One glance at PALM, and all self-esteem crumbles, and the trader knows his or her true place in the world: A worm, stomped into the dirt by the evil boots of Revenue Guidance.
Well, enough self pity.
The PALM shares, readers will recall, were part of a February covered call play that made a nice 83-cent premium from the sale of the options.
I bought the shares on Jan. 20 at $12.63, and sold a $13-strike option, all by the book. At the time PALM had come off a peak and bounced slightly off of support. After pausing the next day, it continued to slide to the next support level, around $10, where it stayed. Then on Feb. 23 it gapped down to about $8.50, and on Feb. 25, after negative revenue guidance from the company, it gapped agin down to the $6 level. The call option is long expired, unexercised, and I'm holding shares of stock worth less than half of what I paid for them. Time to ask the question posed by the immortal Vladmir Lenin, also a risk-taker who would have made a great trader had he not been a Communist. Asked Lenin, "What is to be done?" When it doubt, look to the long term. The present $6 level is an area of support running from December 2007 to July 2008. So it's a natural stopping point. PALM is not sitting atop the rabbit hole from Alice. | Depicts the stock market as legalized gambling on a massive scale. Can't say I disagree! |
However, the new resistance is at $8, far below my basis (which, with the covered call premium, is $11.80).
In addition, earnings will be released after market close on March 18. Since the revenue forecasts have already been released, I'm guessing there are no more negative surprises left. Earnings will either be a neutral or possibly a positive event, so far as prices go.
So my inclination is to hold the stock through earnings, on the theory that there will be some buying interest. The decline looks very much like a panic, as managers seek to rid their portfolios of an embarrassment.
PALM's new smart phones aren't selling well -- that's why revenues are doing so poorly. Retailers are starting to discount the smartphones heavily.
Once earnings are past, assuming no upside surprise, then what? PALM could be bought out, in which case I probably get more for my shares than the market is offering now. They could go into bankruptcy, in which case I lose it all. They could find a way out of their difficulty and start earning money again, in which case all is good.
My basic strategy is to let the price rise a bit, then sell another covered call, thereby lowering my basis again, and taking the loss on the shares if the call is exercised. If it's not exercised, then I can sell another covered call, and lower my basis even further.
I doubt that I'll ever be able to push the position back into a profit, but I can mitigate the loss.
P.S.: Almost neglected the Lessons Learned. The smart thing to have done would have been to close the position on Jan. 22, when the price sailed through my basis as adjusted for the covered call premium. Would I have taken a small loss? You bet. Would I have a zombie stalking my portfolio, tying up funds and producing heartburn? Nope.
Hope is the enemy of profit. That's the lesson of my error, and those are words to live my. Whoever wrote, "Abandon Hope all Ye who Enter Here" had a deep understanding of the true nature of trading.
New to private trading? Here's a look at How to Become a Private Trader.
Topic: Palm smartphone Pixi Pri.
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