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Portfolio Activity - LEH

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Thrown for a loop by LEH...

Murphy's Law was active again Wednesday, providing an unfavorable judgment in the case of the Lehman Brothers (NYSE:LEH) position. The issue clipped our stop-loss price near midday and then promptly retreated below the sold (call) strike when the broad, early-session rally gave way to brisk profit-taking after a Federal Reserve official warned that interest rates might continue to climb. It's not surprising the upside activity in the stock ended just pennies above our target exit point at $95.50, because that's where the recent (technical) resistance begins. However, we are disappointed at being ousted "early" from yet another position, especially when the trigger point for the closing trade was breeched by only a few cents. Although we must record the debit in the position, readers who utilized a less conservative stop-loss (or opted for one of the alternatives listed in the previous Blog) should monitor the issue closely if it moves back above $95. The "key" test of technical strength will occur as the stock tries to break through overhead supply, which exists near $95.30 and again at $95.60 (then from $96.00 to $96.20). If these levels continue to be insurmountable, the issue will likely remain in a lateral trading range until another catalyst for buying (or selling) emerges. Of course, a consolidation pattern in the low $90s is exactly what we expected when the position was offered, but our volatility estimate was (apparently) incorrect due to the widespread complacency that currently plagues the market. That's not an excuse, simply an observation and it stems from the fact that a number of profitable spreads have been "stopped-out" early, possibly because of imperfect analysis. While it's obvious an adjustment must be made, either in the allowance for future movement of the underlying or our basic position management strategy, we don't want to (hastily) abandon a system that has worked so well in the past. At the same time, it seems a change must be made soon or there will be no funds left to demonstrate the merit of our unique approach to the options market.

MCM Staff

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