The LEAPS Option Trader
105 W. Monument Street
Baltimore, MD 21201
Monday, August 2, 2004
Email – #187
** The New Bubble
What do you call a stock that trades with a $3 billion market cap with less than 10% of that in sales? How about one that trades with a P/E ratio of almost 45, based on the premise that the price of what it produces is going higher, much higher? If you guessed semiconductor – you’re wrong. If you guessed Internet, wrong again.
This company’s business is labor-intensive, capital-intensive and subject to factors COMPLETELY out of its control. How about management? Well, it’s hard to tell what they would be doing if not for being in the right place at the right time. They may be great – but it’s really not possible to know for sure.
What I can tell you is that they were smartly snapping up shares a few months ago when this company was trading in the teens, and now that it is close to $50, they are selling stock and exercising options to sell shares. Why not? They probably have good reasons. And in their business, they are sure of one thing – prices for their product could just as easily be half of where they are today… within a few months. It’s happened before and it will likely happen again.
The only problem here is how to short this company effectively. You see, it does have LEAPS, but they are not exactly liquid. Right now the LEAPS trade on four exchanges and each one has about 20 contracts on the offer. I am telling you this because you know that I use tight limits – I don’t want our buying to be the reason for the LEAPS to increase in price.
Fortunately, because this is such a volatile situation, you are likely to be able to get filled if you are patient. So far the only pick I have made this year where not all of you were able to participate – the shares soared within hours of the pick – was Yellow Freight. Those who got in made over 200% – I still feel badly that not everybody got the chance.
The company is Ultra Petroleum Corp., a junior oil and gas company – more gas than oil. If you were to place a chart of Ultra’s share price on top of a chart of the Amex Oil and Gas index, you would see just one line. The movement is almost identical. This gives us a good clue as to what could happen if oil/gas started to move south.
Right now, oil and gas plays are hot – hotter than tech, hotter than gold, and (gasp!) hotter than even the Internet. Is it a bubble? I think so. Oil is a commodity that is in high demand. But there is also lots of supply. Oil/gas is subject to geopolitical risk – something that is keeping the price higher than it should be right now. Any day now it could spike to $50 per barrel or $10 for natural gas – but just as easily it could fall to $34 and $4. A month ago, oil did fall more than $6 in a week. This past week it rose almost $4.
This volatility has nothing to do with fundamentals and everything to do with risk and uncertainty in the short-term. I say short-term because sustained high oil prices cannot continue without stifling economic growth of the world’s largest consumer – the USA. That fact is what can limit how high oil can trade ON A SUSTAINED basis. Can it spike to $70? Sure. Will it stay there for more than a few days? NO!
This is not a play without risk. If you are not able to sleep at night being short oil/gas, DON’T do this trade. We already have a long-hedged position with Chesapeake that is doing just great for us during this energy boom. And we are long an energy trader, Dynegy – more of a turnaround play than an energy play.
This trade will have insane volatility, something we need to make money. We will use a HARD STOP of 50% on this trade. The options are very expensive. We did the same thing when we shorted and made money on Amazon early this year. So, our risk is actually half of what we are investing and we will base our return on that number.
Right now the stock is trading at around $45 up over $10 in the last two weeks. Now, I must tell you that this company is not just a hype job – it has sales and earnings and it is growing. But it has the volatility and options we are looking for, and it trades in step with the price of oil/gas, giving us a good proxy.
Buy the Ultra Petroleum (AMEX: UPL) January 2006 $35 put options. The symbol is WSS-MG. These puts are currently trading at $4.70 on the offer, sporting a huge premium and a huge spread – both reflective of the potential volatility. Be patient and you should be able to get filled at $4.70 or lower.
Please do not chase the price on this option – it is volatile. Use limit orders, not market orders. We will set our HARD STOP at $2.35, 50% of the offer price. As always, I will update you on any changes to this price. Since this is a HARD STOP, we are risking $2.35 on this trade, not the entire $4.70 price.
Again this is a very volatile stock and sector and there is a LOT OF RISK involved in this trade. Please do not risk what you cannot afford to lose!
Regards,
Karim Rahemtulla
——————————————————————————–
Current Portfolio:
Company / Symbol: Ultra Petroleum (AMEX: UPL)
Option / Symbol: Jan. 06 $35 puts (WSS-MG)
Date Purchased: 8/2/04
Current Price: $4.70
Comment: Buy at $4.70 or better. Sell stop is $2.35.
Company / Symbol: Semiconductor Holders Trust (AMEX: SMH)
Option / Symbol: Jan. 06 $40 call (YRH-AH)
Date Purchased: 7/23/04
Current Price: $2.85
Comment: Hold. No TS.
Company / Symbol: Semiconductor Holders Trust (AMEX: SMH)
Option / Symbol: Sold Jan. 06 $45 call (YRH-AI)
Date Purchased: 7/23/04
Current Price: $1.75
Comment: Hold. Sold call against Jan 06 $40 position.
Company / Symbol: Ciena (Nasdaq: CIEN)
Option / Symbol: Jan 07 $5 call (VCB-AA)
Date Purchased: 6/22/04
Current Price: $0.90
Comment: Hold. No TS.
Company / Symbol: Ciena (Nasdaq: CIEN)
Option / Symbol: Jan 05 $5 call (EUQ-AA)
Date Purchased: 7/23/04
Current Price: $0.20
Comment: Hold. Sold call against Jan 07 $5 position.
Company / Symbol: Lucent (NYSE: LU)
Option / Symbol: Jan 06 $5 call (YXL-AA)
Date Purchased: 5/25/04
Current Price: $0.35
Comment: Hold. No TS.
Company / Symbol: Dynegy (NYSE: DYN)
Option / Symbol: Jan 06 $5 call (YNY-AA)
Date Purchased: 5/25/04
Current Price: $0.75
Comment: Hold. No TS.
Company / Symbol: Placer Dome (NYSE: PDG)
Option / Symbol: Sell Jan 06 $25 call (YDI-AE)
Date Purchased: 4/1/04
Current Price: $1.25
Comment: Hold. Sold call against Jan 06 $20 position.
Company / Symbol: Placer Dome (NYSE: PDG)
Option / Symbol: Jan 06 $20 call (YDI-AD)
Date Purchased: 1/23/04
Current Price: $1.90
Comment: Hold. No TS.
Company / Symbol: Hewlett Packard (NYSE: HPQ)
Option / Symbol: Sell Jan. 06 $30 call (WPW-AF)
Date Purchased: 2/3/04
Current Price: $0.40
Comment: Hold. Sold call against Jan 06 $25 position.
Company / Symbol: Hewlett Packard (NYSE: HPQ)
Option / Symbol: Jan 06 $25 call (WPW-AE)
Date Purchased: 12/10/03
Current Price: $1.20
Comment: Hold. No TS.
Company / Symbol: Nokia (NYSE: NOK)
Option / Symbol: Sell Jan 06 $30 call (WIK-AF)
Date Purchased: 2/9/04
Current Price: $0.10
Comment: Hold. Sold call against Jan 06 $30 position.
Company / Symbol: Nokia (NYSE: NOK)
Option / Symbol: Jan. 06 $22.50 call (WIK-AX)
Date Purchased: 8/29/03
Current Price: $0.25
Comment: Hold. No TS.
Company / Symbol: Chesapeake Energy (NYSE: CHK)
Option / Symbol: Sold Jan 06 $15 call (WZY-AC)
Date Purchased: 11/6/03
Current Price: $2.80
Comment: Hold. Sold call against Jan 06 $12.50 position.
Company / Symbol: Chesapeake Energy (NYSE: CHK)
Option / Symbol: Jan 06 $12.50 call (WZY-AV)
Date Purchased: 7/28/03
Current Price: $4.30
Comment: Hold. No TS.
Company / Symbol: S&P 500 MITT (AMEX: MCP)
Date Purchased: 7/18/03
Current Price: $10.06
Comment: Buy under $10. No TS.
——————————————————————————–
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.
——————————————————————————–
Copyright – 2004 Mount Vernon Publishing. Mount Vernon Publishing does not act as an investment advisor or advocate the purchase or sale of any security or investment. Mount Vernon Publishing expressly forbids its writers from having a financial interest in any security recommended to its readers. All of our employees and agents must wait 24 hours after an Internet publication prior to following an initial recommendation. And for hard-copy-only publications, 72 hours after the publication is mailed. Investments recommended in this letter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company. Mount Vernon Publishing provides its members with unique opportunities to build and protect wealth, globally, under all market conditions. The executive staff, research department and editors who contribute to recommendations are proud of the reputation Mount Vernon Publishing has built since its inception in 1984. We believe the advice presented to its members in our published resources and at our meetings and seminars is the best and most useful available to global investors today. The recommendations and analysis presented to members is for the exclusive use of members. Copying or disseminating any information published by Mount Vernon Publishing, electronic or otherwise is strictly prohibited. Members should be aware that investment markets have inherent risks and there can be no guarantee of future profits. Likewise, past performance does not assure future results. Recommendations are subject to change at any time.
