One word perfectly sums up the recent market movements – VOLATILITY.
While the market has been long overdue for a correction and this might very well be the beginning of one, its still to early to decide. Perhaps a few more down days will really get the talking heads out on CNBC saying correction, correction . . .oh well . . . WHO CARES!
As options traders we LOVE volatility. UP or DOWN, as long as the market is moving we can profit, if we apply the right options trade. This week, we’ve found a trade that we think is PERFECT for todays market conditions.
We initially wanted to post a bullish trade on this stock; however, we decided to post a more delta neutral trade (in simple words: a trade where we dont care which way the stock goes) as it would allow us (and yourselves) to sleep peacefully.
First, a quick brief summary on why I’m bullish on ComTech Telecommunications (CMTL). CMTL recently posted GREAT earnings (Up 115.2% to 71 cents per share) w/ a 34% increase in SALES. If that wasnt enough, this company has recently been awarded new contracts totaling about $14.3 MILLION in NEW business. A quick look at the charts will show you, that the action so far has only been SOMEWHAT bullish. I have no idea what investors are waiting for; whatever it is, it wont be long before they realize the potential of this stock and bid shares up accordingly. And before they do, lets go ahead and get in so we can profit from it too, after all thats what trading is all about 
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TECHNICALLY, this stock is bullish, so I’m going to bias this trade a just a little bit on the bullish side.
TICKER: CMTL
PLAY: Strangle
ENTRY POINTS: There are 2 options involved in this trade, so please try to execute the trade as a spread instead of legging into it one option at a time. If you do leg into it, then please dont spend any more than $3.35. The current ask price on this spread is $3.25.
BUY Oct’07 $50 LONG CALL
BUY Oct’07 $40 LONG PUT
EXIT POINTS:
Primary Exit: Sell the entire spread for a 30% ROI. In Other words, when we can get a net credit of $4.40 for our spread, we will exit this trade. We expect to hit this ROI in 2 – 3 WEEKS.
Secondary Exit: We will spread trade this position by shorting options against our long options, depending on what the stock is doing in 2 – 3 weeks from now.
As always, please look under the comments section for updates.
September 21, 2007 at 2:39 pm
Lets go ahead and roll our call to Jan’08 $55. . . even though we didnt hit our PE of 30%, we are looking at a 25% profit here.
I would have closed out the trade; however CMTL just posted GREAT EARNINGS and is now starting to move in our direction.
Lets do the roll to Jan’08 for a max debit of $0.30 or less.
The Oct’07 can be sold for $4.1 BID, and the Jan’08 can be purchased for $4.40 ASK.
This roll will buy us more time and give us a shot at greater profits. Once again our PE will be a 30% profit. So if Jan’08 option hits $5.75 or better, we’ll look to exit or book some profits on this trade.
Our Cost basis on this trade is now: $3.55.
I’ll post adjustments as needed.
-Murtaza
July 17, 2008 at 12:55 am
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