The LEAPS Option Trader
105 W. Monument Street
Baltimore, MD 21201
Monday, September 19, 2005
#274
** A Rising Tide…
When the price of gold moves higher, gold shares move much higher. The converse is also true. Right now, all of the major gold shares are eclipsing their 52-week highs, except for one, Placer Dome (NYSE: PDG).
Of all the majors, PDG is trading at the lowest valuation, even though it is not the highest cost producer. This has to do in part with the effect of the last quarter’s numbers from Placer, which came in below estimates. But, with gold prices where they are, and where they look to be headed, Placer should have no trouble meeting future numbers.
Placer is one of the most active explorers in the world. It is also a medium cost producer, not the lowest by any means, but not the highest either. The company’s cash costs are below $300 per ounce. Its major struggle has been to realign its operations and close down some of its higher-cost mines. Of course, higher cost is relative. With gold at $450, even its higher-cost mines are profitable.
Last year, I made a call on higher gold prices for reasons ranging from demand to inflation. We bought AngloGold Ashanti as a straight play. I was right, but early. This time we will use a spread trade. With it, we will still have the opportunity to triple our gains in the year ahead. Using the spread will reduce our cost to a point that would equate buying the same options straight before the current run.
I strongly believe that we are headed for higher prices as the U.S. dollar falls under the pressure of our massive debt levels and uncontrolled government spending. PDG is currently at $17.52 – $6 below its 52-week high. If gold hits $500 in the next TWO years, the shares should easily eclipse the $25 level.
Here is the play:
Buy the Placer Dome January 2008 $17.50 LEAPS calls (YDI AW). These options are trading at $4.50 on the offer. Against this position sell the PDG January 2008 $25 call options (YDI AE). They are currently trading for $2 on the bid.
This means your net debit is $2.50. If Placer closes at $25 or higher by expiration, that spread will be worth $7.50. Of course, if gold ratchets up faster, we may cover this position early. And, if gold falls significantly in the near term, we will cover our higher strike position and be straight long at a lower price. These options are liquid. Use $2.50 as a guideline with an upper limit of $2.60.
Also, there is a good chance that gold and gold shares will pull back in the near term, especially if the Fed raises rates tomorrow. So, don’t chase this play, wait for it to come to you.
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: $1.95
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: $1.85
Comment: Hold.
Company / Symbol: S&P 500 MITT (AMEX: MCP)
Date Purchased: 7/18/03
Current Price: $10.96
Comment: Hold.
Bull & Bear Spreads
Company / Symbol: Placer Dome (NYSE: PDG)
Option / Symbol: Buy Jan. 08 $17.50 call (YDI-AW)
Date Purchased: New
Current Price: $4.50
Comment: Buy
Company / Symbol: Placer Dome (NYSE: PDG)
Option / Symbol: Sell Jan. 08 $25 call (YDI-AE)
Date Purchased: New
Current Price: $2.00
Comment: Sell call against Jan. 08 $17.50 position.
Company / Symbol: International Game Technology (NYSE: IGT)
Option / Symbol: Buy Jan. 08 $30 call (WGG-AF)
Date Purchased: 9/6/05
Current Price: $4.60
Comment: Hold
Company / Symbol: International Game Technology (NYSE: IGT)
Option / Symbol: Sell Jan. 08 $40 call (WGG-AH)
Date Purchased: 9/6/05
Current Price: $1.60
Comment: Sold 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: $2.75
Comment: Hold
Company / Symbol: Lexar (Nasdaq: LEXR)
Option / Symbol: Sell Jan. 07 $7.50 call (VRF-AU)
Date Sold: 3/29/05
Current Price: $1.65
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: $1.10
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: $2.85
Comment: Hold.
Company / Symbol: Intel (Nasdaq: INTC)
Option / Symbol: Sell Jan. 06 $25.00 call (INQ-AE)
Date Sold: 11/2/04
Current Price: $1.25
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: $4.00
Comment: Hold.
Company / Symbol: Interactive Corp. (Nasdaq: IACI)
Option / Symbol: Sell Jan. 07 $30 call (VSW-AF)
Date Sold: 12/10/04
Current Price: $1.85
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: $21.30
Comment: Hold.
Company / Symbol: Chesapeake Energy (NYSE: CHK)
Option / Symbol: Sold Jan. 06 $15 call (CHK-AC)
Date Sold: 11/6/03
Current Price: $20.40
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.
Copyright – 2005 Mt Vernon Options Club. Mt Vernon Options Club does not act as an investment advisor or advocate the purchase or sale of any security or investment. Mt Vernon Options Club expressly forbids its writers from having a financial interest in any security recommended to its readers. All of our employees and agents must wait 24 hours after an Internet publication prior to following an initial recommendation. And for hard-copy-only publications, 72 hours after the publication is mailed. Investments recommended in this letter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company. Mt Vernon Options Club provides its members with unique opportunities to build and protect wealth, globally, under all market conditions. The executive staff, research department and editors who contribute to recommendations are proud of the reputation Mt Vernon Options Club has built since its inception in 1984. We believe the advice presented to its members in our published resources and at our meetings and seminars is the best and most useful available to global investors today. The recommendations and analysis presented to members is for the exclusive use of members. Copying or disseminating any information published by Mt Vernon Options Club, electronic or otherwise is strictly prohibited. Members should be aware that investment markets have inherent risks and there can be no guarantee of future profits. Likewise, past performance does not assure future results. Recommendations are subject to change at any time.
