The LEAPS Trader
105 W. Monument Street
Baltimore, MD 21201
Tuesday, May 23, 2006
#316
** Nothing Generic About These Profits
Teva Pharmaceuticals is one of the largest pharmaceutical companies, based on sales. Better yet, it has an unending pipeline for future sales and profits, as well. It is the top-tier generic drug maker in the world, having just acquired IVAX Corp. this past year.
Fortunately for us, the IVAX deal cost Teva its momentum stock status… for now. The shares have retreated by more than 30% from their highs and are trading at a level reflecting about 19 times 2006 estimated earnings. For a company projected to grow its bottom line at much more than that in coming years, Teva’s shares are poised to recover. There are only two near-term obstacles… and reasons for us to use a spread strategy for better than 2-to-1 profits.
The first reason is a selloff in emerging market shares. Teva is an Israeli company – one of the biggest, with more than $8 billion in sales forecasted for 2006.
Second, U.S. markets in general are weak – as evidenced by our profitable QQQQ put position.
The plusses for Teva far outweigh the minuses. First, it is in the right sector – demographically speaking. Second, it is a low-cost producer with major market share. Third, it is very profitable and fundamentally sound. Finally, jittery markets like safety, and if the slide continues, Teva should benefit from new investors.
Add to this the strong push toward cost control in the health care sector, and the future for generics looks very bright. With Teva, it is a matter of when the shares will regain momentum, not if. Investors have few choices like this in the entire generic sector.
Here is what you should do. Enter into a bull spread on Teva Pharmaceuticals by doing the following:
Buy the January 2008 $40 call options (WTX AH) at the current price of $4.90. Against this position, sell the Teva January 2008 $45 call options (WTX AI). These are currently bidding $3.10. Your net cost for this spread will be about $1.80, with the potential to make $5 (the spread) for gains of better than 2-to-1. Execute the trade as long as your cost of the spread is less than $2. We are looking for Teva to revisit its highs of $45 within the next 12 months – the upper end of our spread should expire worthless – or we may cover early to make the most of this trade.
Good investing,
Karim
Current Portfolio
Company / Symbol: CBOE Volatility Index (WCB: ^VIX)
Option / Symbol: Feb. 07 $15 call (VIX BC)
Date Purchased: 5/3/06
Current Price: $2.70
Comment: Hold.
Company / Symbol: sanofi-aventis (NYSE: SNY)
Option / Symbol: Jan. 08 $60 call (WFK AL)
Date Purchased: 4/17/06
Current Price: $2.55
Comment: Hold.
Company / Symbol: Boston Scientific (NYSE: BSX)
Option / Symbol: Jan. 08 $30 call (WBX AF)
Date Purchased: 2/27/06
Current Price: $1.10
Comment: Hold
Company / Symbol: Microsoft (Nasdaq: MSFT)
Option / Symbol: Jan. 08 $30 call (WMF AF)
Date Purchased: 8/8/05
Current Price: $0.90
Comment: Hold.
Company / Symbol: S&P 500 MITT (AMEX: MCP)
Date Purchased: 7/18/03
Current Price: $11.25
Comment: Hold.
Bull & Bear Spreads
Company / Symbol: Teva Pharmaceutical (Nasdaq: TEVA)
Option / Symbol: Jan. 08 $40 call (WTX AH)
Date Purchased: New
Current Price: $4.90
Comment: Buy.
Company / Symbol: Teva Pharmaceutical (Nasdaq: TEVA)
Option / Symbol: Jan. 08 $45 call (WTX AI)
Date Purchased: New
Current Price: $3.10
Comment: Sell call against January 08 $40 position.
Company / Symbol: Chesapeake Energy (NYSE: CHK)
Option / Symbol: Jan. 08 $35 call (WZY AG)
Date Purchased: 4/25/06
Current Price: $4.25
Comment: Hold.
Company / Symbol: Chesapeake Energy (NYSE: CHK)
Option / Symbol: Jan. 08 $45 call (WZY AI)
Date Purchased: 4/25/06
Current Price: $1.85
Comment: Hold. Sold call against January 08 $35 position.
Company / Symbol: Nasdaq 100 Trust (Nasdaq: QQQQ)
Option / Symbol: Jan. 07 $42 put (VCQ MP)
Date Purchased: 2/1/06
Current Price: $3.60
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: $1.65
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: $0.55
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: $0.35
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 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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