Options Advantage
105 W. Monument Street
Baltimore, MD 21201
URGENT EMAIL – 159
Tuesday, March 16, 2004
** It’s Time for a Return to the QQQ – And a Brief Lesson on Shorting
It’s time to revisit a position in the Nasdaq 100 Trust
(AMEX: QQQ). We closed out our previous QQQ short position
several weeks back with a healthy gain. Since then the
market has fallen about 5% more and our option has
increased in value. We could have held on for a greater
gain, but there was no evidence that the decline would
continue. Now, there appears to be some evidence that we
are in for worse times ahead.
The problem with puts is that they are expensive. This
usually means that the market is nervous and wants you to
pay to play. On the flipside, since we use a 50% stop, we
can fall prey to a quick stop when the market turns against
us. Our QQQ position was in place to guard against a
decline in our HPQ and NOK positions until we had a chance
to either sell or hedge the positions in question.
Well, it worked. We took 80% profits on our NOK and 15% or
so on our HPQ. We also initiated a hedge on the positions
not sold, lowering our risk and keeping a healthy upside
intact.
In effect, we went short by hedging. How? By selling an
option against another option, we have the right to buy
back the sold option if the position falls, thereby
reducing our ultimate cost in the first option and removing
any upside barrier.
To add to this we are short Toll Brothers Housing (NYSE:
TOL). This is one of those “when it falls, it is going to
tank” picks. If we are not stopped out of this position, we
stand to make some good money if consumer confidence and
the economy start to get a case of cold feet. We will wait
and see on this short.
We are also short the market through our PDG call. Gold is
historically a great hedge against market declines and the
declines of currencies. Right now it looks as if gold is
reacting strictly against the dollar and not against market
deterioration. If that changes, “Katie bar the doors.”
I have tried in vain to find a way to short Chinese
Internet stocks, Indian outsourcing companies, companies
like Research in Motion and Juniper (both of which I
mentioned as great shorts several weeks ago, with good
results I might add). The problem is this: These companies
are SO volatile, that we would pay through the nose for a
PUT position, or as in the case of Indian outsourcers,
there is no option available. In fact with premiums for
RIMM, you are paying more than a couple of dollars for PUTS
that are $40 out of the money. That bet is too steep. So an
alternative is required.
To wit, we do have a couple of new long positions, Yellow
and Lockheed Martin. These were established recently for
specific reasons. We are up about 15% on Yellow despite the
market decline and with Lockheed it is way to early to
tell.
As I scanned through the available LEAPS last night I came
across the QQQs. The pick here is a short of the QQQs
again. This offers the best risk/reward potential to take
advantage of a re-rating of technology shares. We have been
in and out of the QQQs many times in the past. It has
always been for the same reason – to hedge against a
decline in the market. IF this market is headed lower – I
have been of the opinion for many months that tech shares
have been overvalued as a group – then this is the cheapest
play. We will buy the Nasdaq 100 Trust (AMEX: QQQ) January
2005 $32 put option (ZWQ-MF). These are currently at $2.10
on the offer. Do not pay more than $2.20. We will also be
risking less than $1.20 on this play by employing a hard
MENTAL stop at $1.
Regards,
Karim Rahemtulla
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Company / Symbol Option: Nas. 100 Trust/ QQQ Jan 05 $32 puts
Symbol: ZWO-MF
Date Purch: New
Current Price: $2.10
Comment: Buy. Do not pay more than $2.20. TS is $1.00.
Company / Symbol Option: Lockhed Martin/ LMT Jan 06 $50 calls
Symbol: WLA-AJ
Date Purch: 3/15/04
Current Price: $3.70
Comment: Buy at $3.60 or less. TS is $1.75.
Company / Symbol Option: Yellow Freight /YELL Jan 06 $35 calls
Symbol: YBQ-AG
Date Purch: 3/10/04
Current Price: $4.50
Comment: Buy at $4.60 or less. Trailing stop is $2.00.
Company / Symbol Option: Toll Brothers / TOL Jan 06 $25 puts
Symbol: YKW-ME
Date Purch: 2/20/04
Current Price: $2.05
Comment: Hold. Trailing stop is $1.00.
Company / Symbol Option: Placer Dome / PDG Jan 06 $20 call
Symbol: YDI-AD
Date Purch: 1/23/04
Current Price: $2.20
Comment: Hold. Trailing stop is $1.00
Company / Symbol Option: Hewlett Pack. / HPQ Sell Jan. 06 $30 call
Symbol: WPW-AF
Date Purch: 2/3/04
Current Price: $1.60
Comment: Hold. Sold call against Jan 06 $25 position.
Company / Symbol Option: Hewlett Pack. / HPQ Jan 06 $25 call
Symbol: WPW-AE
Date Purch: 12/10/03
Current Price: $2.80
Comment: Hold. No TS.
Company / Symbol Option: Nokia / NOK Sell Jan 06 $30 call
Symbol: WIK-AF
Date Purch: 2/9/04
Current Price: $1.05
Comment: Hold. Sold call against Jan 06 $30 position.
Company / Symbol Option: Nokia / NOK Jan. 06 $22.50 call
Symbol: WIK-AX
Date Purch: 8/29/03
Current Price: $2.80
Comment: Hold. No TS.
Company / Symbol Option: Chesapeake En / CHK Sold Jan 06 $15 call
Symbol: WZY-AC
Date Purch: 11/6/03
Current Price: $1.65
Comment: Hold. Sold call against Jan 06 $12.50 position.
Company / Symbol Option: Chesapeake En / CHK Jan 06 $12.50 call
Symbol: WZY-AV
Date Purch: 7/28/03
Current Price: $2.65
Comment: Hold. No TS
Company / Symbol Option: S&P 500 MITT
Symbol: MCP
Date Purch: 7/18/03
Current Price: $10.25
Comment: Buy under $10. No TS
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