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Daily Newsletter, Thursday, 10/21/2004

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The Option Investor Newsletter                Thursday 10-21-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Adrenaline Rush
Futures Wrap: See Note
Index Wrap: Bulls may be BANKING on tech rally
Market Sentiment: Friday Could Be Quiet


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      10-21-2004           High     Low     Volume   Adv/Dcl
DJIA     9865.76 - 21.20  9903.15  9800.87 2.04 bln 2164/1050
NASDAQ   1953.62 + 20.70  1957.48  1933.00 2.02 bln 1863/2052
S&P 100   531.26 +  0.54   532.53   527.28   Totals 4027/3102
S&P 500  1106.49 +  2.83  1108.96  1098.47 
W5000   10851.86 + 55.06 10870.68 10775.31
SOX       408.98 + 15.60   411.21   393.36
RUS 2000  576.66 +  6.53   576.70   568.38
DJ TRANS 3431.69 + 45.00  3435.52  3381.86
VIX        14.54 -  0.31    15.19    14.28
VXO (VIX-O)14.99 -  0.11    15.97    14.86
VXN        20.36 -  0.29    20.92    20.21 
Total Volume 4,397M
Total UpVol  3,098M
Total DnVol  1,254M
Total Adv  4545
Total Dcl  2548
52wk Highs  233
52wk Lows   140
TRIN       1.10
NAZTRIN    0.60
PUT/CALL   0.83
************************************************************

Adrenaline Rush
by Jim Brown

Nearly 400 companies reported earnings on Thursday and 
the results were all over the board. Good news was mixed
with bad news and delivered so quickly investors were
left dizzy and confused. Strong market moves were made
in both directions and outlooks changed faster than 
traffic lights during rush hour. Welcome to the busiest
day in the October earnings schedule.

Wilshire-5000 Chart

 
Dow Chart

 
Nasdaq Chart

 

What a day! I hardly know where to start with mixed
economics and even more violently mixed earnings. The
Jobless Claims fell -25,000 to pre hurricane levels
but analysts suggested it might be too early to get
excited. The Columbus Day holiday may have impacted
number collection and the low number may be in error.
Seems to me there is some qualification on every number
we get recently. The headline number was 329,000 for
the week and heading for levels that translate to job
gains on a consistent basis. 

The Chicago Fed National Activity Index fell -0.01 for
September and back into negative territory after posting
a high of 0.83 back in March. The decline has been very
erratic with a spike from -0.08 in June to +.55 in July
only to completely retrace that spike in August. Only
37 of the 85 indicators that make up the CFNAI rose
during the month. Employment moved to -.09 from -.02
in August and was the biggest contributor to the decline
in the headline number. High oil prices were also a
factor in the decline. 

The Conference Board Leading Indicators fell for the 
fourth consecutive month with a -0.1% headline number.
The Coincident Index also fell -0.2% for the month. 
These numbers may seem insignificant but the key is
the trend and it is clearly down. Declining shipments
and narrower yield spreads were two major reasons for
the decline along with the pressure from energy prices.
This is the only the third time since Jan-2002 that the
index has declined more than three months in a row. The
outlook is negative for future releases based on the
internal trends. The index typically predicts economic
trends for the next six months. 

Not all economics were negative with the Monthly Mass
Layoffs falling slightly to 708 events impacting only
68,792 workers. This was only 51 workers less than the
August report but both months were significantly below
the recent trends. For instance July had 253,939 layoffs
and when compared to Aug/Sept there is a significant
improvement. Temporary services accounted for 10% of the
Sept number and hit the highest level since 2001. This
could be a negative sign that the fringe workers are
being trimmed in advance of cutting into the long term
workers. 

The best news came from the Philly Fed, which exploded
to 28.5 compared to estimates for 19.3 and the September
number at 13.4. This was clearly a blowout and renewed
faith in manufacturing in general despite being only a
regional index. Shipments surged to 28.2 from 22.4 and
New orders remained strong at 24.6. On the negative
side back orders fell into negative territory at -5.4
from last months already weak +3.1. Employment also 
fell strongly to 14.1 from 21.5. The six-month outlook
dropped significantly from 44.9 to 27.6. The report
was bullish on the surface definitely showed some
cracks in the foundation. These are not insurmountable
and as long new orders remain firm the minor weaknesses
will be ignored. 

That brings us to earnings and this was a monster day
with nearly +400 companies reporting. Five Dow components
reported with CAT the standout with the best results and
the biggest share price loss. CAT earnings more than
doubled on strong demand for its products but concerns
about high costs knocked -$3.35 of the share price. The
basic worry was that continued high oil prices would 
pressure sales and growth in other countries. Steel 
prices have doubled and for CAT that is a major expense.
Estimates for 2005 saw revenue up +10% compared to +30%
gains in 2004.    

Dow component Merck reported earnings that fell to 60
cents compared to 82 cents for the same period last
year. The Q3 earnings contained a 25 cents charge for
the VIOXX recall. However, MRK guided analysts to a
higher number for Q4 but many analysts were expecting
the charge in the current quarter and not on the Q3
earnings so the real continued earnings should not
appear until 2005. Merck said it already had over 300
personal injury lawsuits in progress from the VIOXX
claims. MRK was flat for the day at $31.28.

AIG fell another -1.15 on news a grand jury was looking
at products that might have been used to make earnings
look better. The probe centers on a contract with CELL
claiming the company fraudulently concealed losses on
the policy. AIG announced earnings that matched analyst
estimates and that was the good news. A JPM analyst
said he expected Spitzer to extract more than $2 billion
in penalties from the current insurance scandal. 

Pfizer reported earnings of $3.34 billion for the quarter
compared to $2.22 billion for Q3-2003. They beat the
street slightly but warned that there would be increased
generic competition next year for $5 billion of their
products. Considering they will have more than $50B in
total revenue next year the minor amount they may lose
on generics should more than be made up on Celebrex.
The stock appears to have found support at $28.50 and
the VIOXX news is slowing.

UPS missed estimates by two cents but used the politically
correct hurricane excuse and escaped investor wrath. The
company said business was strong and 2005 earnings should
grow +13% to +17%. They said the holiday shipping season
was shaping up to be a strong season. 

After the bell Microsoft beat estimates by +2 cents and
said Q4 could be weaker than expected but raised estimates
for all of 2005. The company said it was seeing more 
business decisions on software purchases being postponed
by companies from Q4 and into 2005. Unearned income fell
unexpectedly and suggests Linux is cutting into their
subscription revenue base. MSFT fell -14 cents at the 
close and about -70 cents in after hours before the call
produced some minor buying. MSFT has that monster $32B
dividend that will be paid next month and $9 billion of
that is expected to be received by retail investors. The
rest will be collected by funds and insiders like Bill 
Gates. The $9 billion is expected to provide a retail
bounce for the holiday season and some analysts suggest
it could add 25-30 points to the GDP. I assume that was
before the nearly $100 billion haircut in the insurance
industry.  

AMZN dropped -3.46 in after hours after missing estimates
by a penny and giving disappointing guidance. The +17
cent earnings were significantly over the +4 cents from
Q3-2003 but the bar is pretty high for the online firm.
AMZN did say they were well positioned to go into the
DVD rental space. The problem came from revenue growth
that was less than analysts had hoped. Competition is
growing and growth is slowing as the business matures.
I bought my first online book from Barnes and Nobel last
week because Amazon did not have it. In the past Amazon
always had everything and this could be a symptom of the
future of their retail model. Skinny the inventory and
ignore the slow sellers. With their reputation built as
the worlds greatest marketplace it will be interesting
to see how this plays out. I might also note I bought
12 other books from Amazon last week so the defection 
to BN.com for the one they did not have was only a minor    
detail. 

The big news after the bell was Google, which brought 
back the Internet volatility of yesteryear. When GOOG
announced earnings of only 45 cents when analysts were
expecting 56 cents the crowd went wild. The stock dropped
from $149 to $140 as traders dumped the stock but then
rallied back to $162 after they disclosed in the call
that there was in fact some hidden charges in the number.
The clean number was reported to be 70 cents and a beat.
The volatility was huge and analysts could not say enough
good things about the stock. However, nobody seemed to 
want to buy it at the current range. GOOG was touted as
having a better growth rate than YHOO, EBAY and AMZN and
while that may be true based on today's numbers the field
is about to become very crowded. The Google model is not
yet fully understood and once understood it will be widely
copied. Microsoft is expected to make an announcement soon
and Yahoo and Amazon already have products in place and
growing. GOOG has a whopping 250 million shares coming 
eight times the current shares available for trading. 

With GOOG adding to the share price each day whether
on valid assumptions or not the market cap continues
to grow. Eventually this stock will be included in the
various major indexes and at the current nearly $50 
billion market cap will mean index funds will need to
buy large quantities when that happens. This could be
months away and after the last lockup release on Feb-15th
of 176 million shares. Currently there are slightly more
than 30 million shares in circulation and another 40 mil
will be released on Nov-16th a little more than three
weeks from now. Additional releases of 25M each will 
occur on Dec-15th and Jan-15th. 

The bad news came from numerous chip stock earnings. 
There were several today including BRCM, HLIT, IDTI, 
KLAC, MCHP, TQNT and XLNX to name a few. Led by BRCM
several warned about Q4 and the amount of orders being
pushed into 2005. BRCM warned that sales could drop
as much as -18% in Q4 on delayed customer orders. They
blamed excessive chip inventories still held by their
customers due to weak Q3 demand. They said weaker sales
of networking and satellite equipment had rippled back
to them through the supply chain. 

XLNX warned that revenue would be down for the quarter
based on increasing inventory levels at customers. The
average inventory level at quarter end was 156 days, up
from 131 days in the prior quarter. KLAC also said they
saw a decline in Q3 and another decline is expected for
Q4. They said sales to foundries had slowed significantly.
TQNT warned that they would have a bigger loss than they
previously expected for Q4, sales were slowing and their
book to bill had dropped to only 0.81. MCHP warned that
despite record sales in Q3 their expectations for Q4 
had fallen. IDTI repeated the claims that Q4 would also
be a challenge as customers wade through excess inventory.
Sounds like they have the excuse committed to memory.

That pretty well makes it unanimous that chip inventory
has not improved and is not expected to improve for Q4.
Based on dozens of company forecasts this situation is
expected to pass by Q1-2005. The warnings tonight were
nothing new and exactly like the warnings we have seen
from chip companies for the last two months. Despite
those warnings the SOX rose to a three week high today
and the SMH did not lose any ground in after hours 
trading. The bad news appears to be fully priced in and
traders are buying chips six months ahead of when they
believe the next demand bounce will occur. Those buying
today are looking at the April earnings as an exit point
if the current tech scenario completes as expected. 

SOX chart

 

Today was the largest earnings schedule for the Q3 cycle
with nearly 400 companies reporting. As of yesterday's
close 223 S&P companies had reported with an average
increase in revenue of +9.2% and an average earnings
increase of +10.8%. Analysts expect the final total to
show earnings growth of +14.8% but as you can see by the
current total there is a big gap. The breakdown of the
results so far is shown in the following table and it
is still not that bad. 

2004-Q4 Comparisons

   

Partial list of companies reporting after the close:

KO  earnings est +0.47, actual = +0.50 
ACF earnings est +0.39, actual = +0.43 
ACS earnings est +0.71, actual = +0.72
CLS earnings est +0.08, actual = +0.11 
ELX earnings est +0.10, actual = +0.11 
GNW earnings est +0.54, actual = +0.55
MCK earnings est +0.24, actual = +0.29
RHI earnings est +0.21, actual = +0.24
SFA earnings est +0.36, actual = +0.36 
AMZN earnings est +0.18, actual = +0.17
BRCM earnings est +0.34, actual = +0.36
CAMD earnings est +0.09, actual = +0.10 
CPKI earnings est +0.25, actual = +0.27 
EPNY earnings est -0.07, actual = -0.06 
FDRY earnings est +0.12, actual = +0.11
GILD earnings est +0.21, actual = +0.25 
GOOG earnings est +0.56, actual = +0.70 
HLIT earnings est -0.03, actual = -0.03 
NSIT earnings est +0.29, actual = +0.30 
IDTI earnings est +0.07, actual = +0.09 
KLAC earnings est +0.57, actual = +0.58 
MENT earnings est +0.07, actual = +0.05
MCRL earnings est +0.07, actual = +0.08
MCHP earnings est +0.29, actual = +0.29 
MSFT earnings est +0.30, actual = +0.32
OSTK earnings est -0.20, actual = -0.16
PSFT earnings est +0.14, actual = +0.17
PLCM earnings est +0.19, actual = +0.19 
RSAS earnings est +0.14, actual = +0.15 
SIAL earnings est +0.81, actual = +0.81 
TQNT earnings est -0.04, actual = -0.03 
WEBX earnings est +0.24, actual = +0.26
XLNX earnings est +0.24, actual = +0.24
YELL earnings est +1.34, actual = +1.38


The obvious question is where do we go from here. The
overall earnings are not that bad although expectations
from techs for the next quarter are falling. The SOX
is telling us the bad news is priced in despite the
pummeling the Dow has taken over the last several 
sessions. 

However, was it really that bad? The Dow is only composed
of 30 stocks and there have been some monumental blowups
over the last several weeks. Drugs and insurance aside
the weakness we have seen has been due mostly to the 
huge impact of individual stocks on the Dow. Using the
broader indexes of the Wilshire-5000 and the Russell the
markets are not in that bad of shape. The Wilshire is
comfortably holding the high ground above 10800 support
and only -300 points from a new high for the year. The
Russell is also holding the high ground over 560 support
and only 25 points from the breakout 600 level. This is
not bad news despite what the Dow appears to be showing.

The Dow has tested 9800 for two consecutive days and 
saw nearly a +100 point rebound on both days. Neither
stuck due to individual stock issues. Today it was CAT
and its -3.35 drop taking nearly -30 points off the Dow
along with the continued AIG weakness. They were the
only two Dow components losing more than $1 for the day.
Dow 9800 is the conversational low of the year from
August with the actual low 9783 but close enough for
most. This 9800 retest is exactly where an October
bottom should occur if it is in the cards. A break of
the 9800 level would change all the rules but I will
wait to cover that if it happens. Bulls really want to
see the Dow rebound from this level and tomorrow would
be nice. There are no economic reports to confuse the
issue. 

The Nasdaq has actually been rising since the Oct-15th
lows at 1900. The close today at 1952 is just one good
day away from a potential breakout over 1975. It appears
the October low was already made and the bad news bulls
are back. This will of course be tested again tomorrow
after the multiple chip warnings tonight. 

The futures are well off their lows and nearly positive
as I type this and they appear to be indicating another
bounce at the open. With the election only seven trading
days away and October almost over there is a rising bid
beginning to appear. Unfortunately every bounce is sold
so there is still major resistance to be overcome. Any
fund portfolio shuffling for their October year end should
be over and if anything they should have cash to spend. 
TrimTabs reported tonight that fund flows for the week
were positive to the tune of +$1.5B on top of +$1.4B
last week. The tide may be turning and hopefully the
worst is behind us. 

For Friday I think traders will be watching oil and chips
and nothing else. Oil closed at $54.50 again and is higher
overnight. Like the chip warnings I think investors have 
decided to ignore oil and consider it a "transitory event"
using the Greenspan terminology. That sets up Friday as 
a possibly bullish day assuming chips don't suddenly 
implode. Watch the Wilshire, Russell and SOX for the 
real market direction. 

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

Bulls may be BANKING on tech rally

The very broad NASDAQ Composite (COMPX) rose more than 1%, where 
for the first time since July 21, volume breached the 2 billion 
share mark with chips, networkers, software internet sectors all 
recording 3% gains.

While not listed at the NASDAQ, Dow component SBC Communications 
(NYSE:SBC) $25.68 -2.95% provided today's catalyst for technology 
sectors when the telecommunication service provider said it was 
accelerating plans to spend as much as $6 billion to connect 18 
million households within the next three years.  SBC had 
previously said to would continue to build out its high speed 
fiber-optic network over a 5-year period.

But the stepped-up rollout comes after the company reported 
quarterly net income of $2.1 billion, or 63 cents a share, up 
from $1.22 billion, or 37 cents, a year ago.

SBC's stepped up plans had the company awarding Alcatel 
(NYSE:ALA) $14.24 +11.25% a 5-year contract worth $1.7 billion, 
to build out SBC's Project.  The Networking Index (NWX.X) 226.01 
+3.09%, which Alcatel is a component, lifted from curling higher 
21-day and 50-day SMA's with CIEN $2.39 +9.13%, ADCT $2.23 +7.21% 
and CMVT $20.75 +5.7% leading the sector's gains.

Bulls that were looking to add some fiber to their diet bid up 
shares of JDS Uniphase (NASDAQ:JDSU) $3.56 +7.22% and Corning 
(NYSE:GLW) $10.73 +2.77%.

The AMEX-listed Internet Infrastructure HOLDRs (AMEX:IIH) $3.95 
+10.33% surged above their 200-day SMA ($3.66) on unusually heavy 
volume of 174, 500 shares. 

In SBC's conference call, the company said earnings were 
primarily drive by the addition of 402,000 high-speed DSL 
customers in the third quarter.  

As SBC was adding customers to its high-speed DSL service, online 
auctioneer $99.59 +9.00% added to its string of new all-time 
highs to trade as high as $100.18 and have the CBOE Internet 
Index (INX.X) 186.02 +3.10% springing higher from its 200-day SMA 
(180.64) and moving above its April high-August low 61.8% 
retracement of 183.45.

In a very confusing, yet highly anticipated earnings report, 
Internet search giant Google (NASDAQ:GOOG) $149.38 +6.32% slid to 
$140 when it reported headline revenues (ex-traffic acquisition 
costs) of $503 million and adjusted EBITDA of $321 million.  
Nobody really knew what to expect, but the stock now ticks at 
$161.30 as it was confirmed that analysts' consensus estimate of 
$284.51 million was comparable.  

GOOG's mysterious management team would not speculate on the ad 
market, but said demand for their advertising is large and unmet. 
Analysts reported kept asking GOOG execs to break down the 
divisions to get metrics for performance, but GOOG officials had 
their own itinerary to follow, saying that Adsense is half of 
revenues and is an "incredible success" and content portion is 
now becoming significant contributor.  As far as CapEx is 
concerned, management said historical investment rates will 
likely prevail and utilization rate is "very high."

How's that for some fundamental analysis?

Are tech bulls BANKING on a continued rally?

They may be.  While the S&P Banks Index (BIX.X) 354.41 -0.07% 
finished down fractions, some may have noted that Silicon Valley 
Bankshares (NASDAQ:SIVB) $39.10 +3.3%, while not a component of 
the BIX.X, jumped higher in today's session.  

While that regional bank fund manager has not yet returned my 
phone call (10/10/04 Ask the Analyst), he may well be busy 
accumulating shares of SIVB on thought that a second leg of 
capital investment does present itself with telecom spending 
suddenly accelerating.  

U.S. Market Watch - 10/21/04 Close

 

Chip giant Intel (NASDAQ:INTC) $21.69 +1.11% closed at its 
highest level in more than a month, where I think it was Analog 
Devices' (NYSE:ADI) $40.30 +5.33% management saying this year's 
slowdown in profits has been largely due to industry inventory 
corrections, not necessarily an economic slowdown.  We'll 
remember Intel (INTC) being slammed lower this summer when it 
said margins were under pressure after the company misjudged 
demand and ramped production and misjudged customer demand.

ADI also said that in China, an inventory buildup in handsets 
combined with a government-engineered credit squeeze had a 
considerable impact on sales.  But CEO Jerald Fishman added that 
"feedback from customers in China indicates inventory levels are 
low and government constraints are likely to end later this year 
or early next year," factors that could signal better growth 
prospects ahead.

Analog Devices' comments seemed to echo those of Intel's CEO Andy 
Bryant when Intel reported its recent quarterly results, where 
Mr. Bryant noted that inventory builds had started to abate, and 
he was hopeful that improved margins would return by the end of 
the year.

Market Snapshot / Internals - 10/21/04 Close

 

The Dow Industrials (INDU), which has been leading decline, 
lagged gains in today's session.  Price heavyweight Caterpillar 
(NYSE:CAT) $77.03 -4.16% turned lower at the open, after bidding 
as high as $83.75 in this morning's pre-market.  The heavy 
equipment giant said business was the strongest it has seen in 
years, but was cautious going forward due to higher materials 
prices potentially being a negative should an expected slowdown 
present itself in 2005.  

Insurer American International Group (NYSE:AIG) $56.45 -1.99% 
also weighed on the Dow after saying a federal grand jury is 
investigating products it sold that companies might have used to 
make their earnings look better.  That continued the fallout in 
the insurance sector that began a week ago when New York Attorney 
General Eliot Spitzer sued insurance broker Marsh & McLennan 
(NYSE:MMC) $24.85 -0.28% and said the company involved other 
insurers in a bid-rigging scheme. 

Pivot Matrix - Index Trader Wrap

 

Correlative near-term support for the NDX/QQQ moves higher to 
WEEKLY R1 and MONTHLY R1, where broader technology gains had the 
NDX/QQQ as well as the SOX.X trading and closing at, or slightly 
above their WEEKLY R2s.  

NASDAQ-100 heavyweight Microsoft (MSFT) $28.56 -0.48% slid to 
$28.10 in tonight's extended session after saying profits rose to 
$2.9 billion, or 27 cents per share, including stock-based 
compensation, which compared to a profit of $2.6 billion, or 24 
cents per share, a year earlier. 

The Redmond, Washington-based software maker said revenue rose to 
$9.19 billion from $8.22 billion.

For the current quarter, Microsoft forecast a profit of $0.28 per 
share, including stock-based compensation. 

The company said it expected to record revenue of $10.3 billion 
to $10.5 billion, which was shy of Wall Street's consensus 
estimate of $10.63 billion.

NYSE Composite ($NYA.X) Chart - Daily Interval

 

Last night we looked at the 10-year YIELD Chart ($TNX.X) as the 
benchmark bond's yield was sitting at a level I felt/feel is 
rather important.  As I review the NYSE Composite Chart ($NYA.X) 
it too is sitting on a rather important near-term level of 
support and its 50% retracement of 6,505.

When we look at the NASDAQ Composite (COMPX) 1,953.62 +1.06% we 
will see it sitting just BELOW its 200-day SMA, but just 
recapturing its 50% retracement from its January highs to recent 
August lows.  More on this in a minute, but let's take a quick 
look at the BIX.X, as I want to tie it with the NYSE and the 10-
year yield chart.

S&P Banks Index (BIX.X) Chart - Daily Intervals

 

We can make a tie between the NYSE pullback and "double bottom" 
it is trying to find at its 50% retracement, with the S&P Banks 
(BIX.X).  One comment I've seen more than a couple of times in 
recent quarterly earnings is that the decline in Treasury YIELD, 
which sets the interest rate for CONSUMER borrowing, is starting 
to narrow the spread between what a bank is borrowing at and what 
they're generating new loans at.

As the 10-year YIELD ($TNX.X) pulls back into a "zone of 
support", so has the BIX.X.  

As noted back in May, we can't necessarily tie a "finite level" 
of Treasury YIELD to the BIX.X, but we should understand its 
impact on the banking industry.  

It was a partial negative that YIELD rose, as it made it a little 
more difficult to entice consumers to borrow.  Conversely, the 
main reason the banks surged from their May lows, is because the 
spread between what they were borrowing at, and lending at, 
widened considerably.  Think of that "widening" of the spread as 
a technology company's "gross margin."

NASDAQ Composite Index (COMPX) Chart - Daily Intervals

 

Now, the COMPX looks nothing like the BIX.X, but after looking at 
the NYSE Comp chart, and its BLUE conventional retracement, we're 
looking at the NASDAQ Comp. and its conventional retracement.  
Both very near their 200-day SMAs and 50% retracement.

I've noted that the INX.X has broken above its recent high, which 
would equate to the recent NASDAQ Comp high of 1,970.  Great!

Oh shoot!  The Disk Drive Index (DDX.X) 101.51, rather 
representative of "storage," was looking so strong a couple of 
weeks ago as it broke above its 200-day SMA after a strong move 
from then 100 resistance.  

We get the distinct feeling that momentum players are in, then 
they're out, then they're back in again, rotating quickly from 
sector to sector.

Now the SOX.X is back to challenge its recent 412 relative high 
set on 10/04/04, which came days after the COMPX had that one-day 
close above its 200-day SMA.

Software continues to show up as the stronger sector, not only on 
its bar chart, but its sector bullish % from Dorsey/Wright.

Software, software, software.... internet, internet, internet.... 
telecom spending on fiber for broadband, broadband, broadband.

While there's plenty of cash in the nations M2 supply (see this 
morning leading indicators and 10/17/04 Ask the Analyst) I still 
think equity markets want to see some selling in Treasuries.

Jeff Bailey


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

Friday Could Be Quiet
- J. Brown

You wouldn't know it from looking at the major indices but the 
markets were generally positive today.  The Dow Industrials ended 
the session lower under weakness from drug stocks, insurance, and 
a negative reaction to Caterpillar's earnings.  The tech-heavy 
NASDAQ moved the opposite direction as investors bid up shares of 
EBAY for a 9 percent gain to $99.50.  EBAY reported earnings last 
night with a 77 percent jump in profits.  

After the bell Internet stocks continued to command the 
spotlight.  Shares of Google (GOOG) took traders on a wild ride 
as everyone struggled to discern whether or not the earnings miss 
was more or less important than the upside revenue surprise.  
GOOG closed at $149.38 in the regular session and initially 
dipped to $140 before soaring to $161 in the after-hours market.

GOOG may grab the headlines tonight and tomorrow but it will be 
lackluster earnings numbers and comments from the likes of 
Amazon.com (AMZN), Broadcom (BRCM) and Microsoft (MSFT) that are 
likely to lead the NASDAQ and most of the tech sector lower on 
Friday.  This will likely be a drag on the already weak Dow and 
S&P.  

Not helping matters today were comments from Federal Reserve 
governor Ben Bernanke who said that the days of cheap oil were 
likely behind us.  He did say that the U.S. economy would be able 
to manage but the initial reaction to his words were not 
positive.  

Whether you believe the market is going to head up or down it's 
worth noting that the Dow Transports have broken out to another 
new five-year high over the 3400 level.  I know some investors 
find this unbelievable given the high cost of fuel but it's 
happening anyway.  Plus, the RLX retail index just hit a new all-
time closing high.  The strength in retailers could have been 
boosted by a CNN article that said consumers were not going to 
let higher interest rates and higher gasoline prices impact their 
holiday spending.  The latest poll suggested that the average 
American consumer plans to spend about $702 in holiday shopping.  
That's a 4.5 percent increase over last year.

The big story on everyone's mind is the election.  Some market 
pundits feel that the stock market is likely to trade sideways 
for the next twelve days until after the November 2nd election.

Tomorrow's schedule is light.  There aren't any major economic 
reports due out and the Q3 earnings parade is relatively quiet 
after this week's deluge of numbers.


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

Market Averages

DJIA ($INDU)

52-week High: 10753
52-week Low :  9497
Current     :  9865

Moving Averages:
(Simple)

 10-dma:  9965
 50-dma: 10114 
200-dma: 10275



S&P 500 ($SPX)

52-week High: 1163
52-week Low : 1018
Current     : 1106

Moving Averages:
(Simple)

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



Nasdaq-100 ($NDX)

52-week High: 1559
52-week Low : 1301
Current     : 1474

Moving Averages:
(Simple)

 10-dma: 1442
 50-dma: 1404
200-dma: 1440



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

CBOE Market Volatility Index (VIX) = 14.54 -0.31
CBOE Mkt Volatility old VIX  (VXO) = 14.99 -0.11
Nasdaq Volatility Index (VXN)      = 20.36 -0.29 


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

          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          62.7    - 0.4   Bear Correction
NASDAQ-100    49.0    + 2     Bull Alert      
Dow Indust.   50.0    - 3     Bear Confirmed
S&P 500       60.0    - 1.4   Bear Correction
S&P 100       59.0    - 2     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: 0.93
10-dma: 1.19
21-dma: 1.07
55-dma: 1.12


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    1947      1824
Decliners     862      1105

New Highs     104        88
New Lows       49        50

Up Volume   1326M     1490M
Down Vol.    701M      485M

Total Vol.  2034M     2001M
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                 Thursday 10-21-2004
Copyright 2004, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: None
Dropped Puts: None
Call Play Updates: APC, OSIP, PGR, SBUX
New Calls Plays: FDX
Put Play Updates: APOL, HSIC, TDS
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:
*****

None


PUTS:
*****

None


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Go to http://www.optionsxpress.com/marketing.asp?source=oinvest34

Note: Options involve risk. Risk disclosure: 
http://www.optionsxpress.com/welcome_risk_index.htm

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

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

Anadarko Petroleum - APC - close: 69.67 chg: -0.20 stop: 66.99

Almost!  We saw several oil-related stocks tick higher today and 
APC did trade back above the $70 level but it failed to hold any 
gains.  APC also failed to hit our TRIGGER to go long at $70.40.  
More aggressive traders may consider longs here or on a dip back 
toward $69.00.  The rest of are going to wait for the breakout.  
Remember, we don't have a lot of time on this play so consider 
that as part of the risks involved.  

Picked on October xx at $xx.xx <-- see TRIGGER
Change since picked:    + 0.00
Earnings Date         10/29/04 (confirmed)
Average Daily Volume =     1.6 million 
Chart =


---

OSI Pharma - OSIP - close: 63.47 change: -0.12 stop: 61.99

The last three days have erased the rally from Monday and left us 
right back where we started.  Currently OSIP continues to channel 
higher but the angle of OSIP's ascent isn't very steep.  We're 
willing to hold on to OSIP for now but our patience is growing 
thin.  Watch the BTK biotech index.  If the BTK can build on 
today's intraday rebound into a more sustainable bounce then OSIP 
might get the boost higher it needs. 

Picked on October 03 at $63.45
Change since picked:    + 0.02
Earnings Date         08/10/04 (confirmed)
Average Daily Volume =     1.6 million 
Chart =


---

Progressive - PGR - close: 88.54 chg: +1.12 stop: 84.75     

Thus far PGR has completely ignored the dramatic declines in the 
IUX insurance index.  The news that Spitzer is investigating the 
insurance industry has not yet spread to car insurance providers 
like PGR.  At this time we don't expect it to.  It would appear 
that Wednesday's intraday low to $86.80 was enough to satisfy the 
"fill the gap" crowd and shares took off on Thursday.  P&F chart 
readers will notice that Monday's big gap higher produced a new 
P&F buy signal with a $120 (long-term) price target.  We're 
still targeting a short-term move to $90.00.  No change in stop.

Picked on October 13 at $85.65 
Change since picked:    + 2.89
Earnings Date         10/13/04 (confirmed)
Average Daily Volume =     700 thousand
Chart =


---

Starbucks - SBUX - close: 50.76 chg: +0.50 stop: 46.95*new*

Another day, another new closing high (yawn).  Such is the life 
for SBUX shareholders these days.  The momentum machine just 
keeps on chugging.  We're encouraged to see traders buy the dip 
to $49.40 this morning and push SBUX back above the $50 mark.  We 
are going to raise our stop loss to $46.95. 

Picked on October 17 at $49.47 
Change since picked:    + 1.29
Earnings Date         11/10/04 (confirmed)
Average Daily Volume =     3.3 million 
Chart =



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

Fedex Corp - FDX - close: 89.45 change: +1.58 stop: 84.99

Company Description:
FedEx Corp. provides customers and businesses worldwide with a 
broad portfolio of transportation, e-commerce and business 
services. With annual revenues of $26 billion, the company offers 
integrated business applications through operating companies 
competing collectively and managed collaboratively, under the 
respected FedEx brand. Consistently ranked among the world's most 
admired and trusted employers, FedEx inspires its more than 
240,000 employees and contractors to remain "absolutely, 
positively" focused on safety, the highest ethical and 
professional standards and the needs of their customers and 
communities. (source: company press release)

Why We Like It:
Investors are obviously not worried about the impact of record 
oil prices and the costs of higher fuel on the transportation 
sector.  If they were the Dow Jones Transportation average would 
not be breaking out over the 3400 level and hitting new five-year 
highs.  Neither would Fedex Corp be breaking out to new all-time 
highs.  Right now it's a stock pickers market.  Momentum and 
relative strength traders are reinforcing the maxim that the 
trend is your friend.  We like the momentum in FDX and the 
bullish breakout over resistance at $88 and $89 on Thursday was 
fueled by very strong volume.  The move actually produced a new 
triple-top breakout buy signal on its P&F chart.  Short-term 
technicals are strong and its MACD just produced a new buy 
signal.  We're willing to speculate on a run toward the $100 
level.  The stock last split 2-for-1 in May of 1999 near the $120 
level and shares are approaching levels where the company can 
announce a new stock split at any time.

Suggested Options:
Traders can choose from the Novembers, Decembers and January 
calls.  Currently the Novembers have a lot of open interest and
volume but we'd suggest the Decembers too.  Both months will 
work.

BUY CALL NOV 85 FDX-KQ OI=1872 current ask $5.10
BUY CALL NOV 90 FDX-KR OI=2866 current ask $1.55
BUY CALL NOV 95 FDX-KS OI= 298 current ask $0.30

BUY CALL DEC 85 FDX-LQ OI=  24 current ask $5.80
BUY CALL DEC 90 FDX-LR OI= 539 current ask $2.55
BUY CALL DEC 95 FDX-LS OI=  60 current ask $0.80

Annotated Chart:


Picked on October 21 at $89.45 
Change since picked:    + 0.00
Earnings Date         09/22/04 (confirmed)
Average Daily Volume =     1.5 million 
Chart =



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

Apollo Group - APOL - close: 69.99 chg: -0.55 stop: 73.01     

The tug of war continues in APOL near the $70 level.  The stock 
continues to suffer under a trend of lower highs and failed under 
support/resistance at its October lows.  APOL gapped lower this 
morning and hit $68.44.  That could have been used as an entry 
point.  However, if APOL trades back over $71.50 we might use 
that as an early warning system and/or conservative stop loss.  
We're going to leave our stop at $73.01 for now.  

Picked on October 10 at $69.81
Change since picked:    + 0.18
Earnings Date         10/05/04 (confirmed)
Average Daily Volume =     3.3 million 
Chart =


--

Henry Schein - HSIC - close: 58.62 change: +0.53 stop: 60.01*new*

Bears saw a little bit of excitement on Wednesday.  Shares of 
HSIC dipped to $56.15 early in the session before quickly 
rebounding.  Thus far HSIC continues to decline in a trend of 
lower highs and lower lows.  Despite this trend we're a little 
concerned.  Yesterday's candlestick looks like a potential one-
day reversal pattern. Today's gain is arguably the technical 
follow through bulls are looking for.  Given that earnings are 
next Tuesday we may end up exiting this play tomorrow before the 
closing bell.  Plan your exits now.  We're lowering our stop loss 
to $60.01.

Picked on October 14 at $58.35
Change since picked:    + 0.27
Earnings Date         10/26/04 (confirmed)
Average Daily Volume =     655 thousand
Chart =


---

Telephone Data Sys - TDS - close: 75.85 chg: -3.90 stop: 79.01*new*

Wow!  That was quick.  TDS has already traded into our exit, 
profit target region near $75.  We knew that yesterday's drop 
looked like a nasty breakdown but we didn't really expect TDS to 
fall so quickly.  Volume was extremely high at more than four 
times the average.  We are suggesting anyone who actually entered 
this play this morning consider exiting for a quick pop.  We are 
going to keep the play open and target the $73 level above the 
200-dma.  However, this is not the best spot to consider new 
positions.  We are lowering our stop loss to $79.01.

Picked on October 20 at $79.75
Change since picked:    - 3.90
Earnings Date         10/20/04 (confirmed)
Average Daily Volume =     155 thousand
Chart =



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

None


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**********

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The Option Investor Newsletter                 Thursday 10-21-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Watch List: Poised to Breakout 
Combos/Straddles: A Speed Bump On The Path To Profits

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

Poised to Breakout

___________________________________________________________________

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.
___________________________________________________________________


Pixar - PIXR - close: 81.32 change: +1.78

WHAT TO WATCH: We strongly considered adding PIXR to the play 
list tonight.  The stock has been digesting its August and 
September gains in a sideways trading range between $78 and $82.  
The stock added 2.2 percent on Thursday after a broker upgrade.  
The short-term technicals are looking positive and its MACD is 
hinting at a new buy signal soon.  We would consider aggressive 
bullish plays if PIXR can break through the $82 level.  Earnings 
are not expected until November 11th.

Chart=


---

Kmart Holdings - KMRT - close: 91.04 change: +0.73

WHAT TO WATCH: We are still watching KMRT for a breakout over 
resistance at the $92.00 level. Shares came awfully close today 
with a high of $91.94.  The MACD is very close to a new buy 
signal.  With the RLX retail index at new closing highs the 
sector is supporting more upside for this stock.  KMRT doesn't 
have earnings until Nov. 15th (or so) and a breakout over $92 
could/should lead toward a run at the $100 mark.

Chart=


---

Timberland Co - TBL - close: 63.35 change: +5.54

WHAT TO WATCH: Wow!  TBL announced earnings Thursday morning and 
beat estimates by 16 cents.  The stock gapped higher to $59.60 
and then soared.  This is a breakout over its simple 100-dma, the 
simple 200-dma and the round-number resistance level at the $60 
mark.  Volume was huge.  We would not chase it here but we would 
watch for a pull back toward the $61-62 area and look for a 
bounce.  The move has produced an ascending triple-top breakout 
buy signal on its P&F chart with a $69 target.

Chart=



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

BRCM $30.47 +2.25 - BRCM was in rally mode today ahead of its 
earnings but the earnings news and guidance wasn't so hot.  Look 
for shares to reverse on Friday.

FFH $127.85 -5.15 - We played FFH a few weeks ago and now shares 
are rolling over again.  The next stop could be the $120 level.

NKE $80.79 +1.14 - NKE is one again trading near new all-time 
highs over the $80 mark.

TXT $67.01 +2.61 - TXT's 4 percent rally was inspired by its 
earnings report today.  The move is a breakout to new 4 1/2 year 
highs.

EXM $36.92 +3.51 - EXM doesn't have options (yet) but the 
volatile stock looks ready to rebound higher again with a short-
term base of support near $30.  This would be a very high risk 
play!


************************Advertisement*************************

Quit paying fees for limit orders or minimum equity
  * No hidden fees for limit orders or balances 
  * $1.50 /contract (10+ contracts) or $14.95 minimum.
  * Zero minimum deposit required to open an account
  * Free streaming quotes and Dow Jones news

Go to http://www.optionsxpress.com/marketing.asp?source=oinvest34

Note: Options involve risk. Risk disclosure: 
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**************************************************************


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

A Speed Bump On The Path To Profits

By Mike Parnos

When the phone rings, you never know what to expect.   The glass-
is-half-full crowd expects it to be Ed McMahon with news from 
Publisher's Clearing House.   Realists will tell you that with 
three out of four calls, you'll probably wish you never picked up 
the phone.

Early this week, one of my private students called me to report he 
had just received a margin call from his broker (OptionsXpress).  
"Impossible," I thought.  There must be a mistake.  Either that, or 
my student had made some ill-advised trades without my knowledge.

Then, the phone rang again -- another student with a similar 
problem.  In the next two hours I heard from three more students – 
all of them having received margin calls.  I also began receiving 
emails from traders who were trying to place Iron Condor trades 
(see below).

I reviewed the respective accounts and vowed to get to the bottom 
of it.  I picked up the phone and called OptionsXpress.   They 
probably wish they hadn't answered it.
________________________________________________________________

Dear Mike,
I tried to place an Iron Condor trade with OptionsXpress and they 
required maintenance margin for both sides of the trade.  They said 
this was a new requirement by the exchange. For a $2,500 potential 
profit they required $46,000 maintenance margin. This high 
requirement makes the Iron Condor strategy less attractive. Is 
there a way around this requirement?  Thanks.
________________________________________________________________

When I called OptionsXpress, they explained that, a few days ago, 
they had changed their maintenance policy.  Recently, OptionsXpress 
had changed clearing firms -- from Legent to Spear Leeds.    In the 
past, OptionsXpress would hold only the maintenance on the higher 
spread of an Iron Condor.   That's a logical progressive stance 
and, for as long as I have been associated with them, has enabled 
spread traders to maximize the use of their trading capital.  

Changing The Rules
Now, according to the new plan, in order to qualify to have only 
one side held, both the bear call spread and the bull put spread 
have to be the same size.
 
For instance, if you had an SPX 1165/1180 (a 15-point) bear call 
spread and a 1055/1040 (15-point) bull put spread, you would 
qualify for maintenance to be held only on one side.
 
In the past we could have 5 contracts of a 20-point bear call 
spread and then 4 contracts of a bull put spread.  Both add up to 
$10,000 maintenance.  In the past, OptionsXpress would hold only 
one side.  But, NO MORE.  Now the spreads have to be equal.  The 
new clearing company (Spear Leeds) seems to have a real bug up its 
ass about it.
 
This new policy will apply primarily to the SPX because of its 
availability (or lack of availability) of strike prices.  As you 
are already aware, there are not a lot of SPX strike prices from 
which to choose -- until the next month becomes the current month.  
Then, the market makers open up additional strikes (still not all) 
and make it a little easier to put together a sensible spread or 
two.
 
The Problem
OK, so they changed their rules and now we understand what we have 
to do for future trades.  From this point forward, we'll abide by 
the new policy.  But that's not how the OptionXpress margin 
department looks at it.  They expect traders to respond to the 
margin calls by either 
a)  bringing in money to cover the new requirements based on the 
new policy, or
b)  adjusting their current position to make the spreads equal in 
size.

There seems to be a solution missing -- one that doesn't require 
the OptionsXpress client to come up with additional money or absorb 
the costs of adjusting the positions.  Why should OptionsXpress 
clients have to carry the financial burden of adjusting their 
portfolio to adapt to a policy that wasn't in effect when the 
positions were initiated?
  
We Did Nothing Wrong
We live in a world where the majority of people refuse to take 
responsibility for their actions.  We live in a "the dog ate my 
homework" society.  When something goes wrong, there are fingers 
pointing everywhere imaginable -- except in the one direction that 
counts.  

However, in this instance, my students didn't do anything wrong.  
We all played by the rules as we knew them to be.  The trades were 
placed with the blessings and the assistance of OptionsXpresss 
representatives (on their recorded phone lines).  Now, it's up to 
OptionsXpress to step up and take responsibility.

All That Being Said . . .
I recognize that OptionsXpress is in a tough position.  They have 
to answer to Spear Leeds, but what's right is right.  I don't know 
how this situation will be resolved, but I truly hope they come to 
their senses.  If they get just a little creative, there are 
solutions that would satisfy everyone.

All that being said, OptionsXpress still is at the top of my list 
of options brokers.   They offer real time streaming quotes, 
streaming charts, virtual trading, and an easy to navigate trading 
platform that allows for complex trades to be sent from a single 
screen.  Their phone brokers are pleasant and easy to work with.  
My students and I do hundreds of trades every month with 
OptionsXpress.  I sincerely hope we can continue working with them 
indefinitely.
____________________________________________________________

T-Shirts I Wish I Had
"I'm right 98% of the time & who gives a crap about the other 3%?

"To err is human, to blame it on someone else shows management 
potential."
____________________________________________________________

NOVEMBER CPTI POSITIONS
November Position #1 - SPX Iron Condor - 1106.49
We sold 12 SPX November 1185 calls and bought 12 SPX November 1200 
calls with a credit of about $1.25 ($1,500).  Then we sold 9 SPX 
November 1070 puts and bought 9 SPX November 1050 puts for a credit 
of about $1.65 ($1,485).  Total credit and potential profit of 
about $2,985.  The maximum profit range is from 1070 to 1185.  Can 
this 115-point range withstand the market's emotional highs and 
lows?  Let's hope so.  The maintenance is $18,000.  The potential 
return on risk is about 20%.

New November Position #2 - SPX Iron Condor - 1106.49
Considering the downward market movement, I felt it is appropriate 
to initiate a SPX position with different parameters.  We sold 10 
SPX Nov. 1160 calls and bought 10 SPX Nov. 1180 calls for a credit 
of about $1.40 ($1,400).  Then we sold 13 SPX Nov. 1025 puts and 
bought 13 SPX Nov. 1005 puts for a credit of about $1.20 ($1,560). 
Maximum profit potential of about $2,960.  Max profit range of 1025 
- 1160.  Maintenance: $20,000.

November Position #3 - OEX Iron Condor - 531.26
We sold 10 OEX Nov. 500 puts and bought 10 OEX Nov. 490 puts for a 
credit of about $.70 ($700).  Then we sold 10 OEX Nov. 555 calls 
and bought 10 OEX Nov. 565 calls for a credit of about $.60 ($600).  
Total net credit and maximum profit of $1.30 ($1,300).  Max profit 
trading range of 500 to 555.  Maintenance $10,000.

November Position #4 - RUT - Iron Condor - 576.66
We sold 10 RUT Nov. 520 puts and bought 10 RUT Nov. 510 puts for a 
credit of about $.70 ($700).  Then we sold 10 RUT Nov. 610 calls 
and bought 10 RUT Nov. 620 calls for a credit of about $.60 ($600).  
Total net credit and maximum profit of $1.30 ($1,300).  Max profit 
range of 520 to 610.  Maintenance $10,000.
____________________________________________________________

ONGOING POSITIONS
QQQ ITM Strangle – Ongoing Long Term -- $36.60
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.  We rolled 
to the Sept. $34 calls and $37 puts for a total of $.70 ($700). Our 
new total credit is now $12,900. 

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 conservative cash flow generating strategy.  

ZERO-PLUS Strategy.  OEX – 531.26
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.  We own 3 OEX December 2006 540 calls @ $81 (x 300 = 
$24,300).  Our cash position as of August expiration was $8,390.  
In September we added another $975 for a total of $9,365.  In 
October we added $650 for a new total of $10,015.

New Zero-Plus Position For November
November bull put spread 500/490 for credit of $.70 x 5 = $350.  
November bear call spread 555/565 for credit of $.60 x 5 = $300.  
If all goes well, we'll be able to add another $650 to our cash 
position.
__________________________________________________________

SPX "Sure Thing" Strategy - 1106.49
Formerly called the "Credit Spread Boogie."  The market seems to be 
in an uptrend since mid-August.  Let's go with the flow until the 
market tells us otherwise.  We sold 3 SPX 1120 October puts and 
bought 3 SPX 1095 October puts for a net credit of about $6.50 
($1,950).  The initial maintenance was $7,500.

When the SPX traded in the low 1100s, it was time for an 
adjustment.  We closed out the original bull put spread for $13.20 
($3,960).  We then opened a seven-contract position of a 1115/1140 
bear call spread, taking in $6.35 ($4,445).  That means we've taken 
in some extra premium.  Our new profit potential is $2,435 -- if 
SPX closes below 1115.  

We've been getting whipsawed.  Our most recent position was a 
November 14-contract 1120/1095 bull put spread (coincidentally, 
right back where we started) at $7.00 ($9,800).  The maintenance is 
getting pricey at $35,000.  That's why this strategy is not for 
everyone.  Our potential profit is still $2,435. 

Here we go again.  We had to close the 1120/1095 bull put spread 
and we initiated a new 1115/1140 bear call spread.  We picked up 
another $350 in premium to $2,785, but our maintenance is now 
$70,000. 
____________________________________________________________

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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