The rate-setting Federal Open Market Committee announced it would be lowering rates from 5.25% to 4.75%. This is the first rate cut the committee has made since June of 2003. The Federal Reserve Committee also cut the discount rate it charges banks for short term loans by one-half a percentage point.
Audio Podcast:
An audio podcast of this article is available at: poweropt.com/podcasts/2007_09_20_Fed.mp3
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Before we continue and evaluate how experts feel this will affect stock prices, and ultimately the price of derivatives, it is interesting to review how the Fed views its rate cutting role and how its actions affect the broader economy.
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The Federal Reserve’s Website (newyorkfed.org) offers a good overview of the mechanics of rate adjustments:
The health of the economy affects interest rates by influencing the supply of, and the demand for, credit. For example: People’s incomes fall in a recession, so the amount they save also decreases. The demand for credit by business generally declines in a recession, as business spends less on new buildings, equipment, and inventories. Also, the Federal Reserve acts to reduce interest rates during recessions, in order to stimulate economic activity. The federal government’s demand for credit generally rises in a recession, as the reduction in business and consumer incomes reduces tax revenues, and programs such as unemployment insurance require increased spending. How the Rate Cut Has Affected Stocks:
Prior to the news of the rate cut, tech stocks had already been giving rosy outlooks. Western Digital Corporation (WDC) revised its earnings estimates upward on Monday and was additional bolstered by the rate cut news. The stock has seen a rise from $22.37 at the end of last week to $23.50 in trading today. Apple (AAPL), IBM (IBM), Sony (SNE), Google (GOOG) and countless others have also seen a rise this week.
Microsoft (MSFT) is down slightly, but still may be a good pick for a long position as their sales continue to grow and their P/E is a relatively low 20. Apple, although they are a company more focused on hardware than Microsoft, has nearly twice Microsoft’s P/E at 40. Apple-supporting analysts might argue the company will see this type of runaway growth, but Microsoft maintains a profit margin of around 27% as compared to Apple’s 13.75%.
Because analysts expect tech stocks to continue their upward trend and because the rate cut will, as the Fed website pointed out, help with capital expansion, we will take a bullish view of the tech sector in our search today.
Potential Trades:
The following search used PowerOptions SmartSearchXL Covered Call platform and returned over 100 results. We have only included the top 10 results. An individual would probably want to add additional parameters to suit their personal investing technique. The parameters used for the search are included in the following table.
| Covered Call Search – Top 10 Search Results | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Symbol | Stock Price |
OPTION | Strike Info |
Option Bid |
Net Debit |
% Dnsd. Prot. |
% If Unch. |
% If Asgnd |
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| IDCC | 21.25 (-0.12) | DAQJX | 07 OCT 22.5 (30) | $0.95 | 20.3 | 4.5 | 4.7 | 10.8 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| IMMR | 14.43 (+0.21) | IMUJC | 07 OCT 15.0 (30) | $0.65 | 13.78 | 4.5 | 4.7 | 8.9 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CY | 28.58 (+0.06) | CYJF | 07 OCT 30.0 (30) | $0.90 | 27.68 | 3.1 | 3.3 | 8.4 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SPSS | 43.13 (-0.28) | QSKJI | 07 OCT 45.0 (30) | $1.55 | 41.58 | 3.6 | 3.7 | 8.2 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| NVTL | 23.87 (-0.37) | NVUJE | 07 OCT 25.0 (30) | $0.75 | 23.12 | 3.1 | 3.2 | 8.1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SMSC | 38.38 (-0.09) | SMQJH | 07 OCT 40.0 (30) | $1.35 | 37.03 | 3.5 | 3.6 | 8 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| VSEA | 53.95 (-0.95) | UESJK | 07 OCT 55.0 (30) | $2.80 | 51.15 | 5.2 | 5.5 | 7.5 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| UCTT | 14.55 (+0.22) | QFUJC | 07 OCT 15.0 (30) | $0.60 | 13.95 | 4.1 | 4.3 | 7.5 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| GRMN | 106.34 (-1.38) | RZJJB | 07 OCT 110.0 (30) | 4 | 102.34 | 3.8 | 3.9 | 7.5 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| DIVX | 14.61 (-0.01) | QDWJC | 07 OCT 15.0 (30) | 0.65 | 13.96 | 4.4 | 4.7 | 7.5 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The Interdigital Communications Corporation (IDCC) is an interesting covered call trade. The company’s share price is trading down around $14 from one year ago and the stock was noted in a Motley Fool article as undervalued yesterday. The stock price decline appears to be because of a patent battle the company was waging with cell phone giant Nokia (NOK). The trade also has appeal because it offers nearly 11% potential profit if assigned, a return no doubt commensurate with the risk involved.
Hopefully this blog illustrated the complete and comprehensive picture an investor can get simply by doing research with the PowerOptions website and the conveniently provided external news and information links. Each search result has a personalized dropdown menu to allow an investor to get company profile, news, and price information on the stock in question.
Competitors:
Competitors for IDCC include: Alcatel-Lucent (ALU), QUALCOMM Inc. (QCOM), and Freescale Semiconductor, Inc. (private).
Competitors for IMMR include: Logitech International SA (LOGI), Microsoft Corporation (MSFT), and Sony Corp. (SNE).
Competitors for CY include: Integrated Device Technology Inc. (IDTI), Xilinx Inc. (XLNX), Samsung Electronics Co., Ltd. (private), Integrated Silicon Solution Inc. (ISSI), Monolithic System Tech. Inc. (MOSY), and PLX Technology (PLXT).
Competitors for SPSS include: Insightful Corp. (IFUL), Oracle Corp. (ORCL), and SAS Institute Inc. (private).
Competitors for NVTL include: Sierra Wireless Inc. (SWIR), Option NV (private), and Sony Ericsson Mobile Communications AB (private).
Competitors for SMSC include: Fairchild Semiconductor International Inc. (FCS), National Semiconductor Corp. (NSM), and Winbond Electronics Corp. (private).
Competitors for VSEA include: Applied Materials Inc. (AMAT), Axcelis Technologies Inc. (ACLS), and Sumitomo Heavy Industries, Ltd. (private).
Competitors for UCTT include: Celerity, Inc. (private), Matheson Tri-Gas, Inc. (private), and Wolfe Engineering, Inc. (private).
Competitors for GRMN include: Magellan Navigation, Inc. (private), Navico Holding A.S. (private), TomTom N.V. (private), and Trimble Navigation Ltd. (TRMB).
Competitors for DIVX include: Apple Inc. (AAPL), Google Inc. (GOOG), and Microsoft Corporation (MSFT).
For more information about how to identify and research great option trades, visit the PowerOptions website. There you will find the data you need to make quick, clear, and informed decisions. You can trade knowing you have found the best investment. Also, PowerOptions will allow you, with a few quick clicks, to quickly and accurately compare trades. PowerOptions‘ premium customer support is second to none in the industry. They can be easily contacted when you need them at their toll-free number to answer customer questions. Call them now toll free at 877-992-7971.
PowerOptions provides a free 14-day trial of its service. So join PowerOptions today, and you too can start reaping the benefits of the covered call investment strategy.
[tags] Freescale Semiconductor, Inc., Samsung Electronics Co., Ltd., SAS Institute Inc., Option NV, Sony Ericsson Mobile Communications AB, Winbond Electronics Corp., Sumitomo Heavy Industries, Ltd., Celerity, Inc., Matheson Tri-Gas, Inc., Wolfe Engineering, Inc., Magellan Navigation, Inc., Navico Holding A.S., TomTom N.V., AAPL, Apple Computer Inc., ACLS, Axcelis Techs. Inc., ALU, Alcatel-Lucent, AMAT, Applied Mats. Inc., FCS, Fairchild Semi. Inter. Inc., GOOG, Google Inc., IBM, Intl. Business Machines, IDCC, Interdigital Comms. Corp., IDTI, Integrated Device Tech. Inc., ISSI, Integrated Silicon Solution Inc., LOGI, Logitech Intl. SA, MOSY, Monolithic System Tech. Inc., MSFT, Microsoft Corp., NOK, Nokia Corp. ADR, NSM, National Semiconductor Corp., ORCL, Oracle Corp., PLXT, PLX Technology, QCOM, QualComm Inc., SNE, Sony Corp. ADR, SWIR, Sierra Wireless Inc., TRMB, Trimble Navigation Ltd., WDC, Western Digital Corp., XLNX, Xilinix Inc., covered call investment strategy, investment strategy, poweroptions [/tags]