Repair Strategy for PMCS…

     

Of that list, we like the action in PMCS options the best, so we’re focusing
on that company. Today’s 1½ point rally brings PMCS to $28, still a far
cry from its highs, but just $7 or so off its bottom, which PMCS put in at
about $20 in early April.

    

If you already own shares of PMCS, you might want to take a look at what we
call a repair strategy. Simply put, this strategy helps the investor recover
some or all of the money lost by getting into a stock too early. For
instance, let’s say you bought PMCS back in May for $38. On a 1000 share
position, you’d be out about $10,000 (the difference between 38 and 28).
Here’s what you could do to fix that:

    

Buy 10 Aug 25 calls for $6 and sell 20 Aug 30 calls for $3.80. Prior to
commissions, you would have taken in $1.60 in credit for this spread. On this
10 x 20 example, you’d have put $1,600 (less commissions) back into your
trading account. This repair strategy (listed in my book, How I Trade Options,
published by John Willey & Sons and available in Trader’s Galleria)
really gives you twice the performance of PMCS between $25 – $30. Instead of
just getting 1000 shares worth of performance, you also get 10 calls (the
right to buy 1000 shares).

    

If unchanged that spread would be worth $3, or $3,000, as our 25 calls would
be worth $3 with the stock at $28. When coupled with our $1,600 credit, you
would have recovered $4,600.

    

If PMCS rallies to $30, our 25 calls are worth $5 and our 30s would be
worthless. That means the stock has recovered $2, and our spread made $5, so
we’ve recovered $8,600.

    

The only bad news is that’s as good as it gets, as our short 30 calls cap
our upside at $30. So at $35, our stock has recovered $7, our 25s are worth
$10 and our two short 30s are worth $5. Add that $1,600 from our credit back
in and you get the same $8,600.