The LEAPS Option Trader
105 W. Monument Street
Baltimore, MD 21201
Tuesday, September 6, 2005
#270
** Cha-Ching
That is the sound that most gamblers playing slot machines like to hear. There is something about the sound of coins falling into the tray that makes slot machine gambling more fulfilling… if that is your game.
Recently, there has been a move toward cashless slot machines, but the results are not great to date. While many casinos are trying them out, they are finding lower-than- anticipated customer acceptance rates.
One of the biggest players in the slot business is International Game Technology (NYSE: IGT). After several years of high growth, the company has begun to slow down. This is about to change. Like PCs, slot machines have a lifecycle that requires updates and replacements. That cycle is just beginning, according to industry followers. But, that would not be reason enough to own IGT. There is more to this story.
IGT, unfortunately, is a play on Hurricane Katrina as well. First, it will produce the replacement machines for many of the casinos that were damaged, and will be rebuilt, in Mississippi, Louisiana and Alabama. Fear not, these mega cash machines will be back if for no other reason than they provide billions in tax revenues for the states mentioned.
Second, there will be an expansion of casinos and casino activity in the jackpot of gambling, Las Vegas. The business for Vegas casinos will boom in the next couple of years as gamblers and conventioneers flock to Vegas in lieu of New Orleans. Unfortunately, the options on casino stocks are sporting very high premiums right now, increasing our cost to play them directly.
Third, IGT is a big player for the new casino haven in Asia, Macao. IGT already has international operations, and they contribute about 30% of the company’s revenues and income. And this segment is growing. It is entirely possible that once Macao really gets going, in 2007, IGT will be in the thick of things in Asia. It has already penetrated the Japanese market. Right now, the shares are sporting a price earnings ratio of about 21, based on earnings of $1.25 projected for this year. If Macao takes off, the replacement cycle is in place, and the casinos are rebuilt in the devastated Gulf states, the company could grow its bottom line to about $1.80 to $2 by 2008. With the same P/E ratio, the share price would reach around $40 or more.
There are two ways to play the potential of IGT. The first is to buy the stock, currently trading at $27.25. A thousand shares will set you back about $27,000. With a 25% stop-loss, your loss would be limited to about $6,700. My target price for IGT is $40 by 2008. Or, you could buy the IGT January 2008 $30 LEAP call options (WGG AF) for about $4.10. Now your dollar investment to control 1,000 shares would be $4,100, less than what your 25% stop loss would cost you if you bought the shares. But, it gets even better. Since the target price on this trade is $40, we can sell the $40 call options (WGG AH) against our positions, receiving $1.30 in premium to offset our cost. This is called a bull-spread. Our cost would now be $2.80 to make $10, or a return of more almost four times our investment.
Here is what you need to do:
Buy the IGT January 2008 $30 call LEAPS (WGG AF) for $4.20 or less. Against this position, SELL the IGT January 2008 $40 call LEAPS (WGG AH) for at least 1.20 to get a NET DEBIT or NET COST of $3 or less. Current prices are $4.10 for the buy, and $1.30 for the sell, for a net debit of $2.80.
Regards,
Karim Rahemtulla
Current Portfolio:
Company / Symbol: Microsoft (Nasdaq: MSFT)
Option / Symbol: Jan. 08 $30 call (WMF-AF)
Date Purchased: 8/8/05
Current Price: $2.45
Comment: Hold.
Company / Symbol: Sun Microsystems (Nasdaq: SUNW)
Option / Symbol: Jan. 08 $5 call (WSU-AA)
Date Purchased: 7/27/05
Current Price: $0.75
Comment: Hold.
Company / Symbol: Doral Financial (NYSE: DRL)
Option / Symbol: Jan. 07 $20 call (OVL-AD)
Date Purchased: 5/6/05
Current Price: $1.60
Comment: Hold.
Company / Symbol: Comcast (Nasdaq: CMCSA)
Option / Symbol: Jan. 07 $35 call (VPK-AG)
Date Purchased: 2/16/05
Current Price: $1.75
Comment: Hold.
Company / Symbol: S&P 500 MITT (AMEX: MCP)
Date Purchased: 7/18/03
Current Price: $11.01
Comment: Hold.
Bull & Bear Spreads
Company / Symbol: International Game Technology (NYSE: IGT)
Option / Symbol: Buy Jan. 08 $30 call (WGG-AF)
Date Purchased: New
Current Price: $4.10
Comment: Buy
Company / Symbol: International Game Technology (NYSE: IGT)
Option / Symbol: Sell Jan. 08 $40 call (WGG-AH)
Date Purchased: New
Current Price: $1.30
Comment: Sell call against Jan. 08 $30 position.
Company / Symbol: Lexar (Nasdaq: LEXR)
Option / Symbol: Jan. 07 $5 call (VRF-AA)
Date Purchased: 3/29/05
Current Price: $2.50
Comment: Hold
Company / Symbol: Lexar (Nasdaq: LEXR)
Option / Symbol: Sell Jan. 07 $7.50 call (VRF-AU)
Date Sold: 3/29/05
Current Price: $1.35
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: $1.20
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: $1.00
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: $3.70
Comment: Hold.
Company / Symbol: Intel (Nasdaq: INTC)
Option / Symbol: Sell Jan. 06 $25.00 call (INQ-AE)
Date Sold: 11/2/04
Current Price: $2.05
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: $3.50
Comment: Hold.
Company / Symbol: Interactive Corp. (Nasdaq: IACI)
Option / Symbol: Sell Jan. 07 $30 call (VSW-AF)
Date Sold: 12/10/04
Current Price: $2.55
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: $0.05
Comment: Hold.
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: $19.10
Comment: Hold.
Company / Symbol: Chesapeake Energy (NYSE: CHK)
Option / Symbol: Sold Jan. 06 $15 call (CHK-AC)
Date Sold: 11/6/03
Current Price: $17.00
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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