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Portfolio Review

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Waiting on the Fed!

Stocks drifted lower Monday as buyers moved to the sidelines in anticipation of tomorrow's FOMC Meeting. The Fed is widely expected to boost the federal funds rate by one-quarter percentage point to 2.75% but while most analysts consider the increase a foregone conclusion, the broader concern is how aggressively policy-makers will attempt to manage inflation in the coming months. Since May 2004, the Fed has suggested that rates can rise "at a pace that is likely to be measured" and the big question is whether or not that term will be used again in the FOMC's statement about future monetary policy. At the close, the Dow was down 64 points at 10,565, while the S&P 500 index finished 5 points lower at 1,183. The NASDAQ Composite index ended relatively unchanged at 2,007.

The MCM Portfolio endured some unfavorable activity today, most notably in Vimple Communications (NYSE:VIP). The issue dropped nearly 3% in early trading and, in keeping with our plans to manage each position more conservatively, we recommended a spread closing order for a debit of $0.40 per contract. Based on the (stock price) rebound later in the session, it appears that order would have been easily filled. Traders who used other exit (or adjustment) strategies are welcome to comment on their techniques at: support@optioninvestor.com

Another downdraft was observed in the PHLX Gold&Silver Sector Index (PHLX:XAU), which was offered as a "supplemental" spread candidate for traders who follow gold and other precious metals. The XAU fell more than 2% to $97.79 and from a purely technical standpoint, the issue seems likely to reach our conservative loss-limit/exit point in the coming week. For those readers who are participating in the position, a partial explanation of today's gold-related activity (and its near-term outlook) can be found here: gold

Portfolio trades:

Positions in Harmon International (NYSE:HAR) and Silicon Laboratories (NASDAQ:SLAB) can be closed for mere pennies, so we recommend that traders "lock-in" some gains by closing the short options in each spread. This will free up capital for new plays and eliminate the risk of future loss. We suggest that readers keep the long options open with a $0.05-$0.15 (GTC) sell-limit order to profit from any unexpected (upside) activity in these issues.

On the "watch" list:

Chiron (NASDAQ:CHIR) - CHIR's share value is consolidating near a recent support level as investors ponder the likelihood of a profitable recovery from the 2004 closure of its flu vaccine plant in Liverpool, England. Our loss-limit/exit point has been adjusted lower, to the $34.50 range, to take advantage of the technical support near that price.

Estee Lauder (NYSE:EL) - This issue appears to be comfortable at the current price ($43.75) but any significant news could propel the stock to the top of a recent trading range near $46. Traders should have a loss-limiting order in place at all times. This could be: a "buy-to-close" limit order on the spread or the short option (triggered by the stock or the option price), a "covering" order using the stock or a more-distant call to offset the short option, or a "roll-out" order to transition to a different strike and/or forward to a future expiration date.

New Plays:

Lexmark (NYSE:LXK) - There was lots of activity in the LXK options and it appears that a credit of $0.30 in the suggested spread was achieved by more than one trader. We will record that entry price in the portfolio summary.

Celgene (NASDAQ:CELG) - With the share value moving down late in the session, there was ample opportunity to enter this position at the recommended target. Unfortunately, the credit may get better tomorrow. In addition, traders should consider establishing a stop-market order on the short option with a stock-based ($30-$31) trigger to limit losses from any unexpected move in the underlying.

MCM Staff

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