as the next level
of support.  Maintain stops at $71.

Picked on January 13th at    $72.63
Change since picked:          +0.15
Earnings Date               3/18/04 (unconfirmed)
Average Daily Volume =     1.91 mln
Chart =


---

Quest Diagnostic - DGX - close: 78.42 chg: +0.58 stop: 76.60 *new*

The chase continues for shares of DGX.  We're both surprised and
encouraged by the constant march higher.  Traders appear to be buying
every dip in anticipation of DGX's Jan. 27th earnings report.  Due to the
short time left before its announcement we would not suggest any new
bullish positions.  As a matter of fact we're raising our stop loss to a
tight $76.60 (yesterday's low).  This is tighter than we would normally
play it but we don't want to give back too much of DGX's recent run and
it could see some minor profit taking ahead of the weekend tomorrow.  In
Tuesday's newsletter and in the monitor the last two sessions we've
suggested that traders actually consider taking profits at current levels
above $77.50.  We're also sticking by our plan to exit the stock should
DGX trade at $79.95, assuming we aren't stopped out first.

Picked on December 30 at $72.95
Change since picked:     + 5.47
Earnings Date          01/27/03 (confirmed)
Average Daily Volume:      836  thousand
Chart =


---

Express Scripts - ESRX - cls: 68.82 chng: +0.30 stop: 64.00*new*

Despite the pullback from its intraday highs today, ESRX is
continuing its steady march higher.  Today's close over $68.50
marks the start of our expected move into the gap left behind in
late July, and opens the door for a continued rally to the top of
that gap just below $72.  Of course, with daily Stochastics
already extended into overbought territory, it may be time for a
bit of consolidation before making that upward move.  With former
resistance near $66 solidly broken, a pullback near that level
would make for a very nice entry point, as we see old resistance
act as support.  Both the 10-dma ($66.56) and 20-dma ($66.05)
have now risen to the point that they can reinforce that expected
support level.  Due to the way the stock continues to pull back
from its intraday forays into higher territory, momentum entries
don't seem to be the best choice.  More aggressive traders can
consider intraday dips into the $67.50-68.00 area as viable
entries as well.  Note that we're raising our stop to $64
tonight, which is just below the 50-dma ($64.02).

Picked on January 13th at    $68.32
Change since picked:          +0.50
Earnings Date               2/24/04 (confirmed)
Average Daily Volume =     1.24 mln
Chart =


---

Genzyme Corp. - GENZ - close: 55.18 change: +0.04 stop: 51.00

Biotechnology bulls were treated to a real roller-coaster ride
over the past couple days, as the BTK index pushed to a new high
yesterday and then reversed just about half of that gain today.
The ride was more adrenaline-filled for traders in GENZ though,
as the stock soared higher following yesterday's new recent high,
tapping the $57 level before commencing on a complete retracement
of the morning's gains, ending right back near the $55 level.
Now we'll get to see if the breakout over $55 transformed that
level to support or if there will be a deeper pullback.  With
daily Stochastics starting to roll over already and today's
gravestone doji candlestick looking bearish, it looks like a more
significant pullback is in store.  The most logical place for the
buyers to step back in will be on a dip and rebound from the $52-
53 area.  Recall that $52 was strong resistance before last
week's breakout and $53 had been the base of this week's
consolidation before yesterday's breakout over $55.  We know now
that there will be a fair amount of supply coming in as GENZ
works its way through the $57-58 resistance area in preparation
for a run at the $60-61 zone.  For that reason, our inclination
is still to focus on entries on pullbacks, rather than breakouts.
Maintain stops at $51.

Picked on January 20th at    $53.00
Change since picked:          +2.18
Earnings Date               2/19/04 (unconfirmed)
Average Daily Volume =     2.81 mln
Chart =


---

MBIA Inc. - MBI - close: 63.07 chg: -0.23 stop: 59.99*new*

In the last two sessions shares of MBI have gone...nowhere!
We're right back to Tuesday's close at $63.07.  While we're not
terribly excited about its performance it has held up considering
today's pull back across most market sectors.  The current trend
of higher lows appears to be coiling for a breakout above the
63.50 mark.  If we don't see this move occur in the next couple
of trading days we may close MBI and look for something that is
moving.  We are going to raise our stop loss to 59.99.

Picked on January 20 at $62.93
Change since picked:    + 0.14
Earnings Date         02/03/04 (confirmed)
Average Daily Volume:      572 thousand
Chart =


---

Morgan Stanley - MWD - close: 59.86 chg: -0.82 stop: 56.75

We see a similar pattern in MWD (as to MBI).  The stock has gone
sideways and is within a couple of cents of Tuesday's closing
price. This sideways consolidation isn't necessarily bad for
investors and it gives MWD time to digest its breakout above
resistance at $59.00.  Only if MWD breaks down below $59.00 would
we begin to worry.  Actually, traders might want to keep an eye
on MWD for a dip back to the $59.00 level as a potential entry
point.  The XBD broker-dealer index just posted its first decline
in six days and we could see a little bit of follow through on
the profit taking.

Picked on January 15 at $59.81
Change since picked:    + 0.05
Earnings Date         03/18/04 (unconfirmed)
Average Daily Volume:      3.8 million
Chart =


---

Maxim Integrated - MXIM - cls: 56.62 chg: -0.04 stop: 51.89 *new*

Uh-oh!  We were okay with the SOX churning sideways as investors
digested Intel's earnings news but now the sector index appears
to be headed lower.  RFMD's uninspired guidance for next quarter
didn't help chip stocks any and we could see more profit taking
in the group.  MXIM is also pulling back but has held support at
$52.60 for two days in a row.  Traders might want to wait for
MXIM to trade back above the 54.25 level before considering new
entries, especially with its technical oscillators turning
bearish.  The good news is that even if the chip sector and MXIM
pull back it will probably set us up for another bullish entry
point.  Two days ago S&P released a 52-page report detailing why
they feel semiconductor stocks are poised to gain 20-25% over the
next 12 months.  Here's an excerpt, "Key factors driving
semiconductor growth, according to the analysts, include surging
demand from Asia, as outsourced manufacturing spurs prosperity in
that region; improving corporate profits in the U.S., which are
leading to increased IT investment; under-investment in
semiconductor manufacturing capacity, which has led to high
capacity utilization rates and, ultimately, pricing power; and
high operating leverage at chipmakers, resulting from three years
of cost reductions."   We are going to raise our stop loss to
51.89 or breakeven.

Picked on January 06 at $51.89
Change since picked:    + 1.73
Earnings Date         02/05/04 (confirmed)
Average Daily Volume:      5.4 million
Chart =


---

Saint Jude Medical - STJ - cls: 66.38 chg: -0.12 stop: 62.75*new*

The volume-powered breakout from its cup-and-handle pattern
continues for STJ.  The stock actually hit a new high this
morning before slipping back in very minor profit taking.  The
good news here is that traders bought the dip to $66.00 late in
the afternoon.  We are anticipating a lack of sellers between now
and STJ's earnings report on Jan. 28th but we're going to raise
our stop loss just in case.  Our new stop is $62.75 but more
conservative traders might want ton consider something closer to
$64.00.  Keep in mind that if the major indices decide to show
any serious weakness the vast majority of stocks, including STJ
will likely follow.  Always play with a stop. In addition, there
aren't many trading days left between now and STJ's earnings
report so we are not suggesting any new bullish positions.

Picked on January 12 at $64.01
Change since picked:    + 2.37
Earnings Date         01/28/04 (confirmed)
Average Daily Volume:      1.4 million
Chart =



**************
NEW CALL PLAYS
**************

Henry Schein - HSIC - close: 70.65 chg: +1.15 stop: 67.00

Company Description:
Henry Schein, Inc. is the largest distributor of healthcare
products and services to office-based practitioners in the
combined North American and European markets. Recognized for its
excellent customer service and low prices, the Company's four
business groups--Dental, Medical, International and Technology--
serve more than 400,000 customers worldwide, including dental
practices and laboratories, physician practices and veterinary
clinics, as well as government and other institutions. The
Company's sales reached a record $3.1 billion for the twelve
months ended September 27, 2003. With a presence in 14 countries,
Henry Schein's International Group posted sales of over $500
million for the same period.  The Company operates through a
centralized and automated distribution network, which provides
customers in more than 125 countries with a comprehensive
selection of over 90,000 national and Henry Schein private-brand
products. (source: company press release)

Why We Like It:
HSIC turned out to be a big performer for investors in 2003.
Shares rallied from their February '03 lows near $35 to end the
year near $66.  Now it looks like the stock is ready for its next
leg higher.  HSIC did have some recent news when the company
announced a $328 million acquisition for a handful of European
dental product distributors.  Fortunately, from the bullish
reaction in the stock price, Wall Street appears to agree with
HSIC's management that there is little risk in the acquisition
that will be immediately accretive to earnings.  However, we will
note that Bank of America did recently downgrade the stock from
"buy" to "hold" based on valuation claiming it was near their $70
price target.

Coincidentally HSIC's current point-and-figure price target is
$70 and that target has been met.  Technically this raises the
risk level for the play.  The vertical price objectives
forecasted by P&F analysis are not always met and can be exceeded
but P&F fans should be extra cautious here.  Chart readers will
also notice that HSIC appears to be breaking out of a mult-week
consolidation.  We do like the bullish breakout over the $70
level on a day where the major averages were lower.  HSIC's MACD
is in a bullish buy signal while its other oscillators are also
pointing higher.  Our first target is the $75 mark but we believe
HSIC can actually trade beyond this level.  We'll start the play
with a stop loss at $67.00, just under its simple 50-dma at
67.36.

On a side note...HSIC does not appear to have any sort of stock
split history but shares are at an all-time high.

Suggested Options:
Traders have plenty of options to choose from.  HSIC has
February, March, April and July strikes.  We're prone to use the
February and March calls.  Our favorite would be the March 70s
but there is no open interest.  The April 70s will have to work.

BUY CALL FEB 65 HQE-BM OI= 35 at $6.20 SL=4.00
BUY CALL FEB 70 HQE-BN OI=590 at $2.40 SL=1.20
BUY CALL MAR 65 HQE-CM OI=  0 at $6.70 SL=4.30
BUY CALL MAR 70 HQE-CN OI=  0 at $3.10 SL=1.65
BUY CALL MAR 75 HQE-CO OI=  0 at $1.05 SL= --
BUY CALL APR 70*HQE-DN OI=550 at $3.80 SL=2.00
BUY CALL APR 75 HQE-DO OI=134 at $1.55 SL=0.75

Annotated Chart



Picked on January 22 at $70.65
Change since picked:    + 0.00
Earnings Date         03/04/04 (unconfirmed)
Average Daily Volume:      334 thousand
Chart =



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*******************
PLAY UPDATES - PUTS
*******************

Adobe Systems - ADBE - close: 37.30 change: -1.23 stop: 40.00

Was that the reversal we've been waiting for?  It certainly feels
like it, with ADBE having now reversed the strong rally of last
week and falling back under the 200-dma ($37.52).  Daily
Stochastics are now tipping over without having made it into
overbought territory (another sign of weakness) and the 50-dma
($39.71) has now dropped below $40, which will make it that much
harder for the bulls to take a run at our stop.  The first proof
of real weakness will come in the form of a breakdown under $36,
which will take out the early January lows and set the stage for
a drop to the $34 area.  Depending on how much selling pressure
develops on the way to that objective, ADBE might have a real
shot at stronger support in the $30-31 area.  Should that level
be reached, we would gladly close the play for a tidy gain.
Maintain stops at $40.

Picked on January 11th at     $37.12
Change since picked:           -0.18
Earnings Date                3/11/04 (unconfirmed)
Average Daily Volume =      3.38 mln
Chart =



*************
NEW PUT PLAYS
*************

QLogic Corp. - QLGC - close: 45.25 change: -1.49 stop: 48.50

Why we like it:
One of the early reporters, QLGC issued its earnings release back
on January 14th.  The headline number of 39 cents per share beat
consensus estimates by 2 pennies, but with revenues a bit on the
light side, investors were clearly disappointed.  The stock was
already looking a bit weak just above the $50 level before the
report, and the reactionary selling created a drop at the open
the next day that didn't find support until the $46 level was
touched.  As would be expected, a bounce ensued, but over the
past couple days, that bounce has been weakening and failed in
spectacular fashion today, with a break below $46 and close at
the low of the day.  The supply-demand dynamic has now shifted
solidly in the bears favor, as demonstrated by the PnF chart.
Currently on a Sell signal with a bearish price target of $40, it
looks like there is enough downside in the stock to make for a
winning play.

QLGC bottomed just above $41 in late July, so there is the
potential for support to be found there again.  But looking at
the longer-term chart, we can see that $40 appears to be a more
significant support level, making it the logical choice for our
exit target.  Should we see a rebound attempt from here, then a
rollover below $47 will be the ideal entry point.  On the other
hand, momentum traders will want to enter the play on a drop
below today's intraday low.  With price so far below all the
moving averages, we can't expect them to offer any help in terms
of support or resistance levels.  Following today's breakdown out
of the post-earnings consolidation pattern, the stock shouldn't
be able to break back above the top of that consolidation pattern
near $48.25, so we're initially setting our stop at $48.50.
Conservative traders may want to harvest some gains on signs of a
rebound from the $41 level, while more aggressive traders will
want to aim for our target in the $39-40 area.

Suggested Options:
Aggressive short-term traders can use the February 42 Put, while
those with a more conservative approach will want to use the
February 45 put.  We've also listed March strikes for those
traders desiring greater insulation from time decay.  Our
preferred option is the March 45 strike, as it is currently at
the money and provides more time until expiration.

BUY PUT FEB-45 QLC-NI OI=5358 at $1.95 SL=1.00
BUY PUT FEB-42 QLC-NV OI=1916 at $0.95 SL=0.50
BUY PUT MAR-45*QLC-OI OI= 194 at $2.65 SL=1.25
BUY PUT MAR-42 QLC-OV OI= 354 at $1.65 SL=0.75

Annotated Chart of QLGC:



Picked on January 22nd at    $45.25
Change since picked:          +0.00
Earnings Date               4/14/04 (unconfirmed)
Average Daily Volume =     3.84 mln
Chart =



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**********
DISCLAIMER
**********

Please read our disclaimer at:
http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html


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ADVERTISING INFORMATION

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Contact Support
The Option Investor Newsletter                 Thursday 01-22-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Watch List: Another Mixed Bag
Traders Corner: Ignorance May Be Bliss, But It’s No Excuse For
    Losses
Options 101: The Light Finally Goes On

**********
WATCH LIST
**********

Another Mixed Bag
___________________________________________________________________

How to use this watch list:
  Readers can use the candidates below as a springboard for their
  own research.  Many are in the process of breaking support or
  resistance or in the process of starting new trends or
  extending old ones.  With your own due diligence these could be
  strong potential plays.
___________________________________________________________________


Broadcom Corp - BRCM - close: 38.83 change: -1.05

WHAT TO WATCH:  The recent profit taking in the semiconductor
sector has hit BRCM a bit harder than its peers.  Shares have
failed at the $42.50 level and have now broken support at $40.00.
The descent might stall at what should be support near $37.50,
especially as investors step back to hear from BRCM at its Jan.
27th earnings report.

Chart=


---

Allergan - AGN - close: 82.81 change: +0.90

WHAT TO WATCH: It looks like early January news that the anti-
trust lawsuit against AGN was dismissed has fueled a strong
rally.  Shares have rocketed from $75 to break major resistance
in the 81-82 region.  This is a major bullish breakout on AGN's
point-and-figure chart and is sure to attract some attention.
Watch out for AGN's earnings report near Jan. 28th.

Chart=


---

RJ Reynolds Tobacco - RJR - close: 59.93 change: +1.33

WHAT TO WATCH:  Can bulls smoke out a breakout in RJR?  The stock
was in a non-stop rally from September to December but stopped
dead at resistance of $60.00.  Now shares have consolidated for
almost six weeks and look poised to breakout again before its
Jan. 27th earnings report.  Will traders sell the news or chase a
6.48% dividend yield?

Chart=


---

Best Buy Co - BBY - close: 52.88 change: -0.77

WHAT TO WATCH:  We strongly considered adding BBY to the OI play
list as a put tonight.  The stock just can't get any momentum
going and its 40-dma has been a lid on the stock price.  Its MACD
indicator is about to roll over under the zero line and
aggressive bears could open positions now with a stop just above
current resistance near 55.  We would target a move to its 200-
dma currently near 47.50.

Chart=



-----------------------------------
RADAR SCREEN - more stocks to watch
-----------------------------------

DE $66.40 +0.53 - Deere Co looks ready for its next leg higher.
Shares have consolidated their recent gains, bounced from support
near its rising 50-dma and traders bought the dip today at
$66.00.

JNJ $53.05 +0.49 - JNJ has seen a post-earnings rally push the
stock price up and through resistance at 52.00-52.50 as well as
its 200-dma.  Its weekly chart looks even better crossing above
its weekly 50 & 200-moving averages.

CSC $45.61 +0.71 - CSC looks ready for another breakout of its
own.  The stock has been consolidating the last two weeks and
just broke back above the $45 level.  Earnings are in February.

NEM $42.80 -1.20 - The oversold bounce in NEM appears to be
faltering under the $45 level and now completely rolled over.  If
you're not scared of a spike in gold this looks like a bearish
entry point.

KSS $43.68 +0.28 - Once again KSS has returned to the top of its
descending channel.  The stock appears to be failing at the $44
mark and this looks like an entry point for new bearish
positions.


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Personal Service and Education


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**************
TRADERS CORNER
**************

Ignorance May Be Bliss, But It’s No Excuse For Losses
By Mike Parnos, Investing With Attitude

Is it better to have profited and lost than to never to have
profited at all?  During the tech bubble many traders had the good
fortune (and that’s what it likely was) to make a chunk of money.
They could do no wrong – then!

Even monkeys threw darts at the stock pages and doubled their
money.  Unfortunately, the investors and monkeys have something
else in common.  They have the same level of investing skills –
poor!   Actually, the monkeys had an excuse.  They never learned
to read, write, add, subtract, use indoor plumbing – or watch
CNBC.   Before they knew it, the profits (and most of their
original investments) disappeared.   Easy come, not so easy go.

I had a tough time breaking out the violins and listening to one
sob story after another.   When you hitch your wagon to a star,
you have to know when to unhitch the wagon.  Stars rise and fall.
Whether you’re talking about Martha Stewart, Dennis Rodman, or
Dennis Koslowski, it’s greed or ignorance or a combination of both
that lead to their downfall.  Ignorance is no excuse.   We can
control our destinies – IF we choose to.

The market has gone up dramatically in the past year.  Many
investors are sitting on substantial gains.  How many stock (or
option) owners have protective puts in place?  How many have stop
losses in place?  How many have handed his or her money over to
someone else to handle?

Maybe the market will go to the sky.  Let them follow Jack up the
beanstalk.  It’s a long hard fall.  In an upcoming column we’ll go
over the concept protective puts and how they enable you to profit
with little, if any, risk.
_____________________________________________________________

Hi Mike,
First, great job on the column! I have a question regarding
ordering spreads.  I'm fairly adept at buying & selling individual
options, but fairly new to combos (my favorite so far is credit
spreads).  My broker (OptionsXpress) says that spreads ordered as
combined limit credit/debit must go to the floor for manual
execution, which can delay order fulfillment, especially if I try
to come in between the bid & ask, which I normally do.
Supposedly, individual orders fill automatically.  That would mean
legging into spreads, which then introduces the risk of the market
going against me while getting the second order filled.

What are your thoughts on ordering spreads via a credit/debit
limit vs. legging in?

Second - is there a rule of thumb about how far inside the bid/ask
an order might get filled.  I usually offer $.05-$.10 more than
the bid on credit spreads and sometimes get filled, sometimes I
don't.  Thanks for your insight!  Scott

Hi Scott,
Glad you're enjoying, and hopefully profiting from, my column.
Spread orders can vary greatly.  Normally, if I'm trading a stock
that is offered on multiple option exchanges, I accept the best
bid or the best ask and leg in.  It should take all of a minute to
execute both legs of the spread.  OptionsXpress, PreferredTrade
and ThinkOrSwim are particularly quick -- assuming you place the
orders properly.

If you put on a spread, both legs are submitted at the same time
to one exchange.  The problem is that it is rare that one exchange
will have both the best bid and the best ask on a particular
option.   When you submit your credit (or debit) limit, you're
probably looking at the best bid and ask and still trying to shave
off another nickel or dime.  The chance of that happening on a
single exchange is not great.  That may be why some of your spread
orders don't get filled.

Most (at least many) index options are only traded on one
exchange.  That is the best time to enter a spread order.   The
bid/ask spreads are often large and you can realistically expect
to shave off 20-30% from each option spread.   That doesn't mean
you'll get filled instantly.  The market makers may wait until the
end of the day, but the chances are pretty good on getting filled
-- especially if your spread consists of liquid options with
decent open interest.

The only rule of thumb is to not get too greedy.  The
market makers want your business, but they're not desperate for
it.  If you were selling a house for $100,000 and someone offered
you $60,000, how would you feel?  Not only would you reject the
offer, but, you'd likely be insulted by the offer.  You would be
prejudiced against doing business with these same people who were
trying to take advantage of you on principle alone.
Mike
_____________________________________________________________

Mike,
I read with interest your positions for the QQQ ITM Strangle and
the OEX Credit Spread Boogie.  How does one calculate the margin
required for these plays?  Thanks.  Davis

Davis,
QQQ:  This position is simply two calendar spreads.  They are
debit spreads so there should be no margin requirements.  The
short near term options are covered by the long LEAPS options.

OEX:  The initial bull put spread has 25 points between the strike
prices.  The maintenance required will be $25 times the number of
contracts you trade.  If we trade three contracts, it would be 300
x $25 = $7,500.

Let's say the position reversed and we had to establish a bear
call spread.  Perhaps it would be a 30-point spread.  Plus, you
might have to trade 7 of those contracts to replenish what was
spent to close the bull put spread.  We would calculate it like
this:  30-point spread x 700 (7 contracts) =$21,000 in
maintenance.

Maintenance can take many forms.  Obviously, it can be cash.  But
it can also be marginable stocks, CDs, Treasury Bills, Bonds,
Mutual funds, etc. Check with your broker.  Different brokers have
different policies regarding forms of maintenance.

On the same topic, broker maintenance policies will vary.  That
comes into play when dealing with our Iron Condors.  Some brokers
(the ones we especially like) hold maintenance for only one of the
two credit spreads that make up the condor.  Tying up maintenance
for both sides of the Iron Condor is not an economical or sensible
use of your available funds – particularly since there are viable
alternatives readily available.
______________________________________________________________

NEW FEBRUARY CPTI POSITIONS

Position #1 -- OEX – Credit Spread Boogie – 566.21
With the market trending, let's not fight the tape.  We're going
to establish a bull put spread, take in some premium, and ride the
wave into shore.
We sold 3 OEX February 565 puts, and bought 3 OEX February 540
puts for a total credit of $6.80 (x 3 contracts = $2,040).
This strategy requires $25 x 3 contracts = $7,500.  We're only
trading three contracts because, if the market reverses
significantly, it might become necessary to close the bull put
spread and establish a bear call spread that may be wider and
would require more contracts.  We need to preserve our money for a
potential maintenance requirement.

Position #2 – MNX (mini NDX index) – Iron Condor – 153.04
This index seems substantially safer than the highly volatile NDX.
We're going to put on an Iron Condor with limited exposure.
Because the market is trending, we skewed the strike prices
slightly so that we have a little more cushion on the upside.
We sold 10 MNX February 165 calls and bought 10 MNX February 170
calls for a net credit of $.40 x 10 contracts = $400.  Then we
sold 20 MNX February 150 puts and bought 20 MNX February 147.50
puts for a net credit of $.50 x 20 contracts = $1,000.  Our total
credit of $1,400.  Our maximum profit range is 150 to 165.  Our
exposure is only $3,600 ($5,000 less $1,400).  Maximum profit:
$1,400.

Position #3 – XAU (Gold/Silver Index) – Iron Condor -- $99.25
The XAU has been tempermental of late.  This is a low risk and
relatively safe play with a wide range.  Maybe we can make a
couple of bucks.
We sold 10 XAU February 90 puts and bought 10 XAU February 85 puts
for a net credit of about $.70 (x 10 contracts = $700).  Then we
sold 10 XAU February 110 calls and bought 10 XAU February 115
calls for a net credit of about $.45 (x 10 contracts = $450).  Our
maximum profit range is $90 to $110 – a 20-point range.  Our
exposure is $3,850 ($5,000 less $1,150).  Maximum profit: $1,150.

Position #4 – OSX (Oil Service Sector Index) - $98.88
We're being cautious again here.  We're reducing our potential
income by expanding our safety range.
We sold 10 OSX February 105 calls and bought 10 OSX February 110
calls for a net credit of about $.45.  Then we sold 10 OSX
February 90 puts and bought 10 OSX February 85 puts for a net
credit of about $.75.  Our total net credit of about $1.20 (x 10 =
$1,200).  Our maximum profit range is 90 to 105 – a 15-point
range.  Our exposure is $3,800 ($5,000 less $1,200).  Maximum
profit: $1,200.
_____________________________________________________________

ONGOING POSITION
QQQ ITM Strangle – Ongoing Long Term -- $38.15
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.
February: Feb. $34 calls and $36 puts – credit of $750.
Total credit: $6,150.

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.
___________________________________________________________

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
24/7.
____________________________________________________________

Happy Trading!
Remember the CPTI credo: May our remote batteries and self-
discipline last forever, but mierde happens. Be prepared! In
trading, as in life, it’s not the cards we’re dealt. It’s how we
play them. Your questions and comments are always welcome.

Mike Parnos
CPTI Master Strategist and HCP
_____________________________________________________________

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
strategies.


***********
OPTIONS 101
***********

The Light Finally Goes On
by Mark Phillips
mphillips@OptionInvestor.com

Today's article will be a bit different, as I'm going to discuss a
structural change to the way I'm implementing and tracking plays
in the LEAPS column.  If that isn't part of your trading focus,
you can feel free to click away and you won't hurt my feelings in
the least.  I've intended to cover this material in both of the
last two weeks in that column, but there just hasn't been either
time or space to get to it on the weekend.  So I'm taking
advantage of this venue to try to explain (or at least begin the
process) of what we're going to change and why.

I don't mind telling you (and if you've been with me for awhile
you already know) that the past year has been exceedingly
frustrating to me in terms of the plays we've tracked in the LEAPS
column.  As a point of interest though, it isn't the losing plays
that have caused my this frustration.  No, it is the plays that we
missed getting an entry point in and then watched as the stock has
gone on to perform beautifully, but sadly with us on the
sidelines.

A significant contributor to this unfortunate dynamic has been my
lack of confidence in the intermediate to long-term direction for
the market.  I see many factors that ought to lead to a
significant slide, while at the same time the continued bullish
price action suggests that playing the downside is a bit too
risky.  As a way to mitigate the risks of holding long-term
positions in a market that has the potential to either continue on
its upward trajectory or reverse sharply, I've been a bit too
demanding in terms of the entry points I'm seeking.  The result is
that many of the plays we've listed in the Watch List over the
past several months have never fulfilled their entry points and
we've watched as large missed profits have accrued.  Two of the
biggest misses are NEM at $23-24 last spring and QCOM at $44 last
November.  Plays currently on the Watch List that may fall into
this trap as well are HD, where we're looking for a failed bounce
in the $37-38 area and SNDK, where we're hoping for a significant
pullback to afford entry into the play.

On the other side of my frustration are the large number of plays
that we've actually put into the Portfolio, that simply haven't
worked and price action has then proceeded to go against us until
our protective stop is hit.  These plays are frustrating as well,
as each one results in a financial hit, not to mention a hit to
our confidence.  So the question becomes, how do we take the
entries into the winning plays and mitigate the damage on the
losing trades without getting an advance copy of tomorrow's
newspaper?  Put another way, what do we do to mitigate risk in any
other aspect of our lives?  We buy insurance!

Insurance Reduces Stress

Imagine owning a $500,000 house without insurance against fire,
theft or any other potential hazard.  How about driving your new
SUV without insurance against collision and liability.
Unthinkable isn't it?  Without insurance, we'd all be constantly
worrying about what could happen to these valuable assets.  So why
not take the same approach with our long-term investing.  It
doesn't matter whether our long-term position is a LEAP or a
long/short position in the underlying stock, the approach will be
the same.

After initiating a long position, we buy a protective put, using a
slightly out of the money strike with 2-4 months of time premium.
The intent of this strategy is that we never need the insurance
and the stock will move far enough in the intended direction to
allow us to place a stop near break even, while at the same time
selling the put for any residual value.

It works the other way around as well.  We can buy a LEAP Put as
our main position, betting on a long-term downtrend in the stock.
Then we buy a protective call to hedge against the risk that the
play goes against us.

In either of these situations, we're still going to suffer a loss.
Think of the net loss on the position if forced to close it out
due to an adverse move as the deductible we pay when involved in a
vehicular accident.  Would you rather pay the $500 deductible for
rear-ending another vehicle, or the full cost of the damage, which
can very easily rise into the $3000-4000 range.  The answer is
obvious.  It is the same thing when we're using insurance on a
long-term investment.  The insurance option won't completely make
up for the loss on the core position, but it will significantly
reduce the damage.

I don't know why it took me so long for the light to come on and
for me to come to the realization that this is a strategy that
ought to be routinely applied to our LEAPS investments, but it
slowly dawned on my during and shortly after writing all my plays
for the end of year stock picks.  In order to be sufficiently
protected when writing those plays so far in advance of the
desired entry points, it was necessary to build some sort of
insurance into those plays.  I figure, if it can work there, then
why not in our LEAPS trades?

So from this point forward, I'll be changing the structure of our
plays in the LEAPS column.  Each bullish play will have a listed
protective put and each bearish play will have a listed protective
call.  Purchase of this insurance policy will reduce the overall
gain of each winning play, but I think the reduced damage on the
losers will make the additional cost more than worthwhile.  I
haven't yet worked out the details of how I'll be displaying all
the pertinent information in the playlists, but we'll find a way
to cram it all in there in a legible format.

As a side note, I think our bearish play on EK will make a good
case study in the application of this strategy.  Following better
than expected earnings, the stock skyrocketed through our $31 stop
today and we'll be dropping it this weekend.  As part of that
drop, I'll detail how the results would have been different if we
had employed a protective call.  I would have done that analysis
and description tonight but I just didn't have time before my
publication deadline.

There are still many details to be worked out in the actual
presentation of the minutia of each trade each week, but hopefully
this gives you a heads up for the direction we're headed and over
the next couple weeks, we can flesh out those details, answering
questions as they come up.

Probably my favorite part of adding this tool to our regular
strategy is the fact that we can afford to be a little less stingy
with our entry points, avoiding the emotional pain of missing
trades that go on to perform beautifully.  If we don't get the
'perfect' entry, it's alright because we're insured!

Remember, questions are always welcome!

Mark


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