The LEAPS Option Trader
105 W. Monument Street
Baltimore, MD 21201
Tuesday, March 29, 2005
Email – #240
** Sniffing Out a New Trend – And a New Play
In the past two weeks there have been two major patent/intellectual property cases that have hit the wires.
The first was a massive win by Lexar Media (Nasdaq: LEXR) against Toshiba regarding the theft of trade secrets related to flash memory chips. The jury awarded Lexar $381 million plus another $84 million in punitive damages. The effect was a doubling in Lexar’s share price… from around $3 to over $6. The shares have since settled to $5. Toshiba has vowed to appeal the decision.
If Lexar wins the appeal, or Toshiba loses, it will mean a windfall for Lexar shares. LEXR is down from its highs of $18 in the past 52 weeks in large part due to its declining sales and profits. One of the main reasons for this decline was the sales lost as a result of Toshiba. A more likely outcome is a settlement in the case where Toshiba will pay a fee to Lexar and sign a licensing agreement.
Next month, Lexar will ask the court to ban Toshiba from selling products that contain Lexar’s technology – something that Toshiba cannot afford.
A second case is Immersion Technology (Nasdaq: IMMR) and Sony. Immersion has long claimed that Sony has been infringing its patents and technology for use in its hugely popular Playstation consoles, controllers and games. Immersion has developed and patented specific haptics technology that allows the user to feel specific vibrations as a result of what is happening on the screen.
Sony lost the case and has been ordered to pay Immersion over $90 million and all future and past royalties. Sony is also promising to appeal the decision, BUT must pay Immersion past and future royalties during the appeal – OR pull all its PS2 units and games that use this haptic technology off the shelf.
More than 40% of Sony’s profits came from the PS2 franchise last year. Again, it is likely that this case will be settled – Microsoft settled with Immersion over a year ago to avoid what Sony is facing today.
The trend I am seeing is a justice system that is finally punishing mega corporations for stealing or infringing on the technology of smaller, less well funded companies. Both Sony and Toshiba have been using legal muscle to basically wear down their opposition, knowing that the cost involved in these long and expensive cases can bankrupt many small companies. With the recent decisions and the severity of the fines and potential immediate loss of sales and profits for the larger companies, it looks as if the legal system in the U.S. has finally caught up and is ready to make immediate judgments, thereby protecting the rights of the infringed.
How can we make money from this?
Today’s recommendation is a bull spread on Lexar (Nasdaq: LEXR) LEAPS. We have the opportunity to have about 75 cents at risk to make about $1.75 on your money at risk. When engaging in a bull spread, you must buy one call option, in this case the Lexar January 2007 $5 call option, and sell a corresponding option with a higher strike price AGAINST your position. In this case you will be selling the January 2007 $7.50 call option AGAINST your position. By selling the option you immediately reduce your cost by the amount that you receive for selling the option, thereby reducing your downside. However, for this reduction in risk, you are also limiting your upside, in this case to $2.50 less your cost of $0.75.
Here is what you need to do.
Buy the Lexar January 2007 $5 LEAP calls (VRF AA). The current offer price is $2.65. Immediately sell the Lexar January 2007 $7.50 LEAP calls (VRF AU) against your position. The current bid (the price you sell at) is $1.90, giving you a cost basis of $0.75 in at risk money.
If Lexar shares move higher, so will the value of both of your options and we may close the position early. If Lexar closes above $7.50 at expiration, you WILL MAKE $1.75 on every $0.75 invested. So, why should we do the spread if we think Lexar will prevail? Stranger things have happened. And if the appeal by Toshiba is successful and Lexar shares plunge – we will have only $0.75 per contract at risk if this happens. (Note: We’re using long-term LEAPS options because an appeals process can take 12-18 months.)
Regards,
Karim Rahemtulla
Current Portfolio:
Company / Symbol: Lexar (Nasdaq: LEXR)
Option / Symbol: Jan. 07 $5 call (VRF-AA)
Date Purchased: New
Current Price: $2.65
Comment: Buy
Company / Symbol: Lexar (Nasdaq: LEXR)
Option / Symbol: Jan. 07 $7.50 call (VRF-AU)
Date Purchased: New
Current Price: $1.90
Comment: Sell call against Jan. 07 $5 position.
Company / Symbol: Energy Select SPDR (AMEX: XLE)
Option / Symbol: Jan. 07 $39 put (ORJ-MM)
Date Purchased: 3/1/05
Current Price: $3.00
Comment: Hold. Mental sell stop is $1.20.
Company / Symbol: Comcast (Nasdaq: CMCSA)
Option / Symbol: Jan. 07 $35 call (VPK-AG)
Date Purchased: 2/16/05
Current Price: $5.10
Comment: Hold. Mental sell stop is $1.95.
Company / Symbol: AngloGold/Ashanti (NYSE: AU)
Option / Symbol: Jan. 07 $40 call (VKE-AH)
Date Purchased: 1/5/04
Current Price: $3.90
Comment: Hold.
Company / Symbol: General Electric (NYSE: GE)
Option / Symbol: Jan. 07 $40 call (VGE-AH)
Date Purchased: 1/4/04
Current Price: $2.00
Comment: Hold.
Company / Symbol: Daimler Chrysler (NYSE: DCX)
Option / Symbol: Jan. 07 $40 put (VLN-MH)
Date Purchased: 11/30/04
Current Price: $3.30
Comment: Hold.
Company / Symbol: Intel (Nasdaq: INTC)
Option / Symbol: Sell Jan. 06 $25.00 call (WNL-AE)
Date Purchased: 11/2/04
Current Price: $1.50
Comment: Hold. Sold call against Jan. 06 $22.50 position.
Company / Symbol: Intel (Nasdaq: INTC)
Option / Symbol: Jan. 06 $22.50 call (WNL-AX)
Date Purchased: 10/19/04
Current Price: $2.75
Comment: Hold.
Company / Symbol: Interactive Corp. (Nasdaq: IACI)
Option / Symbol: Sell Jan. 07 $30 call (VSW-AF)
Date Purchased: 12/10/04
Current Price: $1.50
Comment: Hold. Sold call against Jan 07 $25 position.
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: 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 $22.50 position.
Company / Symbol: Nokia (NYSE: NOK)
Option / Symbol: Jan. 06 $22.50 call (WIK-AX)
Date Purchased: 8/29/03
Current Price: $0.10
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: $6.70
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: $7.90
Comment: Hold. No TS.
Company / Symbol: S&P 500 MITT (AMEX: MCP)
Date Purchased: 7/18/03
Current Price: $10.41
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.
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