COVERED CALLS Qcom, Jdsu, Brcm options.
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Covered-Call Exit Strategies...
One of our readers requested an educational narrative concerning
the proper management of "in-the-money" covered-call positions.
A rise in share value is the ultimate goal of stock ownership but
with the covered-write, a significant short-term move can provide
additional opportunities for profit. When the share price of the
underlying stock moves above the strike price of the short option,
the complexity of the position changes along with the risk factor
of early exercise. For long-term investors, the tax consequences
of assignment can also pose a difficult problem; how to adjust the
overall position for maximum return while retaining ownership of
the underlying stock.
If the share value rises substantially after the initial position
has been established, you have several choices: you can do nothing,
get called-out and accept the original return that was established
when the play was opened; if the option is priced near parity, you
can close the play early; or, you may also choose to adjust the
position to match the revised outlook for the underlying issue by
"rolling" the call up (or forward) to a higher strike price.
In closing the position early, an experienced trader evaluates the
cost of commissions verses an increased annualized return. A "net"
order (net credit) can be used in closing a covered write to ensure
a proper exit. Similar to a "Buy-Write", you would place an order
to "sell the stock and buy-to-close the sold call for a specific
net credit at a price relatively close to parity.
When you roll up (buy-back the current sold call and sell a higher
strike call), you increase the profit potential of the position.
The catch is, you surrender downside protection. Your new downside
break-even point will be increased by the amount of debit required
to complete the transaction (the cost of the closed position minus
the premium received for the new position). Thus when one rolls up,
a debit is incurred and this is usually considered a negative move
(placing more money at risk) by many traders. Generally it is more
beneficial to roll to a future expiration date as it reduces the
debit required for the new position. It is normally not advisable
to adjust to a higher strike if a 10% correction in the underlying
stock price cannot be withstood (though this percentage may not be
applicable to volatile Internet stocks).
As expiration nears and the time value premium disappears from the
written option, you should also consider rolling forward to reduce
the likelihood of early assignment and increase the overall profit
potential of the position. You can buy-back the short option and
sell a new, longer-term call at the same strike price or move to a
different series, consistent with your outlook for the underlying
issue. With deep in-the-money calls, the time value premium often
vanishes long before expiration. However, as long as there is time
premium left in the call, there is little risk of early assignment
(you are also earning time premium by remaining with the original
position). As the option price (bid) falls to parity or a discount,
there is a considerable probability of exercise by arbitrageurs;
floor traders who do not pay commissions for trading. When this
situation occurs, you should endeavor to roll-forward or adjust
the position in some manner that prevents a monetary loss through
early assignment.
The key is to evaluate the risk-reward outlook of all the possible
scenarios and construct a position that fits your trading plan and
your future outlook for the underlying issue.
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LEAPS
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All hail the Nasdaq. Despite a quick pullback on Tuesday to
the 10-dma, this market continues to show us its resilience.
You can began to see the optimism grow when you notice that
despite a stock remaining flat on the week, the 2001 options
are not decreasing and the 2002 are actually rising. This
would lead one to believe that the VIX becomes even more of
a factor when trading LEAPs. You're best bet is to be buying
when the market has corrected and the VIX is high and thus
the premiums have decreased. Of course, this is standard
procedure in the options world, but becomes even more important
when dealing with LEAPs. Short-term options will rarely
increase while the stock is flat. That situation usually
results in death by time decay. So even though we are at a
situation where the VIX is low and premiums are high, we are
waiting for a nice short-term sell-off to do some buying.
Remember, we have all kinds of time to sit back, be patient,
and wait for the perfect buying opportunities. If there is
one thing to remember about trading LEAPs, it is that when
fear is high, it's time to buy!
QCOM - Qualcomm Inc. $384.75 (+17.69)(-10.94)
QUALCOMM Incorporated is a leader in developing and delivering
innovative digital wireless communications products and services
based on the Company's CDMA digital technology. The Company's
major business areas include CDMA phones; integrated CDMA
chipsets and system software; technology licensing; and
satellite-based systems including OmniTRACS® and a 6.4% interest
in Globalstar(TM). Headquartered in San Diego, Calif., QUALCOMM
is included in the S&P 500 Index and is a 1999 FORTUNE 500®
company.
With CDMA as the new standard for wireless protocol transmission,
QCOM will earn a fortune from licensing the technology over the
next few years. While they sell the equipment needed to run the
systems, they also get paid by selling the code with every new
CDMA phone, much the same way that MSFT gets paid for almost
every new PC. Even when they sell the handset division, the
announcement of which is expected by year-end (perhaps at the
December 20 shareholder meeting), they will still collect the fee
for every handset sold with CDMA capability. Technically, QCOM
has been consolidating nicely on low volume. It indicates that
nobody is particularly interested in dumping the shares at these
lofty heights. Who'd want to with a 4:1 split expected to be
approved by shareholders on December 20 (while not guaranteed,
the split would likely be immediate)? Support is hard to peg,
but is moving up. Just in the last week, it came as low as $345
on Tuesday and $380 on Friday (short day). We would expect
Friday's gap to be back-filled down to $375 in a re-test of old
resistance becoming new support. Only a suggestion, but $375
might make a good target. Of course, if the market decides to
retrace some of the November gains, all bets are off. For the
unexpected surprises (and they will occur), keep a trailing stop
in place to protect your profits
The news is a bit old, however, China will adopt CDMA as the new
standard for wireless transmission under the new trade agreement.
When that happens, there are estimated to be 30 mln new
subscribers within the first year. That's bigger than AT&T's
wireless division and fractionally less than Vodaphone and
Airtouch combined. With the announcement of the sale of the
handset division (December 20?), there's added horsepower for a
price move over and above the split news.
HIGH PREMIUM ALERT !!
Another good strategy for this play would be to go long the
stock and write covered calls at or out of the money. The
premiums are so inflated that even an at the money
contract can yield roughly a 7% return until December 17.
TRADING CAUTION
If QCOM takes a sudden unexpected turn for the worst,
all OTM strikes will likely vanish into thin air. Obviously,
it has shown amazing strength so far and investors continue
to throw money at it with wild abandon... this will not last
forever. This play is not for everyone. Higher strikes are
only listed for those willing to take the risk.
BUY CALL DEC-370*AAF-LN OI=2066 at $37.00 SL=29.00 wait for dip
BUY CALL DEC-380 AAF-LP OI=1766 at $31.75 SL=24.75
BUY CALL DEC-390 AAF-LX OI=1956 at $27.00 SL=21.00
BUY CALL DEC-400*AAF-LY OI=2627 at $22.00 SL=16.50
BUY CALL DEC-420 AAF-LV OI= 505 at $15.13 SL=11.00
BUY CALL JAN-370 AAF-AN OI= 655 at $58.00 SL=45.25
BUY CALL JAN-380 AAF-AP OI= 769 at $53.25 SL=41.50
JDSU - JDS Uniphase $266.00 (+52.19)(+13.81)
Uniphase Corporation is a fully integrated optical electronics
company that designs, develops, manufactures and markets fiber
optic telecommunications components and modules and laser
subsystems. The Company's telecommunications products include
semiconductor lasers, high-speed external modulators,
transmitters, fiber Bragg gratings and optical modules for fiber
optic networks in the telecommunications and cable television
industries. Based in the Silicon Valley, California, they employ
approximately 6260 people worldwide. Customers include Lucent,
Nortel, Cisco and Ciena. American Express owns 10% of the common
shares
"Dear God, please let there be one more company like Intel to
invest in, and I promise not to mess it up this time". Here's
your big break. UNPH makes the laser modules and pumps (in
addition to other components) that split a fiber optic strand
into many different, potentially unlimited channels. Effectively
they do for light what Intel does for electrons. Their
components are critical to the development of optical networks.
Now would somebody please show us an entry point? Egad, this
one's been hard to hit. Wednesday we had one opportunity after
the opening to get in at $240 before the run to $256 by the
close. Friday, volume remained solid, pushing the price all the
way up to $272.50 before day-end profit taking zipped it back to
$266. Technically, we are in the middle of the short-term
channel and at the high end of the longer-term channel. In
either case, support is in the $247-$250 range. We urge you not
to chase it at these lofty levels; wait for a pullback since
missed money is better than lost money. There is still a full
month until the 2:1 split. That said, there still appears to be
plenty of cash waiting to be put to work, which will drive
volume, and thus, the price. As long as funds are buying, a
major retracement is unlikely. If you take a position, be sure
to set a trailing stop to protect the profits (but choose
carefully, our suggested stops may be too close for you).
JDSU again added another optical company to its stable by
agreeing to buy Britain's SIFAM. Their components split, combine
and filter light on optical fibers. It will cost them about $100
mln. This follows their recent agreements to buy EPITAXX for
$400 mln, and OCLI for $2.8 bln.
***No January strikes available***
BUY CALL DEC-260 UQD-LL OI= 528 at $21.38 SL=16.75
BUY CALL DEC-270*UQD-LN OI=1482 at $16.38 SL=12.75 wait for dip
BUY CALL DEC-300 XXZ-LT OI= 215 at $ 7.13 SL= 4.00 see note.
BUY CALL JAN-270 UQD-AN OI= 272 at $28.38 SL=21.00
BUY CALL JAN-300 XXZ-AT OI= 73 at $17.13 SL=12.00
TRADING NOTE:
JDSU trades like a rocket. Thus all of these premiums are
inflated. As soon as this stock turns, premiums will deflate
like a balloon. When it finds a bottom, that is when to buy.
When it is rocketing like this - it is time to sell calls
(covered or naked - it is up to your account and risk profile).
Wait for a dip or consolidation of some kind to go long this
thing. At this point, traders start looking at round numbers
like $300 as targets. Be careful, just because there is a lot
of volume and OI for such OTM strikes doesn't mean the stock
will EVER reach that price.
Picked on Nov 21st at $213.81 P/E = N/A
Change since picked +52.19 52-week high=$273.62
Analysts Ratings 13-13-0-0-0 52-week low =$ 26.31
Last earnings 10/99 est= 0.25 actual= 0.29 surprise = 16%
Next earnings 01-24 est= 0.30 versus= 0.14
Average Daily Volume = 2.6 mln
Chart = quote.yahoo.com
*****
BRCM - Broadcom, Corp. $207.13 (+10.63)
Broadcom Corporation is a leading provider of highly integrated,
silicon solutions that enable broadband digital transmission
of voice, data and video content to and throughout the home and
within the business enterprise over existing communications
infrastructures, most of which were not originally intended for
digital transmission. Using proprietary technologies and advanced
design methodologies, Broadcom designs, develops and supplies
integrated circuits for some of the most significant broadband
communications markets, including the markets for cable set-top
boxes, cable modems, high-speed office networks, home networking,
direct broadcast satellite and terrestrial digital broadcast, and
digital subscriber line ("DSL").
BRCM started November with a close at $138 and here we are,
over $69 later in just four weeks. Why the big move up? Could
there be a possible split announcement in the near future of
BRCM? That's what we are thinking. BRCM just recently held a
special shareholders meeting on November 22 to vote on an
increase of authorized shares from 200M to 400M, one good
indication of an upcoming split. BRCM has a two-time history
of lagging split announcements, so the fact that they did not
announce at the recent meeting does not deter our play. It is
possible that BRCM could announce a split early as next week.
There may be rounds of profit taking, since BRCM has made such
a big climb in a relatively short period of time. This has
potential to offer some nice points of entry, so keep an eye
out. As far as support goes, the psychological levels look to
be providing the majority, i.e., $200 and $190. BRCM's 10-dma
is all the way down at $188.50, which could serve as further
support if needed. BRCM hit it's head a few times on a
resistance level of $210 throughout the session last Friday.
Watch for a breakthrough here. One thought being spread
around lately is that BRCM has seen a lot of institutional
buying. This is pretty hard to prove at the moment. Whatever
your opinion, BRCM makes some wild swings and is not for
everyone. Conservative players should wait for a break out
above $210 and patient investors may see an entry point at
$190 (or even $180 if things get ugly). Play with stops.
Broadcom announced last Wednesday that they are working on a
chip that will increase the data throughput in a home network
and plans to have the chips ready to ship out during the first
half of next year. BRCM is also scheduled to present at the
upcoming Internet Stocks Forum on December 4th in Santa Clara.
The semiconductors were boosted by a report issued by ABN AMRO
last week. The report estimated a fairly substantial period of
growth for the semis over the next three years.
BUY CALL DEC-200 RDZ-LT OI=567 at $20.00 SL=15.50
BUY CALL DEC-210 RDW-LB OI=131 at $15.25 SL=12.00
BUY CALL DEC-220*RDW-LD OI= 97 at $11.25 SL= 8.75
BUY CALL JAN-220 RDW-AD OI= 13 at $21.75 SL=16.50
Picked on Oct 17th at $207.13 P/E = 258
Change since picked +0.00 52-week high=$215.25
Analysts Ratings 6-13-1-0-0 52-week low =$ 42.50
Last earning 10/99 est= 0.21 actual= 0.26
Next earning 01-26 est= 0.27 versus= 0.13
Average Daily Volume =2.08mln
Chart = quote.yahoo.com |
