Option Investor

New Portfolio Position: DWA "Bear-Call" Spread Projected Gain = $225

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DWA - DreamWorks Animation $31.50

DreamWorks Animation (NYSE:DWA) develops and produces computer-generated, animated films. Utilizing creative talent and advanced CG film-making technology, DreamWorks Animation has produced a number of movies including Shrek, the first-ever winner of the Academy Award for Best Animated Feature film, and Shrek 2, the third highest-grossing movie ever. The company also recently released Shark Tale and it's current product, Madagascar, is slated to debut on May 27, 2005.

Since the new position in Toro (NYSE:TTC) may not be available at the suggested entry price, we decided to publish an additional candidate for conservative spread traders. This issue was "in the news" last week after its share value plunged on mediocre first-quarter profits and an earnings forecast that was lower than consensus expectations. The shortfall was apparently due to weak "Shrek 2" DVD and video sales and the announcement resulted in a pair a downgrades as analysts revised their targets for the company's stock. A technical review confirms the neutral to bearish outlook for DWA and traders who believe there is little (near-term) upside potential in the issue should consider this position.

Fundamentals Chart Earnings Dates Analyst Ratings

PLAY (conservative - bearish/credit spread):

BUY CALL JUN-40.00 DWA-FH OI=4461 ASK=$0.15
SELL CALL JUN-35.00 DWA-FG OI=2259 BID=$0.55

POTENTIAL PROFIT (X 5 contracts @ $0.45) = $225
MARGIN REQUIREMENT (X 5 contracts) = $2275
COST BASIS = $35.45


A "net-debit" order of $0.90-$1.00 to exit the entire spread may be appropriate for some portfolios, however we are going to focus on a "covering" technique that benefits from a change in (technical) character, rather than simply trying to exit the spread for a small loss. Based on the intermediate-term lateral pattern between $35-$40, the issue would likely be a good candidate for a horizontal spread if it moves back into the previous trading range. Readers who want to pursue this strategy should enter a contingent "stop-market" order to purchase five (5) contracts of the SEP-$35 call options (DWA-IG) if the stock trades above $35.25 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. Future adjustments to this strategy will be posted in the MCM Newsletter.

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