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Daily Newsletter, Tuesday, 10/19/2004

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The Option Investor Newsletter                 Tuesday 10-19-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Halloween Coming Early?
Futures Markets: See Note
Index Trader Wrap: A different kind of healthcare reform
Market Sentiment: Divided Focus


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      10-19-2004           High     Low     Volume   Adv/Dcl
DJIA     9897.62 - 58.70 10020.55  9894.89 2.16 bln 1124/2079
NASDAQ   1922.90 - 13.60  1952.85  1922.60 1.72 bln 1236/1887
S&P 100   530.99 -  4.19   538.10   530.93   Totals 2360/3966
S&P 500  1103.23 - 10.79  1118.03  1103.15 
SOX       388.00 +  3.94   395.63   384.35
RUS 2000  566.67 -  5.36   576.63   566.49
DJ TRANS 3345.34 - 37.34  3392.76  3345.25
VIX        15.13 +  0.42    16.32    14.32
VXO (VIX-O)15.63 +  0.94    15.64    14.46
VXN        20.84 +  0.12    20.89    20.10 
Total Volume 4,229M
Total UpVol  1,410M
Total DnVol  2,750M
Total Adv  2723
Total Dcl  4484
52wk Highs  241
52wk Lows   170
TRIN       1.45
NAZTRIN    1.20
PUT/CALL   0.95
************************************************************

Halloween Coming Early?
by Jim Brown

The markets may be warning us that Halloween is coming
early this year. The markets gave back an early bounce
to sink back to critical support and there were no bulls
in sight at the close. Dow support at 9900, Wilshire 5000
support at 10800 and SPX support at 1100 all appear to
be in danger of failing. Could this be predicting an ugly
October surprise?

Dow Chart

 
Nasdaq Chart

 
SPX Chart

 
Wilshire-5000 Chart

 

Today was not a good day for economics. The weekly Chain
Store Sales fell -0.2% after two weeks of gains. This is
not a big drop but shows retail simply can't maintain a
positive trend. Debt burdens are nearing record levels
and gas prices over $2.00 are cutting into budgets. Not
anything we did not already know. 

Worse news came in the form of the Consumer Price Index
which rose +0.2%. If you don't use food or energy the
core rate rose +0.3%. These levels would have been much
worse but there was actually a -0.4% decline in energy 
prices during the survey period. This held the headline
numbers down but as we all know the small drop in energy
prices did not last. The core inflation rate is now at 
+2.0% for the year and at levels not seen since Oct-2002.
Once the rebound in energy prices filter back through the
market this will be even higher. This could force the Fed
to continue the rate hikes despite a cooling of the economy. 

New Residential Construction fell to 1.898 million from
2.02 million in August. Starts fell -6% and it was the
largest decline since January and they are well below
their 12-month average. Multifamily units continue to 
buck the trend but single family homes are suffering.
There could be some benefit underway in the South for
hurricane recovery but it is still too early to tell.
With long-term rates stabilizing we could see a level
housing market for the near future. Permits suggest
we have reached a support level where demand could be
stable as long as jobs continue to hold. The ten-year
yield closed today at 4.04% and bonds could continue
to find buyers in a weak equity market. 

The challenge remains the job market and the Challenger
Survey announced on Monday showed 54,701 high tech jobs
were lost in Q3. This was up +60% from Q2 and +14% from
the same period last year. Challenger said tech companies
have no pricing power and they are having to sell for 
lower margins just to keep market share. After three 
years of cost cutting the only avenue left to reduce 
costs is to reduce jobs. Challenger said IBM and 
BearingPoint are hiring in the U.S. but are becoming
increasingly picky about who they hire. Service and 
consulting businesses like IBM are seeing their backlog
increase but tech manufacturing accounted for 56% of 
the Q3 job losses. 

IBM roared out of the gate this morning with a +3.50
gain to trade over $89 and contrary to the market did
manage to hold those gains. IBM reported profits on
Monday night that beat the street and were surprisingly
good. Emerging markets such as Brazil, China, India and
Russia grew by more than +30% with American revenue up
only +8%. IBM said it had more than $110 billion in
back orders. Profits for the quarter were $2 billion.
Not bad for a blue chip tech that was known for earnings
warning fears just a few quarters ago. 

Texas Instruments also beat the street and jumped +1.50
on the news. The TXN gains were not so spectacular and
came in part due to late quarter sales that boosted the
prior two months of weak results. This and several other
chip stocks helped push the SOX to resistance highs at
395 that were tested last Wednesday after the Intel 
earnings. Those highs did not hold then and they did
not hold again today. The SOX did close in positive
territory but well off its highs. 

It was not techs or software or even Internet stocks
that captured the spotlight today. It was the warlock
of Wall Street in the person of Elliott Spitzer making
headlines once again. The regulatory gargoyle jumped
from sector to sector as not only insurance companies
like MMC, CB and AOC took the heat but subpoenas spread
out to AET, CI, WLP and ATH with monster losses the rule
for the day. ATH -7.30, AET -11.57, CI -6.85 and WLP 
-11.30. The size of the losses and the widening scope 
of the witch hunt put fear into investors and every 
sector even remotely related saw selling. Financial
stocks suffered because they were not only grouped 
into the same indexes being dumped but due to fears 
the carnage would impact current loans and relationships
with the banking community. Somebody needs to put a 
leash on this wild man or maybe use a wooden stake
to prevent Count Spitzer from sucking the lifeblood
from any new victims. 

The markets sank from the open and never found a bid. 
Support levels were not broken sharply they just eroded
away with slow steady selling pressure. Although volume
on the NYSE was higher than recent levels at 2.16B shares
there was not a serious imbalance. Decliners beat the
advancers by slightly more than 2:1 and given the hit
to three letter insurance stocks listed above this was
not unreasonable. There were just very few buyers.

The Dow retreated to 9900 at the close and while that
is/was strong support the action at the close suggested
it may not hold tomorrow. This is the third retest in
the last four days and the odds are good this one will
not hold. The August low was 9783 and this could be the
next target. One analyst is suggesting we could go all
the way to 9500 and the bottom of the downtrend channel.

The Nasdaq is refusing to crack and holding above 1925
most of the day. The Nasdaq tried to hold the high ground
at 1950 but failed and pulled back to the middle of its
recent congestion range running from 1900-1950. This
divergence from the blue chips has more to do with the
insurance implosion than a tech rally. The IBM/TXN
earnings helped techs but swimming upstream in a down
market is a tough task. 

Tonight's earnings were a mixed bag with companies
beating estimates disappointing on guidance and those
that did not disappoint on guidance found some other
reason to trade lower. MOT, PLT, STK, STX, CYMI, MNST
and SIMG were some of the stocks beating estimates
after the close. MOT, CYMI, MNST, SIMG all traded down
along with ERTS which missed estimates. 

Very late after the market closed Teradyne, a maker of
semiconductor testing equipment, posted a serious warning.
TER posted earnings of +0.21 cents but warned that Q4
earnings would drop to only +0.04 cents due to customers
significantly slashing orders compared to Q3. They said
there was a significant reduction in capital spending as
chip makers tried to deal with snowballing inventory
levels. Revenue for Q3 was $457.8 million and current
Q4 orders are only $284 million. At the same time FSL,
Freescale Semi, a recent spin off from Motorola said
they were laying off -1000 workers and expected orders
to decline through Q4. 

The negative earnings and guidance from multiple companies
after the close sent the futures plunging to below 1100
on the S&P and buyers were just beginning to nibble at
8:PM. Will they return to positive territory by morning?   
Will it matter? With today's negative session and the 
nights earnings events you would expect Wednesday to be
less than exciting for the bulls. The key for traders is
not likely to be the chip woes but the ailing financial
sector. 

Eventually the fear will wear off and investors will 
tip toe back into the water but they may want to cling
to the safety of the bank for a few more days. Spitzer
needs to be sighted targeting somebody else before they
will feel safe entering the sector again. Since banks
are grouped with insurance companies in various funds
the financial sector may remain weak. Citibank said
after the close three top officials are leaving due to
the Japan scandal and Fannie Mae reported the SEC inquiry
had turned negative with a formal attack now underway.
This sent FNM plunging in late trading. 

Negative chip earnings, weak financials, an election tie
and a calendar month known for volatility. Sure sounds 
like a recipe for disaster. Helping to lubricate the 
selling was a firming in oil to near $54 once again and
money moving from equities to bonds. While myself and 
many others were expecting an election rebound to begin
this week I believe that potential is quickly eroding. 
If the Dow trades down to 9800 tomorrow it should be our
most likely spot to launch a rebound. Should that level
fail the sentiment could turn much uglier and the next
stop could be that 9500 I mentioned earlier. 

Wednesday will clearly be a battle between the technical
traders and market sentiment. Should they end up on the
same side the outcome could be dangerous. There are no
material economic events in the morning but we will get
oil and gas inventories at 10:30. A drop in inventories
could breathe new life in the lagging oil prices. Earnings
before the bell include AMR, BK, CL, CFC, DCN, DAL, EK, 
FLIR, GD, GENZ, HET, HON, JPM, NITE, LIN, LU, MGG, NTRS,
ODP, PFE, SWFT, UTX, WYE. Three of those are components
in the Dow and misses could be painful to the market. 
The airlines are expected to show large losses and the
transports should react to their guidance. Look for 
a bounce at 9800 should we trade that low but enter 
carefully. Given the weak market breadth and sentiment
I would be careful about rushing back into the water 
too soon or you may end up swimming with the fishes 
rather than surfing the waves. 

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 WRAP
*****************

A different kind of healthcare reform

I don't think today's decline for the HMO Index (HMO.X) 870.41
-9.37% was what Americans had in mind when discussing the pros 
and cons of government-initiated healthcare reform.

For a second time in less than a week, the insurance industry was 
rocked, this time health insurers, on news that Eliot Spitzer, 
New York's Attorney General, was widening his office's inquiry 
into fees paid by HMOs to brokers, acting as intermediaries 
between employers and the HMOs.

UnumProvident (NYSE:UNM) $12.19 -9.83% got the ball rolling when 
the nations largest provider of disability insurance said it 
received a fresh subpoena from Eliot Spitzer's office.

UnumProvident pledged to cooperate with the probe and, at the 
same time, examine its own business practices. 

"We will further review our compensation policies and procedures 
to be sure that we appropriately compensate our brokers but do 
not create any actual or perceived conflict between the broker 
and the customer," UnumProvident CEO Thomas Watjen stated.  Mr. 
Watjen added that "UnumProvident will not enter into any new 
compensation agreements until this review is completed." 

S&P 100 Index (OEX.X) 530.00 -0.78% component Cigna (NYSE:CI) 
$59.73 -10.28% said it received a new subpoena from the New York 
Attorney General.  

Aetna (NYSE:AET) $86.17 -11.8% plunged below $83 intra-day, with 
rumors circulating that it may have received a new subpoena from 
Sptizer's office.  After today's close, Aetna's shares slipped to 
$85 when the company confirmed it had indeed received a subpoena.

As investors continue to juggle the potential outcomes, several 
being downright frightening for shareholders, investor confidence 
toward insurers was dealt further blow when representatives from 
California and Pennsylvania said they are examining allegations 
raised in Eliot Spitzer's lawsuit against insurance broker Marsh 
& McLennan (NYSE:MMC) $24.10 -5.74%.

"We are analyzing the allegations and are in touch with the New 
York regulators that are assisting Attorney General Spitzer to 
assess what additional actions we can and will engage in," said 
Melissa Fox, spokeswoman at the Pennsylvania Insurance 
Department.

Goldman Sachs did make comment late this afternoon that they felt 
the selling among HMOs was "overdone," reminding investors that 
commissions are not paid under purchasing agreements for the 
large employer business.  In what seemed to be a cautious note, 
Goldman Sachs did mention that commission payment practices for 
smaller employer business may come under scrutiny and that the 
bulk of liability rests with brokers, not HMOs themselves.

HMO Index (HMO.X) Chart - WEEKLY Intervals

 

Declines among the health insurers spoiled what may have been an 
otherwise bullish session as last night's quarterly earnings from 
IBM (NYSE:IBM) $89.37 +4.01% and Texas Instruments (NYSE:TXN) 
$22.51 +6.92% were met with a bullish response.

According to Standard and Poors, profits for the 17 top U.S. 
health providers rose 114% to $414 million from $193 million 
since 2004, while profit margins doubled to 5%, the highest level 
in at least a decade for the industry's top 10 insurers.  

By comparison, the S&P 500 (SPX.X) 1,103.23 -0.98% saw profits 
rise a more modest 5% the past four years.  

U.S. Market Watch - 10/19/04 Close

 

I can't say that the recent declines for insurance brokers and 
now health insurers have had a significant "fundamental" impact 
on the broader S&P 500 Index (SPX.X), but I do think the 
UNCERTAINTY surrounding the eventual outcome of Eliot Spitzer's 
investigation provides negative, if not cautious sentiment among 
investors.

Market Snapshot / Internals - 10/19/04 Close

 

While the health insurers started their decline just after the 
opening bell, the major indices reached their intra-day highs 
about 40-minutes into the session.  Strength among semiconductors 
and broader tech lasted longer.

Uncertainty is such a difficult trade.  Some things I saw, or 
perhaps heard, is what can often times happen when one concern 
suddenly becomes a second concern.  Let's call it "Eliot Wave."

For example, with news of an insurance broker investigation last 
week, building to further investigation of the health insurers, 
brokers came under selling pressure on RUMOR that Mr. Spitzer's 
office might be investigating brokers and their dealings with 
various derivatives.  

Dow component JP Morgan (NYSE:JPM) $37.98 -2.61% fell from the 
$39.20 level just prior to 11:00 AM EDT, as it was one of the 
brokers RUMORED as being a target.

Similar RUMORS circulated that Fannie Mae (NYSE:FNM) $67.67
-1.51% might be under greater scrutiny from the SEC, where an 
informal probe has been underway as to some of its accounting 
methods.  After the closing bell, the mortgage lender confirmed 
that the SEC had changed the status of its investigation of the 
company's accounting to formal from informal.

The Washington, D.C.-based company, which stands behind more than 
$2 trillion in mortgages, said it will continue to cooperate 
fully with the SEC. 

A formal SEC investigation implies that the SEC has now assigned 
staff, budget and subpoena power to the ongoing investigation. 

S&P 500 Index (SPX.X) Chart - Daily Intervals

 

The SPX has really gone nowhere the past 4 sessions, and whether 
any of us fully understand the implications of Mr. Spitzer's 
probe, it may be broader market psychology that dictates trade, 
with the though being it best to either take profits, or play 
things conservatively, let things cool down a bit, and get more 
information before committing new capital.

While it has been somewhat refreshing to discuss something other 
than oil prices, today's main driver was the widening probe of 
Mr. Spitzer.

Things can change quickly though.  We've got oil inventories 
tomorrow, and while oil prices remained firm after yesterday's 
decline, oil didn't trade new highs either and the SPX.X still 
holds above MONTHLY S1 and 1,100.

Pivot Matrix - 

 

The VIX.X traded a session low of 14.32 and high of 15.20, which 
comes just shy of its WEEKLY Pivot.  Traders might keep tabs on 
VIX.X 15.25 tomorrow should the SPX.X edge under the 1,100 level 
and near 3 levels of correlative support at 1,098 in tomorrow's 
trade.  Especially into the 10:30 AM EDT mark, when we should get 
weekly oil inventory data.

The NDX/QQQ came within fractions of their WEEKLY R2, with the 
SOX.X providing a push to its WEEKLY R1.

Jeff Bailey


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

Divided Focus
- J. Brown

Investors have a lot on their minds these days.  Normally 
investors would turn a white-hot spotlight on corporate earnings.  
They remain center stage today, especially as Wall Street ponders 
future earnings growth and just how fast or how slow earnings 
will grow in the fourth quarter and beyond.  Unfortunately, 
record high oil prices continue to upstage the Q3 earnings 
performance.  Yes, crude has slipped two days in a row now (whoa! 
is that a trend?)  but oil remains near its highs. Plus, the 
markets and individual investors are starting to grow more 
concerned about the rise in heating oil.  That's especially true 
now that winter's chill is not that far away.  

If you read most of the financial media tonight they'll probably 
suggest to you that tech stocks turned in a decent day.  That may 
be true for the likes of IBM and TXN who soared higher after 
beating earnings estimates.  Whether these two stocks gained on 
short-covering or investors breathing a sigh of relief that 
things were not worse than expected is up for grabs.  The bears 
will have to concede that the earnings numbers were indeed 
positive.  Unfortunately the NASDAQ Composite closed in the red 
and the SOX semiconductor index was the only major tech index to 
close in the green.  

Overall market internals were negative today.  Declining stocks 
outnumbered advancers by 2-to-1 on the NYSE and 18-to-11 on the 
NASDAQ.  Down volume was 2.5 times up volume on the NYSE and with 
a heavy volume day overall for the Big Board.  So far we're 
seeing stocks affected by the age-old tradition of "sell the 
news".  If earnings are inline or just slightly better than 
expected investors are still hitting the sell button - at least 
short-term.  

Speaking of earnings we're going to see a huge number of earnings 
on Wednesday and Thursday this week.  Tomorrow alone brings 
reports from Dow-components HON, JPM and UTX.  Plus, we'll hear 
from the likes of AMGN, COF, CHIR, DAL, and EBAY.  

Overshadowing both the earnings numbers and the rise in oil is 
probably the upcoming election.  Many feel that stocks are likely 
to churn sideways in choppy fashion between here and November 
2nd.  That's not a surprise given the incredible cacophony being 
generated by both sides.  Whether you think it's a good thing or 
a bad thing so far the media appears to be focusing on just the 
election itself and not the terror threat it was acknowledged to 
be just a few weeks ago.  Yup, investors definitely have a lot on 
their minds right now.


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

Market Averages

DJIA ($INDU)

52-week High: 10753
52-week Low :  9497
Current     :  9897

Moving Averages:
(Simple)

 10-dma: 10026
 50-dma: 10116 
200-dma: 10282



S&P 500 ($SPX)

52-week High: 1163
52-week Low : 1018
Current     : 1103

Moving Averages:
(Simple)

 10-dma: 1118
 50-dma: 1109
200-dma: 1119



Nasdaq-100 ($NDX)

52-week High: 1559
52-week Low : 1301
Current     : 1443

Moving Averages:
(Simple)

 10-dma: 1442
 50-dma: 1399
200-dma: 1440



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

CBOE Market Volatility Index (VIX) = 15.13 +0.42
CBOE Mkt Volatility old VIX  (VXO) = 15.63 +0.94
Nasdaq Volatility Index (VXN)      = 20.84 +0.12 


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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.95        856,237       810,611
Equity Only    0.87        728,489       633,400
OEX            1.39         15,123        21,170
QQQ            5.38         30,026       161,746


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

Bullish Percent Data

           Current   Change   Status
NYSE          63.1    - 1     Bear Correction
NASDAQ-100    47.0    + 3     Bull Alert      
Dow Indust.   53.3    - 0     Bear Confirmed
S&P 500       61.4    - 0.8   Bear Correction
S&P 100       61.0    + 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: 1.06
10-dma: 1.18
21-dma: 1.11
55-dma: 1.15


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     929      1169
Decliners    1874      1845

New Highs      58        52
New Lows       55        48

Up Volume    571M      731M
Down Vol.   1531M      942M

Total Vol.  2150M     1689M
M = millions


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

Commitments Of Traders Report: 10/12/04

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 continue to hedge their bets on the large
S&P contracts as longs and shorts move closer to parity.  Small
traders didn't move much money either but remain net bullish.


Commercials   Long      Short      Net     % Of OI
09/21/04      404,746   425,560   (20,814)   (2.5%)
09/28/04      404,773   434,441   (29,668)   (3.5%)
10/05/04      421,217   435,736   (14,519)   (1.7%)
10/12/04      423,472   436,780   (13,308)   (1.5%)

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
09/21/04      134,943   108,036    26,907    11.1%
09/28/04      135,317   107,173    28,144    11.6%
10/05/04      137,210   114,489    22,721     9.0%
10/12/04      139,175   113,903    25,272     9.9%

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

Uh-oh!  This could spell trouble for stocks.  Commecials,
who are normally on the "right" side of the trade are upping
their short positions.  Meanwhile, small traders decreased
their short positions leaving them strongly net bullish.
This alone is a contrarian indicator for a market top.
Just remember that these readings were taken before the 
Wednesday-Thursday sell-off this past week.


Commercials   Long      Short      Net     % Of OI 
09/21/04      213,014   397,844   (184,830)  (30.2%)
09/28/04      226,020   420,714   (194,694)  (30.1%)
10/05/04      248,190   476,608   (228,418)  (31.5%)
10/12/04      258,457   517,805   (259,348)  (33.4%)

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
09/21/04      256,315     60,275   196,040    61.9%
09/28/04      262,501     68,255   194,246    58.7%
10/05/04      308,021     80,373   227,648    58.6%
10/12/04      309,720     62,502   247,218    66.4%

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


NASDAQ-100

Commercial traders aren't changing their bets.  They remain
net bullish on the NDX.  Small trades have significantly 
reduced positions in both longs and shorts but remain 
strongly net bearish, which of course is bullish for the
NDX if you're a contrarian.


Commercials   Long      Short      Net     % of OI 
09/21/04       54,530     30,827    23,703   27.7%
09/28/04       55,045     32,319    22,726   26.0%
10/05/04       55,640     32,872    22,768   25.7%
10/12/04       52,572     32,775    19,797   23.2%

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
09/21/04        7,417    25,821   (18,404)  (55.3%)
09/28/04       10,078    22,917   (12,839)  (38.9%)
10/05/04       12,254    30,693   (18,439)  (42.9%)
10/12/04        8,756    24,400   (15,644)  (47.2%)

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 reduced both long and short positions
but remained net bullish.  In contrast small traders
significantly increased both their longs and their shorts on
the Dow Industrials but in essence remain rather neutral.


Commercials   Long      Short      Net     % of OI
09/21/04       30,816    27,200    3,616       6.2%
09/28/04       29,714    26,877    2,837       5.0%
10/05/04       27,498    25,772    1,726       3.2%
10/12/04       24,150    22,849    1,301       2.7%
 
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
09/21/04        4,467     6,748   (2,281)   (20.3%)
09/28/04        5,143     5,988   (  845)   ( 7.6%)
10/05/04        5,531     5,539   (    8)   ( 0.0%)
10/12/04        8,814     9,167   (  353)   ( 1.9%)

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                  Tuesday 10-19-2004
Copyright 2004, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: CMI, GDW
Dropped Puts: FLIR, SEPR, WHR, 
Call Play Updates: MTB, OSIP, PGR, SBUX
New Calls Plays: None
Put Play Updates: APOL, HSIC, 
New Put Plays: None


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

Cummins Inc - CMI - close: 73.64 change: +0.74 stop: 71.49     

Per our previous comments we are closing CMI as of Tuesday's 
close to avoid the company's Wednesday earnings report.  The 
stock traded to $74.95 this morning giving nimble traders another 
chance to exit near the $75 mark if they missed it the first 
time.  Wall Street will be looking for $1.51 a share when CMI 
reports tomorrow morning. 

Picked on September 19 at $70.99
Change since picked:      + 2.63
Earnings Date           10/20/04 (confirmed)
Average Daily Volume =       724 thousand
Chart =


---

Golden West Financial - GDW - cls: 112.81 chg: +0.96 stop: 111.65     

Uh-oh!  The banking indices took a dive again on Tuesday.  The 
BKX dropped 1.5 percent and fell under its simple 200-dma.  
Shares of GDW slipped just over 2 percent and hit our stop loss 
at $111.65 late in the session.  We are stopped out just two days 
before GDW is due to report earnings.  

Picked on September 30 at $110.95
Change since picked:       + 0.60
Earnings Date            10/21/04 (confirmed)
Average Daily Volume =        512 thousand
Chart =



PUTS:
*****

FLIR Systems - FLIR - close: 53.38 chg: -0.87 stop: 56.35     

Time's up!  It's too bad too.  Shares of FLIR continue to sink 
lower as investors sell each little bounce.  The stock is 
producing a nice trend of lower highs over the last few weeks.  
However, per our previous comments we are exiting as of Tuesday's 
close to avoid FLIR's Wednesday morning earnings report.  
Analysts estimates are for 47 cents a share.  So far FLIR has 
fallen almost six points from our entry point.

Picked on September 29 at $59.35
Change since picked:      - 5.97
Earnings Date           10/20/04 (confirmed)
Average Daily Volume =       577 thousand
Chart =


---

Sepracor Inc - SEPR - close: 43.80 chg: -1.05 stop: 48.01   

Close enough for government work.  SEPR broke down under the 
$44.00 level and its simple 200-dma to hit a low of $43.52 this 
afternoon.  We've been watching and waiting for SEPR to hit 
$43.50 so we could exit before its earnings report.  Fortunately, 
earnings are not expected until Oct. 26th and given today's close 
under $44 SEPR could see more weakness tomorrow.  We're just 
choosing to exit now.  Watch the exponential 200-dma at $43.30 as 
possible support.

Picked on September 22 at $48.94
Change since picked:      - 5.14
Earnings Date           10/26/04 (confirmed)
Average Daily Volume =       1.8 million 
Chart =


---

Whirlpool - WHR - close: 59.31 change: +1.03 stop: 60.55    

WHR is not cooperating.  The stock managed a 1.76 percent bounce 
on Tuesday just one day before its earnings report.  The move was 
fueled by above average volume and WHR broke its short-term trend 
of lower highs.  Technical traders will note that its MACD is 
hinting at a new buy signal soon and short-term oscillators like 
the RSI and stochastics are suddenly looking stronger.  Not 
helping the bears was news out today that WHR had declared a 
quarterly cash dividend of 43 cents per share payable on Dec. 
15th, 2004 to shareholders on record as of Nov. 18th.  Wall 
Street will be looking for earnings of $1.52 a share tomorrow 
morning.

Picked on October 07 at $59.03
Change since picked:    + 0.28
Earnings Date         10/20/04 (confirmed)
Average Daily Volume =     854 thousand
Chart =



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

M&T Bank - MTB - close:  99.50 change: -1.33 stop: 98.00

A down day in the markets was a bummer for bank stocks.  The BKX 
slipped under its simple 200-dma and the BIX fell back under the 
360 level.  Likewise shares of MTB fell back under the round-
number support/resistance level at the $100 mark.  This is not 
good news for bulls in the stock.  MTB is still above historical 
support/resistance at the $99 level but we had hoped to avoid any 
more consolidation by buying the bounce formed on Friday-Monday.  
If you're still looking for an entry point we suggest waiting.  
At this time it may be more prudent to see a new short-term high 
above $101.50 or $102 before initiating new positions.  Looking 
more closely at MTB's chart it is possible that MTB is building a 
bull-flag pattern but that's probably more wishful thinking right 
now.  The MACD is looking weaker on the daily chart.  Again, we 
want to reiterate our suggestion to be cautious here!

Picked on October 18 at $100.83
Change since picked:     - 1.33
Earnings Date          10/12/04 (confirmed)
Average Daily Volume =      327 thousand
Chart =



---

OSI Pharma - OSIP - close: 64.08 change: -2.02 stop: 61.99

Tuesday had to be a frustrating day for OSIP bulls too.  
Yesterday the stock broke out from its consolidation pattern and 
pushed through resistance at $64.60 and its simple 100-dma.  OSIP 
was looking pretty strong and its MACD had produced a new buy 
signal on its daily chart.  Today (Tuesday) the stock completely 
reverses yesterday's gains with a 3 percent loss.  There is no 
news on the move and OSIP under performs the BTK biotech indices 
1.3 percent decline.  At this time we would not suggest new 
positions until OSIP traded back above the $65.00 mark.  
Yesterday we moved our stop loss up to $61.99.

Picked on October 03 at $63.45
Change since picked:    + 0.63
Earnings Date         08/10/04 (confirmed)
Average Daily Volume =     1.6 million 
Chart =


---

Progressive - PGR - close: 87.60 chg: -1.25 stop: 84.75*new*

If you caught Monday night's OptionInvestor.com email newsletter 
then you already know that PGR gapped higher on Monday.  The move 
was fueled by positive news that the company reported a 
successful Dutch auction to buy 16.9 million shares of its own 
stock at $88 a share.  PGR soared to $89.59, almost our initial 
profit target at $90.  Seeing some profit taking today was 
probably expected and PGR's 1.4 percent decline may have been 
hastened by the Spitzer-influenced downdraft in the insurance 
sector.  PGR is mainly car insurance and at this time not one of 
the industries under investigation by the New York Attorney 
General.  Hopefully, PGR will remain free and clear of this 
insurance-disaster cause by Spitzer's probing.  Thus we don't 
expect the news to have any significant affect on PGR but readers 
should be aware of the risk.  We are raising our stop loss to 
$84.75.

Picked on October 13 at $85.65 
Change since picked:    + 1.95
Earnings Date         10/13/04 (confirmed)
Average Daily Volume =     700 thousand
Chart =


---

Starbucks - SBUX - close: 50.31 chg: +0.01 stop: 45.99

The momentum in SBUX may be taking a breather today.  Monday saw 
shares breakout above round-number, psychological resistance at 
the $50.00 mark.  We were encouraged to see some follow through 
today with SBUX challenging the $51.50 level three times earlier 
in the session.  Then the rally began to fade in the last two 
hours.  Fortunately, you can see that volume surged as buyers 
rushed into buy the dip at the $50 mark.  Still, we wouldn't be 
rushing to open bullish positions.  Yes, SBUX still has great 
relative strength but if the broader indices continue to sink 
then SBUX may retest support at the $48-49 levels before moving 
higher.  

Picked on October 17 at $49.47 
Change since picked:    + 0.84
Earnings Date         11/10/04 (confirmed)
Average Daily Volume =     3.3 million 
Chart =



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

None


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

Apollo Group - APOL - close: 70.10 chg: -1.22 stop: 73.01     

This is a pivotal spot for shares of APOL.  Yesterday the stock 
rallied sharply after Morgan Stanley started coverage on the 
stock with an "out perform".  APOL pushed back above round-number 
resistance at the $70 mark but couldn't breakout over the 
September lows near $71.75.  We suggested that conservative 
traders may want to exit to keep losses at a minimum. We were 
willing to stick it out and see if the September lows would hold 
as resistance.  Thus far resistance is working but we're 
surprised to see APOL still trading above $70.  The stock is 
naturally oversold but we think this could just be an oversold 
bounce with some short-covering involved.  Readers may want to 
consider new bearish positions if APOL trades back below the $69 
mark.  

Picked on October 10 at $69.81
Change since picked:    + 0.29
Earnings Date         10/05/04 (confirmed)
Average Daily Volume =     3.3 million 
Chart =



---

Henry Schein - HSIC - close: 57.60 change: -1.34 stop: 62.01

Heads up! We have a significant change in strategy or at least 
our time frame in HSIC.  Previously our research showed that HSIC 
was due to report earnings in November.  The company has not 
reported that it would announce Q3 earnings on Tuesday, October 
26th.  We do not want to hold over the event and will either exit 
this weekend or on Monday afternoon before the closing bell.  So 
far the bearish trend continues with lower highs and lower lows 
but HSIC is descending slower than we expected.  We are 
encouraged to see HSIC closing near its lows today after the 
failed rally under $59.50.

Picked on October 14 at $58.35
Change since picked:    - 0.75
Earnings Date         10/26/04 (confirmed)
Average Daily Volume =     655 thousand
Chart =



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

None


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**********

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The Option Investor Newsletter                  Tuesday 10-19-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Watch List: Retailers, Software and more!
Spreads & Straddles: Stocks Plunge Amid Widening Insurance Industry 
                     Probe
Premium Selling Plays: Naked Puts & Calls


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

Retailers, Software 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.
___________________________________________________________________


Harley Davidson - HDI - close: 56.60 change: -1.09

WHAT TO WATCH: This could be a pivotal test for HDI.  The stock 
has not done very well with five down days in a row.  The company 
reported earnings about four sessions ago.  Investors were not 
impressed and shares are now testing technical support at the 
simple and exponential 200-dma's.  We can also see that a drop 
under the $56 mark would reverse HDI's P&F chart into a sell 
signal.  HDI's daily chart appears to have produced a double-top 
near $63 so it's not surprising to see a potential trend change.  
Consider bearish positions under $56 or under $55.

Chart=


---

Kohl's - KSS - close: 50.98 change: +1.29

WHAT TO WATCH: We've mentioned KSS before.  There is a strong 
camp of analysts and investors who believe KSS will out perform 
the market over the next several months as the company moves into 
the next few quarters of easy year over year earnings 
comparisons.  The stock appears to have produced a new short-term 
bottom at the $48 level near its exponential 200-dma.  This could 
be a bullish entry point given today's above average volume rally 
toward the $51 mark.  Or wait for a new high over $52.  The MACD 
is in a new buy signal.  Earnings are in November.

Chart=


---

Electronic Arts - ERTS - close: 46.66 change: +0.14

WHAT TO WATCH: Bulls were trying to mount a rally in shares of 
ERTS before its afternoon, post-close earnings report but the 
rally failed.  Now shares are going to gap down tomorrow as 
investors react to its earnings miss and lowered guidance.  We've 
had ERTS on the watch list before.  The key level to watch is the 
$44 mark.  If ERTS trades under $44 it could be a bearish entry 
point with a $40 target.

Chart=


---

Symantec - SYMC - close: 55.36 change: -0.21

WHAT TO WATCH: On the eve before its earnings report shares of 
SYMC didn't see much action.  The stock is stuck trading near the 
$55 strike price.  If you squint your eyes a bit it looks like 
SYMC has been creating a bull-flag pattern.  However, if they 
don't knock the ball out of the park on earnings tomorrow shares 
will easily see some profit taking.  We're watching for a dip 
toward round-number support at the $50 level. 

Chart=




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

BIIB $57.06 -0.94 - BIIB is looking weak here and could be 
challenging support near $55 and its exponential 200-dma soon.

AMZN $38.33 -0.94 - AMZN is looking weak here with a failed rally 
under the $40.00 mark.  AMZN reports earnings on Thursday.

BDK $79.20 +2.39 - BDK still showing strength with another new 
high before its Oct. 27th earnings. 

EBAY $92.45 -2.26 - EBAY is slipping toward minor support at $92 
ahead of its earnings tomorrow after the closing bell.


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*******************
SPREADS & STRADDLES
*******************

Stocks Plunge Amid Widening Insurance Industry Probe
By Ray Cummins

The major equity averages retreated sharply Tuesday after the New
York Attorney General expanded his "price-fixing" probe into the
health insurance industry.
 
The Dow Jones Industrial Average closed down 58 points at 9,897,
with weakness in American International Group (NYSE:AIG), Alcoa
(NYSE:AA), Citigroup (NYSE:C), General Motors (NYSE:GM), and JP
Morgan (NYSE:JPM).  Technology companies on the NASDAQ avoided
most of the selling pressure, and the index fell only 13 points
to 1,922.  The S&P 500 index slumped 10 points to 1,103, with a
sell-off in the health insurance segment weighing heavily on the
broader market.  Decliners outpaced gainers by nearly 2 to 1 on
the New York Stock Exchange and by 3 to 2 on the NASDAQ.  Volume
was 1.7 billion on the Big Board and 1.7 billion on the hi-tech
exchange.  In the bond market, treasury prices reclaimed most of
the day's earlier losses to end nearly unchanged for the session.
The benchmark 10-year note was up 1/32 at 101 22/32, while its
yield closed at 4.04%.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
SUMMARY OF CURRENT POSITIONS - AS OF 10/17/04
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

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


PUT-CREDIT SPREADS

Stock  Pick   Last   Mon  L/P   S/P  Credit   CB     G/L   Status

BSC    94.16  91.81  NOV  80.0  85.0  0.65   84.35   0.65   Open
PHS    37.23  36.31  NOV  30.0  32.5  0.35   32.15   0.35   Open?
BTU    60.07  60.78  NOV  50.0  55.0  0.60   54.40   0.60   Open
MRVL   28.84  28.69  NOV  22.5  25.0  0.35   24.65   0.35   Open
COST   44.69  45.60  NOV  40.0  42.5  0.30   42.20   0.30   Open
NEM    46.25  44.78  NOV  40.0  42.5  0.30   42.20   0.30   Open
INSP   47.25  46.70  NOV  35.0  40.0  0.85   39.15   0.85   Open

L/P = Long Put  S/P = Short Put  CB = Cost Basis  G/L = Gain/Loss

Special Tuesday Note: Pacificare Health Systems (NYSE:PHS) became
an "early-exit" candidate after today's decline on reports of the
New York Attorney General's new probe into the health insurance
industry.


CALL-CREDIT SPREADS

Stock  Pick   Last    Mon  L/C   S/C  Credit   CB    G/L   Status

AMZN   40.47  38.55   NOV  50.0  45.0  0.65   45.65  0.65   Open
PDX    55.00  54.45   NOV  65.0  60.0  0.60   60.60  0.60   Open
BZH   103.14 100.39   NOV 115.0 110.0  1.10  111.10  1.10   Open
CHIR   37.98  32.47   NOV  45.0  42.5  0.30   42.80  0.30   Open
FLIR   54.52  54.50   NOV  65.0  60.0  0.70   60.70  0.70   Open
MERQ   37.97  37.22   NOV  45.0  42.5  0.35   42.85  0.35   Open
BIIB   59.82  58.02   NOV  70.0  65.0  0.65   65.65  0.65   Open
MCHP   27.56  27.65   NOV  35.0  30.0  0.60   30.60  0.60   Open

L/C = Long Call S/C = Short Call CB = Cost Basis G/L = Gain/Loss


DEBIT STRADDLES

Stock   Pick   Last   Exp.   Long   Long  Initial   Max     Play
Symbol  Price  Price  Month  Call   Put    Debit   Value   Status

QLGC    29.12  27.78   OCT   30.0   30.0    2.40    2.60   Closed
MDC     74.96  71.76   OCT   75.0   75.0    3.50    8.00   Closed
ETN     64.82  62.70   OCT   65.0   65.0    2.05    5.50   Closed
RMBS    15.23  15.80   OCT   15.0   15.0    1.10    1.45   Closed

Debit straddles in MDC Holdings (NYSE:MDC) and Eaton (NYSE:ETN)
were the best performers during the October expiration period.

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

This following group of plays is simply a list of candidates to
supplement your search for profitable trading positions.  As with
any new investment, you must decide if the selections meet your
criteria for potential plays.  Only you can know what strategies
are suitable for your personal skill level, risk-reward tolerance
and portfolio outlook.  In addition, we recommend that you avoid
any trading techniques in which you are not completely comfortable
with the potential capital loss, the necessary adjustments, and
the common entry-exit strategies.

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

BULLISH PLAYS - CREDIT SPREADS

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

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

ADBE - Adobe Systems  $53.57  *** New "All-Time" High! ***

Adobe Systems (NASDAQ:ADBE) offers a line of software products that
allow consumers, businesses and creative professional customers to
create, manage and deliver visually rich, compelling and reliable
content.  Adobe has four business segments: Creative Professional,
which provides software for professional page layout, professional
Web page layout, technical document and business publishing; Digital
Imaging and Video, which provides users with software for creating,
editing and enhancing digital images and photographs, digital video,
animations, graphics and illustrations; ePaper Solutions, which
provides electronic document distribution software that allows users
to create, enhance, annotate and securely send Adobe PDF files that
can be shared, viewed, navigated and printed, and OEM PostScript and
Other, which includes printing technology to create and print simple
or visually rich documents with precision.

ADBE - Adobe Systems  $53.57

PLAY (conservative - bullish/credit spread):

BUY  PUT  NOV-45.00  AEQ-WI  OI=1413  ASK=$0.25
SELL PUT  NOV-50.00  AEQ-WJ  OI=1790  BID=$0.65
INITIAL NET-CREDIT TARGET=$0.50-$0.55
POTENTIAL PROFIT(max)=11% B/E=$49.50


__________________________________________________________________

VRNT - Verint Systems  $37.73  *** Testing 2004 Highs! ***

Verint Systems (NASDAQ:VRNT) is a global provider of analytic
software-based solutions for security and business intelligence
markets.  The firm's solutions for the security market consist
primarily of communications interception solutions used by law
enforcement agencies, government agencies and telecom carriers,
and networked video solutions used by government agencies and
public and private organizations for use in airports, public
buildings, financial institutions, retail stores, correctional
facilities and corporate sites.  Verint's solutions for the
business intelligence market consist primarily of solutions for
enterprises that rely on contact centers for voice, e-mail and
Internet interactions with their customers.

VRNT - Verint Systems  $37.73

PLAY (conservative - bullish/credit spread):

BUY  PUT  NOV-30.00  JOQ-WF  OI=24  ASK=$0.25
SELL PUT  NOV-35.00  JOQ-WG  OI=5   BID=$0.70
INITIAL NET-CREDIT TARGET=$0.55-$0.60
POTENTIAL PROFIT(max)=12% B/E=$34.45



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

BEARISH PLAYS - CREDIT SPREADS

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

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

AET - Aetna  $87.26  *** Industry Probe! ***

Aetna (NYSE:AET) is a health benefits company whose business 
operations are conducted in the Health Care, Group Insurance and
Large Case Pensions segments.  On December 13, 2000, the company
was spun off, with the remaining entity merged into a subsidiary
of ING Group N.V.  The Health Care segment consists of health and
dental benefit products including health maintenance organization,
point-of-service, preferred provider organization and indemnity
products, and group insurance products including life, disability
and long-term care insurance products.  The Group Life Insurance 
segment consists principally of renewable term coverage, the 
amounts of which may be fixed or linked to individual employee 
wage levels.  Large Case Pensions manages a variety of retirement
products, including pension and annuity products, offered to 
qualified defined benefit and contribution plans.

AET - Aetna  $87.26

PLAY (very conservative - bearish/credit spread):

BUY  CALL  NOV-100.00  AET-KT  OI=5260  ASK=$0.35
SELL CALL  NOV-95.00   AET-KS  OI=532   BID=$0.70
INITIAL NET-CREDIT TARGET=$0.40-$0.45
POTENTIAL PROFIT(max)=8% B/E=$95.40


__________________________________________________________________

CI - Cigna  $60.65  *** Sell-Off In Progress! ***

Cigna Corporation (NYSE:CI) and its subsidiaries are investor-
owned employee benefits organizations in the United States.  Its
subsidiaries are major providers of employee benefits offered
through the workplace, including health care products and other
services, life, accident and disability insurance, retirement
products and services and investment management.  CIGNA's main
operating divisions include Employee Health Care, Disability and
Life Benefits, CIGNA Group Insurance, Employee Retirement, and
Investment Services, and International Life, Health and Employee
Benefits.
  
CI - Cigna  $60.65

PLAY (less conservative - bearish/credit spread):

BUY  CALL  NOV-70.00  CI-KN  OI=951   ASK=$0.30
SELL CALL  NOV-65.00  CI-KM  OI=1104  BID=$1.00
INITIAL NET-CREDIT TARGET=$0.75-$0.80
POTENTIAL PROFIT(max)=17% B/E=$65.75



~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
STRADDLES AND STRANGLES
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Based on analysis of the historical option pricing and technical
background, these positions meet the fundamental criteria for
favorable volatility-based plays.
_________________________________________________________________

No straddles or strangles today...

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

SEE DISCLAIMER - SECTION 1

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


*****************************************
PREMIUM-SELLING PLAYS: NAKED PUTS & CALLS
*****************************************

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

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
SUMMARY OF CURRENT POSITIONS - AS OF 10/17/04
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

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


MONTHLY YIELD FOR UNCOVERED OPTIONS: MAXIMUM & SIMPLE

The Maximum Yield (listed in the summary and with "naked" option
selling plays) is the greatest possible profit available in the
position.  This amount, expressed as a percentage, is based on
the initial margin requirement as determined by the Board of
Governors of the Federal Reserve, the U.S. options markets and
other self-regulatory organizations.  Although increased margin
requirements may be imposed either generally or in individual
cases by various brokerage firms, our calculations use the widely
accepted margin formulas from the Chicago Board Options Exchange.
The "Simple Yield" is based on the cost of the underlying issue
(in the event of assignment), including the premium from the sold
option, thus it reflects the maximum potential loss in the trade.
  
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
 
NAKED PUTS

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

NCRX     NOV    25.00   24.30   25.67    0.70   5.52%   2.88%
ANF      NOV    32.50   32.10   36.50    0.40   2.78%   1.25%
STTX     NOV    25.00   24.60   25.61    0.40   3.89%   1.63% *
SNDA     NOV    22.50   21.85   27.95    0.65   7.78%   2.97%
PMTI     NOV    20.00   19.15   23.09    0.85   9.23%   4.44%
IDBE     NOV    12.50   12.15   15.16    0.35   6.44%   2.88%
BVF      NOV    17.50   17.05   18.56    0.45   5.40%   2.64%
USG      NOV    17.50   16.90   21.22    0.60   6.84%   3.55%
SNDA     NOV    25.00   24.50   27.95    0.50   5.67%   2.04%
WEBX     NOV    20.00   19.60   25.17    0.40   5.75%   2.04%
ENER     NOV    15.00   14.40   19.75    0.60   8.11%   4.17%
DRIV     NOV    25.00   24.35   29.70    0.65   6.81%   2.67%
PLMD     NOV    30.00   29.55   32.32    0.45   3.33%   1.52%
CNCT     NOV    22.50   22.10   26.07    0.40   4.68%   1.81%
CCBI     NOV    22.50   21.90   23.20    0.60   5.51%   2.74%

Special Tuesday Note: Steel Technologies (NASDAQ:STTX) became
an "early-exit" candidate today after a steep decline in the
stock price.  A CIBC downgrade of the Steel sector was likely
the cause of the selling pressure.


NAKED CALLS

Stock   Strike  Strike  Break  Current   Gain    Max    Simple
Symbol  Month   Price   Even    Price   (Loss)  Yield   Yield

BRCM     NOV    35.00   35.35   28.20    0.35   4.44%   0.99%
LLTC     NOV    40.00   40.60   36.09    0.60   3.74%   1.48%
SINA     NOV    35.00   35.35   28.00    0.35   4.56%   0.99%
LRCX     NOV    25.00   25.40   21.75    0.40   5.37%   1.57%
IVX      NOV    20.00   20.75   18.25    0.75   9.51%   3.61%
PLMO     NOV    40.00   40.45   26.95    0.45   5.62%   1.11%
SLXP     NOV    20.00   20.65   18.00    0.65   8.83%   3.15%

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

This following group of plays is simply a list of candidates to
supplement your search for profitable trading positions.  As with
any new investment, you must decide if the selections meet your
criteria for potential plays.  Only you can know what strategies
are suitable for your personal skill level, risk-reward tolerance
and portfolio outlook.  In addition, we recommend that you avoid
any trading techniques in which you are not completely comfortable
with the potential capital loss, the necessary adjustments, and
the common entry-exit strategies.

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

WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL!

The sale of uncovered puts entails considerable financial risk,
far more than the initial margin or collateral required to open
a position.  The maximum financial obligation for the sale of a
naked put is the strike price (of the underlying stock) that is
sold.  Although this obligation is reduced by the premium from
the sale of the option, a writer of puts should have the cash or
collateral equivalent of the sold strike price in reserve at all
times.  In addition, there is one very important rule when using
this strategy: Don't sell puts on stocks that you don't want to
own!  Why?  Because stocks occasionally experience catastrophic
declines, exponentially increasing the margin maintenance and
possibly causing a devastating shortfall in your portfolio.  It
is also important that you consider using trading stops on naked
option positions to help limit losses when a stock's price falls.
Many professional traders suggest closing the position when the
underlying share value moves below the sold strike, or using a
"buy-to-close" stop order at a price that is no more than twice
the original premium received from the sold option.

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

NEW NAKED-PUT CANDIDATES

Stock  Last    Option    Option Last Open Cost  Days Simple  Max
Symbol Price   Series    Symbol Bid  Int. Basis Exp. Yield  Yield

SSNC   21.59  NOV 20.00  QUN-WD 0.45    5 19.55  32   2.2%   5.7%
MRVL   28.91  NOV 23.75  UVM-WT 0.40 2086 23.35  32   1.6%   5.6%
DITC   25.43  NOV 20.00  QZD-WD 0.30  329 19.70  32   1.4%   5.3%
GBBK   32.02  NOV 30.00  BBU-WF 0.60 2217 29.40  32   1.9%   5.0%
CKFR   31.66  NOV 30.00  FCQ-WF 0.60  416 29.40  32   1.9%   4.9%
AGIX   30.16  NOV 20.00  AUB-WD 0.30 1477 19.70  32   1.4%   4.5%
OSTK   44.35  NOV 35.00  QKT-WG 0.40  744 34.60  32   1.1%   4.1%
KRON   50.29  NOV 45.00  KUE-WI 0.50   20 44.50  32   1.1%   3.1%

Abbreviations:

LB-Last Bid price, OI-Open Interest, CB-Cost Basis (or break-even
point), DE-Days to Expiry, SY-Simple Yield (monthly basis without
margin), MY-Maximum Yield (monthly basis with margin), TS-Target
Shoot.
_________________________________________________________________

SSNC - SS&C Technologies  $21.59  *** Trend Reversal! ***

SS&C Technologies (NASDAQ:SSNC) is a provider of client/server
based investment and financial management software, application
service provider solutions and business process outsourcing
solutions.  The company's products and related services compete
in a variety of vertical markets in the institutional investment
management marketplace, including commercial lending, financial
institutions, hedge funds and family offices, institutional asset
management, insurance entities, pension funds, municipal finance
and real estate property management.

SSNC - SS&C Technologies  $21.59

NOV 20.00 QUN-WD LB=0.45 OI=5 CB=19.55 DE=32 TY=2.2% MY=5.7%


_________________________________________________________________

MRVL - Marvell Technology  $28.91  *** In A Trading Range? ***

Marvell (NASDAQ:MRVL) designs, develops and markets integrated
circuits utilizing proprietary communications mixed-signal and
digital signal processing technology for communications-related
markets.  Marvell offers its customers a wide range of integrated
circuit solutions using proprietary communications mixed-signal
processing and digital signal processing technologies.  Marvell's
product groups include: storage products, consisting of a variety
of read channel, system-on-chip and preamplifier products; and 
broadband communications products, consisting of a variety of
transceiver products, switching products, internetworking
products and wireless LAN products.  Earnings are due 8/19/04.

MRVL - Marvell Technology  $28.91

NOV 23.75 UVM-WT LB=0.40 OI=2086 CB=23.35 DE=32 TY=1.6% MY=5.6%


_________________________________________________________________

DITC - Ditech Communications  $25.43  *** Technical Break-Out? ***

Ditech Communications (NASDAQ:DITC) is a global telecom equipment
supplier for voice networks.  The firm's voice-processing products
focus on echo cancellers, used to eliminate echo, a common problem
in existing and emerging voice networks.  The company's newest
voice-processing products not only provide customers with the
traditional echo cancellation features, but also can be used to
provide voice quality assurance features that address issues such
as background noise and other voice quality issues in wireline
and wireless communications.

DITC - Ditech Communications  $25.43

NOV 20.00 QZD-WD LB=0.30 OI=329 CB=19.70 DE=32 TY=1.4% MY=5.3%


_________________________________________________________________

GBBK - Greater Bay Bancorp  $32.02  *** Buyout Target? ***

Greater Bay Bancorp (NASDAQ:GBBK) is a financial holding company
with one bank subsidiary, Greater Bay Bank, National Association,
and one commercial insurance brokerage subsidiary, ABD Insurance
and Financial Services.  The Bank provides commercial banking and
financial services to small and medium-sized businesses, property
managers, business executives, property developers, professionals
and other individuals.  The company operates community banking
offices throughout the San Francisco Bay Area.  ABD also provides
commercial insurance brokerage, employee benefits consulting and
risk management solutions to business clients across the United
States.  The company also owns a broker-dealer, which executes
mutual fund transactions on behalf of its clients' employee
benefit plans.

GBBK - Greater Bay Bancorp  $32.02

NOV 30.00 BBU-WF LB=0.60 OI=2217 CB=29.40 DE=32 TY=1.9% MY=5.0%


_________________________________________________________________

CKFR - CheckFree  $31.66  *** Entry Point? ***

CheckFree (NASDAQ:CKFR) is an electronic payment processing
company.  The company provides financial electronic commerce
products and services and is divided in to three divisions:
Electronic Commerce, Investment Services and Software.  With
the Electronic Commerce division, the company allows consumers
to receive and pay bills.  The Investment Services division
provides a range of portfolio management services to financial
institutions, including broker dealers, money managers and
investment advisors.  The Software segment delivers software,
maintenance, support and professional services to financial
service providers and other companies in various industries.

CKFR - CheckFree  $31.66

NOV 30.00 FCQ-WF LB=0.60 OI=416 CB=29.40 DE=32 TY=1.9% MY=4.9%


_________________________________________________________________

AGIX - AtheroGenics  $30.16  *** Pure Premium-Selling! ***

AtheroGenics (NASDAQ:AGIX) is a research-based pharmaceutical
company, focused on the discovery, development and eventual
commercialization of novel drugs for the treatment of chronic
inflammatory diseases, including heart disease, rheumatoid
arthritis, organ transplant rejection and asthma.  The company
has developed a vascular protectant (v-protectant) technology
platform to discover drugs to treat these types of diseases.
Based on this v-protectant platform, it has four primary drug
development programs in the clinic and is pursuing a number of
other preclinical programs.

AGIX - AtheroGenics  $30.16

NOV 20.00 AUB-WD LB=0.30 OI=1477 CB=19.70 DE=32 TY=1.4% MY=4.5%


_________________________________________________________________

OSTK - Overstock.com  $44.35  *** Uptrend Resumes! ***

Overstock.com (NASDAQ:OSTK) is an online retailer offering
discount, brand-name merchandise for sale primarily over the
Internet.  Its merchandise offerings include bed-and-bath goods,
kitchenware, watches, jewelry, electronics, sporting goods and
designer accessories.  The company also sells books, magazines,
CDs, DVDs, videocassettes and video games.  Overstock offers
its customers an opportunity to shop for bargains conveniently,
while providing suppliers an alternative inventory liquidation
distribution channel.  The company also offers travel services,
including airline tickets, hotel reservations and car rentals.

OSTK - Overstock.com  $44.35

NOV 35.00 QKT-WG LB=0.40 OI=744 CB=34.60 DE=32 TY=1.1% MY=4.1%


_________________________________________________________________

KRON - Kronos  $50.29  *** Rally Mode! ***

Kronos (NASDAQ:KRON) is a single-source provider of human
resources, payroll, scheduling and time and labor solutions.
The company's employee relationship management (ERM) solutions
are the Workforce Central Suite, Kronos iSeries Central Suite
and Timekeeper Central System.  These unique solutions enable
organizations to reduce costs and increase productivity,
improve employee satisfaction, align employee performance with
organizational objectives and put real-time information in the
hands of decision makers.  In addition to its core products,
Kronos offers a variety of complementary products designed to
help maximize ERM capabilities.  Kronos maintains service and
technical support organization that maintains systems and also
provides professional and educational services.

KRON - Kronos  $50.29

NOV 45.00 KUE-WI LB=0.50 OI=20 CB=44.50 DE=32 TY=1.1% MY=3.1% TS



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

BEARISH PLAYS - NAKED CALLS

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

WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL!

The sale of uncovered calls entails considerable financial risk,
far more than the initial margin or collateral required to open
the position.  The maximum financial obligation for the sale of a
naked option is the strike price (of the underlying stock) that
is sold.  Although this obligation is reduced by the premium from
the sale of the option, a writer of options must have the cash or
collateral equivalent of the sold strike price in reserve at all
times.  The simple fact is: stocks often experience large price
swings, exponentially increasing the margin maintenance and very
possibly causing a devastating shortfall in your portfolio.  It
is also important that you consider using trading stops on naked
option positions to help limit losses when a stock price moves in
a volatile manner.  Many professional traders suggest closing the
position when the underlying share value moves beyond the sold
strike, or using a "buy-to-close" stop order at a price that is
no more than twice the original premium received from the sold
option.

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

HYSL - Hyperion Solutions  $37.21  *** Earnings Speculation ***

Hyperion Solutions (NASDAQ:HYSL) is a provider of Business
Performance Management software that enables companies to
translate strategies into plans, monitor execution and provide
insight to manage financial and operational performance.  The
company provides customers with solutions that include analysis
and reporting tools, a business intelligence platform, packaged
and tailored applications, and related services.  Its solutions
support the enterprise-wide processes for proactively managing
any business toward optimal performance against goals and for
anticipating and forecasting results.  Earnings are due 10/21/04.

HYSL - Hyperion Solutions  $37.21

PLAY (sell naked call):

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

SELL CALL  NOV 40    WQE-KH    2611   0.85  40.85   6.2%   2.1%


_________________________________________________________________

RNR - RenaissanceRe Holdings  $47.54  *** Next Leg Down? ***

RenaissanceRe Holdings (NYSE:RNR) provides reinsurance and
insurance through its subsidiaries.  The company's subsidiary,
Reinsurance Ltd., provides property catastrophe reinsurance
coverage to insurers and reinsurers.  Reinsurance also writes
specialty reinsurance in lines including catastrophe-exposed
workers' compensation coverage, surety and property per risk,
terrorism, aviation and finite reinsurance.  Within this area,
the company also manages property catastrophe reinsurance
written by joint ventures including Top Layer Reinsurance and
Advance Reinsurance.  The company also has an individual risk
segment that provides insurance for commercial and homeowners'
catastrophe-exposed property business.  Earnings are due on
or about 10/27/04.

RNR - RenaissanceRe Holdings  $47.54

PLAY (sell naked call):

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

SELL CALL  NOV 50    RNR-KJ    1822   0.65  50.65   3.5%   1.3% TS


_________________________________________________________________

X - United States Steel  $32.82  *** Sector Downgrade! ***

United States Steel Corporation (NYSE:X) is an integrated steel
producer with major production operations in the United States
and central Europe.  An integrated producer uses iron ore and
coke as primary raw materials for steel production.  The firm
has annual raw steel production capability of 26 million tons.
U. S. Steel is also engaged in several other activities, most
of which are related to steel manufacturing.  These include
the production of iron-bearing taconite pellets and coke in
the United States and central Europe; transportation services;
real estate operations, and engineering and consulting services.

X - United States Steel  $32.82

PLAY (sell naked call):

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

SELL CALL  NOV 40     X-KH    13525   0.25  40.25   3.5%   0.6% TS



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

SEE DISCLAIMER - SECTION 1

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


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