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On the "Watch" List: BCSI

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An Unwelcome Surprise!

Shares of Blue Coat Systems (NASDAQ:BCSI) plunged more than 15% Friday on reports the SEC is looking into whether anyone in the company, or someone associated with the company, possibly disclosed nonpublic information, and if any "insider" trades were made based on that information. BCSI also warned that the investigation, and any possible negative effects it yields, might have an adverse material effect on its financial results in the coming quarters.

While our sold put strike (APR-$17.50) is well below the current price, today's activity in BCSI brings to mind the most important lesson new traders must learn. That is the need to limit losses whenever they occur, so they do not significantly affect portfolio capital. Of course, it's "easier said than done" but the simple fact is position management is far more crucial to long-term success than any other facet of trading. With "naked" options, this truth is even more applicable because the risk in each position is so large, in percentage terms, when compared to the profit potential.

Despite the sharp drop, our current stance on BCSI (Chart) is "cautiously optimistic" and we expect to remain in the position if the share value stabilizes in the coming sessions. However, it is prudent to keep a closing order in place to protect against any additional "unexpected" decline in the issue. A reasonable loss-limit/exit point, based on the price of the stock, would be near $18.50. That area coincides roughly with the low established in February and, considering the (brief) time remaining until options expiration, should avoid a loss in the position.

OW Staff

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