Chris Tyler, Optionetics.com
April 4, 2011
Just when things were looking good again and after a long, long hiatus from the growth radars of traders, fiber optic / telecom outfit, JDS Uniphase (JDSU) did it again—albeit this time on a much smaller crest of enthusiasm and one which barely shows up against the backdrop of the tech wreck / dot.bomb bubble of 2000.
I’m referring to JDS Uniphase’s shares bullish chart momentum out-the-gate this year. Through mid February, the standout performance saw JDSU stock climb 100% from 14.50 to a high just over 29. The price action likely enjoyed more than a few investors fondly remembering bygone days and expressions like “Just Don’t Short Us!” as being back for a repeat and longer lasting performance. The reality thus far has been a bit different though.
After a quick little pullback of about 22% from its fresh intermediate highs and best levels in five years, bulls received what appeared to be nice confirmation for a resumption of its trendy trend on March 4. That day, shares of JDSU jumped nearly 9% on strong volume, closing near session highs at 27.37 and reclaiming the short-term 10SMA which so many bulls use when trading momentum names.
While Elliott Wave wasn’t fooled this time around, other stock bulls that may have enjoyed the technicals were quickly in for a rude awakening as a potentially bearish counter candle of similar size followed the very next day. Then, after holding 10SMA support in a tight doji pattern; “Thump!”
Off a sympathy reaction to Finisar’s (FNSR) reduced outlook, shares of JDSU tanked the next session by nearly -17%. With much of the technical damage the result of a downside gap, clean and well-managed exits for naked long common stock holders using a traditional stop tied to the share price, was all but impossible.
Figure 1: JDS Uniphase (JDSU) Daily with “Adjustments”
On the less common and other more dynamic hand, bulls entering into JDSU at the same time on March 4 using a collar strategy saw their P&L’s pinched, but losses far less damaging and maybe even considered opportunistic by some measures or accounts.
Aside from the much smaller and limited losses provided by a collar strategy, the swift percentage decline in stock price also allows for the opportunity, if investors are so inclined, to finance the purchase of additional shares without dipping one’s hand deeper; well, maybe a few dollars, into the piggy bank.
Being able to accumulate on weakness without increasing the net debit / cost of the collar or by only a marginal amount of capital is due to the insurance afforded by the collar’s synthetic short combo. When shares of a stock move aggressively lower, the insurance policy provided by the short call and long put can be sold out for a profit with the proceeds used to buy more stock at lower, but not necessarily cheaper (fundamentally speaking) prices.
Figure 2: JDS Uniphase (JDSU) Adjusted Collar vs. Stock
Compared to a bullish shareholder who’s reeling from much steeper losses and would be forced to ante up more capital in full, in order to pursue a similar “Buy, Buy, Buy!” regimen; this adjusted and maybe more dynamic collar position could be an interesting option, pardon the pun, worth exploring for longer-term bullish traders.
Shown above to compare and illustrate but not give away all the workings of the family farm is one such adjusted, slightly aggressive and still underwater collar versus a bull holding onto long stock. Both strategies were initiated as five lots on March 4, but the collar has been adjusted into seven spreads. A very slight dip of the hand into the piggy bank beyond the initial start up cost of $13,730 for five March 27 / 28 collars has allowed this trader to adjust into the April 18 / 20 collar seven times with just a slightly larger net debit of $14,005.
A first adjustment opportunity to acquire 20% more shares or a 1 lot was presented on March 10 with shares off about 22% from the March 4 initiation while also testing 50SMA support. In designing a new six lot collar, March was rolled out and loosened into an April 20 / 23 collar to reflect the expectation for a fast bounce, which in hindsight never occurred.
Then on March 22 and with an additional 10% “Monbacky!” opportunity i.e. pullback, on the table and shares close to filling a prior optimistic gap courtesy of bulls on a high fiber diet in February; we purchased an additional 100 shares while rolling down and tightening the collar to the April 18 / 20 combo seven times.
So far, gobbling down shares still hasn’t been a profitable affair as we can see from the risk graph. The position is also world’s removed from those traders that may have made the pure and correct bearish play and just shorted JDSU as others chanted bullishly otherwise.
On the other hand tied to longer-term bullish commitments, the collar has been a good deal healthier than the other bull’s really, really high fiber stock diet. It’s also now in position to get quickly fit with just a bit of lifting of shares, from what might be, a typical corrective move in an otherwise healthy but sometimes mad money market.
Chris Tyler
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
Optionetics.com ~ Your Options Education Site
