Sometimes, If You Stand On The Bottom Rail Of A Bridge And Lean Over

• May 18, 2001
• Jon Najarian

“Sometimes,
if you stand on the bottom rail of a bridge and lean over to watch the river
slipping slowly away beneath you, you will suddenly know everything there is
to be known. “

Pooh’s
Little Instruction Book, inspired by A. A. Milne

I’m sure there are scores of active
traders out there and certainly plenty of market makers here on the trading
floor, that thought the spin off by 3Com
(
COMS |
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PowerRating)
of Palm
(
PALM |
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PowerRating) signaled the market
top for high-tech. With shares of
hand-held computer makers Palm and Handspring

(
HAND |
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PowerRating) falling off a cliff today, some of us are wondering whether this
recent sell off hasn’t created an equally compelling bottom. 

   

Now, the reasons for today’s PALM related sell off were the earnings
shortfall and a series of ratings downgrades from Wall Street analysts. As of
this writing, PALM shares are trading $4.77, down $2.28 a share. The
gravitational pull of PALM is also pushing down shares of its primary
competitor, Handspring (HAND), which hit a fresh low of $8.50. 

   

Now one possibility with very limited downside would be to buy PALM for $4.77
and sell the November 5 calls for $1.50. I can’t speak for all of you, but a
net debit of $3.27 for a PALM position that pays me a 52% return if the stock
is $5 or higher on November expiration is a pretty attractive investment (I
rarely recommend any naked (uncovered) option positions, but the August 5
calls are trading for just $1.10).

   

Meanwhile, in HAND, you could buy the August 7 ½ – 15-bull call spread for $2
½. That’s paying $3 for the August 7 ½ and selling a like number of August
15 calls for $.50. Your risk is just that $2.50 and a close at 15 or higher
(HAND shares were there at the beginning of the month!) means your $2.50
investment could blossom to $7.50, a return of 200%.