Option Investor
Newsletter

Portfolio Activity

HAVING TROUBLE PRINTING?
Printer friendly version

Position Management

A quick review of the recent activity in the MCM Portfolio revealed that we have not published loss-limit/exit points for the alternate positions in Cigna (NYSE:CI) and Lennar (NYSE:LEN). With regard to the CI bull-put spread, readers should consider using a contingent "stop-market" order to close the short MAY-$85 put options if the stock moves below $89 (50 dema) on an intraday basis. A "net-debit" order of $0.85-$0.90 to exit the entire spread may also be appropriate for traders who want to limit the maximum percentage loss in the play. Normally, we would recommend a similar approach for the bear-call position in LEN, however it would probably be less effective as the sold (call) strike is closer to the current share value and the stock has significant upside potential from its near-term "oversold" condition. At the same time, the previous rally (late April) failed near the sold call strike at $55, which is also an area of overhead supply, so the key to LEN's future trend will likely be determined by how the issue performs during the next few sessions. Since a bullish whipsaw (much like the activity on 4/26) could force a conservative trader out of the position prematurely, it may be best to focus on a "covering" technique or a strategy that benefits from a change in (technical) character, rather than simply trying to exit the spread for a minimal loss. Based on the intermediate-term lateral pattern between $53-$58, the issue would be a good candidate for a horizontal spread if it moves back into the previous (5 month) trading range. Here is a chart of LEN's price history for the past few months, including the support and resistance levels that promote a neutral outlook with the issue above $55:



A move above the sold (call) strike would make the current "bearish" spread untenable for most MCM traders, but if we purchased the JUN-$55 call options to cover the existing short options, there would be a relatively large profit range and time value erosion would continue to work in our favor. In addition, the implied volatility in each series is roughly equal, so we aren't buying expensive options, and the position delta (in the long calls) works in our favor if the issue trends higher prior to the May expiration. Readers who want to pursue this strategy should enter a contingent "stop-market" order to purchase five (5) contracts of the JUN-$55 call options (LEN-FK) if the stock trades above $55.25 on an intraday basis. If this event occurs, a "trade alert" will also be published in the MCM Portfolio Blog, however a mechanical order will be much more effective (timely) in transitioning to the new position.

On the subject of portfolio management, one other position deserves attention as it can now be closed to lock-in gains. Mercery Interactive (NASDAQ:MERQ) is trading near $41, well below the sold (call) strike in our bearish spread and the short option can be purchased for $0.05 per contract. Since the initial spread credit was only $0.40, we will not make this trade in the MCM Portfolio, however readers who achieved a higher credit, as well as those who need some additional margin/collateral for upcoming positions, should consider this transaction. Also, we have observed some (possible) closing trades in the Mohawk Industries (NYSE:MHK) spread. The sold call option at $90 has been crossed at $0.05 and since the issue is $10 below the strike price, a trader could reasonably achieve a "fill" inside the current bid/ask of $0.00 X $0.25. Based on this data, we will show the MHK position closed in the next summary update.

MCM Staff


Monthly Cash Machine Newsletter Archives