Taking profits in EIX
Another quick note on profit-taking.
Our January 18 commentary on Edison International
(
EIX |
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PowerRating)
featured the opportunities created by the high volatilities and steep sell-off.
We liked buying EIX for 8 1/2 and selling the July 7 1/2 calls for a net of $4.50.
As of 11:30 (CST), shares of PG&E
(
PCG |
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PowerRating) and Edison
International
(
EIX |
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Chart |
News |
PowerRating) were up substantially due in part to a Morgan
Stanley Dean Witter analyst that said the threat of bankruptcy has lessened for
the owners of California’s two biggest utilities.
PG&E rallied $1.48 to $13.98, while EIX traded higher by $1.09 to $13.28. What
those rallies have done to our covered write is dramatic as well. The July 7 1/2
calls, pumped beyond belief back on January 18, have shrunk from $3
in premium to just $1 in premium. What that means is the buyer of the stock has
a gain of 4 3/4 (rally from 8 1/2 to 13 1/4), and only a loss of 2 3/4 on the
option, thus resulting in a $2 gain. As with Qualcomm
(
QCOM |
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PowerRating), we
have to take some chips off the table and find some better risk/reward
opportunities.
On the verge of the Fed meeting tomorrow, we’re seeing Cisco
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CSCO |
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PowerRating)
options dominate the lackluster trading volumes. In particular, the FEB 35, 40
and 45 calls. Volatilities in CYQ options are through the roof, approaching
90% on our vol readings. At 90%, the at-the-money 35 calls are trading for 3
3/4,
but at the usual 63% (where it was last week), the 35 would be worth only 2 7/8.
For those brave souls out there willing to buy calls (to bet on the upside) or
puts (to bet on the down) they are paying that extra 7/8, which can be a real
drag on profitability.
