Komag and Cree: A Double Option Play

The shorts kept piling on Komag(KOMG Quote), as witnessed by the heavy selling yesterday, and the pummeling looks like it will continue today. If I didn't know any better, I would have thought they were closing up shop as I watched yesterday's panic-selling.

That said, let's take advantage of the deep-in-the-money (DITM) call strategy. The recent selling has given us the opportunity to control another 2,000 shares of this $23 stock for only $3,000 by placing a limit order to buy 20 contracts for $1.50 or better on the September 25s (QKXIE). For that $3,000 we can control an amazing $46,360 in stock (as of yesterday's $23.18 close).

I buy deep-in-the-money calls with four to six months until expiration in order to protect against a situation like this. It allows ample time for the stock to recover from negative news, and fill in the gap back up to where its value should be.

I often assert that the market exaggerates extremes in both directions, and nowhere is that point clearer than with Komag. The company was the victim of unfortunate timing, as it lowered guidance in the face of an unstable market. To a large extent, the concern over this year's earnings has already been priced into the stock. Once some shorts cover and buyers re-enter the picture, the stock's fundamentals and small float will deliver a quick turnaround. ...