Option Investor

Trade Alert - EL

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If anything can go wrong, it will go wrong...

The recent decline in Estee Lauder (NYSE:EL) shares demonstrated once again the power of Murphy's Law when it comes to trading and the MCM Portfolio. It seems that every time we suggest an adjustment, the position reverses within a few days after the trade. This was the certainly the case with EL, which began to retreat Wednesday morning and followed the broader market lower for three consecutive sessions. Since we were "late to the game" on Friday (missing most of the important activity), there was no opportunity to recommend a timely trade in the current position.

Now we are faced with a losing adjustment (in yet another play that should have expired at maximum profit) and the best we can do is sell some time premium and hope the issue recovers in the coming months. The MAY-$45 calls last traded near $0.75, so plan to initiate a "sell to open" order (for the appropriate number of contracts) at a slightly higher price and monitor the near-term activity of the underlying issue. If the stock moves higher, a "fill" at $0.85 or $0.90 may be possible. If not, the decision to trade becomes much more difficult because it is necessary to balance the desire to reduce the cost basis now with the possibility of achieving a better price in the future. In most cases, it is probably better to simply execute the order at the current (bid) price. However, we hesitate to make a specific recommendation in that regard, given last week's volatility in EL and the unpredictable trend of the market in general. In fact, the decision might just as well be made by a coin toss. But, we are always optimistic and hopefully, the stock will eventually rebound, allowing a favorable outcome in this most difficult position.

MCM Staff

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