Option Investor

Trade Alert - EL (OX Screen Shot)

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Position Adjustment - Part II

Here is a "screen shot" of the OptionsXpress order page for the suggested (EL) trade:

This illustration is for less-experienced traders who follow the MCM portfolio.

Again, we are going to:

BUY (5) JUL-$45 EL-GI Calls

to create a neutral-outlook calendar spread. We believe a transition to a horizontal spread is the most viable strategy beyond simply closing the play outright. As you may recall from the recent strategy narratives, a calendar spread (also known as a time spread) involves the purchase of an option with one expiration date and the sale of another option with the same strike price but a different expiration date. Time erodes the value of the short term option at a faster rate than the long term option so if the price of the issue remains relatively unchanged until the near-term option expires, the outcome will be favorable.

Once the position is established, we will continue to monitor the technical character of the underlying issue for any significant changes. If EL remains in a small range and ends the expiration period near the sold strike, we may decide to simply sell the JUL-$45 calls to close the position. If the outlook remains relatively neutral and the option premiums are robust, we may sell the MAY-$45 calls to reduce the cost basis in the longer-term position, hoping to earn a greater profit when the JUL-$45 calls are eventually sold. Obviously, there are endless variables in the position management that might follow this adjustment but they are all based on a common techniques and fundamental components of option pricing.

We will post further information and/or trade recommendations as the situation requires.

MCM Staff

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