The LEAPS Option Trader
105 W. Monument Street
Baltimore, MD 21201
Wednesday, March 30, 2005
Email – #241
** Oil’s Well… Cleaning Up With a New Bear Spread
Oil prices are tanking. That bodes well for our XLE put option (ORJ MM). Our cost for this put was $2.45. The put is currently at $3.30 on the bid. We are up more than 35% on this position. More interesting, and potentially vastly more profitable, is what I am going to suggest to you next.
For those of you who want to take profits, do so now and lock in your 35%-plus gains. We will book these profits as well. But, we will also engage in a Bear Spread for those of you who really want a chance at the jackpot.
A bear spread works like a bull spread. It allows you to sell a stock at a predetermined price – in this case, we own the right to sell the XLE at $39. So by selling a lower strike put option, you are obligated to buy the shares at a lower price.
Since you can sell at a higher price and you must buy at the lower price, you make the difference in between, less your cost.
In this case I am recommending that you sell the January 2007 $37 put LEAPS (ORJ MK) against your position. This option is currently trading at $2.55. By selling this option, you will receive $2.55 – YES, 10 cents more than you have invested. Your upside is that you can make up to $2 on this play on your NEGATIVE 10 cents invested.
YOU CANNOT LOSE ANYTHING by engaging in this spread and holding until expiration – instead, you are guaranteed to make 10 cents per contract if you are executed at $2.55.
As long as you get at least $2.45, this is a TRUE free ride.
SO, either sell the ORJ MM and book your profits or SELL the ORJ MK at $2.45 or better and lock in a potential $2 profit and risk nothing.
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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