The LEAPS Option Trader
105 W. Monument Street
Baltimore, MD 21201
Thursday, October 20, 2005
Email – #284
** Targeting Housing
We made money a few months back on our housing short. We should have stuck around – there was more money to be made. If you recall, we did not exit the position because we thought housing stocks would recover. We did so because of the funk business in the options market – our puts should have been up more than they were!
Regardless, the housing sector is in trouble. But the problem is that housing shares are now pretty cheap and not worth shorting. But, what is bad for housing stocks usually means something worse is coming down the pike for consumers. High gas prices, higher interest rates and a spent-out consumer are all pointing the way to the belt tightening ahead.
One of the biggest beneficiaries of consumer spending has been the retailers. Not all retailers have done as well as those that have benefited from the middle and upper- middle class segment. This segment has been spending well beyond their means, but not beyond their assets. The biggest asset, their home, is now under strain on two fronts. The first front that you will be hearing about soon is declining prices – meaning declining equity for many.
The second is that these home cash machines are also almost tapped out. People have borrowed hundreds of billions against their homes in just the past two years – money that has been either spent on luxuries or reinvested into newer, more expensive homes that will lose value in the months and years ahead.
So, how to benefit? We could short Tiffanys, as we successfully did a couple of years back, but that play is now a global play – Asia is keeping Tiffanys fat and happy. We have to zero in on a local play, one that is a direct beneficiary, and one that will be a direct casualty. It is not Wal-Mart – its shoppers are not the ones with the big home equity lines of credit. It may even benefit from a slow down.
No, our “target” will be Target (NYSE: TGT)… or Targé as many refer to it. It has done very well recently, making money as middle class and upper-middle class shoppers find all sorts of wares for home and recreation. People admit that they like shopping at Target over Walmart because it is not as down-market feeling. Sure, Wal-Mart is cheaper, but so is its ambience. Hmmm, I have recollections about past recessions – ambience never won over bargains, when monthly outflow was more than income.
It will take some time for this to play out. Shorting Target would cost us $56,400 to short 1,000 shares. That is a high price to pay for unlimited downside. As LEAPS traders we will buy the Target January 2008 $50 LEAPS PUTS (WDH MJ). These LEAPS are trading at around $4.20, limiting our risk to $4.20 per share, less than a 10% stop-loss if we were shorting the shares.
Our strategy does not require Target to collapse in price. It just requires a downward trending price – towards $45 to really cash in.
Here is what to do:
Buy the Target January 2008 $50 PUT LEAPS (WDH MJ). Do not pay more than $4.20 for this liquid option. Our initial target is $6 by March of next year. There is no stop-loss on this position, but I will be monitoring it carefully.
Regards,
Karim Rahemtulla
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Current Portfolio:
Company / Symbol: Target (NYSE: TGT)
Option / Symbol: Jan. 08 $50 put (WDH-MJ)
Date Purchased: New
Current Price: $4.20
Comment: Buy. Don’t pay more than $4.20.
Company / Symbol: Microsoft (Nasdaq: MSFT)
Option / Symbol: Jan. 08 $30 call (WMF-AF)
Date Purchased: 8/8/05
Current Price: $1.70
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: $1.05
Comment: Hold.
Company / Symbol: S&P 500 MITT (AMEX: MCP)
Date Purchased: 7/18/03
Current Price: $10.78
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: $3.40
Comment: Hold
Company / Symbol: Placer Dome (NYSE: PDG)
Option / Symbol: Sell Jan. 08 $25 call (YDI-AE)
Date Purchased: New
Current Price: $1.60
Comment: Sold 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: $3.60
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: $1.10
Comment: Sold call against Jan. 08 $30 position.
Company / Symbol: Lexar (Nasdaq: LEXR)
Option / Symbol: Jan. 07 $7.50 call (VRF-AU)
Date Purchased: 10/7/05
Current Price: $2.00
Comment: Hold
Company / Symbol: Lexar (Nasdaq: LEXR)
Option / Symbol: Sell Jan. 07 $12.50 call (VRF-AV)
Date Sold: 10/7/05
Current Price: $0.85
Comment: Hold. Sold call against Jan. 07 $7.50 position.
Company / Symbol: Energy Select SPDR (AMEX: XLE)
Option / Symbol: Jan. 07 $39 put (ORJ-MM)
Date Purchased: 3/1/05
Current Price: $2.35
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: $1.70
Comment: Hold. Sold put against Jan. 07 $39 position.
Company / Symbol: Interactive Corp. (Nasdaq: IACI)
Option / Symbol: Jan. 07 $25 call (VSW-AE)
Date Purchased: 9/14/04
Current Price: $4.30
Comment: Hold.
Company / Symbol: Interactive Corp. (Nasdaq: IACI)
Option / Symbol: Sell Jan. 07 $30 call (VSW-AF)
Date Sold: 12/10/04
Current Price: $2.00
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: $17.40
Comment: Hold.
Company / Symbol: Chesapeake Energy (NYSE: CHK)
Option / Symbol: Sold Jan. 06 $15 call (CHK-AC)
Date Sold: 11/6/03
Current Price: $15.40
Comment: Hold. Sold call against Jan. 06 $12.50 position.
