Option Investor

Portfolio Review

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Earnings Season Begins...

Stocks traded in mixed fashion Wednesday as the first quarter reporting period began in earnest with Alcoa (NYSE:AA) posting moderately favorable results. Despite the company's robust sales growth, the report did little to change the outlook for corporate profits in the near-term and investors displayed their lack of conviction by unloading stocks as the day progressed. Crude prices were also in the news after a government report showed improved oil supplies, but the optimism did not last long as concerns over the effects of rising fuel costs continued to weigh on share values. At the close, the major equity averages were relatively unchanged, achieving little follow-through in the wake of the mild, two-day rally.

Fortunately, there have been some positive moves in the MCM Portfolio this week including: Chiron (NASDAQ:CHIR), Cerner (NASDAQ:CERN), Celgene (NASDAQ:CELG), Vimple Communications (NYSE:VIP), and UnitedHealth (NYSE:UNH). Also, we are hoping for a successful outcome with Research In Motion (NASDAQ:RIMM), but today the maker of the popular BlackBerry wireless device closed down $1.48 at $72.92 after reporting that fourth-quarter sales came in below consensus expectations despite subscriber growth that more than doubled from a year ago. Our conservative (bullish) spread has previously been closed, however we know there are a few traders who held across the earnings date in expectation of a "blow-out" report. While that wasn't the outcome, we are glad to see the issue holding comfortably above the initial exit points in the position.

Without doubt, the most interesting play this month is Estee Lauder (NYSE:EL) and even with the recent rebound in the (oversold) broader markets, the lateral pattern in the stock price has continued. Although we don't want to "bail-out" of the position at such a late date, the pressure is building among a few of our readers who believe the risk of staying in the spread is not worth the reward. In contrast, that is exactly the premise we have used for remaining in the play; we think the upside potential is limited without a major catalyst to support a significant change in the (technical) character of EL. In addition, we prefer a neutral-outlook adjustment through the purchase of longer-term calls, rather than simply buying back the short options in the spread. This technique would (eventually) profit if the share value stays in a relatively small range and since that is our current outlook, the strategy is a viable alternative to "locking-in" a loss.

Having explained our viewpoint, the more important task is determining what strategy will best suit the majority of traders who participate in the MCM Portfolio. Obviously, there is something to be said for limiting losses with an "early exit" but having gone this far, it appears the best course of action is to closely monitor the issue until a decisive (trend) change occurs, or a successful outcome is achieved in the position. Those of you who don't want to endure the stress of (short) "in-the-money" options should use one of the daily gyrations to close the position for a small loss. In addition, traders with a more aggressive stance should consider using a "buy-to-close" order for the APR-$45 calls with a limit price of $0.25-$0.30, to take advantage of any unexpected (sharp) declines in the underlying issue. Who knows...you might get lucky, and we would certainly "follow suit" if the price is right!

MCM Staff

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