The LEAPS Option Trader
105 W. Monument Street
Baltimore, MD 21201
Wednesday, February 22, 2006
#303
** LEAPING into 2006
The market is not looking very healthy, in my opinion. Sure, we just broke 11,000 on the Dow, and the S&P is nearing four-year highs. That is yesterday’s news, and we made out with significant gains in the past couple of months because of the rise in the market… But what about tomorrow, and the rest of the year?
While on the surface we are seeing a somewhat rosy picture, the underlying picture is not so rosy. One thing that I have learned over the past couple of decades is that when it comes to investing, “This time it is different” is the most dangerous phrase in the investor’s handbook. Right now, there are several negative indicators that lead me to believe that we will not have a year of huge gains in the market – which is fine with me… I’ll tell you why in a minute.
The number of new 52-week highs for individual shares is dropping. In a healthy market, this number should be increasing. Interest rates are rising – the yield curve is inverting. This means that people are willing to loan money at lower rates for longer-term loans than they are for shorter-term loans.
In effect, lenders are projecting a slowdown ahead – a historically accurate predictor of recession that many investors are ignoring. The global geo-political situation is worsening, not getting better. The housing market, the single largest prop for global consumption in the past five years, is starting to slow down. Home prices are moderating, even falling in some areas.
In fact, just about every indicator that made the market and economy hum for so many years is now going the other way. But, many choose to ignore these indicators, because “this time it’s different.” We’ll see.
The Leaps Options Trader is not concerned with market direction as much as it is concerned with volatility. It is volatility that makes us money. But that does not mean that we don’t look for – or anticipate – opportunity from a trend. We are both short and long right now, trying to balance what might happen in the market.
There are a lot of very attractive companies that I would like to trade right now, but I think the prices will get even more attractive in the weeks ahead. Historically, we have made the most money by taking positions in good companies when they are cheap, not when they are expensive. Makes sense.
There are a couple of sectors that I am willing to bet on for reasons other than market fundamentals. The two most attractive sectors are precious metals and technology.
Precious metals have made us a lot of money recently. Right now, the sector is pulling back a little, and that should provide us a more attractive entry point in the weeks ahead. My favorite company just released two-year LEAPS, making the proposition even more attractive.
I like technology, as well…. just not at current prices. There are a couple of fundamentally solid companies that are selling off right now – much more than the underlying index. However, the options premiums are still high for these companies, making them unattractive as LEAPS investments right now.
Earnings season is almost over. Earnings projections going forward are moving lower. Over the next couple of months, when the market has to focus on events other than earnings, it is likely that stocks will come under pressure as the Fed rate-hike regimen continues, housing numbers begin to dim, and investors start to get more nervous.
When this happens, the markets should begin to experience a lot of volatility – this may have already begun, judging by the action in the past couple of weeks, with up and down days to the tune of 1% and 2% on major indices. This is a mark of indecision which, when combined with the general negative tone of earnings, interest rates, housing and politics, should manifest itself in lower prices.
We will be ready when the opportunities arise. Look for a flurry of buys when the time is right.
Regards,
Karim Rahemtulla
Current Portfolio:
Company / Symbol: Target (NYSE: TGT)
Option / Symbol: Jan. 08 $50 put (WDH-MJ)
Date Purchased: 10/20/05
Current Price: $4.50
Comment: Hold.
Company / Symbol: Microsoft (Nasdaq: MSFT)
Option / Symbol: Jan. 08 $30 call (WMF-AF)
Date Purchased: 8/8/05
Current Price: $2.00
Comment: Hold.
Company / Symbol: Doral Financial (NYSE: DRL)
Option / Symbol: Jan. 07 $20 call (OVL-AD)
Date Purchased: 5/6/05
Current Price: $0.35
Comment: Hold.
Company / Symbol: S&P 500 MITT (AMEX: MCP)
Date Purchased: 7/18/03
Current Price: $11.36
Comment: Hold.
Bull & Bear Spreads
Company / Symbol: Nasdaq 100 Trust (Nasdaq: QQQQ)
Option / Symbol: Jan. 07 $42 put (VCQ MP)
Date Purchased: 2/1/06
Current Price: $2.70
Comment: Hold.
Company / Symbol: Nasdaq 100 Trust (Nasdaq: QQQQ)
Option / Symbol: Sell Jan. 07 $38 put (VCQ ML)
Date Purchased: 2/1/06
Current Price: $1.25
Comment: Hold. Sold put against January 07 $42 position.
Company / Symbol: Energy Select SPDR (AMEX: XLE)
Option / Symbol: Jan. 07 $39 put (ORJ-MM)
Date Purchased: 3/1/05
Current Price: $0.70
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: $0.60
Comment: Hold. Sold put against January 07 $39 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 – 2006 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.
