Monthly Cash Machine Newsletter, Wednesday, 05/04/2005 01:31:37 PM ET
HAVING TROUBLE PRINTING?
A Nice Rebound!
Stocks moved higher in early trading Wednesay, bolstered by lower crude prices, a slew of favorable profit reports and some unexpected merger announcements. Near midday, the Dow Jones industrial average was up 65 points at 10,322, while the S&P 500 index gained 6 points to 1,167 and the NASDAQ composite rose 12 points to 1,945.
Needless to say, the activity was beneficial for a number of issues in the portfolio and most notably, in a few plays we have previously closed. Pixar (NASDAQ:PIXR) was one of these "early-exit" victims (even though the share price never fell below the sold put strike), but now it appears to be resuming a long-term uptrend after a brief consolidation near $45. Black & Decker (NYSE:BDK) is in a similar situation, having rebounded from the recent sell-off amid renewed buying pressure at a short-term (technical) support level. The most surprising "laggard" is Sealed Air (NYSE:SEE) and based on the recent move below a multi-month trading range, it appears unlikely the share value will recover in the near future.
Of course, we must not forget the "lessons learned" from Infospace (NASDAQ:INSP), which is finally establishing a lateral trend after last week's precipitous plunge. Based on this (bottoming) pattern, traders who are holding the MAY-$35 puts from the failed credit spread should consider closing the position before the premium erodes further. The options are currently bid near $3.75, thus a significant portion of the original loss could have been recovered simply by remaining in the long portion of the spread when the issue reversed course. The "loss limit/exit point" price listed with each new play works well with this approach, which is explained in the MCM tutorial:
Another strategy is to attempt a "roll-out" of the spread for a small profit or at least a break-even exit. To roll-out of a credit spread (in the current expiration period), place an order to close the short option when the stock trades, and preferably closes, below technical support or a well-established trend line or moving average on heavy volume. There are certainly more precise signals that can be used but this simple technique is based on the probability that, once a reversal has occurred, the stock should continue to move in that direction. After the sold (short) option is repurchased, wait for the new trend to lose momentum and sell the long position to close the entire play. It is a difficult technique to perform when emotion enters the formula but it works well once you become experienced at it. The key to success is using the method at known support levels or after obvious reversal signals, otherwise you are simply speculating about the stock's next move.
Among the other positions in the portfolio, Chiron (NASDAQ:CHIR) appears to be back on track after a recent slump and it is no longer on the "watch" list. Mentor (NYSE:MNT) has also returned to a "comfort zone" and will likely remain in the current range until the company's fourth quarter report, due on Wednesday, May 18. Obviously, we will need to review the technical condition of the issue prior to the announcement, to determine if an "early exit" is warranted. The new position in WellPoint (NYSE:WLP), although initiated at a slightly smaller credit, is performing well. In addition, the alternate spreads in Cigna (NYSE:CI) and Lennar (NYSE:LEN) are moving as expected however will need to monitor the latter issue closely if the broader markets continue to rally in the coming sessions.