LM Ericsson Telephone Company (NASDAQ:ERICY) is engaged in the development and supply of end-to-end solutions to network operators for mobile and fixed-line communications. The company offers mobile platform technology for handset manufacturers and a variety of technology, equipment and services for private-enterprise networks, as well as for special applications, such as radar, cables and mobile devices. LM Ericsson has three major business segments: Systems, which consists of networks and professional services; Phones, a joint venture with Sony Ericsson Mobile Communications that offers a range of personal communication devices; and Other Operations, which consists of a number of small businesses and subsidiaries.
The search for a bearish spread was a difficult task in the wake of Friday's broad rally and most of the technically favorable issues offered little in the way of option premium. After much deliberation, we decided to list a position with slightly more risk (with regard to distance from the sold strike) than would normally be offered in the MCM portfolio. The basis for this selection is the obvious disappointment investors displayed after the company's quarterly report and the relatively limited upside potential in the issue. In addition, the stock price has dropped below a popular moving average and any further selling pressure would likely signal the beginning of a new downtrend. Traders who participate in this position may need to allow a bit more latitude in their exit strategy as there is not much distance between the current share value and the cost basis in the spread.
PLAY (less conservative - bearish/credit spread):
BUY CALL MAR-35.00 RQC-CG OI=3613 ASK=$0.10
SELL CALL MAR-30.00 RQC-CF OI=5968 BID=$0.60
INITIAL "NET-CREDIT" TARGET = $0.55-$0.60
POTENTIAL PROFIT (X 5 contracts) = $275
RETURN ON INVESTMENT (max) = 12%
COST BASIS = $30.55
LOSS-LIMIT/EXIT POINT = $29.75 (cons) - $31.00 (aggr)