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Daily Newsletter, Wednesday, 09/12/2001

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PremierInvestor.net Newsletter              Wednesday 09-12-2001
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Market Wrap: A New Day In A New World
Market Sentiment: Sentiment is Somber but Resolute
Special Report: World Markets Coverage & Reaction
Special Report: Brokers Ready To Roll - But Check Your Orders! 
Special Report: Options Issues - Lost Time! 
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===========
Market Wrap
===========

A New Day In A New World
by Eric Utley

Life and freedom go on.  But the beat feels a little different
today.  It's incredibly difficult to write about financial goings
on following the terrible acts of sub-human nature Tuesday
morning.  My best guess is that whoever is responsible for the
atrocities wanted to paralyze Americans with fear.  And not only
Americans, but the rest of the free world.  But I refuse to
accept the fear;  I refuse to stop living; I will walk on.
Anything less, in my opinion, would be a concession to those
responsible for Tuesday's horrid acts of terror.

While I refuse to live paralyzed in fear, at the same time, I
grieve for those families who lost loved ones Tuesday morning.
I can only send my thoughts and prayers.

But in the spirit of living in freedom, I think we can begin to
look-forward to the rebuilding of lives, buildings, and
confidence.  That way, the terrorists don't win.

Financial market regulators met Wednesday afternoon to report
that trading in U.S. equity markets would remain halted at
least through Thursday.  New York Stock Exchange Chairman,
Richard Grasso, reported that equity markets could reopen as
early as Friday or as late as Monday.  While a decision was
not yet reached, Grasso and others told reporters that further
details would be provided Thursday.

While the U.S. equity markets will remain closed for at least
another day, futures and commodities markets will reopen
Thursday morning.  Trading on the Chicago Board of Trade and
the Chicago Mercantile Exchange will resume, which means bonds
will be trading.  Bond market traders are expecting to see a
flood of capital move into treasuries and out of other
relatively riskier areas of the debt market, such as corporate
bonds.  While the influx of capital into treasuries makes
sense at this point, it will be more difficult to discern the
overall condition of the market without the simultaneous
trading in equities.

Insofar as the equity market is concerned, the overwhelming
consensus is calling for a sharp sell-off once trading
finally opens.  But, there seems to be a patriotic theme
developing in that buyers are expected to step in to prop
up any slump in stocks.  Indeed, some hedge fund managers have
been reported as saying they would hold off from short-selling
strategies, which may exacerbate any weakness in stocks.

But weakness is exactly what was prevalent across the Asian
markets that were open Wednesday.  Japan's Nikkei shed more
than 6 percent and Hong Kong's Hang Seng lost 8.9 percent.
The weakness in Asia, however, was in stark contrast with the
mood in European markets.  After precipitously dropping
early in its trading day, Germany's DAX finished the session 2
percent higher.  France's CAC index finished higher by 1.3
percent and London's FTSE 100 closed higher by about 3 percent.
Although the green across Europe was encouraging, it should be
noted that trading was extremely illiquid, with many market
participants sitting on the sidelines, waiting for trading to
resume across the Atlantic.

It should be somewhat telling to see how the Asian markets
respond in their Thursday sessions after the rebound across
the European bourses.  A follow-through by the Asian markets
might signal a favorable outcome for U.S. equities once the
initial sell-off has run its course.

Perhaps part of the reason for the rebound in European equities
was because of government intervention.  Although it's difficult
to intelligently quantify just how much buying was related to
European governments, central banks across the globe made it
clear that the global financial system would be flush with
liquidity.  The Federal Reserve alone injected some $38 billion
worth of reserves into the U.S. banking system Wednesday.  And
some economists are still predicting an early rate cut from the
Fed.

Even if the Fed does cut rates as early as tomorrow, there's
still a lot of pent up emotion that has yet to work its way
through the markets.  There are myriad scenarios and issues to
contend with between now and the time the U.S. stock market
finally does reopen.  Here at Option Investor, we're trying to
tackle some of those issues through our Special Reports.  We'll
continue publishing those reports into Thursday and readers
might find some very useful information contained within them.

In the meantime, my best wishes to all!

Eric 


================
Market Sentiment
================

Sentiment is Somber but Resolute 
by Jeffrey Canavan

Yesterday's tragic events will undoubtedly leave lasting 
psychological scars, but instead of responding with panic and 
fear, American's have responded with unyielding resolve.

Long lines are not found at found at banks, gas stations, or 
grocery stores, but rather at blood banks.  People calling into 
talk shows have heavy hearts, but speak of how we will persevere, 
not gloom.  While driving into work today, a man was standing at 
an overpass holding an American flag.  

But how will already shaken investors respond?  Reports of 
customers zipping their wallets, catastrophic losses, and 
turbulent trading overseas will weigh heavy on investors minds.  

The Fed and the rest of the world have stepped up to ease any 
worries over a global financial crisis by injecting $118 billion 
into the international financial system.

Calming words from corporate leaders and mutual funds have also 
helped to assuage financial concerns.

European markets have stabilized after yesterday's losses.  The 
FTSE 100 in the United Kingdom was able to climb 2.87% today, 
with advancers leading decliners three to one.  The French CAC 
gained 1.34%.

Oil and gold prices have pulled back after yesterday's panic 
buying, and the dollar has stabilized.  

While the equity markets will remain closed at least until 
Friday, we will have trading at the Chicago Board of Trade and 
Chicago Mercantile Exchange tomorrow.  Trading in bonds, gold, 
and currencies should give us a glimpse of what to expect when 
stocks begin trading again.  

During the initial hours or days, volatility should be expected 
in both commodities and equities, making entry and exit 
difficult.  Sitting on the sidelines for a few days looks like a 
good idea unless defensive action is needed to protect your 
portfolio.

The longer-term outlook has also been clouded.  We were fixed in 
a downtrend before Tuesday's horrifying events, but starting to 
show signs of improvement.  Now hopes economic and equity 
recovering has been put on hold.  When we the picture might 
become clearer in unknown.


=========================
Special Report
=========================

WORLD MARKETS COVERAGE & REACTION
by Jeff Bailey


Foreign markets mixed

U.S. markets remain closed today, but many foreign markets were 
trading after yesterday's attacks on the World Trade Center and 
the Pentagon.  In brief, Gold, Oil and the Swiss Franc rose in 
price during and after yesterday's World Trade Center attack, as 
investors turned toward more defensive assets.

The Americas

In Argentina, officials there said the markets in that region 
would remain closed today and the Central Bank suspended all 
foreign transactions in the wake of events set off on Tuesday.  
The leading index in Argentina (MerVal) finished trading on 
Tuesday at 272.34.  On Tuesday, the MerVal fell 14.87 points.

In Brazil, the Bovespa has gained nearly 2.71% to 11,121.74 on 
Wednesday.  At one point during the trading session, the Bovespa 
fell to a 23-month low, only to bounce back.  On Tuesday, the 
Bovespa had fallen 9.2% in a 75-minute time period, before 
trading was halted.  State oil giant Petrobras (NYSE:PBR), the 
second heaviest weighted issue in the index gained 2.6%.  Also 
helping the Bovespa bounce back were battered telecommunication 
stocks like Telemar (NYSE:TNE).  Brazil's largest phone company 
and Bovespa heavyweight had gained 3.9%.

In Canada, the Toronto Stock Exchange, said it would remain 
closed on Wednesday, showing partnership with U.S. markets.  "We 
want to allow market participants to assess any damage, and 
assess their own situations so we are going to continue to 
monitor the situation," said TSE Spokesman Steve Kee.  Many of 
Canada's largest stocks such as BCE Inc. (NYSE:BCE), Nortel 
(NYSE:NT) and Royal Bank of Canada (NYSE:RY) are cross listed in 
New York and most of Canada's large brokerage houses maintain 
offices and close communications in both cities.  Some Canadian 
institutions also operate trading floors, market-making 
activities and computer systems on Wall Street, but reports are 
not clear if any of the firms were affected by yesterday's World 
Trade Center attack.

In Mexico, trading remained halted on Wednesday.  On Tuesday, the 
benchmark IPC index fell 5.55%.  "There was a lot of confusion 
and panic Tuesday morning," said Hector Trigos, director of the 
$1 billion closed-end Mexico Fund (NYSE:MXF).  "Under this 
extraordinary situation, everyone was looking for a safe haven."  
Mexico's peso (MEX01) fell 18.55 centavos to 9.58 per US$, its 
lowest level since March of 2001.  Many Latin American bond 
traders ceased trading as they were forced to evacuate their 
offices in New York.

In Venezuela, the Caracas IBC stock index officially closed after 
one hour of trading on Tuesday in what was described as stable 
trading.  At the time of suspension, the IBC index had fallen 
2.02% to 7,332.07.  The exchange announced that any prior trades 
would be annulled and the close would be registered as the same 
as Monday's close.  

Asia Pacific Markets

There are many markets in the Asian Pacific region.  For the most 
part, this part of the worlds markets are having a difficult 
time.  Subscribers should note that today's trading is really the 
first day this part of the world has had an opportunity to trade 
after the World Trade Center and Pentagon events.  We will 
discuss the potential reasons for Wednesday's activity, but first 
impression is that many of these markets reside in or near areas 
that are "less stable" politically and are actually farther from 
the United States, one of most politically stable parts of the 
world.

In Australia, the benchmark ASX 200 index fell 133.5 points on 
Wednesday (-4.1%) to 3,108.50.  Breadth was negative with seven 
stocks falling for every stock that advanced.  Investors in that 
part of the region fled to the safer havens of cash, bonds, and a 
minority of equity sectors such as oil and gold stocks.  One 
observation made by Joseph Paliaro of Wilson HTM was that 
Wednesday's Australian market action was more responsive to the 
potential worsening of the U.S. economy due to the World Trade 
Center and Pentagon attacks, than the attacks themselves.  Among 
the heaviest hit stocks was media giant News Corp (NYSE:NWS), 
which gets about 70% of its earnings from the United States.  
Shares of NWS fell 10.6% to A$13.50, their lowest close since 
November, 1999.  Also suffering declines was that region's 
airline heavyweight Qantas Airways (Australia:QAN.AX), which 
cancelled flights to the United States for the time being.  
Shares of Qantas lost 9.3% to A$3.12.  

Another stock that fell sharply was Westfield Holdings 
(NYSE:WEA), which traded down 5.1% in Australian markets trading 
(Australia:WSF.AX).  Westfield has a multi-billion dollar lease 
for New York's World Trade center.  The company did note it was 
fully insured (insurance included acts of terrorism) against loss 
of income and did not expect the attack to have a material impact 
on its earnings.  In my call to the company, their spokesperson 
declined comment on their insurance carrier.  In July of this 
year, Westfield America executed an agreement with the Port 
Authority of New York and New Jersey to lease the retail 
component of the twin towers for 99 years.  Westfield Holdings 
was responsible for the management, leasing and development of 
the retail component of the Center.

Stocks showing strength in Australian trading included oil and 
gas stocks along with gold stocks.

In China, the Hang Seng Index fell 8.87%.  The 923 point decline 
to 9.493.62 was the biggest one-day percentage drop since the 
1997-98 Asian financial crisis.  Shares of Hong Kong's most 
dominant airline carrier, Cathaway Pacific Airways fell 19.16%.  
Analysts in the region said the recent events in New York could 
hurt people's perception of airline safety.  The rise in prices 
for oil and jet fuel were also sighted as reason's for Cathaway's 
decline.

In Japan, stocks were mostly lower across the board.  Japan's 
Nikkei average fell well below its psychological support level of 
10,000 for the first time in 17 years.  The Nikkei 225 fell 682 
points and finished the trading session at 9,610, a loss of 
6.63%.  The capital-weighted TOPIX index lost 67 points or 6.36% 
percent to 990.80.  Traders in Tokyo said that the Tokyo Stock 
Exchange's decision to cut price limits by half for today's 
trading session helped buffer the market from wilder 
fluctuations, but also mentioned that there may be many sell 
orders that were not executed that may roll over into Thursday's 
trading.  Stocks like high-tech bellwether Sony Corp. (NYSE:SNE) 
finished limit-down, as the shares lost 5.02% at 4,730 yen, while 
NEC fell 8 percent and Toyota traded lower by 6.85%.  Airline 
stocks also came under pressure as Japan Airlines fell 11.43%.  
One of the worlds biggest banking groups, Mizuho Holdings Inc , 
dove 9.52%.

In other parts of Asia, Singapore's Straits Times index fell 
7.42% to 1,450 and South Korea's Seoul Composite fell 12.02% to 
475.60.

European Markets

As of today's close of trading, subscribers might note that many 
of these markets were actually winding down their trading session 
on Tuesday when the events here in the U.S. unfolded.  Yesterday, 
many European markets came under selling pressure, but today's 
trading seemed to have many of the indices in the region 
recovering some of Tuesday's late session losses.

The FTSE-100 managed to close 2.87% higher in London after 
Tuesday's 287-point drop. The emotional and volatile trading 
lacked conviction due to the uncertainty of Wall Street's 
reaction.  

Pharmaceutical stocks Glaxo SmithKline and AstraZeneca attracted 
the most buying, and food retailers like Safeway also rose.  
Telecom stocks British Telecom and Vodafone jumped on prospects 
for increase service, and data recovery company Guardian IT rose 
14%.

Airlines, leisure, and insurance stocks continued to sell off, 
and oil stocks Shell and BP also gave back most of yesterday's 
gains.

Frankfurt's DAX 30 rose 2.2% and the French CAC gained 1.34%, 
which helped to erase some of Tuesday's losses.  The general 
feeling was that the sell off was overdone, and today helped to 
correct some of that.  

Summary of sectors

Fear is an emotion that can adversely affect an investors 
decision process.  It can be a very difficult emotion to control.  
You and I can understand fear as it relates to yesterday's 
activity.  When watching yesterday's events unfold on television, 
I could see the fear on many citizens face as they ran from 
locations near the World Trade Center.

Today, the look of fear has perhaps turned toward that of 
concern.  In some aspects, the world markets seem to be depicting 
this very type of progression.

Yesterday when European markets were trading, the immediate knee-
jerk reaction was to sell!  That reaction was based on fear.  24-
hours later, European markets seemed to have calmed down and have 
seemingly entered the concern phase.  As the markets get more 
information, it makes sense that trading activity should become 
calmer and more rational.  We saw some of this today in European 
trading.

Today was the first day for Asian markets to trade after 
yesterday's WTC and Pentagon events.  By the reaction of markets 
there, today was "fear day."  Today, there has been little new 
insight into yesterday's terrorist activities, but time has 
passed and it will be important to see how Asian markets trade.  
I will be looking to see if a similar pattern of "fear to 
concern" presents itself and how things play out in that part of 
the region.  We now have a time line to follow and this may help 
us understand how U.S. market trade when they open.  

Yesterday, across the Premier Investor Network, Jon Farnloff 
wrote an article titled "Historical Reaction to Terrorist 
Attacks" as it relates to how the Dow Industrials have traded 
after four major events.  The historical information there 
certainly depicts the initial reaction of "fear" that turns to 
"concern" and once the markets were able to digest the events, 
the markets became more rational.  We've talked before how 
investor psychology plays into things, and it is relatively 
apparent from past history how human emotions are sometimes 
patterned when it comes to stock market activity.

Airlines:  It's fairly evident from world market's trading that 
airline stocks were perhaps the most adversely affected groups of 
stocks.  I've mentioned before that fuel prices are the second 
highest cost of doing business next to labor for this group.  
When yesterday's events took place, investors in airlines stocks 
immediately drew the conclusion that the consumer's "fear of 
flying" would adversely impact the group.  When oil prices jumped 
in foreign market trading, this then created a double-negative 
for the group.  The visions of the twin towers of the World Trade 
Center being struck by airplanes will not soon be forgotten.  
Look for this sector of stocks to find a lot of activity when 
equity markets resume trading here in the U.S.  (Tomorrow we will 
discuss some hedge strategies for subscribers that may be holding 
some airlines stocks)

When we look at the December 21, 1988 Pan Am #103 disaster near 
Lockerbie, Scotland we can get an idea of how United Airlines 
(NYSE:UAL) traded the day before and just after those events.  
While past history is no guarantee of the future, it does give us 
an idea of what to expect.

On December 20, 1988 (day before explosion) shares of UAL closed 
at $27.12.  On December 21st (day of explosion) shares of UAL 
fell to a session low of $26.56 (-2.06%) before recovering and 
finishing the session at $26.75 and traded just 268,000 shares.  
On December 22nd, volume jumped to 1.2 million shares and shares 
of UAL dropped to a session low of $25.93 (-3.06%), and once 
again recovered some of those losses to finish the session at 
$26.56.  From the December 22nd low of $25.93, shares of UAL then 
climbed steadily.  By January 18th of 1999 (just 17 trading 
sessions later) shares of UAL closed at $28.96.  All was not 
lost.  Notice the pattern of how the stock traded.  Down on the 
initial reaction of "fear", then a recovery phase most likely 
during a period of concern for airline travel.

My initial thought process is that airline companies that have 
more international flights like American Airlines (NYSE:AMR), 
United Airlines (UAL) and a host of others may be more adversely 
impacted than some of the regional carriers like a Frontier 
Airlines (NASDAQ:FRNT).  I mention these three only because I've 
done some fundamental research in the past and have a general 
understanding of their markets and where revenues are derived.

We all understand that the Lockerbie tragedy is different than 
yesterday's terrorist activities, but the historical trading does 
resemble past market activity.  Good example too of what we often 
times talk about regarding MARKET, SECTOR and STOCK analysis.

Real Estate:  Here's an interesting sector as it relates to 
yesterday's events.  This will be the most difficult and research 
intensive sector to address.  There are so many things that can 
happen here, good and bad.  Much of the activity in these stocks 
will be very dependent on a multitude of rulings that have yet to 
be determined.

Here are the quandaries to consider, and it will take extensive 
fundamental research to try and uncover all of the possibilities.  
One thing leads to another.

First.... What real estate firms have involvement in the area 
involved with the WTC and areas in close proximity?  Those that 
are damaged should be covered by insurance.  This brings into 
play several questions of insurance.  Are they covered under 
current conditions.  Many types of insurance carry a multitude of 
what is known as "riders."  Is the real estate covered under acts 
of terrorism?  Were yesterday's acts those of terrorism or an act 
of war?  These "definitions" can determine where liability falls.  
There are many questions yet to be asked and answered here, but 
something to start thinking about for those investors holding 
both real estate investments (perhaps REITS or management 
companies).

Second.... Where will all the tenants go that occupied the WTC 
locations.  There are many companies now looking for new office 
space in the district.  Will they keep locations there in the 
heart of the financial district, or will a new pattern emerge?  
As it relates to supply/demand, there is now a sudden emergence 
of demand and there is renewed optimism for some real estate 
stocks that have space available for occupancy.

Ongoing analysis

I've run out of time and deadlines call.  Stock markets will be 
closed here in the U.S. again tomorrow so this gives us one more 
day to try and sort through all the information and ideas of what 
to be looking for.  We'll cover some more ideas tomorrow.  The 
foreign markets will be watched closely and will perhaps give us a 
better idea of what to expect near-term in the U.S.

Things we may never think of

It's really amazing how integrated the world has become.  As I 
scan news item after news item there are so many things that seem 
to have been affected by yesterday's events.  It becomes very 
apparent that yesterday's terrorist events were not only an 
attack on America, but perhaps many other companies located in 
other parts of North America and the world.

Ford Motor (NYSE:F) had to close 2 of its 30 U.S. and Canada 
plants due to supply problems.  Tight security at border 
crossings and the shutdown in air transportation prevented key 
supplies from reaching plants in Wixom, Michigan and Oakville, 
Ontario.




=========================
Special Report
=========================

Brokers Ready To Roll - But Check Your Orders!
by Jon Farnlof

Lower Manhattan will be spending many months, if not years rebuilding 
the financial and city infrastructure damaged by the destruction of 
the World Trade Center.  One of the benefits of the large investments 
in technology by the brokerage industry was that they had disaster 
recovery plans and equipment in place for this kind of event.  As a 
result, even firms directly affected by the attack have announced 
that all records are safe and they will be fully operational when 
the markets reopen.  However, investors should contact their brokers 
to verify their readiness and perhaps more importantly, to understand 
how will they handle orders that were pending when the markets closed. 

It is likely the resumption of trading will encounter extreme 
volatility.  Investors with market orders pending may find themselves 
getting filled at prices that are difficult to predict.  The safest 
route would be to check with your broker.  In Thursday's 
PremierInvestor.net newsletter Eric Utley, the editor of 
OptionInvestor.com and myself will address the expected volatility 
and methods of coping with it.  In the meantime, traders and 
investors need to know where they stand.  

Following are the results of an informal survey of some of the more
popular full service and electronic brokers to check their readiness. 
Thus far, the following full-service brokers have said they are 
functioning and ready to resume operations: Bear Stearns, Goldman 
Sachs, ABN Ambro, Merrill Lynch, SG Cowen, Salomon Smith Barney, UBS 
PaineWebber and Morgan Stanley.  Morgan Stanley was significantly 
impacted by the tragedy as it had operations and over 3,700 employees 
in the World Trade Center. 

Our review of the major electronic brokers found a similar level of 
confidence.  Some of the brokers indicated how they would handle 
orders that existed prior to the market close. We have included 
direct quotes from their web sites:

www.fidelity.com
  - Because the markets are not open, Fidelity will not be processing 
    market orders for equities and options at this time. 
  – Any market orders placed after 4 p.m. ET on September 10, 2001, 
    will be canceled. 
  – Customers may enter limit orders to buy or sell securities,
    which will be executed as soon as practicable when the exchanges 
     reopen, in accordance with exchange rules and regulations. 
  - Most long-term mutual funds are closed on days when the New York 
    Stock Exchange is closed. 
  – Customers can continue to place mutual fund orders through this 
    Web site – although volume and general Internet congestion may 
    slow response times – and through other normal channels. 
  – In compliance with SEC rules, orders for the purchase or 
    redemption   of mutual funds will be executed at the next 
    available price when the New York Stock Exchange reopens.

www.etrade.com
  - Market orders will be accepted when the exchanges re-open
  - Day limit orders will be canceled at the end of each day. 
  - Good-till-canceled orders will be left open. You may cancel 
    these orders, if desired, prior to market re-opening. 

www.datek.com
  - All premarket executed orders on September 11 will stand. 
  - All unexecuted day orders placed on September 11 will be 
    cancelled. 
  - All GTC orders will remain good orders until you cancel them. 
  - All margin calls due on September 10 will be due when the 
    market reopens. 
  - Any checks written against Datek Accounts will be honored. 
  - All valid check, wire, or Funds Now requests made after 2:00PM 
     EST September 10 will be paid. 
  - If you have any questions, please call us (Datek) at 1-800-U2-
    Datek (1-800-823-2835) or e-mail us at support@datek.com 

www.schwab.com
  - Equity/Option Day-only orders placed Tuesday, September 11th 
    prior to 11 AM ET have been cancelled. 
  - Equity/Option Day-only orders placed Tuesday, September 11th 
    after 11 AM ET will be held for the next market open date. 
  - The Wednesday, September 12th Pre-Market session has been
    cancelled.  
  - If you wish to place a Mutual Fund trade, please call 800-435-
    4000 or your Signature Services Team.

www.brownco.com
  - All Day orders and cancellations of Day orders placed for 
    Tuesday, Sept. 11 or Wednesday, Sept. 12 have expired.
  - All Good-Til-Cancelled orders, modifications and cancellations 
    of Good-Til-Cancelled orders placed after the close of business 
    on Monday, Sept. 10 are in the queue and will be released to 
    the exchanges when they resume operations.
  - All new order entry is suspended at this time. Brown & Company 
    will not accept new orders until further information is 
    received from the exchanges regarding their operations.
  - Modifications and Cancellations of existing Good-Til-Cancelled 
    orders will continue as usual, via our web, broker-assisted, 
    DirectLine and PCLine channels.
  - All other functions and services will continue to operate as 
    normal.
  - Should you have any questions, Customer Service will be available 
    during our normal business hours of 8:00 AM to 8:00 PM ET at 
    1-800-822-2021.  

www.tdwaterhouse.com
  - We will enable customer trading abilities on our web site at 
    approximately 9:00 pm ET on Tuesday, September 11th. It is 
    important to note that orders placed since the market close on 
    Monday, September 10th and while the exchanges and market centers 
    are closed, will be active for market handling once trading 
    resumes.          


=========================
Special Report
=========================

Options Issues: Lost Time!
By Eric Utley

The markets' closures over the past two days have brought up
several important questions.  Specifically, what's going to
happen with open options positions?  After all, options are, of
course, wasting assets.  In other words, the passing of time
decreases the premium of a contract.

The time element in an options pricing formula is known as theta.
And the loss of that time value is known as time decay, or theta
decay.  Options that are out-of-the-money lose time value as the
contract approaches expiration because the probability of that
option expiring in-the-money declines with the passing of time.
Appropriately, the closer the option moves towards expiration,
the faster it loses its time value, which is also known as
extrinsic value.

Options that have higher deltas, that is, deep-in-the-money,
lose time value faster than contracts with lower deltas as
expiration is approached.  The reason for that is because
the intrinsic value of deep-in-the-money contracts is more
accurately known relative to out-of-the-money contracts.  As
such, less time value is incorporated into the pricing
formula for deep-in-the-money contracts.

In either case - in-the-money or out-of-the-money - options
positions lose increasingly larger amounts of time value as
they approach expiration.  And for that matter, at-the-money
contracts, too.  Time decay really speeds up in the final 30
days of a contract's life ahead of its expiration.  The
diagram below depicts time decay.




Traders with open positions are currently faced with the dilemma
of at least three days (possibly more) worth of lost time value,
especially in September contracts.  I have contacted several
traders on the floor of the Chicago Board Options Exchange
(CBOE) as well as spokespersons from the Pacific Stock Exchange
and the Options Clearing Corp. (OCC).  The spokespersons I
contacted didn't offer any insight into what the options
regulatory body would be doing concerning this dilemma.  However,
it was the "sense" of the floor traders I spoke with that there
would NOT be any adjustments to compensate for the lost days of
trading.  (That was only their speculation, I should point out.)

Further, there's not much in the way of precedent for these
events we're experiencing.  So, anything is possible in the
coming days.  My best advice for readers is to either call
the OCC and/or CBOE Thursday or frequently check the CBOE Web
site for updates.  Here's the link to the CBOE site:

http://www.cboe.com/AboutCBOE/WhatsNew.asp

Here are the two phone numbers:

OCC:
1-800-678-4667

CBOE:
1-877-THE-CBOE

I truly wish I could offer more insight into this dilemma at
this time.  But, I can't.  However, one of the floor traders on
the CBOE I spoke with speculated that implied volatility would
see a big spike when the markets finally do open.  A big spike
in volatility would, in turn, help to offset the loss in time
value while the markets have been closed, which would mitigate
any losses in premium during that time.

Jon Farnlof and I will collaborate on a piece Thursday concerning
the issue of volatility in both equities and options.


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DISCLAIMER

Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

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