The LEAPS Option Trader
105 W. Monument Street
Baltimore, MD 21201
Tuesday, September 21, 2004
Email – #200
** Calls of the Wild
Our Interactive Corp. (NYSE: IACI) 2007 call options (VSW AE) have been on a wild ride. A week ago we all got in at $3.70 or thereabouts. A couple of days later the calls spiked to $4.80 when the shares rose on rumors that CEO Barry Diller was considering taking the company private. He has made the statement in the recent past that he believed the shares were severely undervalued and that a private transaction was not out of the question.
This is going to be a wild ride. IACI is an extremely volatile stock with a very vocal personality at the helm. We bought the options for several reasons. One of the main reasons was heavy insider buying by the CFO, who has bought thousands of shares on the open market. We also bought the option because of the tremendous amount of time left – over two years. As you saw, it only took a 5% move in the shares to result in a 25% move in the option. Of course, the same works in reverse to some extent.
But to show you how “out of whack” the current price of the option is versus the shares, all you have to do is to look at a week’s worth of pricing. Last week, we bought the options at $3.70 and the shares were at $22. On Friday, the shares spiked to $23.50 and the option moved to $4.80. Today the shares are at $22.80 and the option is at $3.60.
Using the Black-Scholes model for valuing options, I calculated that based on the parameters of the shares – such as volatility, time to expiration, risk free rate of return etc. – the true value of this option is around $4.30 right now. In the short term there can be a lot of reasons why the share price and options price are out of whack. This is one of those times. The VSW AE option is still a buy with a $3.70 limit.
Regards,
Karim Rahemtulla
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Current Portfolio:
Company / Symbol: Interactive Corp. (NYSE: IACI)
Option / Symbol: Jan. 07 $25 call (VSW-AE)
Date Purchased: 9/14/04
Current Price: $3.60
Comment: Buy at $3.70 or better. Sell stop is $1.90.
Company / Symbol: Toll Brothers (NYSE: TOL)
Option / Symbol: Jan. 06 $35 put (YKW-MG)
Date Purchased: 8/12/04
Current Price: $2.25
Comment: Hold. TS is $2.10.
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: $0.90
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: $1.15
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: $2.10
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: $0.30
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: $2.40
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: $3.90
Comment: Hold. No TS.
Company / Symbol: S&P 500 MITT (AMEX: MCP)
Date Purchased: 7/18/03
Current Price: $10.35
Comment: Buy under $10. No TS.
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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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