The LEAPS Option Trader
105 W. Monument Street
Baltimore, MD 21201
Thursday, June 2, 2005
Email – #253
** Crude Investing
Oil is back up again. Many believe that oil is at the beginning of a long-term bull market. I don’t disagree.
But in the short term a lot of things are pointing to a correction in the price of crude. Inventories are rising. The U.S. economy is slowing, sales of gas guzzling SUVs are plunging (the average SUV is sitting on dealer’s lots for two months versus less than a month in 2003), the housing market is showing signs of a decreasing growth rate, and, as I’ve said before, oil is self-limiting. The higher the price goes, the more likely it is to cause a slowdown, resulting in decreased consumption and a lower price. The only bullish indicator for oil is the growth in emerging markets like China and India.
Having just visited China, I can confirm that they are using a lot of oil. While China is growing and using oil, there are many parts of the world that are not growing and that balance may tilt against oil prices soon. Europe, especially Western Europe is seeing very slow growth. Japan is experiencing stagnant growth. And the U.S. is seeing moderating growth. Oil, meanwhile, has seen a huge increase in price recently, moving from $47 to $54 in just a few weeks. That is good for us.
We are already short oil using a spread on our Energy Select Sector SPDR (AMEX: XLE) that is costing us nothing. I think there is an opportunity in the short term to make money shorting the XLE again. The XLE is a basket of oil related shares. These companies, while very healthy, are facing the prospects of comparing earnings this year to the stellar earnings from last year AND projecting BETTER future growth. If that does not happen, these shares will fall.
By shorting the XLE with LEAPs that expire in January 2006, we are looking to benefit from a 10% move down in the price of oil and the XLE over the summer. We have seen this type of move occur in one week this past spring.
Here’s what to do:
Buy the Energy Select Sector SPDR (AMEX: XLE) January 2006 $42 PUT LEAPS. The symbol is WHA MP. This is an at-the-money PUT, currently trading for $2.80 on the offer.
When the XLE fell to $39 a few weeks ago, this option traded above $5. Our target for this play is $4 to $4.50 by September. Do not pay more than $2.90 for this option and use $1.45 as your initial MENTAL stop-loss.
Regards,
Karim Rahemtulla
Current Portfolio:
Company / Symbol: Energy Select SPDR (AMEX: XLE)
Option / Symbol: Jan. 06 $42 put (WHA-MP)
Date Purchased: New
Current Price: $2.80
Comment: Buy
Company / Symbol: Doral Financial (NYSE: DRL)
Option / Symbol: Jan. 07 $20 call (OVL-AD)
Date Purchased: 5/6/05
Current Price: $2.05
Comment: Hold.
Company / Symbol: Comcast (Nasdaq: CMCSA)
Option / Symbol: Jan. 07 $35 call (VPK-AG)
Date Purchased: 2/16/05
Current Price: $3.30
Comment: Hold. Mental sell stop is $1.95.
Company / Symbol: General Electric (NYSE: GE)
Option / Symbol: Jan. 07 $40 call (VGE-AH)
Date Purchased: 1/4/04
Current Price: $2.05
Comment: Hold.
Company / Symbol: S&P 500 MITT (AMEX: MCP)
Date Purchased: 7/18/03
Current Price: $10.85
Comment: Buy under $10. No TS.
Bull & Bear Spreads
Company / Symbol: Lexar (Nasdaq: LEXR)
Option / Symbol: Jan. 07 $5 call (VRF-AA)
Date Purchased: 3/29/05
Current Price: $1.90
Comment: Hold
Company / Symbol: Lexar (Nasdaq: LEXR)
Option / Symbol: Sell Jan. 07 $7.50 call (VRF-AU)
Date Sold: 3/29/05
Current Price: $1.15
Comment: Hold. Sold 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: $2.90
Comment: Hold.
Company / Symbol: Energy Select SPDR (AMEX: XLE)
Option / Symbol: Sell Jan. 07 $37 put (ORJ-MK)
Date Sold: 3/30/05
Current Price: $2.50
Comment: Hold. Sold put against Jan. 07 $39 position.
Company / Symbol: Intel (Nasdaq: INTC)
Option / Symbol: Jan. 06 $22.50 call (NQ-AX)
Date Purchased: 10/19/04
Current Price: $5.80
Comment: Hold.
Company / Symbol: Intel (Nasdaq: INTC)
Option / Symbol: Sell Jan. 06 $25.00 call (INQ-AE)
Date Sold: 11/2/04
Current Price: $3.80
Comment: Hold. Sold call against Jan. 06 $22.50 position.
Company / Symbol: Interactive Corp. (Nasdaq: IACI)
Option / Symbol: Jan. 07 $25 call (VSW-AE)
Date Purchased: 9/14/04
Current Price: $4.20
Comment: Hold. No TS.
Company / Symbol: Interactive Corp. (Nasdaq: IACI)
Option / Symbol: Sell Jan. 07 $30 call (VSW-AF)
Date Sold: 12/10/04
Current Price: $2.10
Comment: Hold. Sold call against Jan 07 $25 position.
Company / Symbol: Nokia (NYSE: NOK)
Option / Symbol: Jan. 06 $22.50 call (NAY-AX)
Date Purchased: 8/29/03
Current Price: $0.15
Comment: Hold. No TS.
Company / Symbol: Nokia (NYSE: NOK)
Option / Symbol: Sell Jan. 06 $30 call (NAY-AF)
Date Sold: 2/9/04
Current Price: $0.05
Comment: Hold. Sold call against Jan. 06 $22.50 position.
Company / Symbol: Chesapeake Energy (NYSE: CHK)
Option / Symbol: Jan. 06 $12.50 call (CHK-AV)
Date Purchased: 7/28/03
Current Price: $8.00
Comment: Hold. No TS.
Company / Symbol: Chesapeake Energy (NYSE: CHK)
Option / Symbol: Sold Jan. 06 $15 call (CHK-AC)
Date Sold: 11/6/03
Current Price: $6.30
Comment: Hold. Sold call against Jan. 06 $12.50 position.
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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