The Options Advantage
105 W. Monument Street
Baltimore, MD 21201
Tuesday, April 06, 2004
Email – #163
** Nokia Falls! Do We Care?
Nokia (NYSE: NOK) fell 17% today on revised guidance for
sales. I think the fall is an overreaction, but how does
this affect us?
Some of us made money by selling our Nokia option a few
months back and pocketed 80%. For those who did not sell,
we employed a spread to protect us for just the situation
we are seeing today. By selling an option against our
position, we took most of our cash off the table and
reduced our cost in the Nokia calls that we own to $0.80 or
under. We did limit the upside, but that was because I did
not see the upside beyond $30 per share to begin with.
So where are we now?
We own the $22.50 options, still selling for $1.70, and we
are short the $30 options selling for $0.60. The net effect
is we are still UP on the position by 30%-plus even after a
collapse in the shares. This is USING options, not playing
them!
What does the future hold? We could cover our NOK position
and walk away with 30% or more today. Or, we could wait. We
have almost two years to go. Here is how I see this playing
out over the next few months:
The $30 option will lose value quite quickly, since it is
so far out of the money. The $22.50 option will retain its
value, especially if Nokia begins to tick up after a few
days of basing. When the $30 options drop to $0.20 or
thereabouts, we will most likely buy it back and be
straight long NOK again with a cost around $1.00. Then it
all begins again.
By this time next year ANYTHING could happen. If the
economy continues its pick-up, you can bet that handset and
telecommunications sales will head back up and Nokia will
be seen as a participant. This should cause the shares to
move up and our options will begin to trade up as well.
For now, sit tight, do nothing and watch as the spread
unfolds. There are two lessons to be learned from today’s
action. First, LEAPS give you a lot of time for anything to
happen, positive or negative. If we were in a short-term
option expiring in April or May, we would be in big
trouble. Second, by using spreads when we are extremely
profitable, we take good money off the table and still
remain in the game.
Regards,
Karim Rahemtulla
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Current Portfolio:
Company / Symbol Option: Tenet Healthcare/THC Jan 06 $12.50 calls
Symbol: YTX-AV
Date Purch: 3/31/04
Current Price: $2.95
Comment: Hold. Trailing stop is $1.25.
Company / Symbol Option: Nas. 100 Trust/ QQQ Jan 05 $32 puts
Symbol: ZWQ-MF
Date Purch: 3/16/04
Current Price: $1.40
Comment: Hold. Trailing stop is $1.00.
Company / Symbol Option: Lockheed Mart./ LMT Jan 06 $50 calls
Symbol: WLA-AJ
Date Purch: 3/15/04
Current Price: $4.60
Comment: Hold. Trailing stop is $1.75.
Company / Symbol Option: Yellow Freight /YELL Jan 06 $35 calls
Symbol: YBQ-AG
Date Purch: 3/10/04
Current Price: $5.50
Comment: Hold. 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: $1.90
Comment: Hold. Trailing stop is $1.00.
Company / Symbol Option: Placer Dome / PDG Sell Jan 06 $25 call
Symbol: YDI-AE
Date Purch: 4/1/04
Current Price: $1.75
Comment: Hold. Sold call against Jan 06 $20 position.
Company / Symbol Option: Placer Dome / PDG Jan 06 $20 call
Symbol: YDI-AD
Date Purch: 1/23/04
Current Price: $3.00
Comment: Hold. No TS.
Company / Symbol Option: Hewlett Pack. / HPQ Sell Jan. 06 $30 call
Symbol: WPW-AF
Date Purch: 2/3/04
Current Price: $1.75
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: $3.20
Comment: Hold. No TS.
Company / Symbol Option: Nokia / NOK Sell Jan 06 $30 call
Symbol: WIK-AF
Date Purch: 2/9/04
Current Price: $0.60
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: $1.70
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: $2.00
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: $2.95
Comment: Hold. No TS
Company / Symbol Option: S&P 500 MITT
Symbol: MCP
Date Purch: 7/18/03
Current Price: $10.28
Comment: Buy under $10. No TS
———————————————————-
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