Company Commentary
Bear Stearns April Call Options Hit Jackpot
By Rick Rouse
Mar 26, 2008 - 11:48:00 PM

Stearns (BSC, $11.21, up $0.27) made news again today.  Actually no major news but I was just being smart when I said that.  Yes, there were plenty of stories written about Bear but none to explain the late day turnaround.  Sometimes the market will give you a gift and that's exactly what we got Wednesday morning when the April 10 call (BVDDZ, $1.70, up $0.40) opened at $1.05 and hit a high of $2.20 for the day.  The April 15 call (BVDDC, $0.40, up $0.20) opened at $0.20, yes 20 cents and you could have bought 100 contracts for $2,000.  Better yet, they traded to a high of 50 cents which means you could have made an outstanding 150% on your money in less than eight hours.  Even if you sold just half of you position when the April calls doubled from your entry price you're still looking at a nice return but with the added security of a 100% risk-free trade even if the options expire worthless.  This is what is known as the zen of option trading.

If you read my article from last night and were prepared to go to battle, then many of you made some money.  Let's say you did buy 100 contracts of the April 15 calls at the open for 20 cents.  Of course you may have been nervous because the stock wasn't acting all that great.  However, with a hour or so left in the trading day, Bear Stearns reversed course and traded as high as $12.00.  If you sold 50 contracts at 40 cents which was a double from your entry price then you would have received $2,000.  Which means you cannot lose money theoretically (option commissions aren't included for simplicity purposes).  After selling, you still have 50 contracts valued at 40 cents which is all a $2,000 profit.  From here out you could set stops or let it ride.

I was a bit surprised to see the late-day rebound given the weak economic data we got but either way we'll take it.  Volume is still running about 5x the norm with even more explosive volume on any significant news developments.  There was nothing of a higher offer making the rounds today but volume started to swell before the close. 

The key here will be the Fed because they are also involved in the bailout of Bear Stearns with JPMorgan ($44.11, down $1.95).  Interesting was that JP stayed in the red all day while Bear had a rally.  Keep setting stops on Bear or ride it out.  Either way, I wouldn't initiate new positions if you have already opened a position.  Day trading this thing could wreak havoc on your overall results.  That is why it was the safest play to cash out half of your original investment and play with the rest.

With the Fed involved Bear Stearns could get another offer but as of now that may be the biggest factor holding down another bid.  This story has the appeal of an OJ Simpson runaway truck with Wall Street not being able to take its eyes off Bear's ticker symbol as it runs across the trading boards.

Hit me up if you enjoyed the article or made any money!