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Trade Alert - LEN, EL, INSP

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Expiration Day Arrives...

Stocks are drifting lower today with investors collecting some profits as the May options-expiration period comes to an end. That's not surprising considering the recent broad rally in equity values and the small pullback will likely lead to a much needed consolidation in the coming week. Near mid-session, the Dow Jones industrial average is down 32 points at 10,460 while the NASDAQ composite index is 4 points lower at 2,038 and the Standard & Poor's 500 index has dropped 3 points at 1,187.

The MCM Portfolio has experienced little activity worth noting this morning but depending on your previous trades, there are a number of necessary moves to be made prior to the closing bell. First and foremost is Lennar (NYSE:LEN), which has been "rolled" into a neutral-outlook calendar spread. The current position is:

LONG (5) contracts JUN-$55 call LEN-FK
SHORT (5) contracts MAY-$55 call LEN-EK

The objective of the spread is to benefit from the time-value erosion in the short-term options. The greatest profit will be achieved if LEN finishes the session near the sold (call) strike price of $55. If LEN closes above $55 at the end of the day, the sold option will have to be repurchased to prevent assignment of the underlying issue. This trade can be accomplished with a standard order, preferably at "market" if the trade request is entered late in the day, or with a "market on close" (MOC), which initiates the order at the end of the session. For readers who use OptionsXpress, the MOC looks like this:



In addition to the Lennar (NYSE:LEN) calendar spread, an older position in Estee Lauder (NYSE:EL) may require further adjustment. The current spread is:

LONG (5) contracts JUL-$45 call EL-GI
SHORT (5) contracts MAY-$40 call EL-EH

Since EL is trading near the sold (call) strike at $40, readers in the diagonal spread will need to monitor the issue near the end of the day and close the short position if EL finishes the session above $40.00. More experienced traders may choose to increase the "bail-out" price slightly as many options that are within a few cents of the strike price will not be exercised (by their owners) due to the cost of buying and selling the stock. Also, the "auto-execution" process used by many brokerages (including OptionsXpress) does not occur until the option is at least $0.25 in-the-money.

Finally, readers who are still in the Infospace (NASDAQ:INSP) spread should close any open positions (that expire in May) to avoid assignment of the underlying stock. Although there were some good opportunities to reduce the drawdown from the original play, we did not officially recommend a specific exit strategy so we will continue to post the maximum loss in the monthly summary.

Among the remaining positions in the portfolio, Mentor (NYSE:MNT), Genetech (NYSE:DNA), WellPoint (NYSE:WLP), Cigna (NYSE:CI), Expeditors Intl. (NASDAQ:EXPD), Cephalon (NASDAQ:CEPH), Yellow Roadway (NASDAQ:YELL), Mercury Interactive (NASDAQ:MERQ) and Investors Financial Services (NASDAQ:IFIN) are expected to achieve the maximum expected gain. In addition, previously closed (due to conservative money management) plays in Mohawk (NYSE:MHK), Xilinx (NASDAQ:XLNX), and Navistar (NYSE:NAV), as well as Baker Hughes (NYSE:BHI), Black & Decker (NYSE:BDK), Pixar (NASDAQ:PIXR) and Sealed Air (NYSE:SEE), should expire profitably.

We'll update the summary tonight and expect to publish some new credit-spread candidates in Sunday's edition of the MCM Newsletter.

MCM Staff

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