Shares of ADI have come very close to our initial bullish target of $54 and at current levels, traders that established a position in the stock on Friday near $44 may be wondering what to do here. One idea would be to sell the long position here and book a profit of $8 (an 18% gain two days). Let's use simple numbers here. A 100-share investment would book a profit of $800 (not including buy/sell commissions). We know there is a "cloud" over the semiconductor group and might want to limit our risk, but realize the "home run" potential this stock and sector can present (both bullish and bearish). Why not take that $800 profit and look at options? If the company paints a beautiful picture of the future and the stock jumps from here, maybe the Nov55 Calls (ADIKK) at $2.63 would produce favorable results on "good news". If the company says things look tough in the months ahead, maybe the Nov50 Puts (ADIWJ) at $2.50 would produce a nice profit from current levels. When you add the two up, a position in both of these options may give traders the opportunity to lessen their exposure to the stock and still allow for a profit if the stock position were closed out. If traders are currently long 1000 shares, you begin to see how risk can be managed.
The institutional perspective
We often like to bring in the perspective of institutions to our comments and traders may see where we are going from here. If you were an institutional hedge fund, what would you being doing here, if you were long/short 200,000 shares of ADI? You might at least be hedging that position ahead of today's earnings. Institutions pay particular attention to risk management and this is something traders need to think about too. What is "the other guy" doing, or thinking at these levels. The above scenario is a way to "get greedy" and still book a profit. If you've got other stocks that may benefit from this strategy, then get comfortable with it first. Don't go "gung-ho" and start doing it everywhere. Remember that the November option contracts mentioned above expire this week!
ICG Communications announces Chapter 11
Traders should be aware that ICG Communications (ICGX) has announced it will seek Chapter 11 reorganization. While it was widely expected it may affect some telecommunication equipment stocks. Right now the press is very focused on what is developing in election results, but we're going to focus on potential market internals that some may not be aware of.