Wednesday, April 6, 2011

Taking Xerox risk off the table

Xerox approached $11 today, and the May $9 puts sold about 2 weeks ago trading down to a few cents. Prudent risk management led me to cover this position and remove the risk of being forced to buy the stock on some huge unforeseen downdraft. At the same time, the May $12 calls were sold. The transaction was done for a credit of a whopping $.02/share after commissions, but importantly this means there is now no way loose on this lot!

So to summarize the status of Xerox lot 3

- the commitment to buy another lot at $9 is now gone.
- the lot is now essentially long a May $11 - $12 call spread. At this moment that spread is worth about $.18 cents (or a 2% gain of the original $9 risk amount). We will let that amount ride with the belief that after earnings the stock will continue to rally and that will generate more pure profit. Maximum gain of $1 (or 11%) if the stock goes to $12 by expiration.

PS: Portfolio is still also long two lots of Xerox.

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