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Daily Newsletter, Thursday, 12/16/2004

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The Option Investor Newsletter                Thursday 12-16-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Merger Mania
Futures Wrap: See Note
Index Wrap: See Note
Market Sentiment: Maybe Next Week.


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      12-16-2004           High     Low     Volume   Adv/Dcl
DJIA    10705.64 + 14.20 10726.85 10661.67 2.20 bln 1121/2103
NASDAQ   2146.15 - 16.40  2164.80  2138.81 2.39 bln 1222/1952
S&P 100   573.46 +  0.01   575.26   575.04   Totals 2343/4055
S&P 500  1203.20 -  2.52  1207.97  1198.41 
SOX       427.09 -  7.00   435.56   423.84
RUS 2000  642.23 -  6.38   648.61   640.53
DJ TRANS 3733.23 - 26.40  3760.24  3716.77
VIX        12.27 -  0.08    12.59    11.96
VXO (VIX-O)13.01 -  0.15    13.72    12.57
VXN        18.60 -  0.17    19.07    18.19 
Total Volume 4,872M
Total UpVol  1,812M
Total DnVol  2,855M
Total Adv  2716
Total Dcl  4615
52wk Highs  452
52wk Lows    47
TRIN       0.66
NAZTRIN    1.00
PUT/CALL   0.68
************************************************************

Merger Mania
by Jim Brown

Companies are in a shopping mood this season and today
was a banner day for deals. Symantec and Veritas, JNJ 
and Guidant, Nobel Energy and Patina were all caught up
in the holiday shopping excitement. Unfortunately traders
said bah-humbug and dumped stocks for several reasons. 
Some days even the best news falls on deaf ears. 

Dow Chart

 
Nasdaq Chart

 
SOX Chart

 

Bad news was more important to investors today and 
there was plenty of it. Suddenly new home construction
hit a wall and starts fell to an annualized rate of 
1.77 million. This was a -13% drop over October's 2.04 
million rate and the largest drop in eleven years. The
drop suggests builders are becoming concerned about an 
overabundance of future supply. We don't know if that 
was based on slowing sales or just an anticipation of 
slowing sales given the potential for interest rate 
hikes into 2005. Builders are continuing to exceed 
earnings estimates for every quarter and sales have 
also been strong. By lowering inventory levels they 
can keep prices high and not get into a price war. 
Housing permits also fell to 1.988 mil from 2.018 mil
and that was far less than the actual drop in starts. 
This suggests the November lull in starts could have 
been related to external factors or just a timing pause
calculated to delay inventory coming to market until 
spring. Confused? Until earnings begin to slip I would
still buy the homebuilders on any dip. Population 
density is growing, the equity markets are healthy 
and employees are seeing larger bonuses again. All 
this adds up to continued demand. The soft starts did
not impact my favorite builder today. NVR announced 
they were going to buy back $400 million in stock to 
continue adding to shareholder value. The stock closed
at $754 per share. That is slightly higher than the 
$405 per share from just six months ago. Sorry, no 
options yet. 

Offsetting the bad news from Housing Starts the Jobless
Claims fell -43,000 to 317,000. This was the biggest
drop in three years and the lowest level since July-9th.
The last two weeks were inordinately high at 350K and 360K
respectively. Analysts suggested that these levels were due
to an incorrect seasonal adjustment and now it looks like
that could have been the case. I would also expect this
abnormally low level could also be a factor of seasonal
adjustments. Jobless numbers between Thanksgiving and
year end should normally be ignored due to the scheduling
of holidays and the clumsy attempt to adjust for them
based on prior years. 

The economic picture brightened again when the Philly
Fed Survey came in at 29.6 and blew away estimates of
18.7. This was a huge jump and the highest level since
July. This report completely erased fears from the
disappointing Richmond Fed survey out last Tuesday. 
It is also in line with the NY Empire Survey out on
Wednesday at 29.9 that also blew away estimates of 20.5.
These are very strong numbers and they could be the
leading indicators for a new economic surge. 

The Current Account Deficit declined only slightly in
Q3 from -$164.4 to $164.7. This insignificant drop is
a function of several things but it was a real upside
surprise given the ramp in oil over the quarter. Nobody
thinks the downward spiral is over but this could be
an indication of a slowing of that descent. 

The bad news that rocked the markets was the announcement
by FASB that stock options must be accounted in earnings
statements by June-15th of 2005. This has been a hotly
debated topic and one that could really change the 
earnings landscape next year. Merrill Lynch analyst
Richard Farmer said expensing options would have taken
more than 10% off S&P earnings over the last year. That
is not the real problem. Tech stocks are where options
are really used heavily and the impact to tech earnings
is going to be huge. Merrill feels the impact to tech
earnings could be as much as a -20% to -30% drop. This
makes those already high PE stocks even higher and it
put a really dark cloud over techs for early 2005. The
opponents to this change vow to fight it in Congress
and possibly the courts but that could be a long fight
and it will not take away the cloud over Q2 earnings
next year. This was one of the major factors for the
sell off intraday today and one that will not go away.

The second reason for the drop was a sharp sell off in
the Russell due to a monster reweighting scheduled for
the close on Friday. The Russell indexes are adding 40
of the recent IPOs with three large ones going straight
into the Russell-1000. This bumps three large stocks
back down into the Russell-2000 in addition to the 37
remaining IPOs going into that index. Because some of
these IPOs have been very large it means they will go
into the R2K at a much larger weighting than hundreds
of the other smaller stocks. In order for the mutual 
funds to adjust for the new index they have to sell 
a portion of each of the other Russell stocks they 
currently own to adjust everyone's overall ratio. With
nearly $1 trillion indexed to the Russell indexes the
amount of shuffling on any index change is huge. The
Russell company itself advises holders of nearly 
$2 trillion in equities and directly manages $180 
billion for clients. Just a little Russell trivia I
thought you would be surprised to know. The Russell
fell -1% today and retraced from its historic 648
high this morning to 640 on the afternoon dip. There
was a buy program at 3:PM that produced a +3 point 
bounce or it would have been much worse. 

The volume on the exchanges today was close to five 
billion shares and tomorrow it should be even higher.
The Russell shuffle and the quadruple witching option
expiration could push it over five billion. The added
uncertainty of the option expensing could also add to
selling pressure. 

Symantec announced it was buying Veritas for $13.5B
in stock but before the day was over the deal had
fallen to only $10.6B based on the monster selling
on Symantec. The stock has fallen from its $34 high
last week to close at $25 today. This -26% drop in
SYMC has created a major buying opportunity in my
opinion. The combination of virus protection, data
integrity, backup, recovery and storage seems to 
many like a match made in heaven. SYMC had experienced
a monster run from $10.75 in just over a year. That
number is even more amazing when you realize they 
split their stock 2:1 twice in the last 12 months. 
Split adjusted that is the equivalent of $43 to $136
in 15 months. Needless to say there was a lot of
stored up profit and investors ran for the doors on
the news rather than calmly wait to see what analysts
said. 

The LEAPs section is going to go LONG the SYMC 2007 $25
LEAP Calls OBL-AE currently $6.00, Buy JAN-2005 $22.50 
PUT SYQ-MX currently $0.55 as insurance against a further
drop. I view $25 as strong support and the drop very
overdone. See the weekend LEAPS section for further 
details.

JNJ announced it was buying Guidant for $24.5B and 
traded higher on the news. Guidant was seen as adding
another opportunity for JNJ and the company said it
did not foresee any antitrust roadblocks to the deal. 
Noble Energy announced a $2.76B acquisition of Patina
Oil and Gas and NBL dropped -$2.16 on the news and
POG gained +4.69. POG was not a big operator with the
majority of its fields in Colorado, Texas, Oklahoma
and New Mexico. Oppenheimer agreed NBL needed to make
some more acquisitions given the rapid depletion rate
of the current Noble fields. Oppenheimer did think
the deal was too expensive unless oil remained over
$40. 

It is amazing to me how many oil analysts can't see 
the forest for the trees when predicting oil prices.
There are going to be a lot of shocked people in a couple
years when oil is well north of $60. In my Profiting from
the Coming Oil Crisis Report I detail the public smoke
screen that is being used to keep civilians in the dark.
You would think that analysts would have a little more
on the ball and not be sucked into it so easily. Just
last week the ExxonMobil CEO said energy demands were
going to double over the next 20 years and we need to 
begin adding new sources of energy to keep up with 
demand. Some of the new sources he suggested were to
burn garbage, wood and animal dung. Seriously! I don't
know how far your SUV will get on that fuel or how
many planes will be stopping at feed lots for a fill
up. 

The $45B in mergers today brought to $90 billion the
total for December. That is the strongest period since
2000. Analysts have been predicting more activity
because S&P companies have over $600B in cash on their
balance sheets which is also a record. The IPO schedule
is also running at a record pace with 21 IPOs this week
alone. The huge sucking sound you hear is cash being
pulled out of other stocks to fund the IPO frenzy. But,
not to fear there was $3.2 billion in new cash deposited
into fund accounts in the week ended on Wednesday. This
was up from the $642 million trickle the week before. 
The end of year deposits have begun to flow and were it
not for the FASB ruling on options I would be thinking
SPX 1250 was just ahead. Now I am not so sure. 

There are plenty of fund managers that are paid bonuses
based on the years performance so they really need to
keep those stocks pinned against the highs for at least
two more weeks. Once the year-end passes into the record
books, ledger books in this case, they can run for the
hills if they are worried. I suspect a lot of them will
be worried simply because of the uncertainty of what
earnings will look like. Nothing has really changed at
the companies only the way earnings are reported. Does
that matter in the long run? I believe it does. Managers
are judged by the companies they keep and the almighty
PE ratios. If a company has an already high ratio, say
50 and earnings are $1 then the stock price is $50. If
those earnings drop by -25% because of expensing options
then earnings are 75 cents. A PE of 50 then equals a
stock price of $37.50. OR, it could just mean a new PE
of 67. I do not believe we will see either extreme but
a blending of both. That means slightly higher PE ratios
but slightly lower stock prices. This uncertainty cloud
will start to weigh heavy on the markets after the first
of the year when Q4 earnings are released. Many companies
will begin to give guidance on what their earnings will 
be after options expensing and the street will have to 
decide how to deal with it. Just a heads up for everyone,
the outlook has changed for 2005 but few have picked up
on it yet.

Today the Dow notched a new eight-month high at 10726
and seems hell bent on a new multiyear high over 10753.
For a change the Dow was one of the stronger indexes
on the strength of the JNJ gains. That also boosted 
MRK +1.31 and PFE +0.66. There was a strong bid under
the Dow that was not felt in techs. 

The Nasdaq dipped back to 2140 intraday and closed just
over 2146. The FASB news hit it hard as well as the 
Russell shuffle. After the bell CRUS and EFII warned
and traders took $4 from Take-Two Interactive after 
they badly missed estimates. Later the semiconductor
Book-to-Bill number was announced at 1.00, which was
an improvement over last month at 0.96 but the news
was not good. Orders fell -2.1% in November but billing
feel even sharper at -6.1%. This forced an improvement
in the BTB ratio but in reality the news was worse. 
This is not good news for Friday given all the other
challenges from option expiration, Russell and FASB.

Based on today's events my outlook has changed. While
we could continue to struggle higher in the face of
the FASB ruling and the semi slump it would only be
a jam job by funds trying to hold the market up for 
the next ten trading days. It is still entirely possible
that the bulls will just ignore everything but I am much
more cautious tonight. I would no longer buy the dips
blindly as we have been doing over the last several 
weeks. We need to be much more selective in what we
are buying and how long we are planning on keeping it.
Those stocks with the highest PE ratios are usually the
highest flyers and the ones with the most options exposure.
This should shift the focus back to more of a value
perspective and away from the hysterical PEs some techs
now command. The rotation may not occur immediately and
it could be a slow painful process. Once January earnings
begin to appear I believe it will accelerate. Consider
this a caution warning that an investor shift may be
ahead. We need to see how the market digests this news
and be more cautious until the outcome appears. 
  
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Jim Brown
Editor


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

Check the Site Later Tonight For Jeff's Index Trader Article
http://members.OptionInvestor.com/itrader/marketwrap/iw_121604_1.asp


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

Maybe Next Week.
- J. Brown

It looks like I was a little early calling for the year-end, 
Santa Claus, early January effect rally to begin on Dec. 15th.  I 
should know better than picking a single day like that.  I 
suspect that the next push higher will begin on Monday but it's 
only a guess.  This week and the next few weeks are expected to 
see a big increase in inflows into stock funds and money managers 
will need to put that cash to work.  Fortunately, the mood on 
Wall Street suggests that investors are happy for any dip as it 
provides another entry point for the widely expected push higher.  

Aside from another Osama tape out today trading seemed mild.  Yes 
there was lots of volume and market internals were negative but 
the market has been and remains overbought.  The pull back was 
focused in tech stocks and gold issues.  Tech is likely to bounce 
back while gold will depend on strength of lack thereof in the 
U.S. dollar.  

Today brought some positive economic news with the weekly initial 
jobless claims hitting lows not seen since July.  Plus, the 
Philly Fed index surprised economists with a 29.6 reading 
compared to 20.7 in November and expectations for a drop to 20.0.  
Tomorrow is a light day for economic reports with just the 
Consumer Price Index.  Don't forget that tomorrow is also 
quadruple witching Friday when index options, equity options, and 
stock futures expire. 


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

Market Averages

DJIA ($INDU)

52-week High: 10753
52-week Low :  9708
Current     : 10705

Moving Averages:
(Simple)

 10-dma: 10588
 50-dma: 10298 
200-dma: 10238 



S&P 500 ($SPX)

52-week High: 1197
52-week Low : 1053
Current     : 1203

Moving Averages:
(Simple)

 10-dma: 1192
 50-dma: 1155
200-dma: 1125



Nasdaq-100 ($NDX)

52-week High: 1631
52-week Low : 1301
Current     : 1607

Moving Averages:
(Simple)

 10-dma: 1612
 50-dma: 1528
200-dma: 1450



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

CBOE Market Volatility Index (VIX) = 12.27 -0.08
CBOE Mkt Volatility old VIX  (VXO) = 13.01 -0.15
Nasdaq Volatility Index (VXN)      = 18.60 -0.17 


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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.68      1,200,757       814,736
Equity Only    0.44        934,116       410,355
OEX            1.93         44,832        86,646
QQQQ           0.45        122,501        55,839


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

Bullish Percent Data

           Current   Change   Status
NYSE          76.3    + 0.7   Bear Correction
NASDAQ-100    77.0    - 1     Bull Confirmed
Dow Indust.   70.0    + 0     Bull Confirmed
S&P 500       76.8    + 0.8   Bull Confirmed
S&P 100       77.0    + 0     Bull Confirmed


Bullish percent measures the number of stocks in an index 
currently trading on a buy signal on their point and figure 
chart.  Readings above 70 are considered overbought, and readings 
below 30 are considered oversold.

Bull Confirmed  - Aggressively long
Bull Alert      - Cautiously long
Bull Correction - Pause or pullback in upward trend
Bear Alert      - Take defensive action if long
Bear Confirmed  - High risk if long, good conditions for shorting
Bear Correction - Pause or rebound in downtrend


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

 5-dma: 0.93
10-dma: 1.06 
21-dma: 0.96
55-dma: 1.05


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     972      1164
Decliners    1857      1875

New Highs     271        97
New Lows       11        14

Up Volume   1034M      760M
Down Vol.   1206M     1453M

Total Vol.  2261M     2384M
M = millions


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

Commitments Of Traders Report: 12/07/04


Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the 
Chicago Mercantile Exchange and Chicago Board of Trade. COT data 
can be found at www.cftc.gov.

Small specs are the general trading public with commercials being 
financial institutions. Commercials are historically on the 
correct side of future trend changes while small specs tend 
to be wrong.  

S&P 500

Commercial traders are growing a tad more bearish while small
traders have pushed to new bullish levels not seen in many weeks.

Commercials   Long      Short      Net     % Of OI
11/16/04      452,149   468,048   (15,899)   (1.7%)
11/23/04      462,408   491,384   (28,976)   (3.0%)
11/30/04      462,394   491,813   (29,419)   (3.0%)
12/07/04      450,072   498,057   (47,985)   (5.0%)

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
11/16/04      166,862   156,751    10,111     3.1%
11/23/04      171,192   150,606    20,586     6.4%
11/30/04      176,031   148,876    27,155     8.3%
12/07/07      187,707   135,776    51,931    16.0%

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

There has been an interesting switch in the latest data.  
Commercial traders' bearish sentiment, while still strong, has
dropped significantly.  Meanwhile, small traders' bullish bias,
while still extreme, has fallen significantly.

Commercials   Long      Short      Net     % Of OI 
11/16/04      371,282   796,279   (424,997)  (36.4%)
11/23/04      412,724   849,091   (436,367)  (34.6%)
11/30/04      439,074   855,440   (416,366)  (32.2%)
12/07/04      470,553   805,234   (334,681)  (26.2%)

Most bearish reading of the year: (436,367)  - 11/23/04
Most bullish reading of the year:  133,299   - 09/02/03

Small Traders Long      Short      Net     % of OI
11/16/04      445,737     70,169   375,568    72.8%
11/23/04      400,995     62,080   338,915    73.1%
11/30/04      386,665     67,926   318,739    70.1%
12/07/04      311,838     66,496   245,342    64.8%

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


NASDAQ-100

We a similar move in the NDX futures.  Commercials remain
bullish but their enthusiasm has waned a bit.  Small traders
remain very bearish but their sentiment has faded a bit too.

Commercials   Long      Short      Net     % of OI 
11/16/04       55,737     33,683    22,054   24.6%
11/23/04       58,159     34,104    24,055   26.0%
11/30/04       56,629     30,571    26,058   29.8%
12/07/04       57,621     34,313    23,308   25.4%

Most bearish reading of the year: (21,858)  - 08/26/03
Most bullish reading of the year:  26,058   - 11/30/04

Small Traders  Long     Short      Net     % of OI
11/16/04       10,533    37,660   (27,127)  (56.2%)
11/23/04       11,153    39,712   (28,559)  (56.1%)
11/30/04        9,902    44,779   (34,877)  (63.7%)
12/07/04       15,489    49,064   (33,575)  (52.0%)

Most bearish reading of the year: (34,877) - 11/30/04
Most bullish reading of the year:  19,088  - 01/21/02

DOW JONES INDUSTRIAL

Commercials traders pared back their bearish sentiment 
while small traders became more bearish on the Industrials.

Commercials   Long      Short      Net     % of OI
11/16/04       22,004    23,744   (1,740)     (3.8%)
11/23/04       22,527    25,537   (3,010)     (6.2%)
11/30/04       22,622    25,411   (2,789)     (5.8%)
12/07/04       25,523    27,351   (1,828)     (3.4%)
 
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
11/16/04        5,937     6,533    ( 596)   ( 4.7%)
11/23/04        5,833     8,299   (2,466)   (17.4%)
11/30/04        5,739     8,536   (2,797)   (19.6%)
12/07/04        5,274     9,507   (4,233)   (28.6%)

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 12-16-2004
Copyright 2004, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: ARLP
Dropped Puts: None
Call Play Updates: ABK, BIIB, COF, EBAY, FLR, IBM, MDC, MHK, MWD, 
                   OSK, SWN, UTX, ZBRA
New Calls Plays: None
Put Play Updates: GCI
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:
*****

Alliance Resource - ARLP - cls: 69.80 chg: -0.10 stop: 63.99

Target achieved!  Coal miner ARLP climbed throughout the first 
part of Thursday's session to hit an intraday high of $71.30.  
This was above our planned exit point at $71.00.  While it would 
be tempting to hold on to ARLP given its positive technicals and 
new MACD buy signal we suspect that shares may be ready to 
consolidate after testing resistance near $71 again.  We'll close 
the play as planned today but look for a bounce from its simple 
50-dma again.  

Picked on December 5 at $ 65.82
Change since picked:     + 3.98
Earnings Date          10/22/04 (confirmed)
Average Daily Volume =      101 thousand
Chart =



PUTS:
*****

None


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

Ambac Fincl Group - ABK - cls: 83.20 chg: -1.22 stop: 79.89     

A market pull back on Thursday lead to some profit taking in ABK 
following its recent bounce from the 20-dma.  We remain positive 
on the stock but patient traders might look for another dip 
towards $82.50 as a potential entry point.  Keep a careful eye on 
the IUX insurance index, whose momentum is waning.  ABK is 
showing relative strength against its peers but a breakdown in 
the IUX would be negative pressure on the stock.

Picked on December 01 at $82.26
Change since picked:     + 0.94
Earnings Date          10/20/04 (confirmed)
Average Daily Volume =      490 thousand
Chart =


---

Biogen Idec - BIIB - close: 65.89 change: +0.98 stop: 60.99

BIIB continues to consolidate its recent gains in a sideways 
channel between $64 and $67.  Yet shares still managed to out 
perform its peers today with a 1.5 percent gain.  This can be 
attributed to an upgrade by Bank of America.  The firm raised 
their outlook from "neutral" to a "buy" with an $88 price target.  
It's probably no surprise that the Point & Figure chart points to 
an $89 price target. 

Picked on December 9 at $ 65.25
Change since picked:     + 0.64
Earnings Date          01/26/05 (unconfirmed)
Average Daily Volume =      3.5 million  
Chart =


---

Capital One Financial - COF - cls: 81.82 chg: -0.63 stop: 76.99

Not much happening in COF.  The markets took a step back on 
Thursday and COF consolidated sideways.  We remain bullish and 
would consider new entries at current levels.  However, if COF 
did slip lower we would jump on a bounce from the $80 mark. 

Picked on December 12 at $ 81.12
Change since picked:      + 0.70
Earnings Date           01/19/05 (unconfirmed)
Average Daily Volume =       1.4 million  
Chart =


---

eBay Inc. - EBAY - close: 115.70 chg: -1.69 stop: 113.99*new*

Whoops!  A little pull back in the markets sparked a 1.4 percent 
bout of profit taking in EBAY.  That's okay though.  The stock 
hit a new all-time high on Wednesday following positive comments 
from Goldman Sachs.  The firm reiterated their out-perform rating 
and said EBAY was still a "must own" stock as they raised their 
earnings estimates for the company.  We remain bullish on EBAY 
but shares have pulled back to crucial short-term support.  If 
shares breakdown under the $115.00-114.50 region it could be in 
for a quick drop lower.  That's why we're raising our stop loss 
to $113.99.  

Picked on November 08 at $103.69 
Change since picked:      +12.01
Earnings Date           10/20/04 (confirmed)
Average Daily Volume =      10.4 million 
Chart =


---

Fluor Corp - FLR - close: 53.21 change: -0.77 stop: 52.75

FLR is another one of the recent high-flyers that is seeing some 
profit taking on Thursday's market pull back.  So far support 
near $53.00 is holding but we still suggest readers strongly 
consider exiting now for a gain.  The technicals have turned 
south and its MACD, which was very overbought, has now crossed 
into a new sell signal.  The only reason we're holding on is for 
a possible rally from $53 to tag our target at $55.00.  

Picked on November 22 at $48.51
Change since picked:     + 4.70
Earnings Date          10/27/04 (confirmed)
Average Daily Volume =      521 thousand   
Chart =


---

Intl Business Mach. - IBM - close: 97.45 chg: +0.12 stop: 95.49*new*

IBM continues to try and breakout from its current trading range 
between $96 and $98 but today's market weakness didn't help.  
Yes, the Dow Industrials added 14 points but this was mainly on 
the spike in JNJ following its merger news.  We remain positive 
as IBM slowly builds on its trend of higher lows so we are 
raising our stop loss to $95.49.  We continue to target a exit in 
the $99-100 range by year-end.

Picked on October 27 at $90.00
Change since picked:    + 7.45
Earnings Date         10/18/04 (confirmed)
Average Daily Volume =     4.7 million 
Chart =


---

M D C Holdings - MDC - close: 86.30 change: -0.71 stop: 82.00

Are you still holding MDC calls?  If you missed our comments in 
Wednesday's letter we suggested that short-term traders consider 
exiting.  MDC soared on Wednesday above the $86 level surpassing 
our initial profit target at $85 for the second time in three 
days.  The move followed Tuesday night's announcement of a 30 
percent stock split.  We decided to hold MDC and set an official 
exit at $88.50 while raising our stop loss to $82.00.  The action 
in MDC on Thursday was interesting.  MDC gapped lower at the open 
and traded to a low of $82.38, effectively filling the gap from 
Wednesday morning.  Then once the gap was filled traders jumped 
in on the dip and drove MDC back toward the $87 level.  We 
continue to suggest that short-term traders strongly consider 
exiting for a profit here but we will hold the stock and hold out 
for a move to $88.50 considering that we're about to hit the most 
bullish time of year for equities next week.

Picked on December 12 at $ 81.01
Change since picked:      + 5.29
Earnings Date           01/11/05 (unconfirmed)
Average Daily Volume =       435 thousand
Chart =


--

Mohawk Industries - MHK - close: 90.97 chg: -0.60 stop: 86.99

The pull back early in the session for MHK provided traders a 
chance to buy the dip near $9.40.  That's close enough to the $90 
support level for us.  We would use this dip as an entry point 
for new bullish positions.  

Picked on December 14 at $ 91.00
Change since picked:      - 0.03
Earnings Date           02/05/05 (unconfirmed)
Average Daily Volume =       319 thousand   
Chart =


---

Morgan Stanley - MWD - close: 54.85 chg: -0.68 stop: 51.50

Shares of MWD soared to new seven-month highs on Wednesday 
following rival LEH's positive earnings report Wednesday morning.  
This move in MWD confirmed the bullish breakout over resistance.  
Meanwhile the LEH news helped confirm suspicions that earnings 
would be stronger than expected.  We would expect MWD to turn in 
over the top earnings numbers as well.  Our challenge now is that 
we're running out of time.  MWD is due to report earnings on 
Tuesday morning.  That means we have to close the play this 
weekend or on Monday to avoid holding over the earnings report.  
Given this short time frame we are not suggesting new positions.

Picked on December 12 at $ 54.11
Change since picked:      + 0.74
Earnings Date           12/21/04 (confirmed)
Average Daily Volume =       4.6 million  
Chart =


---

Oshkosh Truck - OSK - close: 66.08 change: -0.45 stop: 61.99     

So far so good.  We continue to patiently wait for OSK to hit our 
target in the $67.50 region before year-end.  Shares got close on 
Wednesday with an intraday high of $66.95.  We're encouraged that 
the profit taking today was very mild and stalled near the $66 
level.  This close to our target we are not suggesting new 
positions.

Picked on November 07 at $ 62.16
Change since picked:      + 3.92
Earnings Date           10/28/04 (confirmed)
Average Daily Volume =       205 thousand   
Chart =


--

Southwestern Energy - SWN - close: 50.99 chg: -1.25 stop: 47.99

Hmm... crude futures saw some volatility about midday but managed 
to close up on the session.  Meanwhile the oil sector suffered 
some profit taking along with the rest of the market.  Shares of 
SWN gapped higher and then slipped lower throughout the rest of 
the session.  That's never a good sign with Thursday's candle 
closely resembling a bearish engulfing pattern.  We would be 
cautious here.  If SWN bounces from $50 we consider new entries 
but we would definitely look for some confirmation in the OIX 
index or the broader market indices. 

Picked on December 14 at $ 51.05
Change since picked:      - 0.06
Earnings Date           00/00/04 (confirmed)
Average Daily Volume =       557 thousand   
Chart =


---

United Tech. - UTX - close: 102.00 change: -0.40 stop: 97.89     

Dow-component UTX continues to see some mild profit taking in the 
past couple of sessions.  News that UTX had agreed to buy 
Britain's Kidde for $2.8 billion did not seem to affect shares of 
UTX.  Kidde is a smoke alarm and fire extinguisher producer and 
UTX plans to combine the company with its security division Chubb 
(source: Reuters). We will still be willing to buy shares of UTX 
at current levels.  However, it might pay to be patient and look 
for the dip to continue.  A bounce from $100 or $101 would 
obviously be a better entry point.  

Picked on December 1 at $100.15
Change since picked:     + 1.85
Earnings Date          10/20/04 (confirmed)
Average Daily Volume =      1.8 million  
Chart =


--

Zebra Technologies - ZBRA - close: 55.92 chg: +0.71 stop: 51.99

No weakness for ZBRA.  Our newly added call play continues to 
trek higher disregarding broader market weakness on Thursday.  
Technical traders will note that ZBRA's 1.28 percent gain today 
just barely closed over technical resistance at its 100-dma.  We 
remain bullish with no change in our strategy. For more details 
see Wednesday's play description.

Picked on December 15 at $ 55.21
Change since picked:      + 0.71
Earnings Date           02/09/05 (unconfirmed)
Average Daily Volume =       709 thousand 
Chart =


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

None


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

Gannett Co Inc - GCI - close: 79.67 chg: +0.07 stop: 82.51

Well we didn't have to wait very long.  We added GCI last night 
with a trigger to buy puts/go short on a breakdown below the July 
low.  Early this morning that's exactly what happened.  GCI 
slipped to a new for the year before bouncing.  Fortunately, the 
bounce was minor and shares remain under round-number, 
psychological resistance at $80.00 but we are triggered at 
$79.39.  Readers still looking for a new entry can wait for GCI 
to hit another new low under $79.30.

Picked on December 16 at $ 79.39
Change since picked:      + 0.07
Earnings Date           01/31/05 (unconfirmed)
Average Daily Volume =       1.0 million  
Chart =



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

None


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The Option Investor Newsletter                 Thursday 12-16-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Watch List: Another stocking full of bullish breakouts 
Traders Corner: 5 Chart Patterns with Proven Predictive Value 
Combos/Straddles: New Positions For A New Year  

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

Another stocking full of bullish breakouts

___________________________________________________________________

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.
___________________________________________________________________


Freddie Mac - FRE - close: 70.75 change: +0.99

WHAT TO WATCH: Wow! The relative strength in FRE is impressive.  
The stock bucked the general market weakness on Thursday to 
breakout over resistance at the $70.00 level on rising volume.  
The move solidifies the recent triple-top breakout buy signal on 
its P&F chart that currently points to a $79 target.  The stock 
has had long-term resistance in the $70-71 level for a very long 
time.  A move over $71.25 would be a new all-time high.  Bulls 
may want to consider new positions over $71.25. 

Chart=


---

FLIR Systems - FLIR - close: 60.10 change: +4.22

WHAT TO WATCH: The action and news is interesting for FLIR today.  
The company issued guidance for fiscal year 2005 that was a bit 
under analysts' expectations.  Yet to soften the bad news 
management announced a 2-fot-1 stock split of its common shares.  
Investors responded positively and the stock soared 7.5 percent 
on big volume.  This produced a breakout over all its key 
overhead moving averages and the $60 level.  There is some 
resistance at $62 but bulls can watch this for some follow 
through.  The P&F chart points to an $80 target.

Chart=


---

Par Pharmaceutical Co - PRX - close: 43.04 change: +3.08

WHAT TO WATCH: Wow! PRX has produced a very impressive breakout 
with today's 7.7 percent gain.  Volume was about three times the 
norm as shares soared through resistance at its simple 200-dma, 
exponential 200-dma and the $42 level, which was the top of its 
recent trading range.  PRX is now at seven-month highs and looks 
poised to make new gains.  We can't find any specific news other 
than the general strength in the drug sector boosted by the JNJ-
GDT merger news.  PRX's P&F chart points to $60.

Chart=


---

Black & Decker - BDK - close: 86.01 change: +0.37 

WHAT TO WATCH: We continue to highlight BDK.  The stock 
temporarily broke through resistance at $86.00-86.25 at the top 
of its six-week trading range.  Unfortunately, shares couldn't 
hold its gains.  We still believe that BDK is a strong bullish 
candidate and would consider new bullish positions over today's 
high at $86.68.  It would not surprise us to see BDK add several 
points between now and year's end. 

Chart=



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

MBT $126.25 +7.24 - That's a pretty big bounce following 
yesterday's breakdown.  The rally began to fail at the 200-dma.  
Is this just another bearish entry point?

AIG $64.47 -0.25 - We continue to look at AIG as a potential 
bearish play.  The two-month rally is fading and its short-term 
five-day pattern is one of lower highs.  A breakdown under $64 
could be a bearish entry point.


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

5 Chart Patterns with Proven Predictive Value
By Leigh Stevens
lstevens@OptionInvestor.com

'BUT FIRST A WORD FROM OUR SPONSOR' – OUR SUBSCRIBERS!

SUBSCRIBER QUESTION: 
When you commented on QQQ (AMEX) recently it appeared that your 
chart was out of date. Any change or correction in your opinion 
on the Nasdaq tracking stock based on the current chart?

RESPONSE:   
Well, here is where I say again that any analysis is only as good 
as your data! I overlooked in my Index Trader commentary of 11/13 
that my QQQ chart had stopped updating at the end of November for 
some strange reason - which still baffles me as I cannot now get 
this one symbol to update no matter what. One of those fun 
mysteries of software and data feeds. 

Because QQQ, along with the market, had more or less been going 
sideways in this past weekend, there wasn't much change in the 
chart picture in December. But, egg on my face not to have 
noticed! Thank you for picking up on it. The correct chart 
through today (12/16) is – 


 

I was wrong on resistance being around 40 (based on an outdated 
chart), as prices had tracked higher - but still were following 
the top end of its uptrend channel.  Resistance is more like 
40.60 rather than 40. 

QQQ may have made a minor double top but its too soon to tell.  I 
have been wondering if the bearish price/RSI divergence was going 
to foretell a deeper correction than what has been seen to date. 
By this I mean that the RSI has been trending lower on balance 
since ITS last top.  

The key on the downside still looks the same – whether prior 
resistance – the old high – at 39, will now act as support.  If so, 
the chart would maintain its bullish pattern.  
 
5 Chart Patterns effective in predicting trends – 

I mentioned in my book (Essential Technical Analysis) that there 
has been some academic research done in recent years that 
attempted to assess the what technical patterns had more than a 
chance or ability in forecasting tops or bottoms; e.g., the Head 
& Shoulders top/bottom formations.

Dr. Andrew Lo, at the MIT Sloan School of Management, along with 
some of his assistants, did an extensive statistical evaluation 
of a number of chart patterns and found 5 that yielded 
"statistically significant test statistics"; i.e., they had a 
level of predictive value that was greater than any random or 
chance occurrence.  

This study was reported in "The Journal of Finance" in August 
2000.  The 5 technical chart patterns that their research found 
were ones to take notice of are: 

- The Head and Shoulders top
- The Double top 
- The rectangle top
- Rectangle bottom, and 
- The Broadening Bottom formation

I've described the first two patterns, the Head & Shoulders and 
Double top, in a number of instances where it's developed, but 
can go more into these as patterns in a future Trader's Corner –  

Recently I got thinking about rectangles because in the past few 
weeks the sideways trend in the S&P 500 Index (SPX) had formed 
this kind of pattern as highlighted in my next chart – 


 

A rectangle is simply a sideways trend that forms a well-defined 
trading range such that you can "box" it like the highlighted 
rectangle above.  Now, the question is, when does such a sideways 
trend become a top and when is it simply a pause in an uptrend?  
The answer is duh, we don't know until prices either break out 
above the top end of the rectangle or pierce the lower boundary – 
in which case it is defined as a rectangle top.  

Kind of unfair to say we don't know which it is until after the 
fact.  However, Lo is talking about the fact that when prices DO 
break out to the downside, this event has above average 
predictive value that the pattern indicated a top has formed and 
its down from there. 

The other thing about rectangles is that they are MOST OFTEN 
consolidations before there is another leg higher or lower – it 
depends on whether the trend was UP into the rectangle or DOWN 
into it.  In either case, I find that sideways trends are often 
consolidations (only) of the existing trend – this trend will 
then continue after the pause/sideways move. Hey, it sure looks 
true this week with the move above the prior trading range or 
rectangle.  

For options traders timing is more important in buying puts or 
calls than buying or shorting a stock - you can use the 
rectangle: buy calls toward the lower end of a range establish 
after and uptrend, after 2-3 such up and down price swings. Exit 
calls if the downside of the box is pierced of course.  The 
pattern may be used also to go into (or add to) calls on a 
breakout above the upper end of the box as in the first example 
(left) in the chart below.

Conversely, buy puts if the lower end of a range (the rectangle) 
is pierced to the downside after a rally into the formation of 
what becomes a rectangle – the downside break is a good indicator 
of a top having formed, as in the second example below in the S&P 
100 (OEX) chart -  


 

So, the first example (left) is a rectangle bottom and the second 
pattern highlighted is a rectangle top.

Last in the predictive 5 is the broadening bottom and since this 
one is not seen so much, I will describe it. I wrote about the 
broadening pattern a while back in a Trader's Corner article seen 
at – 
http://www.OptionInvestor.com/traderscorner/tc_081904_1.asp

The broadening formation, whether a broadening top or broadening 
bottom, is seen less often in the indexes and more often in 
stocks, although you don't see it real frequently either.  

The broadening bottom is where there is a pattern of lower lows 
and higher highs that defines a wide-swinging range in prices, 
before a rally phase begins. Lines drawn through the highs and 
through the lows has the appearance of a megaphone. 

The clue to the trend when it’s a broadening bottom is when 
prices break out above the upper line and a pattern of higher 
relative highs begins after that – 


  
 
The example above is not a picture perfect example of a 
broadening bottom in the RUT (Russell 2000) weekly chart, as we 
have to disregard the one spike down (the final bottom) to see 
the "megaphone" type pattern - but it is the type: the pattern of 
higher highs and lower lows.  

By the way, that spike down, followed by an immediate upside 
reversal is a good bottom indication in itself – a key or, bear 
trap, (upside) reversal.

ANOTHER EXAMPLE, IN AN INDEX AND OF INTEREST TO OPTION TRADERS – 

 

Notice that the key to the breakout is when prices pierce a line 
extended from the the up-sloping line that forms the upper end of 
the megaphone outline above. That point is the "breakout point" 
and it’s a signal to go substantially into long calls.  

Good Trading Success!  
 

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

New Positions For A New Year

By Mike Parnos

It's a slow process, but we're going to get there.  With our new 
ultra-conservative approach, we're going to nibble around the edges 
of the market until we're convinced the uptrend has ended.  There 
still may be another leg to go before the market settles back into 
a nice tradable range.  By January expiration, we should have a 
better read on it.

I dreamed up a few "hypothetical" positions that should (hopefully) 
keep us out harm's way.  Remember, these prices are based on 
Thursday's closing prices.   You may not get the posted prices, 
but, depending on Friday's market movement, you should be able to 
come relatively close.
________________________________________________________

December Results
In December, it appears we're going to be back on the positive side 
of the ledger.  It looks like all of our trades are going to be 
successful.  I'll go into detail in Sunday's wrap-up column.  We 
still will have a negative balance to make up (from November's 
fiasco), but we're going to get there.  Remember, it's not a 
sprint, it's a marathon.  It's your hard earned money.  Be careful 
and have your trades all planned out -- the entry, the adjustments, 
and the exits -- before you even get in.
___________________________________________________________

January CPTI Position #1 - SPX Iron Condor (Part 1) - 1203.21
Sell 20 January SPX 1125 puts
Buy 20 January SPX 1110 puts
Credit of about $.50 ($1,000)

Profit potential $1,000.  Maintenance: $30,000.  I know I said I 
prefer not to use anything larger than five or ten-point spreads, 
but this is almost 80 points out of the money that I'm going to 
make an exception.  This seems incredibly safe, but then we've 
thought that before, didn't we?

January CPTI Position #2 - SPX Sure Thing Credit Spread - 1203.21
We're still in an up-trend and we might as well try to take 
advantage of it.  Our "sure thing" spread worked to perfection for 
the December cycle.  So, until the market tells us otherwise, we're 
going to continue with the strategy.  Again, remember that this 
strategy is for only those who have a lot of maintenance dollars 
available, because you may need them.  Eventually, we'll be right, 
but you may need that staying power (money). You have to be able to 
withstand being whipsawed back and forth.
Sell 2 January SPX 1195 put
Buy 2 January SPX 1170 put
Credit and potential profit of about $6.30 ($1,260)
Maintenance (initially): $5,000

January CPTI Position #3 - MSH Iron Condor (Part 1) - 499.67
This is the Morgan Stanley High Tech Index.  We haven't traded it 
before, so now is as good a time as any.  Maybe it will turn out to 
be a usable replacement for the RUT.  We're going to continue to be 
conservative.
Sell 15 MSH January 550 puts
Buy 15 MSH January 540 puts
Credit and potential profit of about $.55 ($825)
Maintenance: $15,000.

January CPTI Position #4 -- SPX Iron Condor  (Part 1) - 1203.21
Put on two weeks ago -- and a wise choice it was (so far).  I've 
become very conservative -- even more so after our unpleasant 
experience in the November cycle.  I saw an opportunity to put some 
serious distance between a bull put spread and where the SPX was 
trading.   With the SPX at 1179, I noticed the January 1100/1090 
bull put spread would yield about $.70.  Being still somewhat 
bullish for the next few months, I was willing to go out to 
January.  I like that almost 80-point (now over 100 points) cushion 
and I'm willing to wait the eight weeks.  When the opportunity 
presents itself, we can always add the other side of the condor.

We sold 15 SPX January 1100 puts and bought 15 SPX January 1090 
puts for a credit of about $.70 ($1,050).  Maintenance: $15,000
____________________________________________________________

DECEMBER CPTI POSITIONS
December Position #1 -- SPX Iron Condor (Part 1) - 1203.21
This bull-put spread still gives us about a 45-point cushion on the 
downside with the short strike near a support level.  

We sold 20 December SPX 1125 puts and bought 20 December SPX 1120 
puts for a credit of $.50 ($1,000).   Maintenance: $10,000.  When 
you're looking for your new position, the concept of getting much 
your profit from negotiating the bid/ask spread still applies. (see 
the Thursday, Nov. 18 column).

This position is just the bull-put portion of a potential Iron 
Condor.  We're going to wait until the smoke clears a little before 
looking for bear-call spread possibilities.  When the time comes to 
put on the bear call spread, as long as we create a 5-point spread, 
there will be no additional maintenance requirement.

December Position #2 -- SPX Sure Thing (Almost) Credit Spread – 
1203.21

We sold two SPX December 1165 puts and bought two SPX December 1140 
puts for a $6.90 credit ($1,380).  Here we go again.  We saw an 
opportunity to sell the 1165 puts and buy the 1140 puts for a 
credit of $6.90.  We're still in a bullish trend and want to 
position ourselves to take advantage of it.  A quick reminder – 
only do this strategy if you have a LOT of maintenance available.  
You might need it.

December Position #3 - SPX Iron Condor (Part I) - 1203.21
We would 20 SPX December 1135 puts and bought 20 SPX December 1130 
puts for a credit of about $.35 ($700).  Maintenance: $10,000.  
Compared to the profit we're used to making, this doesn't seem like 
a lot.  But, we're going to work our way back into the black a 
little at a time -- with a large degree of safety.  
___________________________________________________________
ONGOING POSITIONS
QQQ ITM Strangle - Ongoing Long Term -- $39.95
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 
took in $.45 ($450) rollout. We rolled to the November. $34 calls 
and $37 puts for $.70 ($700).  Last week we rolled in the December 
$34 calls and $37 puts for a total of $.50 ($500).  Total: $13,400.  
We rolled out the Dec. $34 calls at break even and then sold the 
January $40 puts for $.80 ($800).  Our new total premium is about 
$14,200.
Note: We haven't included the proceeds from this long term QQQ ITM 
Strangle in our profit calculations. It's a bonus! And it's a good 
conservative cash flow generating strategy. 
ZERO-PLUS Strategy. OEX - 573.46
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 about 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 $10,675. 
Zero-Plus Position For December
Prior to expiration, we bought back our Nov. 555 calls and rolled 
it to six contracts of the January 580 calls for a credit of about 
$100.  We also put on five contracts of a December 540/530 bull-put 
spread for an $.80 credit ($400). 
 
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, Your 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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