Wednesday, June 28, 2006

Calls of Note Part 4

- Merrill Lynch thinks Microsoft (NASDAQ:MSFT) stock is likely to remain range-bound over next few months. According to the firm investors could still make profits by using a short strangle (sell call options, and sell put options). Annualized returns on the combined premiums are 16.5%. Investors who already own Microsoft stock can use the same short strangle for added income. While options may not be suitable for all investors, other investors may find this strategy profitable over the near-term.

Investors would sell $25.00 call options, and sell $22.50 put options. The combined $1.20 premium provides a 5.2% return (16.5% annualized). This strategy is profitable in the $21.30 to $26.20 range, though the firm would caution that investors are exposed to losses outside this range.

Notablecalls: I must say I have never seen an options strategy highlighted by a broker actually work. Will see how ML fares.

- ThinkEquity says they are hearing that RF Micro Devices (NASDAQ:RFMD) has received sizeable order cancellations in the last month from both Nokia and Motorola. Firm believes that these order cancellations represent approximately 6-7 million units and will primarily impact RFMD's 2H results.

While the firm has previously been and continues to be concerned primarily by a low-end handset inventory glut, they are now hearing that a component build is occurring in the channel that will largely impact CYQ4 results. Firm expects the channel to react by lowering its forecasts to RFICs for late CYQ3 and CYQ4. Target goes to $5 from $7. Maintains SourceofFunds rating.

Notablecalls: I think we will see weakness in RFMD today. Also scroll down and read the JP Morgan note.

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