A 'Stealth' Options Play on RF Micro Devices

This column was originally published on RealMoney on May 23 at 12:45 p.m. EDT. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.

RF Micro Devices(RFMD) has the profile of exactly the type of stock that should be avoided: a relatively small-cap technology company whose main products are older-generation cell-phone and wireless-device components. It faces slack demand, a lack of pricing power and a general lack of interest among the investment community. But I think it could be a good stealth play and using call options offers an attractive risk/reward.

After struggling for several months, the price action is turning positive, opening higher today and seeing an increase in call volume. The stock has held support at the $6 level, and today the August 7.50 call has traded over 5,300 contracts and the July 7.50 call over 4,000 contracts thus far. Be even at the low price of 20 cents, these options represent a long shot that the stock will get through the heavy resistance at $7 created by a gap lower after a disappointing earnings report this past March.

Given my expectations for only modest gains over the near-term, I'd look at buying in-the-money calls that keep the risk or cost of entry very low, but do not require a large percentage price move to produce a profit. For example, with the stock at $6.30, the November 5 call is currently trading around $1.50 per contract. So, even a modest target of $7 per share, or a 10% move in the stock, can produce a 50-cent, or 35%, return on the option.

To keep the risk in line with the reward, I'd use a close below $6 per share as a stop loss for exiting the position.

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