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Daily Newsletter, Wednesday, 02/18/2004

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The Option Investor Newsletter                Wednesday 02-18-2004
Copyright 2004, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Lots of News for a Slow Day
Futures Wrap: Outside reversals
Index Trader Wrap: Dollar's rise was gold's demise
Traders Corner: Channel Surfing
Traders Corner: Seeking The Holy Grail


Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
     02-18-2004            High     Low     Volume Advance/Decline
DJIA    10671.99 - 42.89 10720.51 10646.96 1.76 bln   1075/1774
NASDAQ   2076.47 -  3.88  2088.51  2072.19 1.76 bln   1271/1811
S&P 100   568.33 -  2.91   571.57   567.56   Totals   2346/3585
S&P 500  1151.82 -  5.17  1157.40  1149.42
RUS 2000  591.48 -  3.00   595.41   590.40
DJ TRANS 2901.08 - 19.66  2920.83  2890.49
VIX        15.59 +  0.19    15.76    15.30
VXO        15.74 +  0.18    16.14    15.29
VXN        23.73 -  0.14    24.22    23.49
Total Volume 3,884M
Total UpVol  1,466M
Total DnVol  2,367M
52wk Highs     608
52wk Lows       14
TRIN          1.11
PUT/CALL      0.78
*******************************************************************

Lots of News for a Slow Day
by James Brown

The major averages closed in the red again for the third day in
four sessions.  It would appear to be plain old profit taking
after yesterday's market-wide rally.  Investors shrugged off
negative housing data and focused on headlines in the technology
and biotech sectors.  The Dow Jones Industrials lost nearly 43
points to close at 10,671 as 23 of its 30 components turned
lower.  The NASDAQ dropped less than four points to 2076 and the
S&P 500 dropped 5 to 1151.

The best performers today were the biotech stocks,
semiconductors, hardware and software.  Meanwhile selling was
heaviest in gold stocks, natural gas and oil services.
Influencing gold was the U.S. dollar, which hit a new all-time
low against the euro in early trading before strongly rebounding.
Sending the dollar higher were comments that the Bank of Japan
would continue to intervene as the yen near a three-year high
against the dollar and comments from French President Chirac that
hinted at possible intervention or similar strategies to stem the
rise of the euro against the dollar.

Overall stocks only posted mild losses but market internals were
bearish.  Declining stocks outpaced advancers 17 to 10 on the
NYSE and 3 to 2 on the NASDAQ.  Down volume surpassed up volume
by 2 to 1 on the NYSE and 10 to 7 on the NASDAQ.  The good news
is probably the bullish pattern of higher lows on the major
averages.  The DJIA dropped toward the 10640 level and bounced.
The S&P 500 followed suit with a bounce from its intraday low
near 1149.  The NASDAQ also managed a decent bounce in the last
two hours of trading.

Chart of the DJIA:



Chart of the S&P 500:



Chart of the NASDAQ Composite:



Today's main economic data was the housing starts number.  The
Commerce Department reported an 8% drop to a seasonally adjusted
rate of 1.9 million homes in January.  Wall Street was expected a
dip so the report was largely ignored.  Granted this was the
lowest level since August but the housing starts have been very
strong and hit a 20-year high in December.  Also noteworthy was
the 4.9% jump in mortgage applications for last week.  The
Mortgage Bankers Association of America provided the breakdown
with a 2.9% jump in applications for home purchases and a 6.4%
jump in refinancings applications.  Homebuilders initially traded
lower on the news but eventually climbed higher throughout the
day eliminating most of their losses.

While hardcore traders seem to feel the trading session turned
out rather boring there were a number of stories making
headlines.  Grabbing the spotlight early on was Rambus (RMBS).
Shares of RMBS added more than $9.00 to jump 35% near 3-year
highs at $34.93 after an administrative law judge with the FTC
dismissed an antitrust case against the company.  The judge
produced a 330-page decision on the case where prosecutors were
trying to prove that RMBS violated antitrust laws by helping set
industry standards for memory chips while simultaneously pursuing
patents for their designs.  One analyst estimated that this
decision could help RMBS garner $3 billion a year in royalty
payments.

Almost topping RMBS' gain was Irish drug company Elan (ELN).
Shares of ELN rallied 34% and its marketing partner Biogen Idec
(BIIB) added 20% after ELN announced that it would pursue FDA
approval for its multiple sclerosis (MS) drug Antegren a year
ahead of schedule.  The two drug makers are halfway through a
two-year clinical study of Antegren and based on the one-year
results they decided to go ahead with the approval process.  MS
treatments are a multi-billion a year business and the handful of
companies that compete in this niche traded lower.

Going the opposite direction was Dobson Communications (DCEL), a
mobile phone service provider for rural areas.  Shares of DCEL
dropped 36.6% on 29 times its average volume after reporting
fourth-quarter earnings that were much weaker than expected.  The
average analyst estimate was for a loss of 5 cents a share.  DCEL
turned in a loss of 53 cents a share compared to a profit of 28
cents a share last year.

The truly big surprise today was El Paso (EP), the largest U.S.
natural gas pipeline operator.  Shares of EP fell almost 18%
after the company sliced its proven natural gas reserves estimate
by more than 40%.  Proven reserves are the estimated quantities
that a company believes is recoverable from its current fields.
Why they're called "proven reserves" when they're estimating the
amount of fuel they can extract from the ground sounds like a
mystery to me.  EP said their earnings would be affected by a $1
billion pre-tax charge for its fourth quarter.  If you recall it
was just last month that Royal Dutch-Shell Group reduced its
proven reserve estimates by 20 percent.  Yup, you can almost hear
the herd of lawyers stampeding towards El Paso's Houston
headquarters with briefcases brimming with shareholder lawsuits.

Speaking of lawsuits IBM traded lower today (-0.95%) after a
federal judge ruled against Big Blue in a pension lawsuit on
behalf of 140,000 older employees.  In the 1990's IBM moved to a
"cash balance" pension plan; which the judge felt didn't
accurately give older employees their share of benefits.  The
decision could cost IBM $6 billion in retroactive benefits but
the company plans to appeal.

While we're on the topic of legal issues the SEC finally reached
an agreement with Wall Street's top five specialist firms to fork
over $240 million.  Bear Wagner, which is part of Bear Stearns,
FleetBoston Financial, La Branche, Speer Leeds Kellogg, which is
part of Goldman Sachs, and Van de Moolen are the five firms which
will divulge a total of $155 million in perceived ill-gotten
gains and another $85 million in penalties to settle allegations
that the firms jumped in ahead of its customers while processing
their orders.  As is typical with these types of SEC settlements
none of the firms will either admit or deny any wrongdoing and
hope this settlement will reduce the number of civil lawsuits
from investors.

All of the above are certainly big stories but the ones investors
were most eager to hear occurred after the closing bell.  The
semiconductor sector was able to maintain its gains today because
traders were eager to hear from Applied Materials (AMAT) and
Broadcom (BRCM).  Last night BRCM announced that it would hold a
conference call today after the closing bell to discuss their
"stronger business outlook".  This was highly unusual and shares
of BRCM added 7.3% on the session in anticipation of the event.
Even though the first quarter is only half over BRCM's CFO raised
their first-quarter revenue forecasts from +10% to an estimated
+16-18% as rising demand for broadband and wireless communication
chips exceed previous estimates.  BRCM wouldn't offer any
guidance past the first quarter but did say that the second
quarter should be strong.

BRCM's announcement is certainly bullish for the chip sector but
the one-two punch that could really drive the SOX tomorrow is
AMAT's earnings.  The largest chip equipment maker on the planet
announced net income, minus one-time charges, of 12 cents a
share.  This is 4 cents above the 8-cent analyst estimates and
significantly better than its breakeven results from last year.
New orders for the quarter rose 32%.  Furthermore AMAT's CFO said
new orders will likely rise 30% in the second quarter and they
will probably beat analysts' estimates.  This of course will
force a round of upward revisions for the company as the analyst
community readjusts their forecasts.  The company expects Q2
earnings in the 17-19 cent range, which is well above current
estimates at 11 cents a share and sales were likely to rise 20%
from Q1 levels.

AMAT was trading higher after hours and it could lead the SOX to
a new relative high, which in turn should lead the NASDAQ higher.
Fortunately none of tomorrow's economic reports are expected to
be a surprise and we only have a handful of earnings to worry
about.  So what's on our plate for Thursday?  The Philly Fed
manufacturing survey will probably be the big report tomorrow.
Estimates are for a small dip from January's reading.  The PPI
was supposed to report tomorrow but a new industry classification
system has caused a delay in the report.  Thursday will also
bring the Leading economic indicators index and the weekly
jobless claims.  After Thursday's close will be the semi book-to-
bill report.  Everything looks pretty good and as long a Wal-Mart
doesn't surprise us with any negative comments in their earnings
report before the open tomorrow I believe we'll challenge these
short-term resistance levels.


************
FUTURES WRAP
************

Outside reversals
Jonathan Levinson

The US Dollar Index printed a new low below prior support but
finished sharply higher, engulfing the previous sessions' highs.
Precious metals and foreign currencies did the same in reverse,
breaking below recent lows.  Equities and treasuries finished
mixed near unchanged.

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.


Chart of the US Dollar Index


The US Dollar Index broke to a new low below 84.80, reaching
84.57 before bouncing.  The euro reached a record high above
1.29.  The reversal that ensued was steep and grew steeper as the
session progressed, with the USD Index breaking and closing above
yesterday's high for a key reversal, leaving a bullish hammer
reversal on the daily chart.  The binary dollar trade saw other
assets weaker, with the brunt of the damage restricted to metals
and foreign currencies.  The CRB fell 2.11 to 264.96, led by
coffee, wheat, corn and silver futures to the downside.


Daily chart of April gold


The key upside reversal in the US Dollar was a key downside
reversal in April gold, with a high of 418 followed by a low of
410.50, its closing price.  March silver blasted to 6.90 but
finished at 6.63, 2.3 cents above the low.  Along the same theme,
euro futures, swiss francs and CDN dollar futures all printed
shooting star dojis as well.  Just as the daily downtrend in the
dollar is firmly intact, so is the uptrend on gold and silver.
Today's print felt impulsive, but it was corrective in the
context of the dollar's daily cycle downphase / metals' upphase.
Support for April gold comes at 407-8, followed by 402 and 398.


Daily chart of the ten year note yield


Ten year note yields (TNX) broke to a new low but rebounded
nicely, closing in the green by just 0.1 bp at 4.049%.  The doji
hammer, reflecting a possible reversal off the high in ten year
bonds, caused a twitch in the still-intact daily cycle downphase
for the TNX.  Again, this was a bigger move than we've seen in
the last several sessions, but it remains corrective unless we
see followthrough tomorrow and on Friday.  4.07% appears as
resistance implied by the current daily cycle downphase.


Daily NQ candles


The NQ rose 2.50 to close at 1510, printing a doji star.  That's
not particularly inspiring, but considering that the binary
dollar trade has seen equities advancing as the dollar fell, the
lack of significant pullback for the NQ against a 1%+ rise in the
dollar is a victory for bulls.  The NQ printed a higher low as
the daily cycle upphase advanced.  The session high was 1517, a
point below the stiff resistance level from 1518-20.  Support
below is 1502 (today's low was 1501.50), followed by 1492 and
1480.

The head and shoulders top we've been discussing since last week
is still a valid possibility.  While we look for symmetry in
chart patterns, the sloping neckline and extending right shoulder
are still within the bounds of the pattern.  While the action
today in light of the dollar bounce was bullish, traders need to
be alert to this possible outcome, particularly if the NQ sees
the south side of 1480.


30 minute 20 day chart of the NQ


The NQ gave us both sides of unchanged and the 30 minute cycle
oscillator was whippy and unreadable as a result.  Unfortunately
for bears, the bulk of the skating occurred during the downside,
and severely overbought near current levels has been replaced
with midrange.  The 30 minute cycle downphase aborted early and
bounced back up from a higher oscillator and price low,
confirming the daily cycle upphase.  1518-20 remains the key
level, the pivot above which I'd expect a dismayed short covering
rally.  Another failure will set up a possible rising triangle as
the daily cycle upphase progresses, but unless it breaks above,
bears will get their daily cycle top at a lower price high.


Daily ES candles


ES dropped 5.50 to close at 1151, a .48% decline for the day.  As
with the NQ, a doji star resulted from the rejection of first the
highs at 1158.75 (again) and lows at 1148.25.  With a sideways
range extending, traders are becoming increasingly convinced or
confused, as the case may be, but the fact remains that there is
precious little pullback below the rally highs, particularly on
today's sharp dollar reversal.  Whether this is consolidation or
distribution can only be guessed, and even the oscillators are
confused:  the 10-day stochastic upphase extended while the Macd
is headed for a bearish kiss, while technically still in an
upphase.  The way to stay out of trouble here is to wait for a
range breakout, bullish above 1158, cautiously bearish below 1147
with perhaps a partial position, adding on a break of 1143.
Until the daily cycle upphase ends, bearish trades are aggressive
in the extreme, as uncertainty should resolve itself to the
bullish side in this timeframe.


20 day 30 minute chart of the ES


The ES left off on a flag-type bounce after a whipsaw in the 30
minute cycle downphase.  The rising trendline break delivered a
rapid plunge, but it too bounced from a higher low against the
previous 30 minute cycle bottom.  The daily upphase was
responsible for this higher low, but the test will come on at the
failed trendline, 1155 currently.  A failure there would be the
level at which aggressive bears would look for shorts on either a
scalp basis or in anticipation of a downside range break.


150-tick ES


The halting advance of the 30 minute cycle downphase is reflected
in the whippy bounces of the broader 35-period Keltner channel.
That said, the short cycle (red channel) was no less
temperamental, leaving off in a mixed to sideways drift.  The
bias looks hesitantly up, but the pattern looks and feels like a
bear flag so far.  A move below 1150 should reignite the short
cycle downphase and challenge the 30 minute bounce trying to
form.


Daily YM candles


YM fell 32 to close at 10674, mimicking the ES today.  Nothing to
add here.


20 day 30 minute chart of the YM


The binary dollar trade has been so reliable in recent weeks that
the pattern on the daily ES resembles an inverted daily US Dollar
Index chart.  Given the big move in the US Dollar today, we
should have seen much more damage inflicted on equities (and
treasuries for that matter) than occurred.  Given the recent
overt talk of intervention from the BoJ and speculation about the
ECB, as well as the massive repo drain today (13B), the firmness
in US assets looks suspect.  However, if we do not see a return
to the binary trade and the bounce in the dollar continues,
equity bulls will be contemplating a whole new wave to the rally
of 2003, as a rising dollar attracts foreign investment into US
equities.  I personally don't expect that to occur, but it's not
an unimaginable outcome either.  For tomorrow, we'll continue to
follow these relationships and the trading range in equities.
See you there.


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

Dollar's rise was gold's demise

The major equity indices found a mixed to lower close, where
weaker than forecasted housing starts and building permits put a
lid on bullish gains.

Despite many economists saying sub-freezing temperatures that
blanketed the northeast were most likely the negative variable
for January's 8% month-over-month decline for housing starts, a
4.9% gain in the Mortgage Bankers Association weekly Mortgage
Applications Index, which reversed three straight weekly
declines, wasn't enough to keep the Dow Jones Home Construction
Index (DJUSHB) 600.17 -1.18% from falling 7.2 points.

While major equity index traders may have been lulled to sleep in
today's trade, there was more than enough volatility in the
currency markets.

The dollar rebounded sharply after hitting new lows against the
euro and the pound earlier in the day, when the European common
currency pushed above $1.29 for the first time in its five-year
history.

The dollar's intra-day reversal back higher was driven primarily
by comments by French President Jacques Chirac about exchange
rate volatility.

"Europe must be much more offensive in its treatment of
international economic questions," Chirac said at a summit with
German Chancellor Gerhard Schroeder and British Prime Minister
Tony Blair.

Greater exchange rate stability is "absolutely necessary" to
secure lasting economic growth in Europe, he said.

Mr. Chirac's comments had the dollar finding gains against major
foreign currencies with the U.S. Dollar Index (dx00y) 85.76
+0.87% rising to 86.12.

Commenting on the euro's intra-day reversal, Sean Callow, a
currency strategist at IDEA, a New York-based global financial
research firm said, "A 2-cent pullback is remarkable and the
trading is not for the faint-hearted."  Mr. Callow added that,
"It is a testament to the fact that everyone is on the same
bandwagon and when everyone is looking for dollars to fall, you
soon run out of sellers."

While the euro reversed course against the dollar, gold stocks as
depicted by the AMEX Gold Bugs Index ($HUI.X) 230.55 -4.74%
suffered an 11.4-point decline.

U.S. Market Watch - 02/18/04 Close



In last week's Wednesday evening Index Trader Wrap we took a look
at my QCharts U.S. Market Watch table.  For the most part, the
major indices have seen some gains, but just less than 1%.

The Broker/Dealer Index ($XBD.X) 738.73 -0.15% traded an all-time
high in today's session before falling back to lose 1.14 points,
but has tacked on an additional 5% gain since last week.  The
economically sensitive Airlines Index ($XAL.X) 62.21 -1.69% had
scrapped back to close above its flattening 21-day SMA (62.46)
yesterday, but slipped back to rest comfortably above its
intermediate-term 50-day SMA (61.68) by today's close.

Market Snapshot / Internals - 02/18/04 Close



For the most part, technology stocks bucked some broader market
weakness in today's trade, with the NASDAQ-100 Index (NDX.X)
1,507.49 +0.06% holding onto a 1-point gain by the close, with a
BIG move in Biogen Idec (NASDAQ:BIIB) $53.23 +20.26% not only
helping the QQQ hold positive ground for the bulk of today's
trade, but also having the Biotechnology Index (BTK.X) 539.90
+1.24% finishing as today's only sector to gain more than 1%.

A blowout quarter from Applied Materials (NASDAQ:AMAT) $22.31
+1.68% and upbeat forward guidance has this semiconductor-
equipment giant jumping to $23.52 in extended hours, which has
also lifted the QQQ to $37.72 in its extended hours trade.

Pivot Analysis Matrix -



Support correlations abound at the WEEKLY Pivots for the major
indices in tomorrow's trade.  January's Producer Price Index
(PPI) data was scheduled to be released tomorrow morning, but has
been delayed as the government fine tunes some of its indicators
for this read on inflation at the producer level.  However,
traders will have plenty of economic data to digest in the form
of weekly initial jobless claims (forecast 352,000 vs. prior
week's 363,000), January leading Indicators (forecast +0.5%
versus December's +0.2%) and February's Philadelphia Fed
(forecast 35.0 versus January's 38.8).

With AMAT jumping in after-hours trade, I've highlighted in PINK
tomorrow's DAILY R2 in the SOX.X at 530.08, which may be a key
level of resistance as it relates to the SOX chart we looked at
in last night's Index Trader Wrap.

AMEX Gold Bugs Index ($HUI.X) - Daily Intervals



I've been more apt to trade some gold stocks from both the long
and short side in recent weeks, trying to use shorter-term moves
in the dollar as an indicator.  One sign of looming weakness in
my book is that while the dollar hit a new low against the euro
and the U.S. Dollar Index (dx00y) hit a multi-year low this
morning, gold stocks as depicted by the $HUI.X, which is an
unweighted basket of gold stocks hasn't come close to challenging
its recent double-top highs, where further dollar strength and
$HUI.X weakness below today's lows has gold stocks falling into a
lower trending channel.

One of the most frequently pondered questions is if a
strengthening dollar might be "doom" for U.S. equities.  I'm not
sure, but I don't necessarily think so.  The reason I think this
way is months ago, I was concerned that a strengthening euro
would be "doom" for some of the European bourses, and they are
all near their highs, just like many of the major U.S. equity
indices.

NYSE Composite ($NYA.X) - Daily Intervals



A quick look at the very broad NYSE Composite ($NYA.X) would have
near-term support at 6,680, where after being broken to the
upside on February 10th, immediately served support on a pullback
as if prior sellers turned into buyers.

In late January, when the NYA.X traded 6,680 and fell back to
6,500, the NYSE NH/NL 10-day average ratio had reached 99.5%,
where perhaps there just wasn't enough room to 100% without some
profit taking needing to have taken place.

NASDAQ Composite ($COMPX) Chart - Daily Intervals



It has been awhile (several weeks) since a large 4-lettered
bellwether like Applied Materials (NASDAQ:AMAT) has seen a
positive response in after-hours trade to a quarterly earnings
report.  While some fundamental analysts expected a blowout
quarter from AMAT, those same analysts felt the market had
factored the blowout results into things.  If not, then a broader
rally in the NASDAQ would be found above the 2,100.00 level, if
not the 21-day SMA which has been serving up some resistance in
recent sessions.

Jeff Bailey


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**************
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**************

Channel Surfing

Both Linda Piazza and Jonathan Levinson use Keltner Channels in
the Market Monitor so I decided to take a closer look at this
indicator. Linda has already done an excellent job of defining
what Keltner Channels are and both her and Jonathan describe how
to use them intraday. But for those of you who are unable to log
into the OptionInvestor's Market Monitor, I would like to
introduce you to a really neat little indicator.

There are three kinds of moving average bands - moving average
envelopes, Bollinger Bands and Keltner Channels. All three
consist of three lines – a middle moving average and two outer
lines or bands. Envelope or band theory holds that price has the
greatest probability of falling within the boundaries of the
outer bands and prices falling outside the bands are considered
an anomaly and therefore provide a trading opportunity. The
major differences between the envelope types are in the
calculation of the bands or envelops, in the spacing between the
lines or bandwidth, and how they are interpreted.

Keltner channels are actually the name Chester Keltner gave to a
technique he called the 10-day moving average Rule in his 1960
book How to make Money in Commodities. They are price envelopes
or bands above and below an exponential moving average by a
multiple of the Average True Range (ATR). This is why I find
these Channels so intriguing; they fluctuate as the ATR
fluctuates. But before we get any further I think we should take
a minute and discuss the Average True Range.

J. Welles Wilder introduced ATR in his book, New Concepts in
Technical Trading Systems (1978). It measures a security's
volatility but does not provide an indication of price direction
or duration, simply the degree of price movement or volatility.

Wilder defined the true range (TR) as the greatest of the
following:
1. The current high less the current low.
2. The absolute value of: current high less the previous close.
3. The absolute value of: current low less the previous close.

If the current high/low range is large, chances are it will be
used as the TR. If the current high/low range is small, it is
likely that one of the other two methods would be used to
calculate the TR. The last two possibilities usually arise when
the previous close is greater than the current high or the
previous close is lower than the current low. To insure positive
numbers, absolute values were applied to differences.

Average True Range is a moving average of the True Range over a
certain time period. For example the most popular ATR is the 10-
day which is the average of the True Range over the last 10 days.

Keltner originally constructed his channels with a simple 10-day
ATR moving average and subtracting or adding this MA from/to a
10-day MA of the price. Most charting software now use the
version popularized by Linda Raschke, which uses an exponential
MA of price and builds the channels by applying a multiple of the
ATR to the EMA instead of the actual ATR. Here is the formula

Upper Keltner Channel = EMA(close,x) + (m * ATR(y))
Lower Keltner Channel = EMA(close,x) - (m * ATR(y))

Where:
x = length (number of days) of EMA
m = multiplier
y = length (number of days) to calculate ATR

Most often the EMA and ATR length are the same but they do not
have to be, however, charting packages like Qcharts do not give
you the option of changing the ATR length only the EMA length and
the multiplier. Linda Raschke uses a 20 EMA and a 2.5 multiplier
so that is what I will use.

The primary interpretation for envelopes, bands or channels is a
touch or minor penetration of an upper or lower channel is that
price has become overbought/ oversold and is likely to reverse.
Keltner's technique, however, was based on the opposite - a close
above the upper band or below the lower band is evidence of a
strong move and should be traded as a breakout, that is to say
breaks of the upper channel are bought and breaks of the lower
channel are sold.

However you decide to use the Keltner Channels you can’t use them
in isolation, you need other indicators to confirm.

Let's look at an example of the Keltner Channels using the
conventional envelop theory, a break above is a sell and a break
below is a buy. I have added the MACD and will take a long if
price closes below the Keltner Channel but only after MACD makes
a bullish cross upward for confirmation. I will take a short when
price closes above the Keltner Channel but only after MACD makes
a bearish cross downward.

Here is a chart of the Russell Midcap Value iShare - IWS. In this
time frame only short positions would have been entered because
price never closed below the Keltner Channel.




Blue Boxes are when IWS closed above the Keltner Channel. Using
just the Keltner Channel for buy and sells would have been OK
until the 12/29/03 close. Now add the MACD and although your
entries would have been later you would not have taken a short on
12/29/03 or any of the other closes above the Channel and as you
can see there are many.

Here is the Keltner Channels with stochastics. Now I'm not a big
fan of stochs but they seem to do a little bit better job than
the MACD at least until you add the wrinkle of a cross below the
80 line for a confirmation.

For this example I first of all looked at opening a short
position after a close above the Keltner Channel and a stochastic
bearish cross, marked by red arrows. However, after the 12/29/03
run stochs made bearish crosses at least three times giving false
short signals. I then looked at adding one more filter that
stochs had to not only make a bearish cross but cross below the
80 line also. This eliminated the false signals from the 12/29/03
run but of course, like the MACD, got us in too late (magenta
arrows).





The next pairing I looked at was the Keltner Channels with
RSI(14). Here it seems to be a much better fit. Criteria is price
close above the Keltner Channel and RSI(14) crosses below the 70
line. You would have had one false sell signal on 12/31/03 but
the RSI(14) cross below the 70 coupled with a close above the
Keltner Channel seemed to have nailed almost every short term
top.





You could change the settings in the indicators to your own
liking and see how well they work but the point I am trying to
make is that no matter how good an indicator may be it can not be
used in isolation.

The Keltner Channels are designed to define the upper and lower
boundaries of what can be considered "normal" price fluctuations.
And the reason I like them so much is that these boundaries vary
with volatility and can used quite readily as overbought/oversold
levels from which you can make trading decisions.

Remember plan your trade and trade your plan.

Jane Fox


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

Seeking The Holy Grail
by Mark Phillips
mphillips@OptionInvestor.com

We all enter the world of trading with different backgrounds,
abilities, skills and biases, but after becoming familiar with the
landscape, it is inevitable that we will each embark on our own
crusade to discover the Holy Grail.  Hopefully you can intuit that
I'm not talking about the Holy Grail of Christianity, or even the
one discussed in the popular book "The Da Vinci Code".  No, what
we're talking about here is the eternal (at least it seems that
way sometimes) search for a trading plan/system/strategy that can
be applied in a consistent manner to yield an account that
consistently grows in size.  Isn't that why we all tune in every
day?

In my opinion, traders fall into one of two categories -- they are
either discretionary traders or they are system traders.  While
there are successful discretionary traders, they are a rare breed.
They have somehow managed to marry their knowledge of the market
with intuition and an almost spooky ability to see or hear the
breaking news and know instantly how it should affect price
action.  Despite our desire to play in that league, I think most
of us discover early in our trading careers that we just aren't
cut out for that style of trading.  It takes a high degree of
conviction in your own decisions and those decisions frequently
have to be made in an instant.  I think the profession that would
most easily be able to make the transition to being a successful
discretionary trader would be Fighter Pilot.  Most of us aren't
cut out for that profession either (despite the fact that we might
want to be) and I think it is quite liberating to discover that
that approach just won't work for us.

That brings us to the topic I want to touch on today, that of
becoming a successful system trader.  Let me tell you right now
that this will be a "To Be Continued" discussion, as there's no
way I can cover all the territory that is pertinent in just 2-3
pages.  But let's see just how far we can get this afternoon and
then we'll pick it up again next week.

The Holy Grail of system traders is an animal that I just don't
believe exists.  Simply put, if we could design the perfect
trading system, it would be the equivalent of a black box that we
could plug into a data feed and it would just turn out winning
trade after winning trade.  We'd even be willing to accept a
win:loss ratio of 2:1 or even 1.5:1, but the key is that over
time, it would have to produce a consistent positive equity growth
curve.

The basic reason why we can't just hand it over to a machine to
place one trade after another is because the markets are
constantly in flux.  Not only does price oscillate over time, but
so do the larger tides of human emotion, macro-economic factors
like interest rates, economic growth/contraction cycles, political
issues that bear directly on the financial market, as well as the
changing tide of money flows from one area of the economy to
another.  Many of these factors can be modeled in the computer and
integrated into an overall automated trading system.  The fly in
the ointment is the human emotion component.

There have been many impressive and in some cases successful
attempts to model the way the human mind works, both in terms of
though process and in the way that thought process is affected by
emotions.  The reason why this is so critical to the whole issue
of system design is that price action in the market in many
respects boils down to interpreting herd or crowd psychology in
the face of a given macroeconomic environment.  There's a reason
why contrarian thinking works much of the time in the market --
the herd or crowd is usually wrong.  But we don't know WHEN the
crowd will be wrong.  Sometimes we can predict when the sentiment
of the crowd will shift and at other times, we don't come anywhere
close.  The mind of man is a very complex subject of study and it
is the random and unpredictable factors that will throw a serious
monkey wrench into any attempt at mathematically modeling how an
individual or group will behave in a given situation.  We are
rational creatures...most of the time.  It is the occasional
exceptions to that rule that will turn most any model on its head.

Lest you think I'm making the case that there's no way to develop
a system that can produce regular and consistent profits in the
market, nothing could be further from the truth.  The point I'm
trying to make is that we can never remove the human from the
equation.  We must always be involved in making the real-time
trading decisions.  Certainly, we would like to remove as much
subjectivity from the equation as possible, but we must do so with
the understanding that it will always take a human decision,
evaluating many disparate factors, to make the final "Go-No Go"
decision on any given trade.

The function of a well-designed system is to take in many inputs,
evaluate them against a collection of rules that we have
determined through observation (back testing) to be true and then
produce an indication of which way we ought to be considering a
trade, along with the degree of likelihood that the recommendation
will be correct.  There are simple rules and complex rules and it
is up to us as the system designer to determine which rules belong
in our system and how best to combine them to produce a viable
system.  Let's keep in mind though, when I speak of a system, I'm
referring to something that produces trade RECOMMENDATIONS, which
must then be filtered through our own experience, biases and
observations.

Now I think it is worth pointing out that inputs to a trading
system are not necessarily all related to price action.  I could
envision a trading system that would have inputs for various news
related events or economic developments.  Here is where
individuality comes into play.  We have to decide what we have
found to work or not work through our own path of experience.  By
way of explanation, I give news zero credence in my own trading
approach.  I may temper my trading activities around important
news releases (that's part of the filtering I have to do, external
to my system), but my trading decisions are not affected in the
least by what the contents of the individual news releases happen
to be.

I am a technician -- it's the engineer in my, I suppose -- and as
such, I believe everything I need to know is contained in the
price action on the charts.  The challenge is in turning the
observations into actionable trading signals that win more often
than they lose.  Another trader might have a different belief
system, giving significant weight to the actual contents of
individual news releases and economic reports and will factor that
into their trading system.  My approach says that the sum total of
those factors are very quickly interpreted by the market and
manifested in the form of price action.  My job is to interpret
that price action to make solid trading decisions, hopefully with
a lot of help from a well-defined trading system.

I think that's a good place to leave off for today.  When we
reconvene next week, I hope to walk through the development of an
actual trading system.  My goal is not to offer the Holy Grail
system, but to illuminate the path for all that are interested on
embarking on their own quest for their own Grail.

See you next week!

Mark


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The Option Investor Newsletter                Wednesday 02-18-2004
Copyright 2004, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Stop Loss Updates: None
Dropped Calls: ESRX
Dropped Puts: SINA
Spreads, Combinations & Premium-Selling Plays: Another Failed Rally?
Watch List: Semis, Drugs & Organic foods


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*****************
STOP-LOSS UPDATES
*****************

None


*************
DROPPED CALLS
*************

Express Scripts - ESRX - cls: 69.68 chng: -2.22 stop: 68.00

In an abrupt reversal of fortune, ESRX gave back all of
yesterday's powerful rally and then some on Wednesday, falling
back into the $68-70 price band that had been containing price
action for the past few weeks.  The stock gapped down hard this
morning and the only newsworthy items were the release of the
company's 8K statement and confirmation that earnings would be
released on February 25th.  There didn't seem to be anything in
either news release that should have caused such a negative
action, but the chart doesn't lie.  With oscillators tipping over
in bearish fashion, ESRX appears headed back to test the $68 level
and based on the strong selling volume today, it looks like that
support may not hold this time around.  Rather than take the risk
of a breakdown, we'll close the play tonight.  We'd recommend
using any reflexive rebound tomorrow to gain a more favorable
exit.

Picked on January 13th at    $68.32
Change since picked:          +1.36
Earnings Date               2/24/04 (confirmed)
Average Daily Volume =        987 K
Chart =



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************
DROPPED PUTS
************

Sina Corp - SINA - close: 44.02 change: +3.46 stop: 41.35

Wow!  Yesterday we had turned very cautious on SINA and for good
reason.  Shares dipped low enough to trade through our trigger
but by the end of Tuesday had reclaimed support at its 50-dma and
the $40.00 level.  We warned it was a potential bear trap.  My
how fast it snapped shut!  Fellow Chinese Internet play NTES
reported earnings last night that beat estimates by 4 cents on
quarterly profits that doubled.  This sent the entire niche of
Chinese Internets higher.  We are stopped out of the play at
41.35.

Picked on February 17 at $39.35
Change since picked:     + 4.67
Earnings Date          01/21/04 (confirmed)
Average Daily Volume:       238 thousand
Chart =



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Brokerage Group, addressing the demand for personalized,
experienced service for both securities* and futures trading
within the same firm. Licensed Option Principals Andrew Aronson
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option* and futures traders. The combination of the proven Man
Financial global presence and the convenience of one group for
all trading needs provide customers with the tools needed for
success.

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*********************************************
SPREADS, COMBINATIONS & PREMIUM-SELLING PLAYS
*********************************************

Another Failed Rally?
By Ray Cummins

Market bulls were unable to build on the recent strength in
equities as traders sold for profits in the wake of Tuesday's
robust gains.

The Dow Jones Industrials slid 42 points to 10,671 on weakness
in SBC Communications (NYSE:SBC), Caterpillar (NYSE:CAT), 3M
(NYSE:MMM), Honeywell (NYSE:HON), International Paper (NYSE:IP),
Johnson & Johnson (NYSE:JNJ), Home Depot (NYSE:HD) and Wal-Mart
(NYSE:WMT).  The NASDAQ Composite fared better, falling only 3
points to 2,076 as select computer hardware and internet shares
combined to stem the selling pressure in technology issues.  The
S&P 500 index fell 5 points to 1151, with the worst losses seen
in healthcare, gold, natural gas, transportation and advertising
shares.  Losing stocks outpaced winning stocks by roughly 3 to 2
on both the New York Stock Exchange and the NASDAQ.  Volume on
the Big Board reached only 1.1 billion shares while 1.5 billion
shares changed hands on the technology exchange.  The U.S. bond
market saw little activity during the session with the 10-year
note down 2/32, while its yield rose to 4.05%.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
SUMMARY OF CURRENT POSITIONS - AS OF 02/17/04
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

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.


MONTHLY YIELD FOR UNCOVERED OPTIONS: MAXIMUM & SIMPLE

The Maximum Yield (listed in the summary and with "naked" option
selling plays) 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 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 trade.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

NAKED PUTS

Stock   Strike Strike Cost  Current   Gain    Max    Simple
Symbol  Month  Price  Basis  Price   (Loss)  Yield   Yield

SEPR     FEB    20    19.60  27.80    0.40   21.62%   2.04%
CECO     FEB    40    39.30  52.03    0.70    5.04%   1.78%
ERES     FEB    27    27.00  31.83    0.50    5.07%   1.85%
MICC     FEB    65    64.05  86.00    0.95    4.10%   1.48%
NTES     FEB    40    38.90  41.30    1.10    7.39%   2.83%
RMBS     FEB    25    24.50  25.84    0.50    5.60%   2.04%
SEPR     FEB    22    21.90  27.80    0.60    7.02%   2.74%
SINA     FEB    40    38.75  40.56    1.25    7.89%   3.23%
SOHU     FEB    30    29.30  27.99   (1.31)   0.00%   2.39% *
APPX     FEB    35    34.35  34.53    0.18    1.56%   1.89% *
CRDN     FEB    40    39.05  39.66    0.61    4.59%   2.43% *
GPRO     FEB    32    32.10  35.15    0.40    4.17%   1.25%
KYPH     FEB    25    24.45  26.61    0.55    6.84%   2.25%
IMCL     FEB    35    34.15  42.37    0.85    8.93%   2.49%
OSIP     FEB    30    29.60  33.36    0.40    4.67%   1.35%
PCLN     FEB    17    17.15  23.85    0.35    6.93%   2.04%
SEPR     FEB    22    22.05  27.80    0.45    7.00%   2.04%
BRCM     FEB    37    37.00  39.56    0.50    5.08%   1.35%
CLZR     FEB    22    22.20  22.81    0.30    5.54%   1.35% *
DRIV     FEB    22    21.95  23.79    0.55    9.34%   2.51% *
NANO     FEB    17    17.05  19.56    0.45   10.87%   2.64%
NTAP     FEB    20    19.55  22.27    0.45    8.71%   2.30%
OSTK     FEB    17    17.00  21.10    0.50   11.98%   2.94%
SEPR     FEB    22    22.25  27.80    0.25    5.25%   1.12%
ARO      FEB    30    29.50  33.69    0.50    8.22%   1.69%
ECLG     FEB    17    17.20  22.41    0.30    8.93%   1.74%
ERES     FEB    30    29.75  31.83    0.25    5.33%   0.84%
ERICY    FEB    20    19.65  28.64    0.35    9.74%   1.78%
JCP      FEB    25    24.60  28.54    0.40    8.27%   1.63%
LIN      FEB    30    29.65  33.36    0.35    5.80%   1.18%
WEBX     FEB    22    22.25  25.44    0.25    5.90%   1.12%
DISH     FEB    37    37.25  39.33    0.25    5.96%   0.67%
IDCC     MAR    20    19.55  26.86    0.45    6.66%   2.30%
IMCL     FEB    30    29.55  42.37    0.45   16.77%   1.52%
LSCP     MAR    17    17.10  25.85    0.40    6.20%   2.34%
PCLN     MAR    22    21.70  23.85    0.80    7.85%   3.69%
SLAB     FEB    55    54.60  55.22    0.40    6.70%   0.73%
SONO     FEB    22    22.20  23.65    0.30   13.48%   1.35%

Positions in Sohu.com (NASDAQ:SOHU), Ceradyne (NASDAQ:CRDN)
American Pharmaceutical Partners (NASDAQ:APPX), Digital River
(NASDAQ:DRIV), and Candela (NASDAQ:CLZR) should have been
closed by conservative traders.


NAKED CALLS

Stock  Strike Strike Cost  Current   Gain    Max    Simple
Symbol Month  Price  Basis  Price   (Loss)  Yield   Yield

CYD      FEB    35   35.45  21.97    0.45   6.36%    1.27%
SNDK     FEB    80   81.10  51.69    1.10   5.97%    1.36%
ISIL     FEB    30   30.50  25.00    0.50   6.00%    1.64%
MCHP     FEB    35   35.45  30.61    0.45   4.57%    1.27%
UTSI     FEB    40   40.95  33.45    0.95   8.23%    2.32%
AEIS     FEB    25   25.55  23.44    0.55   9.96%    2.15%
ELX      FEB    30   30.45  25.96    0.45   6.62%    1.48%
PHM      FEB    47   48.00  47.34    0.50   4.66%    1.04%
MRVL     FEB    42   42.90  43.48   (0.58)  0.00%    0.93%
NVLS     FEB    35   35.25  33.76    0.25   4.75%    0.71%
SSYS     FEB    25   25.60  24.62    0.60  15.57%    2.34%
AAII     MAR    25   25.40  18.59    0.40   7.47%    1.57%
GRMN     FEB    50   50.45  47.65    0.45   9.51%    0.89%
PHS      FEB    32   32.90  35.50   (2.60)  0.00%    1.22% *

PacifiCare Health Systems (NYSE:PHS) gapped higher, at the
open, on the day after the position was offered and closed
near the sold (call) strike that afternoon.  Aggressive
traders who initiated the position should have been out of
the play by the end of the session for a maximum loss of
$0.40.  As noted last week, conservative traders should
consider closing the bearish spread in Marvell (NASDAQ:MRVL).


PUT-CREDIT SPREADS

Symbol  Pick   Last   Month L/P S/P Credit  C/B    G/L   Status

COCO    60.73  63.36   FEB  55  55   0.65  54.35   0.65   Open
KOSP    45.30  59.41   FEB  35  40   0.60  39.40   0.60   Open
CEPH    54.65  57.60   FEB  45  50   0.65  49.35   0.65   Open
NFLX    32.55  35.28   FEB  22  25   0.13  24.88   0.13   Open
CFC     80.32  89.70   FEB  70  75   0.65  74.35   0.65   Open
MDC     66.31  68.72   FEB  55  60   0.60  59.40   0.60   Open
CVH     42.54  42.71   FEB  37  40   0.36  39.64   0.36   Open
SII     48.80  50.56   FEB  42  45   0.30  44.70   0.30   Open
BA      43.56  44.60   FEB  40  42   0.30  42.20   0.30   Open
MRK     48.94  48.86   FEB  45  47   0.25  47.25   0.25   Open
GS     107.09 106.92   MAR  95 100   0.65  99.35   0.65   Open
MSTR    64.78  63.89   MAR  50  55   0.55  54.45   0.55   Open

Gilead Sciences (NASDAQ:GILD) has previously been closed for a
small loss.


CALL-CREDIT SPREADS

Symbol  Pick   Last   Month L/C S/C Credit  C/B    G/L   Status

ANF     24.90  28.20   FEB  30  27   0.30  27.80  (0.40) Closed
MANH    27.00  29.15   FEB  35  30   0.50  30.50   0.50   Open
ESV     27.45  29.85   FEB  35  30   0.45  30.45   0.45   Open?
NVLS    41.68  33.76   FEB  47  45   0.40  45.40   0.40   Open
HTCH    32.45  28.46   FEB  40  35   0.60  35.60   0.60   Open
ICST    27.60  28.04   FEB  35  30   0.50  30.50   0.50   Open
BZH     92.40 102.59   FEB 105 100   0.55 100.55  (2.04) Closed
LEN     43.71  47.68   FEB  50  47   0.30  47.80   0.12   Open
BHE     32.30  35.57   FEB  40  35   0.50  35.50  (0.07) Closed
OMG     27.59  30.88   FEB  35  30   0.50  30.50  (0.38) Closed
MGAM    38.65  39.98   MAR  50  45   0.50  45.50   0.50   Open
UTEK    26.28  27.48   MAR  35  30   0.60  30.60   0.60   Open

As noted last week, OM Group (NYSE:OMG), Benchmark Electronics
(NYSE:BHE), Beazer Homes (NYSE:BZH), and Abercrombie & Fitch
(NYSE:ANF) were candidates for early exit.  Ensco (NYSE:ESV) is
on the "watch" list and any further upside movement would be
cause for closure.  Bearish spreads in Checkfree (NASDAQ:CKFR)
and Kohl's (NYSE:KSS) have previously been closed for small
losses.

Questions & comments on spreads/combos to Contact Support

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
NEW POSITIONS
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

This following group of plays is simply a list of candidates to
supplement your search for profitable trading positions.  As with
any new investment, you must decide if the selections meet your
criteria for potential plays.  Only you can know what strategies
are suitable for your personal skill level, risk-reward tolerance
and portfolio outlook.  In addition, we recommend that you avoid
any trading techniques in which you are not completely comfortable
with the potential capital loss, the necessary adjustments, and
the common entry-exit strategies.  The positions with "*" will be
included in the weekly summary.  Those with "TS" (Target-Shoot)
are below our minimum monthly return, but may offer a favorable
entry price with a limit order, due to the daily volatility of
the underlying issue.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

BULLISH PLAYS - NAKED PUTS

All of these issues have robust option premiums and relatively
favorable technical indications.  However, current news and market
sentiment will have an effect on these stocks, so review each play
thoroughly and make your own decision about its future outcome.

WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL!

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.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

AMLN - Amylin Pharmaceuticals  $22.62  *** Bottom Fishing! ***

Amylin Pharmaceuticals (NASDAQ:AMLN) is committed to improving
the lives of people with diabetes and other metabolic diseases
through the discovery, development and commercialization of
innovative, cost-effective medicines.  Amylin has two primary
drug candidates in late-stage development for the treatment of
diabetes; SYMLIN (pramlintide acetate) and exenatide, formerly
referred to as AC2993 (synthetic exendin-4).

AMLN - Amylin Pharmaceuticals  $22.62

PLAY (sell naked put):

Action    Month &   Option    Open   Last  Cost    Max.  Simple
Req'd     Strike    Symbol    Int.   Price Basis  Yield  Yield

SELL PUT  MAR 20    AQM OD     406   0.45  19.55   6.4%   2.3% *
SELL PUT  MAR 22.5  AQM OX     122   1.35  21.15  12.9%   6.4%


__________________________________________________________________

ATRX - Atrix Laboratories  $27.41  *** Entry Point? ***

Atrix Laboratories (NASDAQ:ATRX) is a specialty pharmaceutical
company focused on advanced drug delivery.  With five unique
patented technologies, Atrix is currently developing a diverse
portfolio of proprietary products, including oncology, pain
management, and dermatology products.  The firm also partners
with large pharmaceutical and biotechnology companies to apply
its proprietary technologies to new chemical entities or to
extend the patent life of existing products.

ATRX - Atrix Laboratories  $27.41

PLAY (sell naked put):

Action    Month &   Option    Open   Last  Cost    Max.  Simple
Req'd     Strike    Symbol    Int.   Price Basis  Yield  Yield

SELL PUT  MAR 22.5  OQF OX     20    0.45  22.05   6.8%   2.0% *
SELL PUT  MAR 25    OQF OE     42    0.95  24.05   9.8%   4.0%


__________________________________________________________________

BRCM - Broadcom  $42.46  *** Solid Earnings Outlook! ***

Broadcom (NASDAQ:BRCM) is a leading provider of highly integrated
silicon solutions that enable broadband communications and the
networking of voice, video and data services.  Using proprietary
technologies and advanced design methodologies, Broadcom designs,
develops and supplies complete system-on-a-chip solutions and
related hardware and software applications for all broadband
communications markets.  Their diverse product portfolio includes
solutions for digital cable and satellite set-top boxes; cable
and DSL modems and residential gateways; high-speed transmission
and switching for local, metropolitan, wide area and storage
networking; home and wireless networking; cellular and terrestrial
wireless communications; Voice over Internet Protocol (VoIP)
gateway and telephony systems; broadband network processors; and
SystemI/O(TM) server solutions.

BRCM - Broadcom  $42.46

PLAY (sell naked put):

Action    Month &   Option    Open   Last  Cost    Max.  Simple
Req'd     Strike    Symbol    Int.   Price Basis  Yield  Yield

SELL PUT  MAR 37.5  RCQ OT    3436   0.55  36.95   4.3%   1.5% *
SELL PUT  MAR 40    RCQ OH    2431   1.20  38.80   7.5%   3.1%


__________________________________________________________________

IDCC - InterDigital Comm.  $27.05  *** New Trading Range? ***

InterDigital Communications (NASDAQ:IDCC) specializes in the
architecture, design and delivery of wireless technology and
product platforms.  Over the course of its corporate history,
the company has amassed a substantial and significant library of
digital wireless systems experience and know-how, and holds an
extensive worldwide portfolio of patents in the wireless systems
field.  InterDigital markets its technologies and solutions
primarily to wireless communications equipment producers and
related suppliers.  In addition, the company licenses its Time
Division Multiple Access and Code Division Multiple Access
patents to equipment manufacturers worldwide.

IDCC - InterDigital Comm.  $27.05

PLAY (sell naked put):

Action    Month &   Option    Open   Last  Cost    Max.  Simple
Req'd     Strike    Symbol    Int.   Price Basis  Yield  Yield

SELL PUT  MAR 22.5  DAQ OX    1532   0.40  22.10   5.9%   1.8% *
SELL PUT  MAR 25    DAQ OE     673   0.90  24.10   9.1%   3.7%


__________________________________________________________________

OSTK - Overstock.com  $24.05  *** Rally Mode! ***

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 - Overstock.com  $24.05

PLAY (sell naked put):

Action    Month &   Option    Open   Last  Cost    Max.  Simple
Req'd     Strike    Symbol    Int.   Price Basis  Yield  Yield

SELL PUT  MAR 20    QKT OD     226   0.65  19.35  10.3%   3.4% *
SELL PUT  MAR 22.5  QKT OX      20   1.35  21.15  14.1%   6.4%


__________________________________________________________________

NEOL - NeoPharm  $21.50  *** New Two-Year High! ***

NeoPharm (NASDAQ:NEOL) is a biopharmaceutical company engaged
in the research, development and commercialization of drugs for
the treatment of various cancers.  The firm has built its drug
portfolio based on its 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 treatment for glioblastoma multiforme, a deadly form of
brain cancer.

NEOL - NeoPharm  $21.50

PLAY (sell naked put):

Action    Month &   Option    Open   Last  Cost    Max.  Simple
Req'd     Strike    Symbol    Int.   Price Basis  Yield  Yield

SELL PUT  MAR 17.5  UOE OW     127   0.55  16.95  10.5%   3.2% *
SELL PUT  MAR 20    UOE OD       0   1.45  18.55  16.6%   7.8%


__________________________________________________________________

RMBS - Rambus  $34.93  *** Favorable Judgment! ***

Rambus (NASDAQ:RMBS) designs, develops and markets "chip-to-chip"
interface solutions that enhance the performance and effectiveness
of its client's chip and system products.  These solutions include
multiple chip-to-chip interface products, which can be grouped into
two categories: memory interfaces and logic interfaces.  Rambus'
memory interface products provide an interface between memory chips
and logic chips.  In addition, the firm's logic interface products
provide an interface between two logic chips.  Rambus has two major
memory interface products: Rambus dynamic random access memory and
Yellowstone.  Additionally, it offers a logic interface product for
high-speed serial chip-to-chip communications between logic chips
in a range of computing, networking and communications applications.

RMBS - Rambus  $34.93

PLAY (sell naked put):

Action    Month &   Option    Open   Last  Cost    Max.  Simple
Req'd     Strike    Symbol    Int.   Price Basis  Yield  Yield

SELL PUT  MAR 25    BNQ OE    6223   0.25  24.75   3.4%   1.0% TS
SELL PUT  MAR 30    BNQ OF    2496   1.10  28.90  10.6%   3.8% *
SELL PUT  MAR 35    BNQ OG     442   2.90  32.10  16.8%   9.0%


__________________________________________________________________

SMTC - Semtech  $25.60  *** Earnings Speculation! ***

Semtech (NASDAQ:SMTC) is a supplier of analog and mixed-signal
semiconductors.  The company operates in two business segments,
Standard Semiconductor Products and Rectifier, Assembly and Other
Products.  The Standard Semiconductor Products segment makes up
the vast majority of overall sales and includes power management,
protection, test and measurement, advanced communications and
human input device product lines.  The Rectifier, Assembly and
Other Products segment includes the company's line of assembly
and rectifier devices, which are the remaining products from its
original founding as a supplier into the military and aerospace
market.

SMTC - Semtech  $25.60

PLAY (sell naked put):

Action    Month &   Option    Open   Last  Cost    Max.  Simple
Req'd     Strike    Symbol    Int.   Price Basis  Yield  Yield

SELL PUT  MAR 22.5  QTU OR     346   0.35  22.15   4.6%   1.6% *
SELL PUT  MAR 25    QTU OE     134   1.10  23.90  10.0%   4.6%



~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

BULLISH PLAYS - CREDIT SPREADS

These candidates are based on the underlying issue's technical
history or trend.  The probability of profit in these positions
may also be higher than other plays in the same strategy, due to
small disparities in option pricing however, each play should be
evaluated for portfolio suitability and reviewed with regard to
your strategic approach and trading style.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

MICC - Millicom Cellular  $88.25  *** Wireless Telecom Giant ***

Millicom International Cellular S.A. (NASDAQ:MICC) is a global
telecommunications investor with cellular operations in Asia,
Latin America and Africa.  The company has a number of cellular
operations and licenses in countries around the world and the
group's cellular operations have a combined population under
license of over 500 million people.  In addition, MIC operates
a GSM clearing house, provides high-speed wireless data services
in various countries and has a licenses to develop high speed
wireless data services in other areas.  MIC also has a major
interest in Tele2 AB, an alternative pan-European telecom firm
offering fixed and mobile telephony, data network and Internet
services.

MICC - Millicom Cellular  $88.25

PLAY (conservative - bullish/credit spread):

BUY  PUT  MAR-70.00  CQD-ON  OI=40  ASK=$0.80
SELL PUT  MAR-75.00  CQD-OO  OI=58  BID=$1.15
INITIAL NET-CREDIT TARGET=$0.50-$0.55
POTENTIAL PROFIT(max)=11% B/E=$74.50


__________________________________________________________________

VIP - Vimpel Communications  $83.25  *** Another New High! ***

Vimpel Communications (NYSE:VIP) is an established provider of
telecommunications services in Russia, operating under the Bee
Line family of brand names.  VimpelCom's license portfolio covers
much of Russia's population including the City of Moscow and the
Moscow Region.  VimpelCom introduced two digital communications
standards to Russia and built a dual band GSM-900/1800 cellular
network.  The company also led the development and emergence of
the mass consumer market for wireless communications in Russia by
introducing a prepaid product solution.  VimpelCom offers various
technologies, such as wireless application protocol and BeeOnline,
a multi-access web portal that provides a multitude of wireless
information and entertainment services, including location-based
features.

VIP - Vimpel Communications  $83.25

PLAY (less conservative - bullish/credit spread):

BUY  PUT  MAR-70.00  VIP-ON  OI=317  ASK=$0.45
SELL PUT  MAR-75.00  VIP-OO  OI=164  BID=$1.05
INITIAL NET-CREDIT TARGET=$0.65-$0.70
POTENTIAL PROFIT(max)=15% B/E=$74.35



~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

BEARISH PLAYS - NAKED CALLS

Based on analysis of option pricing and the underlying stock's
technical background, these positions meet our fundamental
criteria for bearish "premium-selling" strategies.  Each issue
has robust option premiums, a well-defined resistance area and
a high probability of remaining below the target strike prices.
As with any recommendations, these positions should be carefully
evaluated for portfolio suitability and reviewed with regard to
your strategic approach and personal trading style.

WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL!

The sale of uncovered calls entails considerable financial risk,
far more than the initial margin or collateral required to open
the position.  The maximum financial obligation for the sale of a
naked option 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 options must have the cash or
collateral equivalent of the sold strike price in reserve at all
times.  The simple fact is: stocks often experience large price
swings, exponentially increasing the margin maintenance and very
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 price moves in
a volatile manner.  Many professional traders suggest closing the
position when the underlying share value moves beyond 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.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

CMTL - Comtech Telcom  $27.34  *** Pre-Earnings Slump? ***

Comtech Telecommunications (NASDAQ:CMTL) designs, develops,
produces and markets products, systems and services for advanced
communications solutions.  It conducts its business through three
complementary segments: telecommunications transmission, mobile
data communications and radio frequency microwave amplifiers.
The telecommunications transmission segment provides products and
systems for satellite, over-the-horizon microwave and wireless
line-of-sight systems.  The mobile data communications segment
provides satellite-based mobile tracking and messaging services
and mobile satellite transceivers for defense applications, such
as logistics, support and battlefield command and control.  The
RF microwave amplifier segment designs, manufactures and markets
solid-state, high-power, broadband RF microwave amplifier products.

CMTL - Comtech Telcom  $27.34

PLAY (sell naked call):

Action     Month &   Option    Open   Last  Cost    Max.  Simple
Req'd      Strike    Symbol    Int.   Price Basis  Yield  Yield

SELL CALL  MAR 35    CQH CG     228   0.45  35.45   7.5%   1.3% *
SELL CALL  MAR 30    CQH CF     182   1.30  31.30  13.3%   4.2%


__________________________________________________________________

FLML - Flamel Technologies  $26.75  *** In A Trading Range? ***

Flamel Technologies (NASDAQ:FLML) is a biopharmaceutical company
engaged mainly in the development of two polymer-based delivery
technologies for medical applications.  The company's Micro-pump
technology is a multi-particulate technology for oral ingestion
of small molecule drugs with applications in controlled release,
tastemasking and bioavailability enhancement.  The company has
three major products based on its Micropump technology: Asacard,
a controlled-release formulation of aspirin for the treatment of
cardiovascular disease; Metformin XL, a controlled-release form
of Metformin that is in development for use for the treatment of
Type II diabetes, and Genvir, a controlled-release acyclovir for
the treatment of genital herpes.  In addition, FLML has developed
new herbicide delivery systems and has patented a biomaterial,
ColCys.

FLML - Flamel Technologies  $26.75

PLAY (sell naked call):

Action     Month &   Option    Open   Last  Cost    Max.  Simple
Req'd      Strike    Symbol    Int.   Price Basis  Yield  Yield

SELL CALL  MAR 35    FLU CG    3033   0.35  35.35   6.0%   1.0% *
SELL CALL  MAR 30    FLU CF    2520   1.05  31.05  12.1%   3.4%


__________________________________________________________________

MHS - Medco Health Solutions  $31.85  *** Big Contract Loss! ***

Medco Health Solutions (NYSE:MHS) is a pharmacy benefit manager
that provides sophisticated programs and services for its clients
and the members of their pharmacy benefit plans, as well as for
the physicians and pharmacies that the members use.  The firm's
programs and services help clients control the cost and enhance
the quality of the prescription drug benefits that they offer to
their members.  Medco accomplishes this primarily by negotiating
competitive rebates and discounts from pharmaceutical companies,
obtaining competitive discounts from retail pharmacies and also
administering prescriptions filled through its national networks
of retail pharmacies or its own home delivery pharmacies.

MHS - Medco Health Solutions  $31.85

PLAY (sell naked call):

Action     Month &   Option    Open   Last  Cost    Max.  Simple
Req'd      Strike    Symbol    Int.   Price Basis  Yield  Yield

SELL CALL  MAR 35    MHS CG     282   0.45  35.45   4.4%   1.3% *
SELL CALL  MAR 30    MHS CF      40   2.60  32.60  14.8%   8.0%



~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

BEARISH PLAYS - CREDIT SPREADS

All of these positions are favorable candidates for "bear-call"
credit spreads, based on the current price or trading range of
the underlying issue and its recent technical history or trend.
The probability of profit from these positions may be higher
than other plays in the same strategy, due to disparities in
option pricing.  However, current news and market sentiment will
have an effect on these issues, so review each play individually
and make your own decision about its future outcome.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

AMZN - Amazon.com  $44.87  *** Consolidation Underway ***

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

AMZN - Amazon.com  $44.87

PLAY (conservative - bearish/credit spread):

BUY  CALL  MAR-55.00  ZQN-CK  OI=7195   ASK=$0.15
SELL CALL  MAR-50.00  ZQN-CJ  OI=14302  BID=$0.60
INITIAL NET-CREDIT TARGET=$0.50-$0.55
POTENTIAL PROFIT(max)=11% B/E=$50.50


__________________________________________________________________

CTAS - Cintas  $42.77  *** Sell-Off In Progress! ***

Cintas (NASDAQ:CTAS) provides highly specialized services to
businesses of all types throughout North America.  The company
designs, manufactures and implements corporate identity uniform
programs and provides entrance mats, restroom supplies, unique
promotional products and first aid and safety products for over
500,000 businesses.  Cintas classifies its businesses into two
operating segments: rentals and other services.  The rentals
operating segment designs and manufactures corporate identity
uniforms that it rents, along with other items, to its customers.
The other services segment involves the design, manufacture and
direct sale of uniforms to its customers, as well as the rental
or sale of ancillary services including hygiene supplies, first
aid products and services and clean-room supplies.

CTAS - Cintas  $42.77

PLAY (less conservative - bearish/credit spread):

BUY  CALL  MAR-50.00  NQQ-CJ  OI=74   ASK=$0.20
SELL CALL  MAR-45.00  NQQ-CI  OI=191  BID=$0.80
INITIAL NET-CREDIT TARGET=$0.60-$0.70
POTENTIAL PROFIT(max)=14% B/E=$45.60



~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

SEE DISCLAIMER - SECTION 1

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~


**********
Watch List
**********

Semis, Drugs & Organic foods

___________________________________________________________________

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.
___________________________________________________________________


Marvell Technology Group - MRVL - close: 45.35 change: +1.87

WHAT TO WATCH:  With all the good semiconductor news investors
may want to keep an eye on MRVL.  The stock broke out over the
$45 level today on better than average volume but it still has
longer-term resistance near $46.50.  Fortunately, its P&F chart
looks bullish as well and points to a $61 price target. Earnings
for MRVL should be February 26th.

Chart=


---

Whole Foods Market Inc - WFMI - close: 77.46 change: +2.25

WHAT TO WATCH:  Up, up and away!  Shares of WFMI are soaring.
The stock has broken out of its recent rising channel and its
trajectory has become much, much steeper.  Driving the stock is
the recent earnings report where the company beat estimates
during arguably the best quarter the company has ever had.
Strong sales growth and impressive same-store sales growth could
keep this one on the run but look for the right entry point.
Right now WFMI looks very extended.

Chart=


---

Invitrogen Corp - IVGN - close: 75.21 change: -1.03

WHAT TO WATCH:  Keep an eye on IVGN.  The company recently
announced earnings and we're seeing some post-earnings depression
as momentum traders exit their positions.  IVGN is approaching
support at $74 but we're not sure it will hold.  A better bullish
entry point would be a bounce from its 50-dma just under $72.00.
However, shares tend to overshoot the 50-dma so look for a bounce
from the $70.00 level.

Chart=


---

United Technologies - UTX - close: 97.36 change: +2.18

WHAT TO WATCH:  UTX was the best performing Dow component today
with a 2.29% gain.  Some shuffling in the S&P 500 really drove
volume for UTX and demand for the stock sent it to a new all-time
high.  The stock remains near the top of its current 2 1/2 month
trading range but bullish traders may want to reconsider new
positions if it can breakout over the $98 level.  Such a move
would produce a fresh triple-top buy signal on its P&F chart.

Chart=



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

RIMM $92.80 -1.66 - RIMM is starting to see a little bit of
profit taking.  If it breaks $90 traders can target the $85
level.

PEP $51.27 +0.27 - Pepsico recently broke out to the upside on
its earnings report and the retest of $50.00 two days ago looks
good.  Bulls can consider new positions here but do so with the
appropriate time frame.  Shares of PEP tend to move slowly.

JNJ $53.89 -0.52 - The recent run for JNJ may be slowing and
traders can watch it for support near 52.50-53.00.


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