The LEAPS Option Trader
105 W. Monument Street
Baltimore, MD 21201
Friday, July 1, 2005
Email – #257
** The Good, the Bad and the Downright Ugly
2005 has been a strange year for trading. The market has not been volatile and has traded in a very narrow range between high and low. This has made for a very tough environment to trade options and stocks. Sure, there is volatility in spurts, but there is no definite trend developing. The likelihood of the markets in general being up 10% this year is just as good as the markets plunging 10%.
The companies in our portfolio are all reporting good numbers and better fundamentals; GE for example has increased estimates each quarter. CEO Jeff Immelt bought 25,000 shares earlier this year in the open market. Just last week, he bought another 15,000 more shares. Yet the shares have been range-bound and there is nothing worse for an option than a stock that is range-bound. Options are dependent on time and with each tick of the clock, options lose value.
Comcast, which we bought on the heels of increasing profitability and cash flow, has also suffered from a tight range. As you may recall, Warren Buffett recently took a huge position in the company betting on a higher price ahead. I say higher price and not better times for a reason. The company is experiencing better times now. All metrics related to its business are moving in the right direction. Furthermore, the recent proposed buyout of CableVision by its founders places the market value of Comcast, the biggest player, at least 20% to 30% above its current price.
For GE and Comcast we still have more than a year and a half left on our positions. A 10% move higher in price would result in profits for us – if that move occurred in the next six to eight months. If not, then we will lose time value rapidly. We will hold on to these picks until the end of the year, unless we see that upward action before then. If not, then we will most likely sell early in the new year.
Computer Associates, a recent pick, just announced that it was up to date in its filing with the SEC and has effectively put its accounting problems behind it. Business is doing well and the insiders know it. They recently purchased hundreds of thousands of dollars in company stock in the open market. In my experience that is one of surest indicators of very good times ahead. Usually within a few months of a large insider purchase, the company’s share price is up 10% to 20%. In this case a 10% move would result in gains of 50% on our LEAPS.
Doral Financial has provided us with volatility. We are back in the black again on this position after watching the clobbering it took on panic selling. The company has issued many clues signaling its good financial health and soothing investor fears. In the past three weeks, the shares have moved from a low of $10 to its current 16.75. It looks great at current levels and once it provides its restatement, the shares could go to the moon, providing us a major return on our position.
Our XLE puts are also a volatile position. I am confident that oil prices will test the low $50s, high $40s before the end of the year. Oil prices have fallen 10% or more in just one week this year. We only need one week like that to make money on this position.
The only really ugly position is in Nokia. Here we have a bull spread that is not working out. We still have six months to find out. In any event, we drastically reduced our risk in Nokia when we entered the spread – but it is still ugly!
Our bull and bear spreads are doing terrifically. We have positions in Chesapeake Energy, Intel, IACI, XLE puts and LEXR which are all either extremely profitable or close to profitability (if you had a 10 contract position in Chesapeake, you could have $50 at risk to make $2,500).
I will be traveling over the next two weeks. Rest assured that I will be keeping track of our picks on a daily basis and will issue alerts if they are needed. If you have any question or concerns, please contact Chris Matthai at 888.384.8339 or 410.223.2635.
Regards,
Karim Rahemtulla
Current Portfolio:
Company / Symbol: Computer Associates
Option / Symbol: Jan. 07 $30 call (VCA-AF)
Date Purchased: New
Current Price: $2.65
Comment: Hold
Company / Symbol: Energy Select SPDR (AMEX: XLE)
Option / Symbol: Jan. 06 $42 put (WHA-MP)
Date Purchased: 6/2/05
Current Price: $1.85
Comment: Hold.
Company / Symbol: Doral Financial (NYSE: DRL)
Option / Symbol: Jan. 07 $20 call (OVL-AD)
Date Purchased: 5/6/05
Current Price: $2.85
Comment: Hold.
Company / Symbol: Comcast (Nasdaq: CMCSA)
Option / Symbol: Jan. 07 $35 call (VPK-AG)
Date Purchased: 2/16/05
Current Price: $2.20
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: $1.35
Comment: Hold.
Company / Symbol: S&P 500 MITT (AMEX: MCP)
Date Purchased: 7/18/03
Current Price: $10.84
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: $1.75
Comment: Hold
Company / Symbol: Lexar (Nasdaq: LEXR)
Option / Symbol: Sell Jan. 07 $7.50 call (VRF-AU)
Date Sold: 3/29/05
Current Price: $1.10
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: $2.15
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: $1.65
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: $4.50
Comment: Hold.
Company / Symbol: Intel (Nasdaq: INTC)
Option / Symbol: Sell Jan. 06 $25.00 call (INQ-AE)
Date Sold: 11/2/04
Current Price: $2.70
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: $3.40
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: $1.50
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: $0.10
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: $10.70
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: $8.60
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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