Option Investor

New Portfolio Position

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A Chart Topper!

Stocks remained volatile during the past week but all the activity resulted in little more than a lateral consolidation for the major averages. The S&P 500 equity index finished Friday's session almost exactly at its 150-dma and there was no convincing indication of which direction the next move will be. Fortunately, there were plenty of individual issues trending higher and one of the stocks that came up on a number of chart scans was CyberSource (NASD:CYBS). Although the company is known as a leading provider of electronic payment and management solutions, investors are more focused on the capital gains that CYBS has paid in recent weeks. We are going to join this bullish group of stock buyers and speculate conservatively on the near-term price of the issue.

Buy CYBS Stock: Last Price = $19.41
Sell JUL-17.50 Call (CXQ-GW) Bid Price = $2.45
Cost Basis = $19.41 - $2.45 = $16.96
Downside Protection = 12.62%
Maximum Profit = 3.18% (without margin)

The target entry price in this example trade will be:

Net Debit = $16.85
Downside Protection = 13.70%
Maximum Profit = 3.85% (without margin)

Because CYBS is a technology company with a fundamental value far below its current stock price, the suggested covered-call position is only appropriate for those who have a bullish "technical" outlook for the underlying issue. The goal of this hypothetical trade is to highlight a low-risk approach to stock ownership and illustrate some common position management strategies if the share value declines unexpectedly. We'll monitor the stock and options prices in the coming week to determine if an entry is possible. A stop-loss transaction (exit trade) or position adjustment should be initiated if CYBS closes below $16.60 - $17.00, depending on each individual investor's risk versus reward tolerance.

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