The LEAPS Option Trader
105 W. Monument Street
Baltimore, MD 21201
Thursday, July 22, 2004
Email – #181
** The Morning After
Here we go again. The market is visiting reality once again. As I wrote in my message a couple of weeks ago when I recommended the QQQ put options, the market had veered from reality and back into the land of fantasy valuations. When this happens, you get massive meltdowns in stock prices regardless of news.
Today was a great example of what can happen, good and bad. Our Motorola position was closed out at a loss. This happened in spite of the company reporting MUCH better than expected numbers all around and raising its outlook. It did not matter; the shares were hammered when they should have soared. The same thing happened with Lucent. The company did better than I expected and predicted when we bought the calls. It earned more, and it raised expectations. The shares did not get hammered, nor did the LEAPS, but they closed lower anyway.
Other stocks, the ones that have been bid up to the moon, did suffer and rightly so. Imclone dropped $15 today; eBay fell more than $7 in the aftermarket trading hours. But both of those companies already support an unbelievable valuation, and are home to the fast money crowd. And, both guided expectations lower – that resulted in the fast money crowd heading for the exits. I can understand this.
While we are protected with our puts, we are still open to volatile moves on a couple of our positions. It is for this reason I am lifting our sell-stops for now on our Dynegy calls and our Ciena calls.
In the case of Dynegy, we have an energy play that is a turnaround. The company is doing better and getting leaner each month by disposing non-core assets, paying down debt and focusing on its core businesses. In Ciena’s case, while it is pure speculation, we have more than 2 1/2 years to go. There is no need to panic in the short term, and we should wait until we have a better idea of what the company has to say about its progress in the weeks ahead. Regardless, we have minimal dollars invested in our portfolio in return for potentially explosive returns – that is the way it should be.
The current market reminds me of October of 2002, when all news was considered bad news. Stocks fell out of bed and nobody wanted to own equities. It is at precisely these times that investors pick up bargains. We are not there yet, but the pessimism is beginning to increase. This pessimism hits all stocks: good, bad and ugly ones alike. We will be ready to pounce on some bargains if this continues.
For now, move your sell stop on the Nasdaq QQQ puts (QQQ-XI) to $2. The current offer on the cheapest exchange is $2.50. This gives us a 50 cent (20%) cushion on the downside and still locks us into a profit. This means that if the options trade at $2 on the OFFER on any exchange, you should be selling.
In addition, remove the sell stop on your Dynegy January 2006 $5 calls (YNY-AA) and on the Ciena January 2007 $5 calls (VCB-AA).
Regards,
Karim Rahemtulla
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Bio:
Karim Rahemtulla is the former Investment Director of The Oxford Club. The editor of The Smart Options E-Report, The Income Trader – A Covered Call Strategy and The LEAPS Option Trader, Karim is also a regular contributor to The Oxford Club Communiqué. His highly successful trading systems use covered calls and LEAPS to boost returns on blue chip stocks, and during the bear markets of 2000 and 2001, his picks outperformed the major market averages. Educated in England, Canada and the U.S. and fluent in several languages, Karim travels the world to find the best investment opportunities for our members.
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