The LEAPS Trader
105 W. Monument Street
Baltimore, MD 21201
Thursday, May 11, 2006
#313
** The V Word, and Weird Signals From Gold and Silver
Volatility is creeping back into the market, slowly, but surely. The VIX, a measure of implied volatility is beginning to show signs of life. We are long the VIX with our February 2007 call options – we should have a good ride in the months ahead. Remember, we are looking for sharp moves in the indexes, up and down, to inject some energy into the volatility component.
Onto bird flu and the vaccines. sanofi, another one of our positions, is setting new highs. Our options are following slowly because we bought way-out-of-the-money options to conserve cash. Today, the medical journal Lancet reported positive news for sanofi pasteur’s H5N1 vaccine in from recent studies.
Natural gas is still lagging historical ration comparisons with crude oil. At current levels, “natty” should be trading at about $10 to $13, above the current $6.80 level. And, guess who is taking note of this? None other than Aubrey McClendon, Chairman of the Board of Chesapeake Energy (NYSE: CHK).
Last week, CHK reported blowout numbers, and this week Aubrey has resumed buying his company’s shares on the open market to the tune of more than $7 million worth this week alone. Our CHK spread should show some real juice if his buying is an indication of things to come, and of course, when the season’s first hurricane is on the radar screen.
Boston Scientific is lagging, but insiders continue to buy, as recently as last week. Since we have more than a year and a half to go on our option, I am not concerned as long as I see two things: First, that the insiders in this particular industry are buying across the board (last week, insiders at a competitor of BSX were also buying in size), and second, as long as the company’s business is performing well. Both are currently happening.
Microsoft reported strong earnings last week, and more emphasis on R&D to boost future profits. The market sold off its shares with a vengeance. The company is on the right track, and one of the drivers will be video gaming. This week, Sony held its first demonstrations of the PS3. A lot of attendees were not impressed. Sure the graphics were great, but at a price point that is $200 or more higher than the Xbox, and a launch that is a year behind, Sony will lose market share to Microsoft in a big way this year. Just as we had a sharp move down in the shares, the reverse is also likely as the company releases results of the fruits of its research in an upcoming conference in July.
On the QQQQ front, we are short the technology sector as a whole from the $42 level. I am comfortable with this position, as the Nasdaq has failed to move in line with the non-tech indices. It is not setting 52-week highs – let alone all-time highs. And, many of its major components have failed to impress with their earnings and projections – Dell and Cisco were the latest to disappoint. We have a low-cost put spread on the QQQQs and the rest of this year for the play to work out.
Finally, gold and silver are flying. Problem is, gold stocks and silver stocks are not even close to confirming that this rise is for real. Less than 10% of the mining shares are at new highs, even after a $200 rise in the price of gold and a doubling in the price of silver since the most recent 52-week highs were set. This means that either the shares are set to soar, or the prices of the metals are set to retreat.
We currently have a silver spread on the shares of Couer D’Alene (NYSE: CDE). A couple of weeks back, the Bolivian government decided that nationalizing the natural gas industry is the way to go. Minerals are probably not far behind. CDE has exposure to Bolivia in the form of a new mine it is developing. But, they also have a huge insurance policy that will pay out the costs of development, should we see an adverse event like government nationalization.
So, that part of the story is not bothersome, fundamentally speaking. What is more bothersome is the inability of mining shares to vault to new highs with such strength as the underlying metals. This is very disturbing – disturbing enough that I am recommending that you reverse the CDE spread and get out of the trade. It will mean a small loss – about 30 or 40 cents, but the shares are just not showing any strength.
Action to Take: Sell the CDE January 2008 $7.50 calls (LGZ AU) and buy back the CDE January 2008 $10 calls (LGZ AB) to close out the spread.
Current Portfolio
Company / Symbol: CBOE Volatility Index (WCB: ^VIX)
Option / Symbol: Feb. 07 $15 call (VIX BC)
Date Purchased: 5/3/06
Current Price: $2.60
Comment: Hold.
Company / Symbol: sanofi-aventis (NYSE: SNY)
Option / Symbol: Jan. 08 $60 call (WFK AL)
Date Purchased: 4/17/06
Current Price: $3.00
Comment: Hold.
Company / Symbol: Boston Scientific (NYSE: BSX)
Option / Symbol: Jan. 08 $30 call (WBX AF)
Date Purchased: 2/27/06
Current Price: $1.50
Comment: Hold
Company / Symbol: Microsoft (Nasdaq: MSFT)
Option / Symbol: Jan. 08 $30 call (WMF AF)
Date Purchased: 8/8/05
Current Price: $0.85
Comment: Hold.
Company / Symbol: S&P 500 MITT (AMEX: MCP)
Date Purchased: 7/18/03
Current Price: $11.47
Comment: Hold.
Bull & Bear Spreads
Company / Symbol: Chesapeake Energy (NYSE: CHK)
Option / Symbol: Jan. 08 $35 call (WZY AG)
Date Purchased: New
Current Price: $6.00
Comment: Hold.
Company / Symbol: Chesapeake Energy (NYSE: CHK)
Option / Symbol: Jan. 08 $45 call (WZY AI)
Date Purchased: New
Current Price: $2.90
Comment: Hold. Sold call against January 08 $35 position.
Company / Symbol: Couer D’Alene (NYSE: CDE)
Option / Symbol: Jan. 08 $7.50 call (LGZ AU)
Date Purchased: 3/27/06
Current Price: $1.75
Comment: Close out position.
Company / Symbol: Couer D’Alene (NYSE: CDE)
Option / Symbol: Jan. 08 $10 call (LGZ AB)
Date Purchased: 3/27/06
Current Price: $1.25
Comment: Close out position.
Company / Symbol: Nasdaq 100 Trust (Nasdaq: QQQQ)
Option / Symbol: Jan. 07 $42 put (VCQ MP)
Date Purchased: 2/1/06
Current Price: $2.20
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: $0.85
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: $0.25
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: $0.20
Comment: Hold. Sold put against January 07 $39 position.
Bi
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 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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