Two new buys: LCD monitor and AUO

Princeton LCD monitor over the Thanksgiving weekend
AU Optronics Jan $15 call @0.35 AUO was trading at $13.11 at that time

AUO is one of the major LCD manufacturers and a supplier to DELL. It was on my watchlist and it successfully held support at 12.00. The MACD, ROC and Momentum indicators are positive.

The reason I bought the option and not the stock is that I am expecting resistance at the 14.2-14.4 level and that is when I plan to sell the option. Also the time value of the option will be quite high at that time. On retracement to around the 13.3 level, if it holds support, I'll buy both the stock and the option. On the other hand if it breaks above 14.4 on very good volume, I'll hold on to the options. since the next resistance is at slightly under 17.00

Fundamentally, LCDs should also be one of the hottest things on shopping lists this season. Typically with products like these, the buying cycle goes like this:

1. Initially, prices are very high, only a few "early adapters" are the ones buying the product. The company has low volumes and high profit margins. And at the same time, it's ironing out it's manfacturing inefficiencies
   
2. Then prices start falling moderately and volume picks up. The company meanwhile is manufacturing efficiently but not in very high volumes. The demand is high enough that price levels are sustained. This is the most profitable phase for the company.
3. The third phase is when production has been ramped up causing the demand levels to come down suddenly. The excess inventory forces sharp drop in prices. However, this drop is not enough to bring up the demand. In essence this is the deflationary mode. People are just waiting for the prices to fall further, causing the prices to fall further. This is the worst phase for the company.
4. Finally, prices drop to a level where demand picks up and the rate at which the price falls stays low. This is a point where every decrease in price will lead to a higher number of units sold. This is an inflexion point. This is also the point where a new product (Like LCD TVs) might be in the "early adapter phase and the cycle will start over.

With 19" LCD monitors, prices have fallen from $1200-$900 and $900- $750 during phase 1 and 2. The fall from $750 to $500 has been the worst. Again at the $450 and below levels, volume should pick up with price decreases.

The next growth phase in the company should come from LCD TVs which the early adapters are already buying. The falling dollar is a big question mark for the company though..


AUO support holds at 12.00