The LEAPS Option Trader
105 W. Monument Street
Baltimore, MD 21201
Friday, February 11, 2005
Email – #231
** Has Gold Bottomed?
From the reaction in gold stocks, it appears that gold’s decline may be over for now. Last week there were rumors of large European Central Banks selling the metal to raise cash for third-world debt forgiveness. There is always a reason or excuse to explain the movement in the price of gold. A conspiracy here, central bank selling there, hedge funds unwinding… you name it. That is not why we are in gold. Our ownership is based on fundamentals… or lack thereof. Right now the world’s greatest economy is accelerating its indebtedness. Its currency is being debased further and there is no end in sight. That is reason alone to own gold.
Yesterday, our AngloGold (NYSE: AU) January 2007 $40 call option (VKE AH), which expires in about two years, soared by 40% on a 5% move in the underlying shares. That is the power of a LEAP option in action. Will it correct? Probably. But, if this week proves to be a low point for gold and gold shares, then we are off to the races with this pick.
Lately, we have seen much volatility in the market. Most of it has been to the downside. And, our LEAPS have reacted poorly on the way down. This is a premium giveaway in my opinion. The market makers are walking the prices down in magnified fashion to panic holders into selling. On certain positions, especially our 2-year options, we need to keep our cool.
We have had a lot of action in just two months – there are another 22 months to go. We have established stop loss limits on all of our LEAPS. Furthermore, I monitor the positions frequently to see if there needs to be a change. For example, our General Electric (NYSE: GE) January 2007 $40 call leaps (VGE AH) are a bargain at current levels. If the price of GE falls BECAUSE the market in general is falling or unstable, we may lower our stop loss to account for a non-company specific event. With almost two years to go on the call option, it may make more sense to hold the position through a market rough patch.
However, on a one-year position such as our do-or-die UT Starcom (Nasdaq: UTSI) January 2006 $20 call (WQZ AD), we should be more vigilant about the stop loss. Right now we are approaching our sell-stop of $1. This means that if the WQZ AD options trade at $1 on the OFFER on ALL OF THE EXCHANGES, we will issue a sell. We use the OFFER price because it is too easy for a market maker to post a $1 BID and a much higher offer just to trigger a stop. And, if we do have to liquidate, it is critical that you use limit orders and not market orders. Market orders will drive the price down artificially, just as they do when you are buying a security.
Our DaimlerChrysler (NYSE: DCX) January 2007 $40 puts (VLN MH) are perking up. The company announced its results yesterday and just as we speculated, its profits from its European division of Mercedes-Benz plummeted because of the strong euro and a sales slowdown. Its U.S. division, Chrysler, saved the day and prevented a profit bloodbath. I don’t expect the euro to weaken significantly anytime soon and we should see continued pressure on euro exporters like DCX. Again, our target for being “right” on DCX would be the shares falling below $44 soon.
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.
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