The LEAPS Option Trader
105 W. Monument Street
Baltimore, MD 21201
Tuesday, November 30, 2004
Email – #214
** The Dollar, Oil and Consumer Confidence
Times are good for exporters. The dollar is low and U.S. companies are reaping the benefits of higher exports. This also means that someone is getting hurt. If you are a euro zone company, your profits are being whacked by up to 30% this past year. That is one strike. The second strike is oil. If you are a company that produces products that are dependent on oil, you are seeing your end-user think twice before buying. Finally, if your market is the biggest debtor in the world, who has been on a massive credit binge for the past four years, then things are looking more and more shaky.
It is time to add a short position to the portfolio, one that takes advantage of all the trends above. We will short DaimlerChrysler (NYSE: DCX). DCX the massive conglomerate that owns Mercedes-Benz and Chrysler. It also has its feet deep into the industrial sector in Europe. One of Daimler’s greatest markets is the U.S. It biggest export is motor vehicles. Its Chrysler division is a huge seller of SUVs and other gas guzzling models. The current line-up features the massive gas gulping hemi engine that is guaranteed to cost you at least $40 to $60 per fill-up.
So far, the U.S. consumer has been ultra resilient. Interest rates while rising; have been kept artificially low by automakers eager to get rid of product. This 0% binge is still going on. While that may have worked well three years ago with rates at 2%, oil at $20 a barrel and consumers enjoying huge growth in their home equity, that party may be nearing its end.
For a company like DCX, this could be a double whammy. Not only will they see lower sales in the years ahead to their biggest market, but the profits from many of those sales will be massively affected by currency translation. Two years ago, a dollar bought you one euro. Today, one euro is worth U.S. $1.33 – not a small move.
Our play is a bet that the euro will not weaken substantially, oil will not crash to $30, U.S. interest rates will not fall, and the U.S. consumer is reaching the limit on his car-buying binge.
You could short shares of DCX – a 1,000 share position would cost you $45,000, and a 20% stop loss (if hit) would cost you $9,000… or you could use a LEAP put option.
The LEAP put option that I am recommending is the DCX January 2007 $40 put (VLN MH), currently trading at $3.80 on the offer. If you were to control 1,000 shares by buying ten contracts, your cost for this short would be $3,800 TOTAL. That is less than 10% of the investment in the shares for a 2-YEAR plus position. We will use an initial 50% mental stop at $1.90. This means that the most you have at risk in this play is $1.90 per share versus $9 per share for the stock – if you used a 20% stop-loss on the shares.
Our goal is for DCX to begin to move lower. It does not have to reach $40, only to head in that direction, for us to make money. We will have two years on this option. That is a lot of time for things to come to fruition. If we do get a move to $43 in the next three months or so, we will rack up a 30% to 70% gain. That is our initial goal.
Action to Take:
Buy the DaimlerChrysler (NYSE: DCX) January 2007 $40 LEAP put option (VLN MH). Do not pay more than $3.90.
Regards,
Karim Rahemtulla
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.
