The LEAPS Option Trader
105 W. Monument Street
Baltimore, MD 21201
Tuesday, January 10, 2006
Email – #296
** Bird flu? This bird won’t fly!
In the past few days, bird flu is in the headlines again. There have been new cases in Turkey and infected birds are being found daily throughout Europe. Just today, HSBC, one of the worlds largest banks, announced that a bird flu pandemic – if the virus mutates and spreads to humans – would cause a major impact to its ability to perform its operations efficiently. It predicts that as many as 50% of its workers may miss work for one reason or another.
The key to this whole mess is whether the flu is transmissible from one human to another… or whether it ever will be. The problem is that the more cases that pop up, the greater the likelihood that the virus will mutate into a transmissible form. If that happens… Katie bar the door as far as the markets go. This is another good reason to reduce your exposure by using LEAPS as opposed to investing whole hog in stocks.
With this in mind, I am proposing a bird flu play that I HOPE WE WILL NOT MAKE A PROFIT FROM, but will soar in value if the pandemic comes to pass in the next year or two. Oh, yes, it does have merit as a play on its own without a bird flu pandemic as well.
Buy the January 2008 $17.50 American Airlines Put LEAPS (WAR MW.) These put LEAPS expire in January 2008 and have more going for them than just the bird flu.
American Airlines (NYSE: AMR) is the last of the top-five legacy carriers that is not in bankruptcy. That in itself is a feat. But, what has not changed is the landscape around American.
Right off the bat, the company is facing strong competition from everyone, everywhere. Many competitors have the benefit of lower, to much lower costs, thanks to post bankruptcy reorganization. Then there is the cost of fuel. The company is also saddled with billions in debt and pension obligations. There are few companies that operate in a bleaker environment.
Yet, with all of these problems, the airline has managed to stay afloat and keep out of bankruptcy. This is a testament to intense cost cutting and better than average management, and banks that have more money than brains. But, if we enter into a recession or if we begin to witness a spread of the bird flu, nothing will stop this stock from tanking. We will have two years to find out.
So, take a HIGHLY SPECULATIVE POSITION in the AMR puts mentioned above. They are currently offered at $4.40 on the offer, do not pay more than that. If you are patient you will be filled on this highly liquid option.
Regards,
Karim Rahemtulla
