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Daily Newsletter, Thursday, 09/16/2004

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The Option Investor Newsletter                Thursday 09-16-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Passing Time
Futures Wrap: See Note
Index Wrap: A vessel without its captain
Market Sentiment: Investors Prepare for Option Expiration


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      09-16-2004           High     Low     Volume   Adv/Dcl
DJIA    10244.49 + 13.10 10281.88 10228.64 1.41 bln 2366/ 847
NASDAQ   1904.08 +  7.60  1914.38  1898.36 1.33 bln 1957/1109
S&P 100   543.35 +  0.72   544.94   542.63   Totals 4323/1956
S&P 500  1123.50 +  3.13  1126.06  1120.37 
W5000   10956.52 + 43.67 10977.31 10912.83
SOX       381.45 +  0.70   386.47   380.15
RUS 2000  574.54 +  6.02   575.10   568.45
DJ TRANS 3233.41 + 17.70  3237.28  3208.83
VIX        14.39 -  0.25    14.66    14.27
VXO (VIX-O)14.44 -  0.33    14.76    14.15
VXN        19.92 -  0.38    20.48    19.60 
Total Volume 2,958M
Total UpVol  1,873M
Total DnVol  1,026M
Total Adv  4838
Total Dcl  2275
52wk Highs  239
52wk Lows    55
TRIN       1.40
NAZTRIN    1.08
PUT/CALL   0.75
************************************************************

Passing Time
by Jim Brown

On the surface today was rather unspectacular with all 
the major indexes finishing very close to the flat line.
They all gave up some decent midday gains but rallied
back from a late day sell off to keep the bullish bid
intact. 

Dow Chart – Daily

 
Nasdaq Chart

 


The morning started off with positive economic news
and a tame jump in Jobless Claims to 333,000. Analysts
were expecting a slightly stronger bounce in the wake
of Hurricane Charley and the abnormal dip to 317K last
week. The bottom line remains a steady claim rate of
330K once the hurricane adjustments are factored in.
This is a level that is consistent with an increasing
job market but only at approximately 100K per month.

Consumer Prices rose slightly with the CPI posting a
+0.1% gain but this was also slower than expectations
for a +0.2% jump. Energy prices fell for the second
month and food prices posted the smallest gain since
January. Core inflation for the year dropped to only
+1.7% while the headline rate is +2.7% mostly on the
higher energy prices earlier in the year. The Fed
action to stop inflation appears to have been the
right amount at the right time but I doubt their hikes
actually had any impact. Hikes and cuts take about six
months to work their way through the system. The more
likely reason for the slowing in inflation is a lack
of demand as retail slumped over the summer. 

The worst news for the day was drop in the Philly Fed
General Business Index to 13.4 from 28.5. This is a
major blow to the recovery theory and could only be
a month away from the return of negative numbers. The
index has been averaging around 30 since January with
the high at 36.1 in July. The shipments component fell
to 22.4 from 32 and the six-month outlook fell to 44.9
from 52.7. All other components were mostly positive
with New Orders rising to 26.4 from 19.2 and Employment
jumping to 21.5 from 17.2. This report shows we could
be at a the crossroads for the recovery. Some of the 
bounce in the internals could be related to holiday 
orders and staffing. If that is the case those same 
internals should begin to decline again in Q4.  

The bond market exploded on the Philly Fed news and
the yields on the benchmark ten-year fell to a five
month low at 4.06%. The yield is nearing support 
that dates back to July of last year at 4.0% and
it appears the bonds are telling us there is fear
creeping into investors about the strength of the
recovery. The Fed funds futures are still indicating
another hike at two of the next three meetings. 

Ten-year Yield Chart

 


Another shock to the economic groupies today was a 
speech by Fed Governor Gramlich on the impact of higher
oil prices. He claimed the standard economic models do
not allow for a major increase in the price of oil at
this point in the economic cycle. He said a serious 
oil price shock could affect consumers confidence or 
spending plans in a way that could not be anticipated 
by current models. He also showed he was one of the 
few Fed heads that did not have his head buried in 
the sand on future prices. He noted that the sharp 
jump in futures prices was an unusual occurrence and
one that suggests the price gains may be permanent. I
am sure he is in the Fed doghouse tonight for opening
Pandora's Box. A 100% jump in oil prices over the last
year and some of those gains may be permanent? Duh! 
Who would have thought that? 

The recent OPEC statements may have continued to target
in print the $22-$28 price band of a year ago but their
actions AND abilities to lower the price much under $40
remain in serous doubt. Oil demand is continuing to 
rocket higher, supplies are continuing to decrease and
reserves are moving closer to depletion. Just yesterday
crude oil inventories in the U.S. dropped by seven mil
barrels for the week. This was the 7th consecutive
weekly drop. How about this for a Fed understatement
from Gramlich? "This whole issue, however, is new and
imperfectly understood. It is virtually inevitable 
that shocks will result in some combination of higher
inflation and higher unemployment for a time". I bet 
he got a phone call from Alan after that speech hit 
the wires. It is no wonder the bonds rocketed higher
with the double hit of the 50% haircut on the Philly
Fed and a Fed speech warning of unemployment and 
inflation.   

Oil fell at the open after it was determined that Ivan
missed the majority of the oil patch and damage to the
system was minor. It spiked again at the close to $44
on reported short covering related to options expiration.
We continue to see a pattern of higher lows wedging up
to $45, a level that appears to be the current pain
threshold. 

The markets moved in a tight range today as the Ivan
news was filtered for economic impact. Volume was low
due to Ivan, expiration and the Jewish holidays but 
the earnings warnings barely slowed. The hurricane
excuse is appearing more often and whether real or
imagined the results are the same. The pace of new
warnings is growing and Q3 could be a challenge. 
Retailers from Office Depot to Panera Bread are now
jumping on the hurricane excuse train and it appears
that train will be loaded to capacity over the next
three weeks. 

Despite the tight range today the internals were 
very strong with the A/D line ending positive with
more than +2400 advancers than decliners. A/D volume
was nearly 2:1 in favor of advancers and this was a
throw away day given all the factors in play. The
strongest indexes were the transports, utilities 
and the Russell-2000. Strange bedfellows for today's
market. The transports hit a FIVE-YEAR high despite
the $44 oil. This is a serious disconnect with 
reality but a new transport high has got to be good
for the Dow theory crowd. Somebody needs to point 
this out to those investors in Dow stocks as the 
index closed very close to a three week low at 10244.

Just as amazing is the Russell clinging to a +10%
gain over the last three weeks and threatening to
breakout of its 575 resistance. A breakout there
would be an open door to 590 and only a strong day
away from its all time closing high at 606. With the
two strongest months of the year about six weeks 
ahead the possibilities are enormous. 

Russell 2000 Chart

 


Getting to that November rally could still be a
challenge as the other indexes have slowed at strong
resistance. Next week begins the real Q3 warning
season and odds are good there will be some high
profile disappointments. Stocks like MMM, PG, HON
and IBM have pulled back from their highs as traders
begin to worry about which Dow component will be the
next to warn. Next week traders will run the earnings
gauntlet not knowing who will be the next to take a
hit. 

We are getting close to the Osama surprise. There
has been speculation for several weeks that Osama
would suddenly be killed or captured in the weeks
leading up to the election as the pressure to 
produce a trump card increases. This must be a
recurring Kerry nightmare.

The chip bulls got some more bad news tonight. 
The S.E.M.I. Association reported a drop in the 
book-to-bill number to 1.00, the fourth consecutive
monthly drop and the lowest level since Sept-2003.
Bookings fell -4.5% in August according to SEMI.
Readers should remember that this is a three-month
moving average which suggests bookings for August
were significantly less than 1.00 with the average
for the last two months at 1.04 and 1.07. SEMI does
not release the raw data so it makes deciphering the
numbers more of an art than science. The SOX had
pulled back to support at 380 and held there for the
last two days. 380 could provide a decent launch point
but tonight's news could provide some minor instability.
Of course the bulls could point to the fact that this
negative news was already priced in and maybe it is
not as negative as traders expected. It all depends
on whether they see it as a glass half full or half
empty.  

SOX Chart 

 

Friday should be another low volume day and the only
event risk is earnings surprises expected next week.
With the positive internals today I would say it was
a tossup for direction on Friday. Options expiration
should have produced about all the damage they are
going to do as positions were squared ahead of the
event. Wednesday's drop was probably more options
related than earnings related but that would be
pure speculation at this point. If there are two keys
to watch for Friday it would be the SOX at 380 and
the Russell at 575. A bounce in the SOX and a breakout
on the Russell would set the stage for a strong close
and a positive setup for Monday. 

Enter Passively, Exit Aggressively. 

Jim Brown
Editor


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

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

A vessel without its captain

The major indices drifted higher, at times almost aimlessly, but 
for the most part bobbed between Wednesday's highs and 
yesterday's lows in a choppy session.

Market participants won't know just what damage Tropical Storm 
Ivan, as it is now called, caused after the eye of Hurricane Ivan 
hit the gulf shores of Alabama late yesterday and now heads 
inland.  However, television shots certainly showed Ivan packed a 
punch.

So strong a punch did Ivan deliver that deepwater driller 
Transocean Inc. (NYSE:RIG) $33.35 +1.52% said it was searching 
not for oil, but its deepwater sumisubmersible Deepwater Nautilus 
in the aftermath of Hurricane Ivan.  All personnel had previously 
been evacuated from the missing rig, which was moored to the 
seafloor with anchors approximately 160 miles south of Mobil, 
Alabama.

Today's release of September consumer prices, which rose a tepid 
0.1% as well as a weaker than forecasted September Philly Fed 
report drew little response from stocks, but the dollar weakened 
while Treasuries surged with the benchmark 10-year bond closing 
at a 4-month high, with the 10-year yield ($TNX.X) plunging 10.1 
basis points to 4.069%.

U.S. Market Watch - 09/16/04 (52-week % change)

 

The major 5, 10 and 30-year Treasury Yields dropped sharply in 
today's session, and with Fed funds futures still predicting a 
100% chance of a Fed tightening of 25 basis points next week, 
bond traders seem to be responding more to "inflation" or lack-
thereof data, and not necessarily trying to predict what the Fed 
is going to be doing on Tuesday.

Sniffffff..... I also smell some massive short covering and 
capitulation from "inflation hawks" dating back to May.

Did you refinance a mortgage this spring?  Buy a new house?  Give 
your friendly mortgage banker a call and see if it might be worth 
cost effective to refinance.

Market Snapshot / Internals - 09/16/04 Close

 

Volumes weren't anemic, but they weren't that robust for a 
quarterly index expiration.  By my account, average daily volume 
for the month of September has been 1.19 billion shares at the 
NYSE, and NASDAQ's been running closer to 1.45 billion per day.  
June's volume, perhaps more comparable to September, also a 
quarterly expiration begins to have looked euphoric when the NYSE 
turned 1.3 billion shares per day on average, while NASDAQ was 
running around 1.58 billion.

One thing we may want to take a note on was how strong the A/D 
lines were today, but index gains somewhat fractional.  The note 
would be how the TRIN, which is measuring up/down volume stayed 
above 1.0 despite the strong A/D breadth, strongly suggesting one 
of those "light volume" rallies that bears will say lacks 
conviction.

Pivot Matrix - 09/16/04 Close

 

DIA and QQQ as well as stock options settle on tomorrow's close 
and while the QQQ was trading $35.25 at 04:00 PM EDT, a pop in 
volume had them gaining a suspicious 7 cents by the close, to 
finish up 7 cents.

A tricky day tomorrow.

But, I've had several questions from traders regarding HL Camp & 
Company's thoughts on "The Expiring Option Exercise Manipulation 
Game," which they discuss at their website 
(http://www.programtrading.com).

Their theory (based on observation) is centered around the OEX.  
I won't say its complicated, but you really need to read it, as 
it is interesting, educational, and will instill the thought of 
just why we can expect some weird, or unexpected gyrations ahead 
of an option expiration.  

I brief, the theory is that institutional traders (even large 
speculators) will start buying a few thousand IN THE MONEY calls 
on the OEX and/or SPX at around 03:20 PM EDT on a Thursday, with 
(I can't stop chuckling to myself) HL Camp noting that it helps 
if the "spoos" are dropping so you can slowly pick them up real 
cheap.  HL Camp's records show this happens about 75% of the 
time.

Today's action certainly looks suspicious.  Doesn't it?

S&P 100 Index (OEX.X) Chart - 10-minute intervals

 

I placed my QCharts' cursor tracker on the 10-minute interval 
from 03:10 to 03:20 PM EDT.  Hmmmm..... pulled right back didn't 
it?

HL Camp & Company then gives greater detail, but the essence of 
the manipulation game is that once a trader has his/her calls, he 
then comes in and starts hammering the big guns of the OEX (the 
most heavily weighted stocks) with buy orders.  Taking offers 
with size on GE, XOM, PFE, C, WMT, AIG, BAC and gets a little 
move higher going.

Then the trader waits.  About 6 or 7 minutes for the ripple 
effect of buying takes hold. (Hmmmm.... OEX did move higher from 
the QCharts' WEEKLY S1).

Interesting, as what I made note of in the QQQ, is HL Camp saying 
often times, day trade shorts will start to panic near the close 
as stocks move higher, and they come in and start covering to the 
bell, where shorts "almost always panic with "at the market 
orders."  

Oh... but traders aren't done yet according to HL Camp.

After the move higher to the close takes hold, a trader will buy 
a few thousand (remember we're talking large speculators and 
institutions) IN THE MONEY PUTS, which should closely match the 
dollar amount of stocks like GE, XOM, PFE, C, WMT, AIG, BAC the 
trader had bought.

Then, at 04:16 PM EDT, further manipulation takes place as 
traders call the clearing firms and traders EXERCISE their CALLS 
that night, thereby locking in profits on the calls that were 
bought.

Now here's where I mark tomorrow's DAILY S2 for the OEX, and QQQ 
traders might want to take some notes here.

On the Friday morning, just after the open, traders will often 
start selling all of the STOCKS they bought Thursday afternoon, 
where this selling can start some "panic dumping" as other 
traders start selling bids and bears come in and start shorting 
with no bids in sight.  HL Camp's observations say this can have 
the OEX falling about 2 points (THAT's ABOUT HOW FAR IT IS TO 
TOMORROW'S DAILY S2 for the OEX).

You're still not done!

Don't forget those PUTS traders bought.  As the OEX drops 2-
points (perhaps DAILY S2) its ca-chingo time for those IN THE 
MONEY PUTS.

If you've never believed that option expiration can be somewhat 
manipulative, then HL Camp's "The Expiring Option Exercise 
Manipulation Game," may be something to be cognizant of.

I (Jeff Bailey) have NEVER used, nor monitored this until several 
subscribers asked me about it, as they saw it.

The one trade I kind of like for tomorrow is to look for an 
opening pop in the QQQ, then look to day trade short the 
UNDERLYING QQQ, using the correlative QQQ $33.50-$33.55 as 
resistance.

Jeff Bailey


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


Investors Prepare for Option Expiration
- J. Brown

It was an odd day on Wall Street.  After Wednesday's weakness 
many felt that the rest of the week would be down.  That's 
probably not a surprise.  We've already mentioned that 
September's option expiration Friday historically tends to end 
lower.  Having the major averages at or near resistance and the 
volatility indices at or near bearish reversal levels looked like 
a good set up for a decline.  

Yet strangely the markets don't seem ready to fall yet.  They 
shrugged of an earnings warning from Canadian networker Nortel 
Networks.  They ignored news from Delta Airlines that it too may 
seek bankruptcy protection soon.  Overall the market seems to be 
ignoring the recent parade of earnings warnings.  

Actually the market internals today were rather bullish.  
Advancing stocks outnumbered decliners 20-to-7 on the NYSE and 
19-to-10 on the NASDAQ.  Up volume outweighed down volume on both 
exchanges.  Active traders will note that overall volume was 
somewhat low.  This was due to the onset of Rosh Hashanah, the 
Jewish new year.  

Hogging the spotlight most of the day was news coverage of 
Hurricane Ivan and its effect on the Alabama, Florida and 
Louisiana coasts.  Believe it or not there is another hurricane 
lurking in Ivan's shadow.  That would be Hurricane Jeane, the 
fourth hurricane in five or six weeks, and one potential factor 
in the afternoon spike in oil prices.  

Economic data was mixed with the CPI confirming what the PPI 
already told us - inflation is under control.  It's too bad the 
Philly Fed survey came in weaker than expected but this slow down 
in the economy and the lack of inflation may actually give the 
FOMC reason to pass on its next interest rate hike.  At least 
that's what some are arguing.  Others look at the economy and see 
it speeding up from its summer slow down.  

Just one more "indicator" that might make you pause before 
initiating another bullish play is the action in bonds.  Bonds 
have been climbing ever since their double-bottom in May and 
June.  The 10-year note rallied to a new 5 1/2-month high today 
pushing the yield lower to 4.069%.  If "smart money" is buying 
bonds that's a defensive posture and doesn't speak well for where 
Wall Street thinks stocks are going.  

I'm not expecting much for tomorrow.  Volume is likely to remain 
low but we could see some volatility with the quadruple option 
expiration.  Look for the preliminary Michigan sentiment/consumer 
confidence numbers for September to come out.

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

Market Averages

DJIA ($INDU)

52-week High: 10753
52-week Low :  9230
Current     : 10244

Moving Averages:
(Simple)

 10-dma: 10291
 50-dma: 10118
200-dma: 10287



S&P 500 ($SPX)

52-week High: 1163
52-week Low :  990
Current     : 1123

Moving Averages:
(Simple)

 10-dma: 1120
 50-dma: 1100
200-dma: 1115



Nasdaq-100 ($NDX)

52-week High: 1559
52-week Low : 1301
Current     : 1417

Moving Averages:
(Simple)

 10-dma: 1402
 50-dma: 1382
200-dma: 1440



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

CBOE Market Volatility Index (VIX) = 14.39 -0.25
CBOE Mkt Volatility old VIX  (VXO) = 14.44 -0.33
Nasdaq Volatility Index (VXN)      = 19.92 -0.38


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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.75        773,434       582,658
Equity Only    0.61        555,654       340,448
OEX            0.77         41,157        31,938
QQQ            0.65         65,724        42,963


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

Bullish Percent Data

           Current   Change   Status
NYSE          61.1    + 1.0   Bear Correction
NASDAQ-100    43.0    - 1.0   Bull Alert      
Dow Indust.   56.6    + 0     Bear Correction
S&P 500       59.0    + 0     Bear Correction
S&P 100       56.0    + 1     Bear Correction


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: 0.96
10-dma: 0.99
21-dma: 1.05
55-dma: 1.28


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    2070      1909
Decliners     717      1047

New Highs     107        62
New Lows       16        13

Up Volume    881M      817M
Down Vol.    504M      468M

Total Vol.  1411M     1311M
M = millions


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

Commitments Of Traders Report: 09/07/04

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

Commercial traders did add to positions during the most recent
week of data but there was zero change in their slightly bearish
bias.  Meanwhile small traders also added to both their longs
and shorts and scaled back their bullish attitude just a bit.


Commercials   Long      Short      Net     % Of OI
08/17/04      398,472   416,109   (17,637)   (2.2%)
08/24/04      402,599   420,478   (17,879)   (2.2%)
08/31/04      406,637   416,778   (10,141)   (1.2%)
09/07/04      415,952   426,342   (10,390)   (1.2%)

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
08/17/04      138,550    97,792    40,758    17.2%
08/24/04      135,151   100,351    34,800    14.7%
08/31/04      144,120   114,343    29,777    11.5%
09/07/04      157,732   130,817    26,915     9.3%

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

We're starting to see some big numbers line up on the short 
side from the commercial traders.  This is not good news for
the S&P 500 as the "smart money" grow more bearish on the
market.  Naturally small traders are walking the opposite 
direction by increasing their longs and bullish stance.  
This sort of tug-o-war usually ends up with the small trader
losing.

Commercials   Long      Short      Net     % Of OI 
08/17/04      404,065   457,372   ( 53,307)  ( 6.2%)
08/24/04      392,065   473,911   ( 81,846)  ( 9.4%)
08/31/04      372,071   543,100   (171,029)  (18.7%)
09/07/04      371,111   600,593   (229,482)  (23.6%)

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
08/17/04      192,939     92,361   100,578    35.3%
08/24/04      211,995     76,184   135,811    47.1%
08/31/04      258,624     77,036   181,588    54.0%
09/07/04      286,194     80,075   206,119    56.2%

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


NASDAQ-100

Surprisingly the commercial trader added to his or her
long positions and increased their bullish bias a tad. 
Small traders also added to their longs but the jump in
short positions decreased the overall bullishness.

Commercials   Long      Short      Net     % of OI 
08/17/04       44,743     41,535     3,208    3.7%
08/24/04       48,624     43,222     5,402    5.8%
08/31/04       48,167     43,411     4,756    5.2%
09/07/04       51,814     44,179     7,635    7.9%

Most bearish reading of the year: (21,858)  - 08/26/03
Most bullish reading of the year:  25,160   - 06/01/04

Small Traders  Long     Short      Net     % of OI
08/17/04       12,256     8,352     3,904    18.9%
08/24/04       11,666    10,068     1,598     7.3%
08/31/04       14,635    10,572     4,063    16.1%
09/07/04       16,817    12,561     4,256    14.5%

Most bearish reading of the year: (20,270) - 06/01/04
Most bullish reading of the year:  19,088  - 01/21/02

DOW JONES INDUSTRIAL

Commercial traders are still asleep here for the Industrials
with very little movement.  Meanwhile small traders are 
growing more bearish on the average.

Commercials   Long      Short      Net     % of OI
08/17/04       30,271    22,809    7,462      14.1%
08/24/04       28,919    23,658    5,261      10.1%
08/31/04       29,143    24,147    4,996       9.3%
09/07/04       29,128    24,011    5,117       9.6%

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
08/17/04        4,388     7,089   (2,701)   (23.5%)
08/24/04        5,052     7,214   (2,162)   (17.6%)
08/31/04        4,929     7,122   (2,193)   (18.2%)
09/07/07        5,041     8,656   (3,615)   (26.4%)

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 09-16-2004
Copyright 2004, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: RAI
Dropped Puts: SPW
Call Play Updates: AHC, BOL, PD, TDS
New Calls Plays: None
Put Play Updates: APOL, FFH, KRI, LXK, MMM
New Put Plays: KSS


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

Reynolds American - RAI - cls: 73.38 chg: -0.96 stop: 72.99     

In last night's newsletter we commented on the weakness in RAI.  
We didn't like the drop and the afternoon selling looked ready to 
continue into Thursday.  Hastening RAI's decline was a downgrade 
from Smith Barney this morning.  The broker cut RAI from a "buy" 
to a "hold" on valuation concerns.  The stock fell more than 1.2 
percent on stronger than average volume.  We've been stopped out 
at $72.99.  Its MACD has now produced a new "sell" signal.  If 
you're interested in following RAI keep your ears open for news 
as we approach the September 21st start of the racketeering case 
in Federal court.

Picked on August 19 at $72.88
Change since picked:   + 0.50
Earnings Date        08/02/04 (confirmed)
Average Daily Volume =    1.2 million 
Chart =



PUTS:
*****

SPX Corp - SPW - close: 36.23 change: +1.22 stop: 36.01     

It's hard to believe.  With all the bad news on this company and 
its questionable accounting somehow, someone is buying the stock.  
SPW has rebounded enough to crack back above the $36.00 mark and 
stop us out.  We've been stopped out at $36.01.

Picked on September 08 at $35.40
Change since picked:      + 0.61
Earnings Date           08/02/04 (confirmed)
Average Daily Volume =       814 thousand
Chart =




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


Amerada Hess - AHC - close: 82.02 chg: -0.08 stop: 81.00           

We continue to be cautious on shares of AHC but if the stock 
continues to churn sideways we're not going to drop it.  Our stop 
loss is at $81.00, which is 50 cents above our official entry.  
More aggressive traders should consider keeping their stop under 
round-number and technical support at the $80.00 mark.  We are 
not suggesting new bullish plays in AHC at this time.

Picked on August 31st at $80.50
Change since picked:     + 1.52
Earnings Date          07/28/04 (confirmed)
Average Daily Volume =      1.0 million 
Chart =


---

Bausch Lomb - BOL - close: 68.55 change: +0.14 stop: 66.99     

News on BOL remains scarce but that's not hindering BOL's steady 
climb higher.  Well, we call it a steady climb.  While BOL is at 
new highs the momentum does appear to be fading.  We are 
concerned about the impending sell signal in the MACD indicator 
if BOL doesn't pick up the pace.  We're not suggesting new 
bullish positions at this time.  No change to our stop loss.

Picked on September 01 at $66.51
Change since picked:      + 2.04
Earnings Date           07/29/04 (confirmed)
Average Daily Volume =       397 thousand
Chart =


---

Phelps Dodge - PD - close: 83.78 chg: -0.91 stop: 81.99*new* 

PD is also struggling to keep the momentum alive.  On Tuesday 
Fitch upgraded PD's debt rating.  Yesterday Morgan Stanley 
reiterated their "over weight" rating on the stock.  Yet PD 
continues to struggle with the $85-$86 level.  Technical 
oscillators are starting to falter and the MACD looks close to 
producing a new sell signal.  We're starting to worry.  Even a 2 
percent rally in copper prices couldn't spur a move higher in PD 
today.  Keep an eye on copper.  The metal is trading near $1.30 a 
lb. and this has been resistance in the past.  A breakout here 
could lead PD higher again.  In the meantime more aggressive 
traders may want to leave their stop loss under round-number 
support at the $80.00 mark.  We're going to turn cautious and up 
our stop near breakeven at $81.99.  If PD dips to $80 and bounces 
again we can always jump back in.  

Picked on August 26th at $82.10
Change since picked:     + 1.68
Earnings Date          07/27/04 (confirmed)
Average Daily Volume =      2.1 million 
Chart =


---

Telephone & Data Sys - TDS - cls: 83.10 chg: +0.21 stop: 79.50     

TDS is looking pretty good.  The stock surged to new two-year 
highs on strong volume this week.  Furthermore it's holding on to 
those gains with very mild profit taking.  Odds are growing that 
we could see TDS hit our exit point at $85.00 in the next couple 
of sessions.  We're not suggesting new bullish plays at this 
time.  

Picked on August 24th at $78.05
Change since picked:     + 5.05
Earnings Date          07/21/04 (confirmed)
Average Daily Volume =      195 thousand
Chart =


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

None


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

Apollo Group - APOL - close: 78.82 change: +0.14 stop: 82.67

We have good news and bad news.  The good news is that APOL is 
still under resistance at the $80.00 mark and appears to be 
building a new trend of lower highs.  There is more good news as 
the MACD indicator nears a new "sell" signal.  The bad news is 
that APOL has found support at the $78.00 level.  Plus, there 
were some positive comments on APOL in the Wall Street Journal.  
Fortunately, the comments didn't spark any sort of rebound today.  
We're still willing to consider new bearish plays here but 
traders may want to wait for APOL to break the $78.00 mark.

Picked on September 14 at $78.88
Change since picked:      - 0.06
Earnings Date           10/05/04 (unconfirmed)
Average Daily Volume =       3.3 million 
Chart =


---

FairFax Financial - FFH - cls: 124.21 chg: -1.84 stop: 133.00*new*

After a small bounce early in the week FFH has rolled over under 
the $130 level and is now slipping under a new trend of lower 
highs.  Volume continues to be above average and the stock is 
hitting new relative lows not counting its intraday spike down in 
late August.  It's not too late to consider positions here but 
remember this is a higher-risk more aggressive play due to 
extremely low stock and option volume.  We're lowering our stop 
loss to $133.00 above the 21-dma.

Picked on September 12 at $126.50
Change since picked:       - 2.29
Earnings Date            00/00/00 (confirmed)
Average Daily Volume =         59 thousand
Chart =


---

Knight-Ridder - KRI - close: 63.59 change: -0.26 stop: 65.51

Our put play in KRI is not off to a screaming start but it is 
moving our direction.  The stock dipped toward the $63.50 level 
this morning then bounced back toward $64 and rolled over again.  
We're encouraged to see its MACD indicator that much closer to a 
new "sell" signal.  This looks like an entry point to buy puts.

Picked on September 15 at $63.85
Change since picked:      - 0.26
Earnings Date           07/22/04 (confirmed)
Average Daily Volume =       491 thousand
Chart =


---

Lexmark Intl - LXK - close: 83.62 chg: +0.92 stop: 86.01     

No surprise here.  If you caught our comments last night we noted 
the bounce from LXK's rising long-term trendline of support.  
Bulls tried to produce some follow through on yesterday's rebound 
but it didn't very far.  We imagine that if LXK can break that 
rising trendline we'd see some significant profit taking but 
there's not guarantee it will happen.  Fortunately, LXK has 
plenty of short-term resistance overhead at the 10-dma, 
exponential 200-dma and the $85.00 mark.

Picked on September 5th at $86.10
Change since picked:       - 2.48
Earnings Date            07/19/04 (confirmed)
Average Daily Volume =        1.2 million 
Chart =


---

3M Co - MMM - close: 82.05 change: +0.05 stop: 84.51

It was a slow day but bears did not fail to notice the bounce in 
the Dow Industrials failed at its simple 200-dma.  Likewise the 
bounce in the MMM failed at its 200-dma (and 50-dma).  The MACD 
indicator is inching ever closer to a new "sell" signal.  This 
looks like an entry point to buy puts.  If you missed MMM's 
original update we added it as a put on Wednesday night.

Picked on September 15 at $82.00
Change since picked:      + 0.05
Earnings Date           07/19/04 (confirmed)
Average Daily Volume =       2.5 million 
Chart =


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

Kohl's - KSS - close: 49.48 change: -1.28 stop: 52.01

Company Description:
The Menomonee Falls, Wisconsin-based department store was a 
strong growth play a few years ago.  Stores provide shoes, 
apparel, and home products all targeted at middle-income 
families.  KSS currently runs over 560 stores.

Why We Like It:
We like KSS as a short-term put play with an emphasis on short-
term.  For months anyone following the stock already knows that 
investors and analysts alike have been calling for the stock 
price to improve based on the stores upcoming Q3 and Q4 results.  
KSS' results last year were terrible but now that gives them easy 
same-store and year over year sales comparisons.  It is this 
belief that sales will drastically improve and the six-week rally 
in the retail sector that has powered KSS through multiple layers 
of heavy resistance.  Now we're starting to see some weakness.  

The RLX retail index has rallied for six weeks and just touched 
resistance at its all time highs from June before slipping 
backward this afternoon.  We feel it could be time for some 
profit taking.  The weakness has already begun in KSS.   Shares 
of KSS peaked at $52 on Tuesday and now shares have fallen 
through the bottom if its narrow channel and its simple 10-dma.  
Please note - this is somewhat aggressive.  Even though the daily 
and weekly oscillators confirm that KSS is overbought and that 
the momentum is fading we're still calling a top here.  That's a 
bad habit to get into.  Fortunately, we do see a new "sell" 
signal in the MACD.  Our plan is to catch any drop toward the 
$46.00 level, which looks like support.  It would also represent 
a 50 percent retracement of its July to September rally.

If KSS achieves our target we may actually switch to calls to 
play the bounce since we do expect the stock to out perform over 
the next few months.

Suggested Options:
We're only expecting this to be a short-term play so we're 
suggesting the October puts.  Our favorites are the 50s.

BUY PUT OCT 50 KSS-VJ OI=4928 current ask $1.95
BUY PUT OCT 45 KSS-VI OI=5488 current ask $0.35

Annotated chart:

 

Picked on September 16 at $49.48
Change since picked:      - 0.00
Earnings Date           08/12/04 (confirmed)
Average Daily Volume =       3.1 million 
Chart =



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**********

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The Option Investor Newsletter                 Thursday 09-16-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Watch List: Hogs to Homes and more!
Traders Corner: VIX question and Trendlines, Part 2  
Combos/Straddles: October Position Preview -- Going Out With A Bang!!  

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

Hogs to Homes and more!

___________________________________________________________________

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.
___________________________________________________________________


Mohawk Industries - MHK - close: 80.28 change: +1.88

WHAT TO WATCH: We don't feel this is the safest environment for 
bullish plays but MHK certainly looks tempting.  Not only does 
the stock show decent relative strength but it would appear to be 
building a bull flag pattern.  Traders bought the dip to $78 and 
now MHK is back above the $80.00 mark.  Aggressive players might 
want to consider some bullish strategies if MHK trades over 
$81.00 or $82.00.  The P&F chart is very bullish with a $102 
target.  Watch out for possible resistance at $84-85.

Chart=


---

Harley-Davidson - HDI - close: 59.94 change: -1.61

WHAT TO WATCH: We strongly considered adding HDI as a put play 
tonight.  The high volume breakdown under support at its 40 and 
50-dma's and the $60.00 mark doesn't look good.  Plus the MACD 
indicator has produced a new sell signal and it's been a 
consistent indicator in the past.  Two things made us pause.  
First the P&F chart is still in a bullish uptrend that is not yet 
broken.  Second, HDI has a couple of rising trendlines of 
support. Just stretch them out from the lows dating back to March 
and you'll see it. A drop under $58.00 might be enough to crack 
these uptrends but then we'd have to deal with round-number 
support at $55.00 and its simple 200-dma.

Chart=


---

Avid Technology - AVID - close: 45.54 change: +1.67

WHAT TO WATCH: We like the short-term action in AVID.  The stock 
is building a new trend of higher lows after its sharp rebound in 
August.  Today's move was powered by better than average volume 
and pushed AVID above its simple 50-dma.  We'd like to consider 
bullish positions if AVID can breakout over the $46.00 level but 
its P&F chart shows overhead resistance at $47.00.  This just 
happens to correspond with technical resistance on the daily 
chart at the simple 100 and 200-dma's.  Watch for a move over $48 
and target the $54 region.

Chart=


---

Centex Corp - CTX - close: 50.42 change: +1.00

WHAT TO WATCH: Some of the homebuilders still look strong and we 
like the breakout over $50.00 and the simple 200-dma in CTX.  
Unfortunately, the rally here is getting a little long in the 
tooth.  Yet if CTX can trade above $51.00 it should produce a new 
double-top breakout buy signal on its P&F chart.  

Chart=



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


IMDC $48.78 -2.23 - That didn't take long.  IMDC broke support at 
$50.00 on big volume and its MACD has produced a new sell signal 
but we're still worried about P&F support near $47.

EBAY $92.33 -1.72 - Is it possible?  Could EBAY really be showing 
some weakness here?  We'd look for shares to retest the $90 level 
soon.

AMZN $42.57 +0.36 - AMZN also appears to have produced a bearish 
reversal pattern at its simple 100 and exponential 200-dma today.

 



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***************
Traders Corner
***************

VIX question and Trendlines, Part 2 
By Leigh Stevens
lstevens@OptionInvestor.com

SUBSCRIBER QUESTION: 
"ANALYSTS ARE TALKING ABOUT LOW VOLATILITY INDEX AS AN INDICATION 
OF INFLECTION POINT. HOWEVER AS AN ANALYST WHO FOCUSSES ON 
POSITION TRADES - PLAESE PROVIDE YOUR INSIGHT/MUSINGS ABOUT THIS 
INDICATOR"

RESPONSE: 
I may not always focus on things that "all" analysts are talking 
about.  Also, I assume by "inflection point", its meaning is what 
I might call a "turning point".  

Low volatility, such as measured by VIX, is sometimes seen at 
intermediate tops (e.g., early-March; late-June) and high VIX 
readings, at bottoms (e.g., late-March, late-May, mid-Aug.), but 
there is not always a reliable connection (e.g., high VIX at 
late-Sept. '03 intermediate low and low VIX in mid-July).

I see another top ahead but have not commented on a correlation 
to low VIX readings (around 14) of late, but will include mention 
and chart of it from time to time as part of the mix of things I 
comment on.  Seems like a useful add since, as you note, its 
commonly commented on – 


 

Plotting the CBOE Market Volatility Index (VIX) under the OEX in 
the chart above, shows that several prior tops in the overall 
downtrend from the market peak early this year, occurred with a 
low VIX reading as pointed to or highlighted by the blue (down) 
arrows.  I use a 5-day average to better show clusters of such 
low Index values; e.g., in the 14.5 area.  

After the possible recent OEX top at the resistance (down) 
trendline (at red down arrow), VIX has jumped from its recent 
lows. The VIX pattern here is consistent with a what has been 
seen in the prior up swing highs over the period shown above.  

My impression has been that (stock) market timers in general, as 
opposed to option traders and analysts, find volatility 
indicators of interest but don't necessarily rely on them for 
market timing, perhaps because it's not always as precise as 
other tools and indicators. 

An example would be taken from the S&P 100 (OEX) chart above that 
shows a possible rally top coming in precisely at resistance 
implied both by the down trendline and at the 200-day moving 
average.  Stay tuned as to whether this was a rally peak! VIX is 
consistent with other patterns (e.g., the down trendline) and 
indicators (e.g., the moving average) too if the low volatility 
pattern continues to show where the S&P is again topping out.   


TRENDLINES – Part 2: Effective Uses in Trading  

The basic construction of chart trendlines was described in my 
previous Trader’s Corner article at –
http://www.OptionInvestor.com/traderscorner/tc_082604_1.asp 

I find many occasions where I use the "best fit" technique 
connecting the most number of highs or lows – this technique may 
cause some extreme highs or low bars to be "cut" through.  This 
method of constructing "internal" trendlines is different than 
the convention understanding of how to draw them – point #1 in my 
prior Trader’s Corner article was that there are some variations 
in drawing trendlines, but guidelines for USE are the same. 

Point #2 is that trendlines are, in effect, "angular measures of 
Momentum" shown visually on a price chart. If you remember this 
point regarding the nature of what trendlines are, you will also 
probably recognize that a rate of momentum is a quality of the 
trend that is sometimes hard to measure exactly. 

So, trendlines are not always precise, as seen from an historical 
index chart from the 90's – the principles are always the same 
whether a steep angle is seen on the way down or up, whether on 
an hourly chart, daily or weekly.  The chart below is weekly and 
like the others (except the last) are taken from my book 
(Essential Technical Analysis) and you don't even have to pay for 
it! - 


 

Related to point #2 - within the exceptions and limitations, 
trendlines are nevertheless sometimes so accurate in depicting 
the trend that it’s easy to forget this cautionary reminder – 


 

Trendlines show, in effect, the "rate of change" for prices in an 
up or down direction as expressed as an angle line.  If prices 
are going up an average of 3% a month, this mathematical 
progression can be shown as a line.  

However, drawing trendlines must also take into account the 
extreme highs and lows (above or below the "mean" or average 
change), which are emotional points of excess in the market.  
Therefore, we can expect that there will be some false signals 
given by trendline breaks and breakouts – that is, downside or 
upside penetrations of the line that you are drawing – because 
points of excess go further than is normally predictable.  

You can anticipate that you will need to periodically or even 
frequently re-draw trendlines to account for some new extremes if 
you want the most accurate visual depiction of the trend 
momentum.  There is the axiom in technical analysis, like many 
disciplines, that you must put in time and work if you expect 
rewards from the technique.  

Getting in early on trends, for which trendlines will be of 
considerable help, provides the best opportunity for capturing 
the most profit from a trend.  Accomplishing this objective more 
often than not tends to make up for periodic losses along the 
way.  The idea is to keep using trendlines - they’ll work over 
time if you just keep using them and don’t expect more than the 
tool can provide.

Point #3 – trendlines look like they make identifying every trend 
and trend reversal easy AFTER the fact. Once the price action has 
unfolded it’s easy to see the dominant trendlines as is apparent 
in the next charts. 

This chart looks like there a trend reversal after a major run 
up, but there were some other technical considerations - the 
break did not take out the prior downswing low, at least not on 
two back to back days. I often indicate that if a new closing low 
lacks downside follow through the next day, it may be a false 
signal.   


 

THE FOLLOW ON CHART STORY IS BELOW – 

 

The downside price action shown above did not take out the prior 
downswing low on two back-to-back days. I often indicate that if 
a new closing low lacks downside follow through the next day, it 
may be a false signal. 

The sideways consolidation above – really a "rectangle" pattern - 
was merely a pause in the trend before a next up leg.  Trendlines 
are not the sole technical tool that was needed to profit from the 
trend shown above. 
 
Of course, the break of Trendline T3 above was fine as an exit 
point to stand aside awaiting a next move; then, re-entry made on 
the upside move above the minor down trendline which suggested 
that the consolidation had run its course.  

ANOTHER CHART STORY – 

   

AND, THE “LOOK BACK” CHART –- 

 

AND, STILL LATER ---

 

It takes some time to make nearly as good of use of trendlines 
going forward, as looking backwards! When market action is 
unfolding and you are in an Index or stock option play that you 
identified as having begun an uptrend due to its breakout above a 
down trendline, along come points where it’s hard to figure how 
to draw or redraw a trendline – and, they do need to be adjusted 
as market action unfolds.  

Some traders will apply a rule that a trendline must be 
penetrated by a certain percentage or dollar amount to "confirm" 
the penetration.  Then there is the question of whether to draw a 
trendline "through" an apparent extreme (cutting through a bar) 
or not and so on.

There is also the risk that setting a stop under a trendline will 
result in exiting a position because prices dipped under the 
line, then resumed an upward course. For this reason, exiting 
only on a close above or below the trendline, could be a method 
used to "confirm" that a trend reversal has occurred. This 
assumes that you can check in on the close, which is not always 
possible.  

Also, exiting on a closing basis means you may not be adequately 
protected against a severe price move against you, where a close 
is far above or below the trendline in question.  Here’s where it 
is important to know not to adopt too "loose" of a risk control 
strategy in a very "overbought" or very "oversold" market – to 
define overbought or oversold could be to use a 14-day RSI when 
the readings are at 70/75 on the upside extreme or 25/30 on the 
downside.  

BACK TO THE FUTURE – 

 
 
UP and DOWN trendlines make up the Trend Channel.  The lower 
(downtrend) channel in the Dow 30 (INDU) chart is a good example 
of an internal trendline as it cuts through the middle cluster of 
lows.  


****************
Combos/Straddles
****************

October Position Preview -- Going Out With A Bang!!

By Mike Parnos

We're going to close out the second year of tracking our CPTI 
portfolio with a month to remember.  I've put together an 
interesting array of new hypothetical positions.  

Remember, the premiums are based on Thursday's closing prices.  
You may get a little less if you attempt to place your trades on 
Friday.  Accepting less premium does not mean it's a bad trade.  
Just be careful.  It's better to be safe than sorry.

In the meantime, I'm looking forward to writing Sunday's column.  
Unless we get an outrageous Friday morning open, it appears that 
all of our regular CPTI positions, along with our Quickies, are 
going to be profitable.  Making money never gets old.   Deciding 
on how to spend it can get a bit tedious . . . but it's something 
we can all live with.
________________________________________________________________

One of the funny things about the stock market is that every time 
one man buys, another sells and both think they are astute. 
________________________________________________________________

In Sunday's column I posted the first of our positions.  I will 
repeat it again for those of you who may have missed it.  
Obviously, the amount of premium available will be down 
significantly.

PREVIEW OF OCTOBER HYPOTHETICAL POSITIONS
October Position #1 - SPX Iron Condor - 1123.50
Sell 10 SPX October 1160 calls
Buy 10 SPX October 1175 calls
Credit of about $1.75 ($1,750)

Sell 10 SPX October 1075 puts
Buy 10 SPX October 1060 puts
Credit of about $1.30 ($1,300)

Total net credit of appx. $3.05 ($3,050).  By putting on the 
position now, we will be exposed for five weeks, but it enables 
us to take in a little more premium.  Maximum profit range is 
1075 to 1160.  Maintenance is $15,000.

If you put on this same position tomorrow (Friday), you could 
likely take in about $2.70 ($2,700).  You might give some 
consideration to using the 1165-1180 for the bear call spread and 
take in about $1.30.  It's a little less premium, but also a 
little safer.
 
Position #2 -- RUT Iron Condor - 574.54
There are two versions of this trade -- conservative and 
aggressive.  I'm going to take the conservative approach.  Why?  
Because basically I'm a chicken.
Sell 10 RUT Oct. 610 calls
Buy 10 RUT Oct. 620 calls
Credit of about $.65 ($650)

Sell 10 RUT Oct 530 puts
Buy 10 RUT Oct 520 puts
Credit of about $.55 ($550)

Total net credit of about $1.20 ($1,200).  Maximum profit range 
is 530 to 610.  Maintenance is $10,000.  If you want to generate 
more income, do a few extra contracts rather than bring in the 
strike prices.  Don't forget that the market makers on RUT are 
very stingy (I'm being diplomatic).  You may have to settle for 
less premium if you want to put on this position.

Position #3 - OEX Iron Condor - 543.35
Sell 10 OEX October 520 puts
Buy 10 OEX October 510 puts
Credit of about $.70 ($700)

Sell 10 OEX October 565 calls
But 10 OEX October 575 calls
Credit of about $.50 ($500)

Total net credit of about $1.20 ($1,200).  Maximum profit range 
is 520 to 565.  Maintenance is $10,000.  Again, if you want to 
generate more income, put on a few more contracts rather than 
bring in the strike prices.

Position #4 - BBH Iron Condor - 144.44
This one is a little riskier than the others.  Our bear call 
spread is going to use $150 as the short strike.  The resistance 
looks respectable, but it's only 5 1/2 points away.  Let your 
risk tolerance be your guide.

Sell 10 BBH October $150 calls 
Buy 10 BBH October $160 calls
Credit of about $.95 ($950)

Sell 10 BBH October $135 puts
Buy 10 BBH October $125 puts
Credit of about $.55 ($550)

Total net credit of about $1.50 ($1,500).  Maximum profit range 
is $135 to $150.  Maintenance is $10,000.  Be careful.

Position #5 -- SPX "Sure Thing" Strategy - $1123.50
This was formerly called the "Credit Spread Boogie."  We know 
there are no "sure things," but the name sure is catchy.  The 
market seems to be in an uptrend since mid-August.  Let's go with 
the flow until the market tells us otherwise.  

Sell 3 SPX 1120 October puts
Buy 3 SPX 1095 October puts
Net credit of about $6.50 ($1,950)

This is a riskier strategy.  The initial maintenance is $7,500.  
Before trying this, make sure you have a large brokerage account 
that will accommodate a lot more maintenance -- just in case.  
Remember, the "Sure Thing" strategy involves the possibility of 
doubling the number of contracts and going in the opposite 
direction, if the trend does not continue.
_________________________________________________________________

SEPTEMBER CPTI POSITIONS
September Position #1 – SPX Iron Condor – 1123.52
The SPX has become our favorite index.  The premiums are 
respectable.  The spreads are wide enough to do a little shaving, 
and we can create some huge trading ranges for safety purposes.

We sold 10 Sept. SPX 1015 puts and bought 10 September SPX 995 
puts for a credit of about: $1.10 ($1,100).  Then we sold 10 
September SPX 1140 calls and bought 10 September SPX 1160 calls 
for a credit of about $1.40 ($1,400).  Total credit and potential 
profit of $2,500.  Maximum profit range: 1015 to 1140.  That’s a 
125-point range.  It is going to require $20,000 in maintenance.  
The return on risk will be about 14.3%.

September Position #2 – RUT Iron Condor – 574.54
We sold 10 RUT September 500 puts and bought 10 RUT September 490 
puts for a credit of about: $1.00 ($1,000).  Then we sold 10 RUT 
September 580 calls and bought 10 RUT September 590 puts
Credit of about $1.00 ($1,150).   Total credit and profit 
potential of $2,000.  It’s a nice size maximum profit range of 
500 to 580.  The maintenance requirement is only $10,000.  The 
return on risk will depend on what premium you take in.  If you 
take in $2,000, the return on risk will be 25%.

September Position #3 – SPX “Sure Thing” – 1123.50
We sold 3 September SPX 1105 calls and bought 3 September SPX 
1130 calls for a credit of about $7.00 ($2,100).  When the market 
moved up quickly, we closed out our Sept. 1105/1130 bear call 
spread at a cost of $13.90 ($4,170).  We then put on 7 contracts 
a bull put spread (1110/1085) at $6, taking in $4,200.  Our new 
maintenance requirement is $17,500.  Potential profit: $2,130.

September Position #4 – OEX Iron Condor – 543.35
This position is in response to some requests for an OEX play.

We sold 10 September OEX 505 puts and bought 10 September OEX 495 
puts for a credit of about: $.65 ($650).  Then we sold 10 
September OEX 555 calls and bought 10 September OEX 565 calls for 
a credit of about $.75 ($750).

Total net credit of about $1.40 ($1,400).  Maximum profit range: 
505 to 555.  Potential return on risk of about 16%.  

ONGOING POSITIONS
QQQ ITM Strangle – Ongoing Long Term -- $35.32
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.  
June $34 calls and $37 puts -- total net credit of $750.  We 
rolled out to the July $34 calls ($.20 credit) and $37 puts ($.60 
credit) and took in a credit of $.80 ($800).  We rolled to the 
August $34 calls and $37 puts, taking in a credit of $900.  We 
rolled to the Sept. $34 calls and $37 puts, yielding $.45 or $450 
for the cycle. For October we were again limited to a $.45 ($450) 
rollout.  Our new total credit is now $12,200.

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 – 543.35
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.
Our current position:  We own 3 OEX December 2006 540 calls @ $81 
(x 300 = $24,300).  Our cash position as of May expiration was 
$4,390 plus unused $1,700 = $6,090.  From the June option cycle, 
we are able to officially add $1,175 to our cash position – that 
now stands at $6,265 As of July expiration we had a total of 
$7,440.  We now add the $950 for the August expiration for a new 
total of $8,390.

New Zero Plus Positions For September  
September bull put spread 505/495 for credit of $.75 x 5 
contracts = $375.  Short 555 call for credit of $1.20 x 5 = $600.  
If all goes well, we'll be able to add $975 to our cash position 
as we wait for the market to move up – hopefully in this 
lifetime.
_______________________________________________________________

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.
   
Mike Parnos, Options Therapist and CPTI Master Strategist
 

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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