Option Investor

Portfolio Activity - DWA

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A Nightmare for Dreamworks!

Shares of Dreamworks (NYSE:DWA) slumped Monday after the debut of the company's new animated motion picture "Madagascar" failed to produce the expected attendance in theatres. The movie took in $61 million from ticket sales in its opening weekend, far less than analysts were expecting, and the mediocre results prompted a sharp decline in the company's stock price. At the closing bell, DWA was down $2.95 at $29.40 and the heavy-volume selling pressure suggests the recent downtrend has resumed. Traders in the original bearish spread (JUN-$40C/JUN-$35C) were elated as the position will almost certainly expire at maximum profit. However, our concern is for readers who transitioned to a neutral-outlook calendar spread as the retreat has significantly reduced the value of the long position (SEP-$35C).

At this point, the alternatives are relatively simple. A trader with a bearish outlook for the underlying issue can close the long position and record the loss. In contrast, those who believe the stock will move laterally before eventually recovering can sell JUL-$35 calls (and then AUG-$35 calls) to reduce the cost basis of the long position as they wait for the issue to rebound in the coming months. Our recommendation is to hold the long position and wait for a bounce to increase the "premium" in the JUL-$35 calls. Since the SEP-$35 calls will not lose much in the way of time value during the next few days, traders should have ample time to monitor the stock's activity and look for additional signs of technical weakness or strength (at the current level) before making a final decision.

MCM Staff

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