Monthly Cash Machine Newsletter, Friday, 04/15/2005 03:16:26 PM ET
Another "Black Friday" for Stocks...
HAVING TROUBLE PRINTING?
Expiration Day Arrives!
As another month of option trading comes to an end, it's no surprise to see the volatility continue right up to the closing bell. The market has been very complacent in recent weeks but when the declines started to impart "fear" among investors, a barrage of trading activity ensued. In fact, Thursday was one of the busiest days in the history of options as roughly 4 million puts and 4 million calls were crossed on the major exchanges.
Thankfully, our portfolio was not significantly affected by the turmoil however there are a number of positions that warrant close attention in the coming sessions. Obviously, all of the bullish issues are suspect: Black & Decker (NYSE:BDK), Sealed Air (NYSE:SEE) and Pixar (NASDAQ:PIXR), and it may be difficult (mentally) to absorb the large losses associated with closing these plays at such an early date. In addition, the new calendar spread in Estee Lauder (NYSE:EL) will be negatively affected if the underlying stock does not rebound in the coming weeks. On the bright side, bearish spreads in Harmon International (NYSE:HAR), Silicon Labs (NASDAQ:SLAB), Allergan (NYSE:AGN), Novellus (NASDAQ:NVLS) and Lexmark (NYSE:LXK) will likely expire at maximum profit.
One move we didn't expect was the rally in Biotech Holdrs (AMEX:BBH), which jumped nearly 5% at the open and climbed to within a few cents of our sold (call) strike at $155 by mid-session. The catalyst for the rise came from Genentech (NYSE:DNA), which soared nearly 20% following news that clinical studies had shown the company's cancer drug Avastin was effective in stopping the progression of breast cancer in certain patients. Needless to say, the event was unexpected and caught us completely "off-guard," proving once again that you should never hold a position without an exit strategy (and a closing/adjustment order) in place. At this point the alternatives are very limited and since we were not able to monitor the activity in "real-time," it is pointless to suggest that a better exit could have been achieved. Our current recommendation is to roll up and out (again) to the OCT-170/OCT-165 call-credit spread, for a small debit. The transition will eliminate the remaining profit in the (original) position but with any luck, we will be able to close the spread for a smaller loss in the coming months.
Look for a complete summary of the MCM Portfolio after the market closes.