The LEAPS Option Trader
105 W. Monument Street
Baltimore, MD 21201
Tuesday, October 19, 2004
Email – #206
** Buy Intel
A while back I used an example in one of my speeches about when to use LEAPS and when not to use LEAPS. The subject of my talk was Intel (Nasdaq: INTC). There is absolutely no reason to buy Intel LEAPS when the stock is trading at higher valuations unless you are a momentum player. At higher levels you have to build several major assumptions into a model. The greatest assumption is that economic growth will be at such a high clip that you are willing to pay two to three times more for Intel than it is actually worth. This happened in 2000 when Intel was a LESSER company than it is today.
My argument is quite simple. Why buy Intel at $70 when the chances of it going down substantially are greater than the chances of it going up? The same thinking, in reverse, applies now. Buy Intel when its price is in the low 20s because the upside potential is much greater.
I strongly believe that on a fundamental basis – looking at cash, book value, earnings, revenues, etc. – that Intel is very reasonably priced today. Just last week the company announced that business was looking better. Yesterday, competitor Texas Instruments announced that things were really picking up again. IBM did the same thing. And, Intel’s smaller but still important competitor (one that we have made a ton of money on in the past) AMD announced that business was looking good.
Yet, the entire semi sector has been blown up this year because of the investors who expected 90s-type growth and bid up prices too fast. Now we have settled back into a more reasonable range from which profits can be made – if you buy the right company and at the right price.
Low interest rates are here to stay, as is government pump priming to keep this economy moving. One of Intel’s largest markets, Asia, continues to boom and there is no end in sight for new products launched that require its chips. For a company that is dominant, cash rich and fundamentally sound, the future looks quite good indeed. Barring a major market meltdown, we should see good profits from this position in the months ahead.
Action to Take:
Instead of buying Intel for $21.16, we will buy the Intel $22.50 January 2006 LEAPS (WNL AX) which are trading at $2.40. A move by Intel to $23 or $24 by early 2005 will return us more than 50%. Use a $1 initial mental stop loss.
Regards,
Karim Rahemtulla
Current Portfolio:
Company / Symbol: Intel (Nasdaq: INTC)
Option / Symbol: Jan. 06 $22.50 call (WNL-AX)
Date Purchased: 10/19/04
Current Price: $2.40
Comment: Buy
Company / Symbol: Forest Labs (NYSE: FRX)
Option / Symbol: Sell Jan. 06 $55 call (WRT-AK)
Date Purchased: 10/6/04
Current Price: $3.60
Comment: Hold. Sold call against Jan. 06 $50 position.
Company / Symbol: Forest Labs (NYSE: FRX)
Option / Symbol: Jan. 06 $50 call (WRT-AJ)
Date Purchased: 10/6/04
Current Price: $5.50
Comment: Hold. No TS.
Company / Symbol: Interactive Corp. (Nasdaq: IACI)
Option / Symbol: Jan. 07 $25 call (VSW-AE)
Date Purchased: 9/14/04
Current Price: $2.65
Comment: Hold. No TS.
Company / Symbol: Lucent (NYSE: LU)
Option / Symbol: Jan. 06 $5 call (YXL-AA)
Date Purchased: 5/25/04
Current Price: $0.40
Comment: Hold. No TS.
Company / Symbol: Dynegy (NYSE: DYN)
Option / Symbol: Jan. 06 $5 call (YNY-AA)
Date Purchased: 5/25/04
Current Price: $0.95
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: $1.60
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: $3.50
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: $10.25
Comment: Buy under $10. No TS.
