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The recent broad rally in equities hit a "bump in the road" today as share values retreated sharply amid widespread profit-taking and a less than stellar earnings report from Cisco Systems (NASDAQ:CSCO). The Dow Jones Industrials closed down 60 points at 10,664, while the NASDAQ fell 34 points to 2,052 and the S&P 500 Index slid 10 points to 1,191.

Our portfolio was relatively unscathed by the sell-off, but one issue is on the radar screen for a possible exit (or adjustment) in the near future. Palomar Medical Technologies (NASDAQ:PMTI), which develops light-based systems for hair removal and other cosmetic procedures, fell nearly 5% in the last hour of trading as investors unloaded the issue ahead of Thursday's quarterly earnings report. The bearish activity increased substantially in the last 30 minutes of the session and with the announcement set for 11:30 AM EST tomorrow, it appears that "fear and trepidation" have overcome the company's shareholders.

The current OW portfolio position in PMTI is short (put) at $20 with a $0.45 per-contract credit, thus the basis is $19.55. Since the report is expected to commence during market hours, any reaction to its content should result in somewhat orderly trading activity. At the same time, an order to close the (sold) put option during a sharp decline would certainly involve a premium, thus we are going to suggest a short order on the stock to limit potential losses in the position. A reasonable target for the sale might be from $20.25 - $19.00, depending on your personal risk/reward outlook and the post-earnings volatility in the issue. Conservative investors with no interest in holding the position through the announcement should repurchase the options for a small debit during the first two hours of trading.

OW Staff

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