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Daily Newsletter, Thursday, 05/06/2004

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The Option Investor Newsletter                Thursday 05-06-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Job Fears Rampant
Futures Markets: See Note
Index Trader Wrap: See Note
Market Sentiment: Good News Bad, Bad News Good


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      05-06-2004           High     Low     Volume   Adv/Dcl
DJIA    10241.26 - 69.70 10308.20 10170.51 1.84 bln  607/2683
NASDAQ   1937.74 - 19.50  1949.55  1923.30 1.80 bln  933/2204
S&P 100   543.90 -  3.29   547.19   540.23   Totals 1540/4887
S&P 500  1113.99 -  7.54  1121.53  1106.30
W5000   10851.70 - 86.25 10937.00 10777.86
SOX       452.48 +  0.20   454.17   444.31
RUS 2000  563.09 -  6.97   570.06   556.97
DJ TRANS 2912.51 - 10.50  2927.82  2889.07
VIX        17.05 +  1.28    17.67    16.45
VXO (VIX-O)17.65 +  1.42    18.98    17.47
VXN        25.28 +  0.84    25.86    24.79
Total Volume 3,980M
Total UpVol    903M
Total DnVol  3,031M
Total Adv  1761
Total Dcl  5517
52wk Highs   64
52wk Lows   438
NasTRIN    1.12
TRIN       0.98
PUT/CALL   1.26
************************************************************

Job Fears Rampant
by Jim Brown

Few traders are afraid of losing their job but they are very
afraid that too many workers may have found jobs in the month
of April. That April Jobs report will be released at 8:30 on
Friday. You would have thought time came to a stand still for
traders today while they waited for the release. Volume was
very light and most of it was down. Traders had visions of
Greenspan with phone to his ear and finger poised over the
auto dialer to raise rates on a blowout number.

Dow Chart - Daily


Nasdaq Chart - Daily



Helping that fear today was a huge +15% jump in employment
ads on over 1500 websites as surveyed by Monster.com. The
index jumped to 125 in April from 109 in March and up from
86 in December. The steady climb over the last three months
really exploded in April and that could have supplied added
jobs to the April employment report to be released tomorrow.
Keep in mind job ads do not translate into jobs until
somebody actually starts to work. Since the low in December
there has been a +50% increase in the number of advertised
jobs. The Monster data is more current than the Conference
Board and shows that jobs were hot in April. The Mountain
region jumped +30% in the last month with New England
gaining +29%. The south Atlantic region was the slowest
with +13% gains.

Also helping feed the fear was the lowest Jobless Claims
since October-2000 at 315,000. The bounce last month has
been completely erased and forgotten and traders see sub
300K numbers ahead. The larger than expected drop of -25K
in claims shocked everyone and the drop to post recession
lows put some real fear into traders that the jobs report
on Friday would be a blowout.

I am not going to repeat all the commentary about the Jobs
from the last couple weeks but just hit the highlights.
Consensus estimates are +185,000, down from the +308K
actual gain in the April report. The whisper numbers have
been running in a wide range between 60K and 250K until
this morning. After the Monster.com survey posted such
strong gains the numbers being discussed rose to as much
as +350K. The latest jobs estimate I heard after the market
close was for a range of 350K to 400K by Cramer. The fears
of a blowout hit the already weak market and down we went.
At least that is the conventional wisdom.

My current thought process is for a number under 200K to
produce buying in equities because it would justify the
Fed's "no rush" position on rate increases. Having a
negative revision to last months number would not hurt.
A number over 200K could produce more consternation over
a potential move in rates at the June meeting. A number
over +300K could produce a rate hike a soon as Monday.
The Fed has raised rates on Monday in the past after
stronger than expected Jobs numbers in a rising economic
environment.

In a nut shell an inline jobs number means the Fed was
right to remain on the sidelines and the economy is still
growing moderately. If the number is much over the current
consensus then the Fed will be seen as behind the curve
and needing to raise rates faster to catch up. Thus the
fear factor for traders is that the Fed may be behind
the curve. We will know the answer at 8:30 tomorrow
morning.

While the talking heads were using the rate hike worries
as the reason for the selling that does not make it true.
There are several reasons for the selling with oil, Iraq,
elections and terror among the leaders.

The market is selling off on risk aversion concerns and
weak guidance on potential earnings. Leading the risk
list for the short term is the rate fears but in reality
those fears are already priced into the market. One of
the items not priced in is the current Iraq prisoner
scandal. This is an Iraq problem the Bush administration
did not need and may turn into a serious political anchor.
There are already calls for Rumsfield's resignation and
the president is having to devote public face time to
defending officials while condemning the event. This is
a lose-lose situation. Nothing good can come from it and
the outcry from the world wide Muslim community is giving
strength to the anti U.S. opposition. This may be a small
event enacted by a handful of soldiers but it has the
potential to swing the election.

Another worry is the Olympics. With a monster bullseye
currently painted on Greece and the games starting in
just over 90 days there is an extreme risk for multiple
terror attacks. Greece is spending more than $1 billion
on security but you can't protect everyone when the
attackers are not afraid of dying. This is going to be
a major deterrent to buying stocks for the next 100 days.

Oil prices rose to within three cents of $40 today with
another 13-yr high and are showing no indications of
falling. Global demand is still rising and OPEC may be
punishing us for invading Iraq and destabilizing the
region. They refuse to raise production or even discuss
it until their next scheduled meeting. Every $1 over $25
a barrel adds billions in undeclared energy taxes to the
U.S. consumer. $2-$3 per gallon gas will be commonplace
very soon and that is sucking dollars available for other
spending out of consumer pockets. April retail sales
reported today were much weaker than expected and this
is one of the reasons.

Earnings guidance for coming quarters is slipping. 429
S&P companies have reported and current average earnings
growth for Q1 is +26.7%. Estimates for the coming quarters
are in the mid to low teens. Investors are dealing with
the fact that earnings growth has peaked and will be
slowing for the rest of the year and potentially falling
in 2005.

As if the market and the administration did not have
enough problems Greenspan took aim at the deficit once
again in a speech today. He launched a tirade about the
now 4.25% of GDP deficit for this year and the rising
deficit in years to come and on the rising household
debt. He reiterated his warning that the budget and
Social Security would become unbearable by the time the
baby boomers begin retiring in 2008-2012. He railed on
the growing trade deficit at 5% of GDP. His point was
that long term stability of the U.S. economy was far
from guaranteed and tough times lay ahead. He questioned
"if something fundamental had happened to the U.S. economy
that enabled us to disregard the time tested criteria for
economic danger." His answer, "The free lunch has still to
be invented." It is obvious to me that Greenspan is not
going to lobby for reappointment when his term expires
and he feels free to take parting shots whenever the
opportunity arises. His comments this morning helped to
cloud the outlook for equities and added to the overall
market weakness. Greenspamed again.

Adding to the negative tone was a late day news report
that Bin Laden had offered 10,000 grams of gold to anyone
that killed specific U.S. and U.N. representatives to
Iraq and the UN. This equates to $136,000 at today's
prices. On the list of targets who were specifically
mentioned were Kofi Annan, UN Secretary General, Paul
Bremer, Chief U.S. administrator in Iraq and Lakhdar
Brahimi the UN envoy to Iraq. While we know those who
are listed would be obvious targets the bounty adds to
the risk. The statement said the family of the killers
would get the reward if the killer did not survive the
attack. How the reward would actually get to the family
remains to be seen. Believing it would appear would take
more faith than most would have.

The multitude of negatives coupled with the rate fears
have pushed shorts in the 10-year treasuries to an all
time high. It appears everyone is counting on a rate
increase very soon. No wonder the pits booed the Fed
announcement on Tuesday. The yield on the ten-year note
rose to close at 46.02 today and highs not seen since
last August. The move off the March lows is nearly
vertical and shows the market is doing the work of
the Fed already.

Despite all the negatives today the market was not as
bad as it appeared. The internals were very negative for
most of the day with the A/D negative 5:1 and A/D volume
negative 6:1. However, it was on light volume with only
3.0B shares traded going into the last hour. We added
another billion shares in the last hour rebound. There
were simply no buyers until the end of day short covering
rally. Up volume was under 500m shares total until late
in the afternoon. Those who want to be long are smart
enough to wait for the Jobs report before wading into
shark infested waters. Every tick lower before the
report just provides a better buying opportunity for
them.

Just because I said it was not as bad as it looked does
not mean it was good. The new 52-week highs fell to a
new 52-week low at only 64 across all markets. The new
52-week lows rose to a new 52-week high at 438. This is
NOT a good sign and illustrates the real underlying market
weakness despite the gyrations of the indexes. While the
indexes did not really tank today the internals that count
did.

The Dow dropped to a low of 10170 intraday and broke
its long term uptrend at 10200 but managed to rebound
back over that level at the close. Still the outlook is
not good. We are continuing to flirt with the bottom of
the recent range and the short term trend is still down.
There is significant resistance in the 10300-10350
range and I can't imagine what surprise on Friday
could push it above 10400. If jobs are bad then the
economy is still struggling and the earnings outlook
would weaken even further. If jobs are a blowout then
more Fed fears would appear. Tough uphill climb ahead
for the bulls.

The Nasdaq also gave up ground gained over the last
couple days and closed back at the 200dma once again
but only after a fight. The intraday lows were near
the lows from last week at 1923 and we could easily
trade down to critical support at 1900 with any bad
news. Like the Dow the Nasdaq is in a short term down
trend and even a strong rally on Friday would not get
it out of trouble.

I cautioned last Tuesday to maintain a short posture
below 10275/1940 and that advice still holds. Any
gains over that level will be questionable and I would
be very careful about new long positions. The Nasdaq
has very strong resistance at 1965 and above 2000 which
should stop/slow any rebound. The Dow has strong repeat
resistance at 10350, 10400 and 10500. With all the negative
items I mentioned earlier there is simply no catalyst on
the horizon that may push the indexes above those levels.
They may be out there but they are not on my radar. All
the good news is priced in and the bad news keeps growing.
Caution is the key and Friday could be mild or wild.

Enter Passively, Exit Aggressively.

Jim Brown
Editor


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

Futures wrap is not emailed due to the excessive number of charts.
It may be read on the website at this address.
http://www.OptionInvestor.com/indexes/futureswrap.asp



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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_050604_1.asp


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

Good News Bad, Bad News Good
Jonathan Levinson

Bulls and bears have continually remarked on the unpredictability
of the market's reaction to economic data.  Good news is often
sold, bad news bought.   For the past year, this counterintuitive
relationship has shown a tendency to occur, confounding traders
who follow the news.  Joe Granville has said "News is for
suckers," and it's often appeared appropriate this year.

The preliminary Q1 GDP met expectations at 3.5%, while initial
unemployment claims surprised strongly to the downside, coming in
at 315K for the week.  What had been weakness in the overnight
markets became a steep selloff throughout the day for equities,
even as the US Dollar Index rose.

On the one hand, the key intraday cycles were in downphases, and
the technical conditions for a selloff were in place.  On the
other hand, the market has been reacting to the prospect of
higher interest rates and the prospect of a decline in
stimulation from the Federal Reserve.  Strong economic data
removes the justification for the easy money stimulative policies
that the Fed has been so aggressively employing, and consequently
leads traders to sell bonds, which causes yields/rates to rise,
and equities.  The rising dollar coincides with all assets valued
in US Dollars falling.

While news may well be for suckers, a wise trader keeps one eye
on the news and the intermarket relationships.  On a day when the
news is good and the charts favor downside, a trader can be more
skeptical of bounces when they occur.  On a bad news day, the
underlying bias may be more likely to be to the upside.  The
moral hazard that the Fed has created with its policies won't
last forever, but for the time being, this appears to be the
relationship between economic news and market prices.


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

Market Averages

DJIA ($INDU)

52-week High: 10753
52-week Low :  8416
Current     : 10241

Moving Averages:
(Simple)

 10-dma: 10341
 50-dma: 10371
200-dma:  9996



S&P 500 ($SPX)

52-week High: 1163
52-week Low :  912
Current     : 1113

Moving Averages:
(Simple)

 10-dma: 1123
 50-dma: 1128
200-dma: 1076



Nasdaq-100 ($NDX)

52-week High: 1559
52-week Low : 1103
Current     : 1415

Moving Averages:
(Simple)

 10-dma: 1442
 50-dma: 1447
200-dma: 1412



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

CBOE Market Volatility Index (VIX) = 17.05 +1.28
CBOE Mkt Volatility old VIX  (VXO) = 17.65 +1.42
Nasdaq Volatility Index (VXN)      = 25.18 +0.84

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

          Put/Call Ratio  Call Volume   Put Volume

Total          1.26        543,069       682,891
Equity Only    0.97        398,820       385,067
OEX            0.86         35,251        30,395
QQQ            3.79         21,003        79,686


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

Bullish Percent Data

           Current   Change   Status
NYSE          72.1    - 1     Bull Confirmed
NASDAQ-100    40.0    - 2     Bear Confirmed
Dow Indust.   80.0    + 0     Bear Confirmed
S&P 500       68.0    - 1     Bear Confirmed
S&P 100       70.0    + 0     Bear 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: 0.77
10-dma: 0.76
21-dma: 1.08
55-dma: 0.98


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     574       896
Decliners    2283      2186

New Highs      47        52
New Lows      203        63

Up Volume    364M      456M
Down Vol.   1444M     1246M

Total Vol.  1818M     1724M
M = millions


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

Commitments Of Traders Report: 04/27/04

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

Commercials aren't making any big moves and remain net bearish.
Small trades are relatively flat from last week as well and
remain net bullish.


Commercials   Long      Short      Net     % Of OI
04/06/04      409,429   419,471   (10,042)   (1.2%)
04/12/04      412,827   419,910   ( 7,083)   (0.9%)
04/20/04      409,729   421,456   (11,727)   (1.4%)
04/27/04      406,927   416,244   ( 9,317)   (1.1%)

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
04/06/04      130,262    80,174    50,088    23.8%
04/12/04      135,840    89,090    46,750    20.8%
04/20/04      136,699    92,982    43,717    19.0%
04/27/04      133,775    90,535    43,240    19.3%

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

Commercial traders have upped their bets on both longs and
shorts but remain net bearish.  Small traders have decreased
the size of their long positions but are still strongly bullish.


Commercials   Long      Short      Net     % Of OI
04/06/04      270,904   328,862    (57,958)  ( 9.7%)
04/12/04      261,889   341,163    (79,274)  (13.1%)
04/20/04      275,985   355,555    (79,570)  (10.1%)
04/27/04      291,365   370,549    (79,184)  (12.0%)

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
04/06/04      148,737     46,235   102,502    52.6%
04/12/04      172,473     52,274   120,199    53.5%
04/20/04      186,799     69,137   117,662    46.0%
04/27/04      175,788     69,613   106,175    43.3%

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


NASDAQ-100

There is virtually zero movement in the positions for commercial
traders but luck would have it the little movement we did get
pushed them to a new bullish high.  Small traders are also
stuck in limbo.


Commercials   Long      Short      Net     % of OI
04/06/04       54,862     34,762    20,100   22.4%
04/12/04       54,144     34,432    19,712   22.3%
04/20/04       54,852     35,964    18,888   20.8%
04/27/04       54,196     33,948    20,248   23.0%

Most bearish reading of the year: (21,858)  - 08/26/03
Most bullish reading of the year:  20,248   - 04/27/04

Small Traders  Long     Short      Net     % of OI
04/06/04        7,971    20,721   (12,750)  (44.4%)
04/12/04        8,297    20,746   (12,449)  (42.9%)
04/20/04        8,538    19,431   (10,893)  (39.0%)
04/27/04        9,008    20,347   (11,339)  (38.6%)

Most bearish reading of the year: (12,750) - 04/06/04
Most bullish reading of the year:  19,088  - 01/21/02

DOW JONES INDUSTRIAL

Commercial traders aren't changing their bets on the Dow either
and remain marginally net long.  Small traders remain net bearish
but they have reduced their short positions.


Commercials   Long      Short      Net     % of OI
04/06/04       23,101    22,108      993       2.2%
04/12/04       23,501    22,748      753       1.6%
04/20/04       24,156    22,009    2,147       4.7%
04/27/04       23,676    22,009    1,667       3.6%

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

Small Traders  Long      Short     Net     % of OI
04/06/04        7,316     8,085     (769)    (5.0%)
04/12/04        6,136     7,450   (1,314)    (9.7%)
04/20/04        5,997     9,631   (3,634)   (23.3%)
04/27/04        5,998     8,868   (2,870)   (19.3%)

Most bearish reading of the year: (12,106) -  3/09/04
Most bullish reading of the year:   8,523  -  8/26/03

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


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The Option Investor Newsletter                 Thursday 05-06-2004
Copyright 2004, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: MIK
Dropped Puts: COF
Call Play Updates: AU, BBY, DGX, GDW, OMC
New Calls Plays: None
Put Play Updates: AMZN, LTR, WHR, SLAB
New Put Plays: BZH, MSTR


****************
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:
*****

Michaels Stores - MIK - cls: 46.75 chng: -3.49 stop: 48.50

If ever there was a need for stops, MIK is the play that proves
their necessity.  After looking for the past week like it was
just resting up for the next leg higher, the stock absolutely
cratered this morning on disappointing April comps.  Gapping down
to $49 was just the beginning, as the stock then proceeded to
fall all the way to $45.65 before a tepid afternoon bounce.  Any
open positions should have been exited as the stock fell through
the 50-dma and our $48.50 stop.  There should be no question
about why we're dropping the play tonight, as every bit of
bullishness was flushed out on today's very heavy volume.

Picked on April 20th at      $51.23
Change since picked:          -4.48
Earnings Date               5/26/04 (confirmed)
Average Daily Volume =        323 K
Chart =



PUTS:
*****

Capital One - COF - close: 66.48  chg: -0.46 stop: 67.81

As the team studied COF's chart Tuesday, we noted the white
candle, although we also of course noted the small upper shadow.
That shadow provided a small measure of hope that COF would find
resistance at the high of that day.  However, COF appeared to be
rising into a bear flag after its near approach to its 200-dma.
We mentioned that possibility in Tuesday's write-up.  Since bear
flags sometimes retrace as much as 50 percent of a previous
plunge before rolling down again, we considered how to protect
readers from a loss.  COF had not traded above its 10-dma since
April 13, so setting a stop just above that 10-dma appeared a
good idea.  Giving COF a few cents leeway, we set the stop at
$67.81.

COF triggered that stop on Wednesday, trading only a few cents
above our stop before it turned lower again.  In retrospect,
perhaps the stop should not have been so close, but that remains
to be seen.

Picked on April 26 at $ 67.99
Change since picked:   - 1.33
Earnings Date        04/21/04 (confirmed)
Average Daily Volume:     2.2 million
Chart =



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success.

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

Anglogold - AU - close: 32.05 change: -1.12 stop: 31.84

By early this week, AU's climb had taken on some aspects of a
bear-flag climb into resistance. Tuesday's gap higher reassured
those worriedly watching the climb.  However, the mid-week
trading pattern reinforced the conclusion that this might be a
bear flag.  Now it looks as if that bear flag formation might be
in danger of breaking to the downside.

Friday's jobs number, any decisions by the Chinese government
after the end of the Chinese May holidays, and other geopolitical
developments might impact this play, sending AU higher toward our
profit target of $35.49 or else hitting our stop and turning down
toward the $27.00 target of the H&S on the weekly chart.
Conservative traders might use any swings up toward the breakeven
level to exit this play, while others might wait to see if AU
zigzags its way up to our profit target. We would not suggest new
entries at this point.

Picked on April 30 at $ 32.25
Change since picked:   - 0.20
Earnings Date        04/29/04 (confirmed)
Average Daily Volume:     1.0 million
Chart =


---

Best Buy Co - BBY - close: 53.40 change: +0.08 stop: 51.99

This week, a Piper Jaffray video game analyst named BBY second
behind AMZN as a low-cost leader in a survey of seven retailers
of video games.  The analyst commented that these retailers were
not discounting the video titles.  Perhaps that was a sign that
pricing power was holding steady.

That development and the survey did not appear to help BBY during
the middle of the week, however, as it continued testing the
descending trendline that marks the big reverse H&S on its weekly
chart.  The 30-dma cycles up toward BBY, now at $52.74, and well
above our stop.

In recent days, BBY's descent appeared to slow.  That may be weak
encouragement, but it is at least some encouragement.  Better
would be a close back above $54.00 and then a move back above the
21-dma.  Although it's possible that BBY is beginning to
consolidate prior to moving up again, the descending daily
oscillators do not invite new bullish entries.  We'll reevaluate
again in this weekend's newsletter.

Picked on April 23 at $ 55.05
Change since picked:   - 1.65
Earnings Date        03/31/04 (confirmed)
Average Daily Volume:     3.6 million
Chart =


---

Quest Diagnostics - DGX - close: 86.00 change: -0.42 stop: 83.75

Putting in a strong showing and closing at a new recent high, DGX
certainly looked good yesterday and with the rest of the market
falling apart today, it was encouraging to see the stock once
again holding up well.  DGX traded a perfect inside day doji on
Thursday, reflecting the uncertainty that investors seem to be
felling.  The stock still looks destined for higher levels and it
is encouraging to see its exhibition of relative strength.  The
best shot at new entries appears to be a breakout over the $87
level, although more aggressive traders can attempt to gain entry
on a rebound from the $85 level.  Take note of the fact that our
stop is now $83.75 due to the fact that with yesterday's new
high, the stock should not take out the lows of last week if our
bullish premise for the stock still holds merit.

Picked on April 25th at      $86.15
Change since picked:          -0.99
Earnings Date               4/22/04 (confirmed)
Average Daily Volume =        611 K
Chart =


---

Golden West Fin. - GDW - cls: 104.36 chng: -1.20 stop: 101.75

After a week on the bullish play list, shares of GDW are still
struggling to gain traction.  The potential bear flag pattern
that we mentioned in a cautionary note in the initial writeup is
still in play and the stock now needs to push through the $107
level to break that pattern.  It is worth noting that although
our $106 trigger was hit earlier this week, the stock has so far
been unable to close above its 100-dma (now at $106.25).  Another
troubling development is the fact that daily Stochastics are now
tipping over from overbought territory and we'll need to see
strong buying interest to break this developing bearish scenario.
While aggressive traders can target entries on a successful
rebound from the bottom of the short-term rising channel near
$103, the more conservative approach will be to wait for a solid
breakout over $107.  Maintain stops at $101.75, just under the
low from a week ago.

Picked on April 29th at     $104.99
Change since picked:          -0.63
Earnings Date               4/20/04 (confirmed)
Average Daily Volume =        660 K
Chart =


---

Omnicom Group - OMC - close: 81.74 change: -1.47 stop: 79.25

Proving the wisdom of setting a breakout trigger on our OMC play,
the stock has yet to develop enough strength to hit that trigger,
keeping us safely on the sidelines.  Recall that a trade over
$83.50 would technically be a breakout, but we want to see a move
through $84 before considering entries, as that move will give us
a new PnF Buy signal, confirming the upside potential in the
stock.  After holding strong yesterday, OMC had a rough session
on Thursday, falling back as low as the $81 level before catching
a bit of a rebound.  Rather than rallying though, the stock just
drifted along in a narrowing consolidation just under the $82
level.  We'll stand by our initial recommendation -- wait for the
breakout over $84 before initiating new entries.  Should the
stock weaken further, we'll consider a break below our stop as
reason to drop the play whether our trigger has been hit or not.

Picked on May 4th at         $82.78
Change since picked:          -1.04
Earnings Date               4/27/04 (confirmed)
Average Daily Volume =     1.21 mln
Chart =



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

None


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PLAY UPDATES - PUTS
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Amazon.com - AMZN - close: 43.14 chg: -1.12 stop: 46.35

Wednesday, a Piper Jaffray analyst named AMZN the low-cost leader
in sales of video games.  The survey was conducted among seven
retailers and used a list of 30 game titles.  Investors had other
matters on their minds, specifically positioning themselves in
front of the jobs numbers to be released Friday morning.  With
AMZN, that positioning resulted in a drop out of the possible "b"
distribution pattern on its daily chart.  That drop moved AMZN
into a congestion zone on its weekly chart, providing enough
support to slow AMZN's descent.

We're leaving our stop at its current $46.35 level, but
conservative traders might elect instead to lower it to a point a
few cents above the 30-dma.  Mid-channel support on the
descending regression channel might be found between $41.50-
41.80, so a bounce or hesitation might be expected at that point
and again at $40.00.  Play participants should decide in advance
how to treat the approach to mid-channel support.  The official
profit target remains at the bottom of the descending trendline
of lower lows, with a more definite target to be set as AMZN
approaches that trendline.  Those wanting new entries could
consider entries at the current level although they should keep
that short-term target in mind when making decisions.

Picked on May 02 at $ 43.60
Change since picked: + 0.46
Earnings Date      04/22/04 (confirmed)
Average Daily Volume:   8.4 million
Chart =


---

Loews Corp - LTR - close: 57.36 chg: -0.33 stop: 60.01

LTR finally broke below the March low and the gap high from
February, but gap support and $57.00 have been providing support.
While we're gratified that it's at least creeping lower, we'd
like to see a bigger decline.  Otherwise, bulls might gain
courage.  We're also gratified that MACD makes lower lows while
price does, although MACD's action could best be described as
flat to slightly descending.  We note that RSI and stochastics
make equal lows, creating apparent bullish divergence.  New
entries could continue to be found on a drop below $57.00.  That
creates a new P&F sell signal.  Our first target remains $54.00.

Picked on May 03 at $ 57.74
Change since picked: - 0.38
Earnings Date      04/29/04 (confirmed)
Average Daily Volume:   419 thousand
Chart =


---

Whirlpool Corp - WHR - close: 63.77 chg: -1.43 stop: 68.96

That's the way we like a put play to begin.  WHR fell more than 2
percent in Thursday's trading.  That drop took it below the
neckline of the H&S on its daily chart.  Because of the tendency
for some stocks to bounce reflexively as such important support
is violated, we're keeping a wide stop for now, but will look at
the stop again in the weekend's newsletter.  Bounces up to and
rollovers from the 10-dma could be used for new entries into the
play.  Make sure first that any bounces occur on lighter-than-
normal rather than heavy volume.  Our profit target remains
$58.01.

Picked on May 05 at $ 64.69
Change since picked: - 0.92
Earnings Date      04/21/04 (confirmed)
Average Daily Volume:   555 thousand
Chart =


---

Silicon Labs. - SLAB - close: 48.73 change: -1.07 stop: 50.40

Continuing its strong round of short-covering on Wednesday, SLAB
rose slightly above the $50 level, coming very close to
triggering our stop.  The strong two-day rise came to an end
today, with the stock falling back below $49 and closing
fractionally under the 200-dma ($48.82).  The big question is
whether the oversold bounce is over, or if today's action was
simply a pause in the rebound.  One issue of concern is the way
the stock found support near the $48.50 level, which acted as
resistance earlier in the week.  By tomorrow, the 10-dma ($50.84)
should have fallen below our $50.40 stop, providing a bit of
additional protection.  But with the daily Stochastics now
pointing up in bullish fashion, entries near resistance carry
greater risk.  The better approach for traders seeking new
entries will be to wait for a break back under the $48 level,
preferably on stronger volume than that seen today and with the
SOX falling back under the $440 level.

Picked on April 29th at       $50.03
Change since picked:           -1.30
Earnings Date                4/26/04 (confirmed)
Average Daily Volume =      1.30 mln
Chart =



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

Beazer Homes - BZH - close: 96.80 chg: -2.16 stop: 100.36

Company Description:
Beazer Homes USA, Inc., headquartered in Atlanta is one of the
country's ten largest single-family homebuilders with operations
in Arizona, California, Colorado, Delaware, Florida, Georgia,
Indiana, Kentucky, Maryland, Mississippi, Nevada, New Jersey,
North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee,
Texas and Virginia.  Beazer Homes also provides mortgage
origination and title services to its homebuyers.  (Source:
Company Press Release.)

Why We Like It:
The removal of the "patience" phrase in the FOMC's statement but
the lack of any clear direction as to when rate hikes might begin
dissatisfied many, and investors in the homebuilders are among
the most dissatisfied.  While this week's Mortgage Bankers
Association's figures showed mortgage applications up more than
four percent, those investors look forward to the time when
rising interest rates might cut into those new home purchases.
The $DJUSHB, the Dow Jones US Homebuilders tried to stabilize but
then dove on Thursday.

What about Beazer?  As Beazer made its last higher high in early
March, the weekly MACD failed to make a higher high along with
the price.  BZH's daily chart shows a continuation H&S forming
just above its 200-dma, but the more important H&S is best seen
on its weekly chart.  That's an ascending H&S with a sharply
ascending trendline.

We're going to set a trigger on this play beneath the 200-dma,
currently at $95.65.  A move below that average would confirm
both H&S formations.  The play will be triggered on a drop below
$95.49, which will also constitute a drop below the April low.
We're setting a first profit target at $90.30, although some play
participants might want to set exit plans in case the $91.40-
92.80 support level halts the descent.  Play participants should
be aware that our initial stop is quite wide, at $100.36, just
above Tuesday's high.  We'll lower that stop as soon as possible.

Suggested Options:
Because of the possibility for a bounce up to test the $99-100
level again before a final rollover, we're suggesting June
options.  The downside target if this pattern is confirmed is
quite deep.  Our suggestion would be to use the June 95 strike.

BUY PUT JUNE-100 BZH-RT OI=  105 last traded @ $7.00
BUY PUT JUNE- 95 BZH-RS OI=1,122 last traded @ $4.50
BUY Put June- 90 BZH-RT OI=  120 last traded @ $2.25

Annotated Daily Chart for BZH:




Picked on May xx at $ xx.xx (See Trigger)
Change since picked: - 0.xx
Earnings Date      04/22/04 (confirmed)
Average Daily Volume:   501 hundred thousand
Chart =


---

MicroStrategy Inc. - MSTR - cls: 47.02 chng: -2.28 stop: 51.50

Company Description:
MicroStrategy Inc. is a worldwide provider of business
intelligence software that enables companies to analyze the raw
data stored across their enterprise to reveal the trends and
insights needed to develop solutions to manage their business
effectively.  The company's software delivers this critical
information to workgroups, the enterprise and extranet
communities via e-mail, Web, fax, wireless and voice
communication channels.  MSTR offers an integrated business
intelligence platform, known as MicroStrategy 7i, which is
designed to enable businesses to turn information into strategic
insight and make more effective business decisions.

Why we like it:
The strong rally that took shares of MSTR to new 3-year highs
earlier this year has been soundly broken and the stock looks
vulnerable to another painful breakdown.  The waterfall decline
that occurred in March took the stock down from the $65 area all
the way to key support near $47.  After a serious rally attempt,
the stock put in a double top near $57 last month and the selling
frenzy that has followed the company's most recent earnings
report shows that something is definitely wrong.  Last week's dip
was halted just above the $47 level, but traders that bought the
feeble rebound off that level were in for a rude awakening this
morning as the bears were out for blood, slicing 4.6% off the
stock's value, as it dropped to close at a new 6-month low.  The
picture shown on the PnF chart isn't pretty either, as MSTR is on
a Sell signal, with a bearish price objective of $38.

There is the possibility of the stock finding support in the
$46.50-47.00 area, near the intraday lows from late March.  But
if that doesn't hold the stock up, then it could be a long ways
down.  We'll use an entry trigger at $46.50 and will target a
drop to the $40 level.  Looking back at the daily chart, we can
see the potential for support to be found at $45 and then $42 on
the way to that target, so we need to keep those levels in mind.
But at this point in the stock's decline, we're going to defer to
the message being sent by the PnF chart and look at rebounds off
those support levels as setups for new entries.  Initial entries
look good on the break below our trigger, with more conservative
entries materializing on a failed bounce below what should be
solid resistance in the $48-49 area.  We're beginning coverage
with a liberal stop at $51.50, just over the 20-dma ($51.30),
which is crossing below the 200-dma ($51.41).

Suggested Options:
Aggressive short-term traders will want to use the May 45 Put.
Those with a more conservative approach will want to use the May
50 put or even the June strike.  Our preferred option is the June
45 strike, as it is just out of the money and should provide
ample time for the play to move in our favor.

BUY PUT MAY-50 EOU-QJ OI= 481 last traded @ $4.00
BUY PUT MAY-45 EOU-QI OI=1100 last traded @ $1.35
BUY PUT JUN-45*EOU-RI OI= 212 last traded @ $2.75

Annotated Chart of MSTR:



Picked on May 6th at          $47.02
Change since picked:           +0.00
Earnings Date                4/27/04 (confirmed)
Average Daily Volume =         389 K
Chart =



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The Option Investor Newsletter                  Thursday 05-06-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Watch List: Teetering on the Edge of Long-Term Support
Option Spreads: Size Matters – IF Can You Manage It!


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

Teetering on the Edge of Long-Term Support

_________________________________________________________________

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.
_________________________________________________________________

Guidant Corp - GDT - close: 62.70 change: -1.34

WHAT TO WATCH: With a P&F downside target of $54.00 and an almost
perfectly formed (but as yet to be confirmed) H&S on the weekly
chart, this bears watching.  GDT reported April 22, so it's had
plenty of time to settle down afterwards.  Bearish divergence
developed as the head was formed on the weekly chart.  The
pattern would be confirmed on a drop below $59.40.  A problem
arises when studying the chart, and that's the location of the
200-dma at $57.19.  Aggressive traders could risk a play at the
current level, but that's not a position we advise.  Rather, it
might be better to enter on a break of the neckline, with a plan
in hand for protecting profits as the 200-dma is approached.
Some might prefer to wait for a break, a test of the 200-dma, and
then perhaps a rollover entry below the neckline again.

Chart=


---

Weyerhaeuser Co. - WY - close: 57.92 change:  -0.47

WHAT TO WATCH: The news that WY faces new lawsuits sent the stock
lower in Thursday's trading.  Perhaps instead it was the sale of
the new stock this week that weakened it.  Whatever has been
weakening the stock has set up a $45.00 downside P&F target.
Earnings are set for July 23.  Wednesday it fell below an
ascending trendline that has been in place more than a year.
Volume increased over the last two weeks.

The breakdown entry tempts us, but we suspect that WY may attempt
a bounce up to $60-61.00 to test the 200-dma.  The stock sale was
completed in mid-week and sometimes stocks rebound when that
happens.  Watch for a rollover entry below that 200-dma.

Chart=


---

Lockheed Martin - LMT - close: 48.84 change: -0.04

WHAT TO WATCH:  The winner of a big missile contract this week,
LMT bounced back above its 200-dma on strong volume.  It moved
above the neckline of a nicely formed inverse H&S on its daily
chart earlier in the week.  Because of expected round-number
resistance near $50.00, we'd like to get a pullback entry, with
that pullback to the $47.50-48.00 level.

Chart=



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Option Spread Strategies
************************

Size Matters – IF Can You Manage It!
By Mike Parnos, Investing With Attitude

It takes more than Viagra to keep your account size up.  In those
“male enhancement” commercials they say that if the effect lasts
longer than four hours, one should consult a physician.  On the
contrary, if your account is up for an extended period of time,
you’re no longer the patient.  You’ve become the doctor.

Principles Of Account Management
When you read a recipe requiring a “pinch” of salt, how much is a
“pinch?”  How much is a “touch” of class?  How much is a “modicum”
of eccentricity?  How about a “slice” of life?  What I’m getting
at is that certain measurements are subjective and can vary based
on the person doing the measuring.  The same holds true for
account management principles.  Account sizes vary and so will the
percentages you may choose to use.

Let’s examine a time-tested method for calculating your risk based
on your account size.  I’ll use an account size of $100,000 –
because I like round numbers and I wish I had that much.

Variety Is The Spice Of -- Safety
By now you should know that there is safety in numbers.  Two
burgers are better than one and two paper bags are better than one
(in some relationships).  The point is that you don’t want to put
all your trading eggs in one basket because you may end up with an
omelet instead of cash souffli.  Diversification will come from
using positions on stocks/indexes in unrelated sectors.  For
instance, we might have one play on the QQQs, another on the BBB
(Biotech sector), another on the RUT (Russell 2000 small caps
index) and another on the SPX (S&P 500 large cap index)

In a $100,000 portfolio, you only want to risk 2-3% of your
$100,000 account on each position.  Now, how do we figure out what
kind of positions we can use?  Since we, in the CPTI community,
primarily use credit spreads, we first need to figure out the
maintenance for each position.  Let’s check out the numbers on a
few of our most commonly used strategies.

Example #1
SPX Iron Condor.  10 Contracts.
Bull-put spread (10 points)
Bear call spread (10 points)
Premium Credit: $2,500
Maintenance Requirement: $10,000
Technical Risk: $7,500 ($10,000 - $2,500)

On the surface, in a $100,000 portfolio, if you were only able to
risk $3,000, that would mean that we could only trade about 4
contracts ($3,000 risk).   But, although our technical risk is
$7,500, we’re never going to allow the position to get to that
point.  The very most we’re going to allow is a loss of $2,500.
That would be a 1:1 risk/reward ratio.

That means we would act if/when it would cost $5,000 to close out
the SPX position.  We are, in effect, giving back the $2,500
premium we took in plus another $2,500.  Our actual loss would be
$2,500.

So, if we figure our risk to be a $2,500 maximum loss (as
described above), that $2,500 represents 2.5% of a $100,000
portfolio.  Therefore, a 10-contract position of a 10-point spread
would be acceptable.

Example #2
Low Risk Straddle – DELL @ $35.60. 10 Contracts.
Buy August $35 puts ($1.60) and calls ($2.40) for a total of $4.00
Technical Risk:  $4,000

As CPTI students know, when we put on our “low risk” straddle, we
anticipate a large move to happen with the first 30 days of having
established the position.  If it doesn’t happen, we’re out of the
position in 30 days.  The amount that the August $35 puts and
calls will erode in the first 30 days may be 10-15%.  Therefore,
if our $4,000 technical risk erodes away be 15%, we actually only
risking about $600 ($4,000 x 15%).

With a real risk of only $600, we could theoretically trade 40
contracts and our risk would be $2,400 – well within our 3%
maximum money management figure.

Don’t confuse the actual amount risked with how much money will be
tied up in the trade.  In Example 1 (SPX), even though we’re only
risking $2,500, we are tying up $10,000 in maintenance.  In
Example 2 (DELL), we are actually tying up $4,000 in the trade,
even though our risk is only about $600.

Stocks – A Slightly Different Game
If you are buying stocks, the method of calculating your risk is
basically the same.  You simply have to calculate how many shares
you can buy and stay within the 3% risk (on your $100,000 account
size) parameter.

Example: NTAP is trading at $20.00
You have to determine where you will place your stop.  Let’s say
you expect NTAP to move up, but you’re putting a stop loss at
$18.50.  You’re willing to accept a $1.50 loss if you’re wrong
about the direction of NTAP.

If you’re limiting your loss to $3,000 per trade, you could buy
2,000 shares of NTAP.  That’s figured by dividing $1.50 (your
acceptable loss/share) into the $3,000 (maximum acceptable loss).
You would actually be tying up $40,000 on this trade, but your
risk would be only the $3,000.

The Most Important Requirement
The common denominator to make the above examples valid, is the
assumption that you have self-discipline.  Without the ability to
take your loss at the predetermined point, calculating your money
management parameters is like pissing in the wind.  Whether you
use mental or physical stops is up to you.  Hopefully, by now, you
know (and can deal with) your limitations.
_______________________________________________________________

MAY CPTI POSITIONS
Remember, May is a five-week option cycle.  Get comfortable.
We’re going to exercise some patience and self-discipline.  That’s
the best kind of exercise.  It beats the hell out of a
Stairmaster.  It’s more profitable, too – usually.

May Position #1 – SPX Iron Condor – 1113.96
We sold 10 SPX May 1080 puts and bought 10 SPX May 1070 puts for a
total credit of $1.90 ($1,900).  Then we sold 7 SPX May 1175 calls
and bought 7 SPX May 1190 calls for a credit of  $1.40 ($980).
Our total net credit and potential profit is $2,880.  Our maximum
profit range is 1080 to 1175.  Maintenance: $10,500.

May Position #2 – RUT Iron Condor – 563.09
We sold 10 RUT May 620 calls and bought 10 RUT May 630 calls for a
credit of $1.20 ($1,200).  Then we sold 10 RUT May 540 puts and
bought 10 RUT May 530 puts for a credit of $1.30 ($1,300).  Our
total net credit and profit potential is $2,500.  Our maximum
profit range is 540 to 620.  Maintenance: $10,000.

May Position #3 – MNX Iron Condor - $141.56
We sold 10 MNX May $152.50 calls and bought 10 MNX May $157.50
calls
for a credit of $.80 ($800).  Then we sold 10 MNX May $140 puts
and bought 10 MNX May $135 puts for a credit: $.95 ($950).  Our
total net credit and profit potential is $1,750.  Our maximum
profit range is $140 to $152.50.  Maintenance: $5,000.

May Position #4 – BBH Iron Condor - $148.56
We sold 10 BBH May $155 calls and bought 10 BBH May $165 calls for
a credit of $.70 ($700).  Then we sold 10 BBH May $135 puts and
bought 10 BBH May $125 puts for a credit of  $.70 ($700).  Our
total net credit and profit potential is $1.40 x 10 contracts =
$1,400.  Our maximum profit range is  $135 to $155.  Maintenance:
$10,000.

_________________________________________________________________

ONGOING POSITIONS

QQQ ITM Strangle – Ongoing Long Term -- $35.26
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 make
money by selling near term puts and calls every month.  Here's
what we've done so far:
Oct. $33 puts and Oct. $34 calls – credit of $1,900. Nov. $34 puts
and calls – credit of $1,150. Dec. $34 puts and calls – credit of
$1,500.  Jan. $34 puts and calls – credit of $850.  Feb. $34 calls
and $36 puts – credit of $750. Mar. $34 calls and $37 puts –
credit of $1,150. Apr. $34 calls and $37 puts – credit of $750.
May $34 calls and $37 puts – credit of $800.  Total credit:
$8,850.

Note:  We haven't included 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.

ZERO-PLUS Strategy.  OEX – 543.90
In my Feb. 8th column, I outlined a strategy based on an initial
investment of $100,000.  $74,000 was spent on zero coupon bonds
maturing in seven years at a value of $100,000.  The principal
$100,000 investment is guaranteed.  We’re trading the remaining
$26,000 to generate a “risk free” return on the original
investment.

Long Term: Bought 3 OEX Jan. 2006 540 calls @ $81 (x 300 =
$24,300)
March: Sold 3 OEX 585 calls @ $3.10 (x 300 = $930)
March: 535/525 Bull Put spread for credit of $1.10 (x 300 = $330).
Bought back 3 OEX March 585 calls for $.10 & sold 3 of March 560
calls for $1.35.  A credit of $1.25 x 300 = $375.00.  Bought back
March 560 calls for $.15, locked in profit of $120 x 3 = $360.
Cash position is $3,320 ($1,620 plus the unused $1,700).  Our cash
position as of April expiration is $2,640 plus unused $1,700 =
$4,340.

The April 570 OEX call and the OEX 515/505 bull put spread expired
worthless.

New May Zero Plus BPS Position
We sold 5 OEX May 530 puts and buy 5 contracts of May 520 puts for
credit of  $1.10 (x 5 contracts = $550).

We sold a call against our long 540 call. We sold 5 OEX May 575
calls for $1.40 (x 5 contracts = $700).  Today (Thursday), when
the market tanked, we bought back the May 575 call for $.15 ($75).
This locked in $1.25 profit on the 575 call.  Then, we still have
two weeks left, so we sold 5 of the May 560 calls for $1.15
($575).

If these plays work out, we can add another $1,175 + $575 ($1,750)
to our cash total – just a little bonus while we wait for the
market to go up.
_______________________________________________________________

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, first look under "Education" on
the OI home page and click on "Traders Corner."  For more recent
columns, you can look under “Strategies” and click on
“Combinations.”  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.


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