Stocks quoted in this article:
Gemstar International Group (GMST - 39-7/8), a maker of video recording systems, has been in a pronounced downtrend since making an intraday high of 100-7/8 on March 27. In fact, the three-week period following that day saw GMST fall as low as 37-9/16, a loss of nearly 63 percent. GMST has traded sideways since that time, supported by historical support at the site of previous resistance and support in the upper 30s. In the options pit yesterday, GMST had two of the most-active call options on the AMEX. Based on the tape action, it appears that a bullish debit spread was opened by selling 10,000 June 45 calls at 3 and using the premium received to help buy 10,000 June 40 calls at 4-7/8. In this debit spread, the net outlay was 1-7/8 (total value of $1,875,000 ignoring commissions). The maximum gross profit at expiration is 5, the difference between the strikes. This would return 167 percent based on the cost of the position (the net debit) and would happen if GMST were at 45 or above at June expiration. Breakeven would occur if the stock closed at 41-7/8 at expiration, when the value of the option purchased would be exactly equal to the debit paid to enter the spread.