We were reviewing the recent positions in Merrill Lynch Biotech HOLDRs Trust (AMEX:BBH) and LM Ericsson (NASDAQ:ERICY), both of which have been difficult to manage, and we noticed a few similarities as well as some key differences.
Most significantly, we were forced to cover the short (call) options in ERICY at the worst possible time - near the top of the current range - by a predetermined loss-limit point. In hindsight, the level we selected was too conservative, as we knew the position would require more leeway, and that outlook was mentioned in the original play narrative. With the BBH, our exit/adjustment point was correctly positioned but for a different type of movement - a slow, relatively steady climb, as opposed to a sharp, vertical spike due to unexpected news.
When compared to BBH, the chart pattern for ERICY suggests far less upside potential, thus the risk of excessive loss from a late exit should be negligible. In contrast, the Biotech HOLDRs has demonstrated an ability to move far beyond the sold (call) strike in only a few weeks, so a timely adjustment is much more critical in that issue. Of course, the strategy for ERICY was greatly motivated by our desire to explain the "call-covering" technique with stock, however we do not have the same latitude with BBH. There is also the concern that some of our new readers are not simply ready for complex adjustment methods such as the transition to a calendar spread (discussed yesterday for BBH).
With that fact in mind, we are going to recommend that less experienced traders close the current BBH credit spread outright for a small loss (currently $0.90 per contract). Those who are willing to remain in the position should first consider rolling up and out to the JUL-$160/JUL-$155 call-credit spread. Since that adjustment can be made for little additional cost ($0.20 - $0.30), it seems to be the best alternative for the majority of readers and the MCM Portfolio. That being said, we are also going to track the (calendar spread) strategy offered in Monday's newsletter, strictly for the benefit of our readers and the educational value it will provide.
On a side note, the market-makers for Vimple Communications (NYSE:VIP) have been absolutely ruthless, even with the stock down nearly 5% from Monday's opening price. We have yet to see a credit (on a simultaneous order basis) greater than $0.10 for the suggested spread and it is impossible to know how many of the contracts traded were due to our recommendation. We ask again that reader's report any fills in this position, so we can determine if it belongs in the portfolio summary. The address for question and comments is: Contact Support