Just over a month ago, I recommended the stock of Entropic Communications (ENTR) on this blog. At the time, the stock was selling for 9.00 per share. The stock closed yesterday at 10.81, and the premarket bid/asked this morning is 11.01 bid and 11.15 asked. When I recommended purchase of the stock, I also recommended the sale of the December 10 calls and the December 7.5 puts. This morning, I was asked by a reader whether I believe those positions should be changed.
My answer is two fold. First of all, anyone who did the trade I recommended will most likely be taken away on next Friday at $10. That will mean that the profit on the six week trade will be just over 120% on an annualized basis. It makes perfect sense to me if one chooses to keep thos positions and close out a very profitable trade next week. I, however, have chosen not to do that. Entropic seems to me to have more to go on the up side. As a result, I have rolled the December 10 calls to the May 12.5 calls, and I have rolled the December 7.5 puts to the may 7.5 puts. Before the opening, it looks like those rolls done this morning would net one about 80 cents -- give or take a dime-- with the result that one would have an additional 25% upside between now and May (about 50% on an annualized basis) plus a cash return of about 16% annualized during the same time. In addition, you will still have all of the gains of the original trade.
Obviously, the time horizon to May is much longer than just holding until next Friday. For the reasons in my original post, however, I think that Entropic has a ways more to go on the upside. That is why I have chosen to do the roll.
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