The LEAPS Option Trader
105 W. Monument Street
Baltimore, MD 21201
Tuesday, January 17, 2006
#298
** Travel Woes, and Our Fourth Win This Year!
Since I am currently pessimistic on the travel industry, it makes sense to exit one of our MOST profitable positions – Interactive Corp (Nasdaq: IACI). You may recall that we entered into a spread on IACI, which reduced our dollars at risk by more than 95%. Our spread is now HUGELY profitable with a year still left to go. However, if the travel market suffers a downturn, we may lose our profits in this position.
So, take profits on your IACI spread. You can do this by buying back the January 2007 $30 calls (LCT AF), currently at $2.05, and sell the January 2007 $25 (LCT AE) currently at $4.50. (The symbols on these options have changed because of the Expedia spin-off that occurred in 2005).
Closing the spread at current prices will return you about $2.40 on $0.05 capital at risk – a massive win in any book!
More good news…
Our American Airlines (NYSE: AMR) PUT LEAPS (WAR MW) are up more than 10% in the past week. They should be up more! The trading pattern on the options has been quite puzzling on the surface. The shares have fallen more than 10% and our options are only up just a bit more than that. Why?
Tomorrow, AMR will report earnings. The options are indicating that the numbers may be good enough to give the shares a pop in the short term. If that happens, our options will decrease in value for the short term.
But, we have two years left, and in my opinion, any rally in the shares will be short-lived for a three reasons. The first is the stubborn high level of oil prices, and the second is increasing threat of more bird flu cases. The bird flu issue does not have to be serious, just sensational. Finally, AMR shares are in a downtrend that is being confirmed by higher selling volume in recent days and breakdowns in resistance levels. If those are reversed by any “earnings” surprise, then we will exit our position if the shares close above $23.53. I will keep you posted.
Even better news….
Our Chesapeake Energy (NYSE: CHK) spread will expire on Friday, giving us our fifth win this month. Recall, when we did this trade we took almost all of our money off the table and reduced our dollars at risk to $0.05 per contract with a $2.50 upside. That will come to pass on Monday of next week when the options settle!
Regards,
Karim Rahemtulla
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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