Tuesday, March 10, 2009

Trading Update: Engaged in Battle with AZO

My lone short term position is currently in AZO, which I am determined to convert into a profit despite its current strength.

My analysis tells me it's way overbought and options open interest point to a lower close next wekk unless the market makes feel like being generous and letting a boatload of calls remain in-the-money.

AZO surged over 7 points today- a painful move for any Bear with short positions and I'm sure many were chased out and had to close their positions, which probably helped with driving up the price.

To defend my short position, I had sold some puts last week and created some bear call spreads, where you sell a call and buy a call at a higher strike price. With today's surge up, I closed the puts I sold for a profit, sold a few March calls, and bought a few April puts. If AZO does reverse and head south I will profit off the calls I sold as well as from the puts I brought. If AZO continues to move up, I can create a short term bullish call spread as a hedge.

I have absolutely no doubt that AZO is too rich in value compared to its earnings for this economy and will give back much of these gains. They do have a good business for this type of economic climate but certainly not enough to be making all time highs. So the question is when will the music stop and AZO fall back to more realistic levels? It's only a matter of time.

My thoughts are AZO should settle somewhere between 140 and 150 for options expiration next week.....we shall see.

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