The Options Advantage
105 W. Monument Street
Baltimore, MD 21201
Thursday, April 1, 2004
Email – #162
** Make More Than 500% on Your Money AND Take Some Money Off the Table
Our Placer Dome January 2006 $20 call option (YDI-AD) is up 28%. It is time to employ a calendar spread on the option. Here is what you need to do to take advantage of the current situation:
My recommendation is to SELL the YDI-AE, January 2006 $25 call options. These are currently trading for $1.85 on the bid – give or take a nickel. Sell these options against your current position. This will take a good chunk (75%) of your money out of this pick. If you cannot execute this strategy, then take your 28% profits on the position now.
This is how this strategy works: by selling the $25 option against your $20 option, you receive $1.85. That money is now off the table and your cost is $0.75 ($2.50 initial price of the $20 option minus $1.85 proceeds from the sale of the $25 option). Your upside is limited to $5 ($25 minus $20). Your return is based on the new cost-basis price of $0.75.
Therefore, if Placer (NYSE: PDG) goes up and closes at $25 at expiration, you will receive $5 back on your $0.75 investment – OVER 500%. In order for Placer to hit $25, gold would have to be close to $500 per ounce, which is our target.
The benefit of this strategy is twofold. First, you are taking money off the table, reducing your risk substantially. Second, if gold prices fall, and Placer shares fall, we can buy back the $25 option at a lower price, reducing your cost and unlocking the upside again. Since gold is volatile and Placer shares are volatile, we are putting ourselves in a Win-Win situation.
Also, we are removing our stop-loss provision on this pick.
Regards,
Karim Rahemtulla
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