Dykstra: Tee Up BEA

With all the volatility we have experienced the last four days, I have decided to close out the week with a stock that has found its bottom.

At a recent $11.82, BEA Systems(BEAS Quote) is trading near its 52-week low.

On the positive side, this company has a big buyback program in place and more than $1 billion in cash, and I believe it could be an attractive takeover target by a larger competitor. BEA remains a world leader in enterprise infrastructure software; customers use the Tuxedo, Web Logic and Aqua Logic products to reduce IT complexity, enhance existing resources, and speed the delivery of new services.

However, readers need to be aware that BEA didn't release earnings results for the fourth quarter because of an ongoing stock options review. The company has said that the outcome of that review will require changing the accounting of some option grants, which will hurt its results for certain periods.

BEA's software is deployed on top of an operating system and database in an enterprise server, and it serves as a platform technology for enterprise applications. BEA has expanded into product categories that take advantage of the features in the underlying application server. BEA has more than 15,000 customers, including the majority of the Fortune Global 500.

This looks like an ideal setup for a buy of in-the-money calls, and we are going to buy 10 of the Sept. 10s (BUCIB) at $2.45. The risk-to-reward ratio is about as good as it gets, meaning this is definitely a lock-and-load situation.

Real vs. Paper Gains

A core principle that any investor needs to understand is the distinction between the increase in value of an investment and a realized gain. As much as a stock or option position may increase in value, that gain is not realized until that stock is sold. Tuesday provided a perfect example of why it is necessary for investors not only to make prudent investment decisions but also to recognize gains. Tuesday saw many investors lose significant portions of their profits from the eight-month bullish run in a matter of minutes.