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Portfolio Activity - WBSN

HAVING TROUBLE PRINTING?
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A Change In Character?

Our newest candidate for a bearish spread, Websense (NASDAQ:WBSN), received a pre-market boost this morning when analysts at Kaufman Brothers and Southwest Securities upgraded the issue. By the time the opening bell sounded, WBSN was trading nearly 4% higher than Friday's close and the previous technical character was significantly altered. Although we can't rescind the recommendation, it's obvious that readers who entered the position (for a much larger credit) may be faced with an early exit or adjustment in the position. Considering the possible transition to a lateral or bullish trend, our suggestion is to contemplate the purchase of longer-term calls (AUG-$50 or OCT-$50) to "cover" the short options, rather than closing the play for a loss. This strategy appears viable based on the recent technical resistance levels between $50 and $55, and although the underlying stock may recover in the near-term, it seems likely to encounter renewed selling pressure above the sold (call) strike price in the coming weeks.

Another position in need of adjustment is Conocophillips (NYSE:COP) and this issue offers a good example of a consolidating stock that has transitioned to a bullish trend. As noted last week, one way to take advantage of this move is to convert the existing horizontal (calendar) spread into a vertical or price spread. Since the current position (in July) is short at $55, the sold calls must be repurchased and the position replaced with new calls (in August) at a higher strike, such as $57.50 or $60.00. The adjusted spread will have relatively low profit potential, however it will not lose money (like the current play) if COP enjoys additional upside movement in the coming weeks.

Among the remaining portfolio issues, we are maintaining a daily watch on bullish positions in General Motors (NYSE:GM) and Chiron (NASDAQ:CHIR), both of which have retreated in recent sessions. We are also considering a hedge position for the adjusted spread in Biotech HOLDRs (NYSE:BBH) as the issue appears to be establishing a new trading range (and possibly a "launch" point) near $165. Finally, the current dearth of option "premium" has forced us to make some changes to our search/scan parameters in order to increase the number of spread candidates that emerge when we use various software products to evaluate charts and option prices. With any luck, this modification will help us find a few more plays in the current "difficult" market environment.

MCM Staff

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