Monthly Cash Machine Newsletter, Tuesday, 05/24/2005 01:10:57 PM ET
HAVING TROUBLE PRINTING?
Slim and None...
If you have been trying to participate in the MCM Portfolio's new bullish positions at the target prices, the phrase above provides a good description of the probability of entering those spreads on a simultaneous (net-credit) order basis. The major equity averages moved higher right from the start of Monday's session and the upside momentum did not subside until this morning.
When the week began, there was a brief opening dip in Best Buy (NYSE:BBY) and some consolidation occurred in Chicago Mercantile (NYSE:CME) early in Tuesday's session, but it appears that individual orders were the only way to achieve the suggested credit in those spreads. Of course, the market may retreat after the release of the Federal Reserve's May 3 meeting minutes, which investors generally regard as a source of insight into the Fed's future plan for interest rates. If a decline ensues, it should lead to some "profit-taking" in previously bullish issues and that activity could provide another chance to enter the plays at the recommended prices. Until then, we can only record the best observed (simultaneous) entry credits - $0.20 for BBY and $0.35 for CME - in the portfolio summary.
There have been other consequences from the recent buying spree, most notably in Dreamworks (NYSE:DWA) and Biotech HOLDRs (AMEX:BBH). DWA is up roughly 5% since Monday morning on strength in the Movie Producers/Theatres sector. Pixar (NASDAQ:PIXR), which was a bull-put candidate last month, is leading a rally in the group after Prudential Equity Group upgraded the stock citing a "ramp up in film production." Since there is an apparent "change of character" in the underlying industry, we are going to take a more proactive approach with the position management for the DWA play. Our plan is to transition to a neutral-outlook calendar spread using the SEP-$35 calls as the "covering" option for the current (JUN-$35 calls) short position. This adjustment will provide a large range for profit and the basis in the long (SEP-$35) calls can be reduced through the sale of additional, short-term options in the coming months. The target debit for the SEP-$55 calls is $2.75 and this cost can be offset partially through the sale of the existing JUN-$40 calls. Having outlined the basic plan, the sequence of orders is:
BUY (5) contracts SEP-$35 calls DWA-IG
SELL (5) contracts JUN-$40 calls DWA-FH
for a total debit of $2.50 per contract or less. Adept traders may be able to improve their profit potential during the transition but we believe this adjustment - at the current price - is preferable to remaining in the original position. Since the short (JUN-$35) option in the initial spread provided a $0.55 per contract credit, the new basis in the calendar spread will be roughly $1.95 per contract.
Readers in the Biotech HOLDRs (AMEX:BBH) position have a much more difficult task ahead and the comments we made in Sunday's Blog (concerning possible hedge techniques) were very timely. We noted a number of strategies including bullish positions in Genentech (NYSE:DNA), which comprises 40% of the value of Biotech HOLDRs, as well as the BBH itself. Hopefully, some of you took action on these suggestions as the issue has since moved higher on favorable news. Although we had hoped to explore the possible adjustments with a separate narrative on the subject, it seems more important to make an official recommendation on the position so we are going to look closely at the various option series and try to offer some viable alternatives in the next few days.