The major equity averages soared higher Tuesday as crude prices dipped and consumer confidence surged to a three-year high. The cost of a barrel of light crude closed at $58.20, down $2.34 from the previous session, and the Conference Board's consumer confidence index rose to its highest level since 2002. The news spurred investors back into the stock market and the level of optimism is high going into Thursday's meeting of the Federal Reserve. The FOMC will release its decision on interest rates after the meeting and analysts will be studying the committee's comments for some insight on the future of the U.S. economy.
The upside activity did nothing to help our new position in Websense (NASDAQ:WBSN) and readers who initiated the play, despite Monday morning's double upgrade, are now facing a potential exit or adjustment trade. As we noted in the previous Blog, those who agree that the issue has changed character to a neutral-to-bullish outlook in the near term could have purchased the AUG-$50 or OCT-$50 calls to offset the existing short options in the spread. Then the long (JUL-$55) calls could be sold as the stock moves higher to further reduce the cost basis in the new position. Of course, this strategy is not a solution to every credit spread that goes awry but it does offer a conservative, low cost alternative to a "locked-in" loss when the underlying issue is expected to remain in a (relatively) lateral price pattern.
The suggested spread in Qlogic (NASDAQ:QLGC) is performing as well as can be expected, however we will be monitoring this issue closely in case the recent bearish trend reverses in the coming sessions. In addition, one of our new readers noticed a typographical error in the recommended stop-loss price (it should be $32.25, not $30.25) and we want to thank that person for completing - as we all should - the appropriate due-diligence before initiating the trade.
It was nice to see General Motors (NYSE:GM) and Chiron (NASDAQ:CHIR) moving higher with the broad-based rally and the potentially bullish character we observed in the Biotech HOLDRs (NYSE:BBH) came to fruition as well. Unfortunately, we did not make a specific recommendation (for a hedge play) so the existing position will still be in jeopardy if the trend continues. Traders who are currently in the OCT-$180C/OCT-$175C spread might consider opening a "bull-put" credit spread in August to offset any losses from future upside activity. A reasonable credit can be achieved between the (long) $155 strike and the (short) $160 strike, and a 10-contract position would net roughly $500 if the issue remains in the current range for the next 7 weeks. Depending on the character of the issue in mid-August, it may be appropriate to initiate a similar spread with the expectation to further improve the basis in the original position.
Another play that did not benefit from today's renewed buying pressure in equities was the bear-call spread on CACI International (NYSE:CAI). The stock climbed nearly 4% to a recent resistance area near $64 and it appears the issue will test last Wednesday's high (near $65) in the next few sessions. Our play is profitable with CAI below $65.45 but considering the volatility of the past week, we will need to watch the issue closely until the short-term trend is clearly established. A move up to the sold (call) strike at $65 would certainly get our attention however the lateral pattern will remain intact until the stock moves through the top of the 8-week trading range near $66. Even if that event occurs, there is additional overhead supply up to $69 so a "covering" strategy may again be more appropriate than simply closing the spread for a loss.