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Portfolio Activity “ CAI/CLF (Part II)

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A Failed Rally...

Indeed it was a "sell the news" event for CACI International (NYSE:CAI) as the company's shares plunged Thursday after the Defense Department contractor detailed its financial outlook through fiscal 2006 and said that with budget delays, new work has been not coming as quickly as expected. The company also said it expects some of the work it's going to bid on to be submitted in the second quarter of fiscal 2006 instead of the first quarter, and the announcement gave investors a perfect excuse to take profits from the recent rally. Since there is little near-term catalyst to support the lofty stock price, the original spread should remain profitable for the next few weeks.

The story was similar, if not as favorable, with Cleveland-Cliffs (NYSE:CLF) as the stock dropped another 2% in conjunction with a negative steel industry article in the WSJ. The move left no doubt about the short-term outlook (neutral-to-bearish) for the issue and all but the most aggressive traders should have repurchased the sold options (JUN-$57.50 puts) during the move. Depending on whether or not (and how much) you adjusted the exit stop, the cost to close the short portion of the spread was somewhere between $2.00 and $2.25 per contract. However the long (JUN-$55.00 puts) have bid as high as $1.40 per contract, thus reducing the overall debit for the position. Readers who agree with a bearish outlook for the issue might consider holding the remaining (long) options until the stock price nears recent technical support at $56. Keep in mind, the time-value premium in the (OTM) puts will continue to decline rapidly, thus the trade must be made in a timely manner to benefit from any additional downside movement.

MCM Staff

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