Option Investor

Daily Newsletter, Monday, 05/01/2000

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The Option Investor Newsletter              Monday  5-01-2000
Copyright 2000, All rights reserved.
Redistribution in any form strictly prohibited.

Posted online for subscribers at http://www.OptionInvestor.com

Also provided as a service to The Online Investor Advantage
MARKET WRAP  (view in courier font for table alignment)
       5-01-2000           High     Low     Volume Advance Decline
DOW    10811.80 +  77.90 10926.30 10724.20   952,514k 1,955  1,042
Nasdaq 3,958.08 +  97.42  3982.38  3899.71 1,500,166k 2,575  1,576
S&P-100  791.12 +   9.70   799.06   784.32    Totals  4,530  2,618
S&P-500 1468.25 +  15.82  1481.51  1456.30            63.4%  36.6%
$RUT     518.93 +  12.68   519.63   506.25
$TRAN   2858.68 +   8.67  2868.48  2835.65
VIX       27.32 -   1.54    28.04    26.67
Put/Call Ratio       .42

Markets Rally, but Resistance Holds

Just last Monday, Microsoft took a beating from the Street for
coming up short on revenue and forward growth prospects while not
even knowing what fate it awaited last Friday at the hands of The
Justice Department.  One week later, investors are muttering to
themselves, "gee, the worst is over - maybe a breakup isn't so
bad."  No matter what you think of Baron's, a positive article
run over the weekend, along with many analysts coming to MSFT's
defense, boosted the stock $3.69 to $73.44, back over its 52-wk.
low point of $73 set a few days before earnings.  It's like
investors care nothing at all about what happened to MSFT last
week, and today's volume of nearly 54 mln shares (21% over the
ADV) proves it.  The fact is that MSFT's challenge to the DOJ's
breakup proposal will be tied up in an appeals process that could
last years.  In effect, the downside appears gone (for now),
while many analyst's today defended the breakup value of the
parts as between $100 and $135.  In his own words Goldman Sachs'
Rick Sherlund says the value will remain "stuck" or range-bound
for quite some time.  A boost from $70 to $135 is "stuck"?  No
matter, with the broad stroke of a Microsoft brush, we got a
rally on the Dow and the NASDAQ today.  The big question is, can
it be sustained?

The big answer is "no".  But before you rush to unload every
position you've opened this week, recognize that it's only
because the threat of rate increases on May 16 at the next FOMC
meeting is keeping investors from lunging back into the market
with their pent up piles of cash.  We simply don't know if there
will be a 50 basis point increase by then or just a 25 basis
point increase, the latter of which is already priced in.  Based
on the NASDAQ's inability to get through the 4000 mark today, and
the 30-year bond rate ticking up to 5.98% resulting from some
inflationary signs last week, mild fear seems to be building for
the 50 BP hike - just the kind of thing to take prices back down
as the May 16 date approaches.  Not only that, but recall too
that as the market rises, many traders who recently
(accidentally) became long-term investors will be looking for a
chance to bail out at even money.  On the NASDAQ, that happens at
about the 4000 level.  For the Dow, the magic number is around
11,000.  In short, that spells "range-bound" on both indices
until May 16.  Interestingly, both the new world and old world
stocks are participating in the rally and that's good news.  It
tells us that traders aren't swapping one sector for the other
and that the moves are broad based - a short-term positive.

So how did those indices do today?  Pretty well, thank you.  The
Dow for its part closed up nearly 78 points at 10,811 (though
intraday it was much better, up almost 193 points from Friday's
close) on 953 mln NYSE shares traded.  Compared to recent
memories of 1.3 to 1.5 bln share days, today's volume was not
enough to confirm any major change of direction.  Internals
though were excellent with advancers beating decliners almost
2:1.  Up volume was in fact more than twice the down volume,
while 80 new highs had the edge over just 35 new lows.  35 new
lows are downright nice to see since anything under 35 would be
really bullish.  But 80 new highs coupled with today's low-
average volume, while acceptable, are nothing to write home about
(but we'll take it!).  The things to notice today are the
resistance at 10,925 followed by a 115-point rollover in the
afternoon and lower volume.  The index isn't sick.  It just lacks
the enthusiasm of a true winner.

The NASDAQ tracked similarly, locking up another 98 points to
close near resistance (4000) at 3958, though it too could not
break through resistance at 4000 and suffered from unenthusiastic
volume of 1.5 mln shares.  Thanks to renewed confidence in MSFT,
other issues in biotech, Internet, telecom and networking
rebounded too.  Surprisingly, semiconductors did not participate
even with positive comments from the Hardware Heaven conference
sponsored by Merrill Lynch.  HWP, though not a NASDAQ stock
certainly showed the value of the conference, as it rebounded
from $1 in the red to over $6 in the green when Carly Fiorina,
HWP's CEO wrapped up her presentation.  Similar to the SUNW
mantra where the network is the processor, Carly pushed the
notion that the printer is an interactive appliance.  Anyway,
advancers beat decliners by a 13 to 8 ratio, while up volume
trounced down volume 3 to 1.  However new lows actually beat out
new highs 60 to 55.  While the internals were fairly strong
compared to recent weeks, the tests of resistance on merely
average volume are telling us that the rally is not likely to
lead us to a breakout over 4000 anytime soon.  In fact, using the
cyclical market theory, with three days up in a row, we would not
be surprised to see the NASDAQ take a breather for a day,
especially since many "accidental investors" will jump at the
chance to break even.  Today's move to a high of 3982, then
rollover may have been NAS's best attempt and investor's nearest
hope of unloading those underwater positions from the recent

Let's cover some news highlights quickly too.

First, Warren buffet spoke to his flock at the annual Berkshire
Hathaway shareholders meeting held over the weekend.  Long
reputed to shun tech stocks, the Omaha sage conceded that he
finally owned some - about 100 shares each of MSFT and INTC just
so could read a copy of the annual report.  Nonetheless, he's
staying away from them, but still notes that he doesn't see many
investing opportunities.  Does that mean that the market is still
over valued?  Heaven help us on the day that Warren thinks there
are many deals to be had.

Second, TWX pulled the plug on Disney-owned ABC affiliates in the
New York, L.A., and a few other major markets across the country.
ABC is a high margin cash cow that carries Regis and Kathy Lee in
the mornings and the wildly successful "Who wants to be a
millionaire?" (makes you wonder why more people don't stand up
and yell, "MEEEEEE!!!!" instead of just clapping).  The FCC makes
it illegal to remove station signals during certain measurement
periods like the sweeps that begin this week.  Sweeps determine
audience reach, which then helps determine advertising rates.  No
viewers equals reduced revenue.  However, the FCC also mandates
there be a contractual agreement to carry the signal, and that
contract has expired until a new one can be reached.  Prolonging
the rift hurts both TWX and DIS in the long run, but puts DIS
over a barrel in the short run given the importance of ratings.

Next from the "lovely parting gift" department, Jill Barad, the
former CEO of Mattel who stepped down under threat of termination
by the board will receive a golden parachute valued at $40+ mln.
it includes some debt forgiveness, $26 mln in cash, a pension
worth over $100,000 per month for 10 years, and a full vesting of
stock options (two thirds are worthless at today's price of
$12.13).  While we're sure most of us would like to be fired that
way, shareholders have filed numerous lawsuits as this comes at a
cost of $0.09 per share to earnings - that's $9 to Jill for every
100 shares an investor owns.  No wonder shareholders are hopping

Finally in some good news for tobacco companies, the Florida
Legislature is contemplating a bill that would put a limit on the
amount of any bonds posted under an appeal process if a tobacco
company is found to be liable in any of the current Florida
tobacco lawsuits.  The truth is that governments don't want
tobacco companies to go away.  The tax revenue they generate is
too huge to risk losing.  They would be killing the goose laying
the golden eggs despite how unappetizing the goose looks.  MO
closed up $1.69 at $23.44, its highest level since January on the

OK, back to the markets. . .how do we play the next few days?  On
both the Dow and NASDAQ, the lack of big volume tells us that there
was no conviction to move the indices (thus its components)
higher.  Greenspan/FOMC/inflation/interest rates loom heavy in
the next two weeks and should serve to keep a limit on
enthusiasm.  With earnings season too coming to an end, there's
not much left to move the market up.  AT&T reports tomorrow
morning; GBLX tomorrow after the close; and DIS reports
Wednesday.  Other than any surprises there, lack of volume is
confirming that range-bound sentiment.  Don't get us wrong, we
are optimists by nature.  However, given the current technical
climate where we meet strong resistance at 11,000 on the Dow and
4000 on the NASDAQ, it appears the markets could squeeze in one
more downdraft before we see a rally in front of the FOMC
meeting.  In short, we're at resistance and there's no good
reason for the markets to go up before May 16.

Consider dusting off some put plays or writing covered calls
during the sideways markets.  And as always, confirm market
direction and sell too soon.  As Jim says, don't buy too soon

Buzz Lynn
Research Analyst


Siemens Buys Shared Medical For $2.1 Billion
By: Matt Paolucci

German industrial behemoth Siemens AG on Monday agreed to
acquire No. 2 healthcare computer services company Shared
Medical Systems Corp. (SMS) for $73 a share, or $2.1 billion
in cash.

SMS supplies information systems and professional services to
over 5,000 health enterprises and health providers in North
America, Europe, and New Zealand. The Company offers a full
range of clinical, financial, and management applications to
support health providers across the continuum of care.

Shared Medical directors already have approved the
acquisition, which Siemens will conduct through its medical-
engineering unit.

In afternoon trading, shares of Malvern, PA-based Shared
Medical were up 70 percent, or $29.19, at $70.63 per share.

For Siemens, the deal significantly bolsters its U.S.
business, which reported sales of $7.97 billion for the six
months ended March 31, a 22 percent increase from the
corresponding period a year earlier.

Shares of companies specializing in health-care information
technology have suffered recently because hospitals have
postponed investing in new computer systems because they are
waiting for the federal government to adopt standards for
electronically transmitting medical records.

Shared Medical had been the target in March of a $67-a-share
unsolicited bid by smaller rival Eclipsys Corp (ECLP). Later
in the month, however, Eclipsys agreed to be sold to
Neoforma.com Inc., operator of an online medical marketplace.

But once Eclipsys disclosed its bid, Shared Medical became
vulnerable to a takeover and retained Goldman Sachs Inc. to
explore "strategic alternatives," including a possible sale. A
number of bidders, including Siemens, expressed an interest in
acquiring Shared Medical, which had 1999 revenues of $1.2

Dr. Erich R. Reinhardt, President, Siemens AG's Medical
Engineering Group commented, "Combining Siemens innovative
technology and know-how with SMS' advanced information systems
will enable us to generate greater efficiencies for healthcare
providers around the world."

Shares of SMS stock, which traded as high $63 a share a few
weeks ago as a result of Eclipsys's bid, has fallen
dramatically of late. SMS currently trades for just over $41,
giving it a market capitalization of around $1.1 billion. The
stock's 52-week high, hit last May, is $73.50 a share.

It isn't clear if a rival bidder could still trump Siemens's
offer, and officials at Siemens and Shared Medical couldn't be
reached for further comment.

Today's merger announcement also comes the same day SMS
reported less-than-stellar first quarter earnings.

First quarter revenues were $240.6 million, down 16 percent
from $287.1 million for the same period in 1999. Diluted net
income per share for the quarter was $0.10, compared with
$0.68 for the same period in 1999.

Earnings were negatively impacted by industry-wide weakness in
new software sales and a general slow down in demand for
large-system implementations.

The companies expect the acquisition to close by June 30.


DHR - Danaher Corp. $58.88 +1.75 (+1.75 this week)

Danaher Corporation operates in two business areas: Process/
Environmental Controls and Tools and Components.  The company's
Tools and Components segment produces and distributes general
purpose mechanics' hand tools and automotive specialty tools.
Among the household names they are responsible for are Sears'
Craftsman line, Allen wrenches, and NAPA hand tools.  The
Process Controls division, led by Veeder-Root, makes leak
detection systems for underground storage tanks, as well as
sensors, switches, measurement devices, and communications and
power protection products.

Most Recent Write-Up

With apparent indifference to the travails of the DJIA, DHR
continued higher throughout the week.  Although appearing to
lose a little momentum towards the end of the week, the stock
is still being supported by the ascending trendline that began
on April 17th.  Earnings came in stronger than expected on April
19th and DHR has been moving higher ever since.  Of some concern
is the fact that volume has been dropping off the past 2 days,
barely posting half the ADV on Friday.  The stock is running
into some resistance between $57-59, and will likely need the
extra push of increasing volume to break through.  There has
been no post-earnings weakness in the past week and a half, but
remain vigilant.  The recent light volume could be an indication
that DHR needs to take a break before heading higher.
Technically our play still looks good as DHR is using the 5-dma
(currently $55.69) as support, but keep your stops in place to
protect those profits.  Use dips to support between $55-56 as
opportunities to open new positions, but exercise caution until
volume picks up.  A more conservative approach at this juncture
would be to wait for volume to pick up and push DHR through


You just can't stop this stock.   Yes, it's a different kind
of play based on low premiums and calculated entry and exit
points, but the results are the same...profits.  The beauty
is in the fact that you only need DHR to move a dollar or two
in order to be sitting on a tidy profit.  Check out the trend
for the past two weeks, almost no weakness.  Look for it to
make that final move up to resistance at $60-$62.  It's not
far away, but far enough to make for a good trade.

BUY CALL MAY-50 DHR-EJ OI=  0 at $7.63 SL=5.25 Wait for OI!
BUY CALL MAY-55 DHR-EK OI= 27 at $4.88 SL=2.75
BUY CALL MAY-60 DHR-EL OI=  0 at $1.25 SL=0.00 Wait for OI!
BUY CALL*JUN-55 DHR-FK OI=320 at $6.25 SL=4.00
BUY CALL JUN-60 DHR-FL OI=  0 at $2.25 SL=1.00 Wait for OI!

Picked on Apr 23rd at   $52.94     P/E = 30
Change since picked      +5.94     52-week high=$69.00
Analysts Ratings     6-5-1-0-0     52-week low =$36.44
Last earnings 04/00  est= 0.46     actual= 0.49
Next earnings 07-19  est= 0.53     versus= 0.45
Average Daily Volume =   452 K


The OEX and Your Brokerage: links in the chain
By: Austin Passamonte

Perhaps the biggest limitations for trading the Skybox system
effectively are features most option brokers don't offer yet.
Let's explore a few scenarios that explain.

Our Skybox instructions today require us to take trades as the
market moves through the listed benchmarks if we can buy at our
maximum purchase price or better. Let's say the market trades
into the 798 bearish trigger. If our brokerage offers a way for
us to place a trade when the option price AND the underlying
index meet our requirements, execution is simple. We can enter
orders with an open to buy stop if the OEX hits 798 and a buy
limit order for the option price of 14.50 is met. If your current
broker offers these features, you have the ability to enter
your order as a limit-buy on the option price once the index
triggers the order. Perhaps there are a number of brokers who
offer dual contingency open-buy features but one I'm aware of
is Preferred Trade listed right here in the O/I website. With
Preferred, you can pre-load an open buy order to execute at
benchmarks when they trigger your market point if the options
can be purchased at or below your limit-buy offer.

Other brokers who don't allow buy on market point stops are much
tougher to enter trades with. For example, if the index is moving
up from today's open at 785 to 796, 797 and finally 798 you could
pre-enter your open buy limit order for 790 put options @ $14.50
because those puts are coming down in price as the index advances
up. By the same token, if the market was trading from 804 to 803,
802 and your instructions are to buy 810 calls at that point,
you could enter an open buy-limit order at $14.50 while the market
falls into your long call order as those calls deflate in price.
This ensures you will not get filled at a higher price at the
intended target than you wish. However, let's say the options
were selling for 16.50 at the 804 mark, 16.00 at the 803 mark
and 15.50 at the 802 mark (Use the same price scenario in the
put example). Now what?

If the options are too expensive as your triggers are hit, one
of two things can occur. The market will reverse and move away
from you without filling your limit bid, no harm done. On the
other hand, the market may continue to move into you and the
order will eventually execute at your limit price but the index
level will be below the target you intended. Using the above
example, if the 810 call price was 15.50 when the index was at
the 802 benchmark, you will not be filled @ 14.50 there. Agreed?
If you leave this buy order open and the index slips to 800
or even 799, the 810 call price will now meet your limit order
at the given option's price without regard to where the index
itself trades at the time. The result is that you didn't own
the calls at the 802 level, you now own them at the 799 level
instead. One more down tick to 798 at the index and we need to
prepare for buying 790 puts as instructed.

When working with discount and online brokers that simply take
orders, you can either attempt to cancel the open buy once the
price situation is recognized or let the trade ride. Should
you happen to buy the 810 call options @ 14.50 near the OEX 799
level instead of 802, simply set the same stop-loss price given
in the Skybox and focus on executing the next put position if
conditions permit. If the call option trade moves deep into
the profit that same day you can execute the sell-limit price
given in the Skybox should it be reached. Personally, I would
close out this position at any profit or before the end of
trading at par. Holding inflated trades into the next day will
see premium value slip a little or a lot, depending on today's
volatility versus what tomorrow may bring. Several times I've
bought "expensive" OEX options, watched them move a few points
into profit later that day and then elected to hold them over
for the big score tomorrow. It's a disheartening feeling to
watch expensive OEX options go from 2 or 3 points in the money
down to purchase price or below by the following day's open. In
almost every case the index market moved back into a trading
range where I could have repurchased yesterday's options for
one or two points less than I paid for them yesterday. Had I
sold the inflated options for a two-point gain the day before
and bought them back today for two points less than I paid y
esterday, that is a four-point swing in unrealized profit. Hold
five, ten or more OEX contracts in this situation and you're
talking about a decent chunk of change missed out on!

If there is one caveat I would stress to you it is sell expensive
OEX options the same day to capture high volatility value. How
will you know when options are expensive? If they are priced
above suggested value at the Skybox benchmarks and/or the bid/ask
spread is wider that one point you can be sure pricing favors
the sellers. Should you own such options for whatever reason on
any given day, don't hold them over without risking a loss of
unrealized appreciation.

Opening positions within the Skybox parameters are extremely
difficult with brokerage accounts that require you to personally
transact as the index hits your targets. The market will
frequently move too fast for you to decide the options are fair
priced, process the order and hit that price while the index
moves in your favor. If you enter an order and the market
moves swiftly against you, it's tough to clear a cancel order
from a browser-based service that beats the execution on the
CBOE floor (slow as the AMEX is, that might be easier if the
OEX traded there!). Resign yourself to the fact that there will
be missed trades and slippage while using most discount brokers
that don't offer the features of buying on stops of option price
limits at specific index (or stock) price points.

Another tough challenge faced when placing open-buy orders at
the benchmark triggers is the emotional factor. It's easy to
calmly map out the day's trading plan prior to the bell going
off, but once that baby is struck and the charts start jumping
around, best laid plans of mice & traders. well, you know the
rest. It can be mentally impossible to take the third trade
of a day in late afternoon when the first two were stopped for
losses while tech signals on your charts and talking heads on
CNBC indicate you should do otherwise. These are times when the
OEX will charge off deep into the money, leaving a vapor trail
as you sit and stew in frustration over failing to pull the
trigger just one more time. The voice of experience speaks once
again, and I can promise it is much easier to pre-load orders
and let them execute on their own while you sit and watch

To my knowledge there aren't any brokerages that allow traders
to use a stop loss and sell-limit stop on a single trade with
"one cancels other" or OCO instructions. If and when this becomes
the case, we could place an order that reads, "buy May OEX 810
Calls @ 14.50 when the index hits 802. Stop-loss 12.00 and
sell-limit at 22.50, GTC". Now we have that pending trade "fenced"
with stop order instructions and it's on autopilot. As a matter
of fact, we could place pending orders on several benchmarks
of trades headed in each direction with total objective execution.
The only thing left for us to worry about would be our money-
management aspect.

Traders who have margin-level clearance to trade naked puts can
use dual stops with some brokers, but the trader is responsible
to personally cancel the non-performing stop once the first one
is triggered. For example, if you purchase OEX 810 calls at the
benchmark for the 14.50, you can place a stop loss at 12.00 and
a sell-stop at 22.50 but you have now entered two sell orders
for one transaction. Any broker I'm aware of currently views
one of these two stops as a naked sell. It is possible and highly
likely that both can be triggered in a given trading session if
not monitored, which could do some nasty things to your account
balance left unattended. There are brokers working on offering
one-cancels-other stop orders for option traders, and that will
take us light years ahead in auto-trading the Skybox. Please don't
ask me for technical or specifics on any brokers; you must learn
for yourself firsthand from them exactly what they offer.

Of course it would be great if we traders were able to drop
these instructions off at the broker's every morning and pick
up the check by month's end. Seems like easy money but there's
the catch. easy money doesn't exist. You really must be able
to monitor the market every minute and know precisely what you're
doing in order to make it work.

For many who ask if the Skybox can be traded verbatim by those
who can't watch the market all day, my answer today would have
to be no. I am not aware of any brokerage that accepts
discretionary power to trade the system, although some may
exist. It's been said that Schwab offers a service via its
"dedicated options team" in Denver or Philadelphia offices but
I have not researched this myself. Feel free to inquire at Schwab
if you choose, hearing the information directly from them is

The OEX is far too erratic over the course of a trading day to
simply buy at the open and sell at close. Most any 60 minute
chart of the index will explain what I mean. There are times
when absentee traders can profit from the OEX safely and when
they happen you don't want to miss out! I'll outline the specific
conditions that set up these trades, and some may be shaping
up real soon.

The good news is there are several strategies part-time traders
can take advantage of offering solid profits for minimal risk,
and we'll discuss those soon. Tomorrow we'll finish up trading
the Skybox with money-management principals, which I consider
to be the most important factor for overall financial success
& failure. Keep an eye on the OEX index and we'll tie things
up tomorrow!

Trade the right direction.

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