The LEAPS Trader
105 W. Monument Street
Baltimore, MD 21201
Wednesday, June 21, 2006
Email – #323
** AMD: Building On Momentum
Recently we covered our short positions on the Nasdaq 100 Trust (Nasdaq: QQQQ) and entered into a bullish spread for our VIX positions. It turns out that both moves were timely… for now. I am still not convinced that we are out of the woods. There are a lot of roadblocks ahead that could cause further dislocation over the next few months. What to do?
It is at times like these that opportunity knocks if you have a nice, long time horizon. Since we primarily use LEAPS, the longer out we can go, the better. However, this does not mean that we are immune to losses in the short term. The secret here is two-fold. First, get time on your side. And second, reduce your dollar outlay significantly so that if you do get hurt, it is modest compared to owning the same underlying shares.
Unfortunately, some of our picks can only be achieved by using the spread technique that we have used successfully time and time again. I implore you to make sure that you can use spreads. If your broker will not let you (it is beyond me why they wouldn’t, since you are covering your position and not putting them at any more risk), then FIND A NEW BROKER. One of the brokers who we recommend is Greg Long at GunnAllen Financial. Call him at 800.329.1984 if you have questions about spreads or to set up an account. He offers special low-cost commission rates to LEAPS Trader members – comparable or less than many online discount brokers… and he is full service.
Okay, enough on the commercial. I really want you to be able to do spreads. In cases like today’s pick, it is the only way to achieve the low-cost, high-return trades we are looking for.
We made a ton of money on Advanced Micro Devices (NYSE: AMD) a couple of years back. We invested when no one cared about it and the share price was stagnant. In the last two years the company has turned from a slow-growth, non-competitive second banana (a ripe one to boot) to Intel (Nasdaq: INTC). Now, AMD has its house in order and is beginning to compete with Intel on many fronts, including recent big wins with formerly Intel-only customers.
It has managed to reduce its cost structure and penetrate much larger markets with its new production facilities. Now, don’t get me wrong, AMD is not going to become the next Intel anytime soon. It is still only at about 23% market share. But, that market share is up more than 40% in the past few years, at the expense of Intel, and because of a growing market for microprocessors worldwide.
The shares have come down recently with the entire tech sector and on fears of a price war with Intel. Both are legitimate concerns. But, the company is also achieving the size, diversity of product and momentum to challenge Intel on many products. One thing about the chip sector: when prices come down, demand explodes and the profits are made up to a large part in volume. And, the price cuts are usually short-lived because newer generation products replace the older microprocessors so frequently that the name of the game is innovation and competitive pricing.
Intel is not going to lower prices on new products at the risk of ruining its own margins or dominant position. So, as long as AMD can keep up, or in recent cases, outdo Intel, the company should maintain a strong growth profile.
In March, AMD shares reached a high of $42. Currently, they are around $25.70. I think that AMD will challenge its old highs at some point over the next two and a half years. This gives us the time to withstand a downturn if there is one, but also gets us in cheap in case there is no prolonged downturn.
Here’s how to play it:
Remember, we may exit the position early if we can grab substantial gains early. BUY the AMD January 2009 $35 LEAP calls (VVV AG), currently trading at $6.20 on several exchanges (be sure to look at each exchange). Against this position, SELL the January 2009 $45 call options (VVV AI), currently trading for $3.70.
Your cost in this trade will be $2.50 with a spread of $10 and a 4-to1 profit potential (300%) if our target is reached by 2009. I am looking for 50% to 100% over the next 12 to 18 months as the initial profit target. So, if AMD rallies in the next 12 to 18 months, we will likely reverse our spread and cash out early. Use a limit price of $2.70 as the most you are willing to pay for this spread.
Good trading,
Karim
Current Portfolio
Company / Symbol: CBOE Volatility Index (WCB: ^VIX)
Option / Symbol: Feb. 07 $17.50 call (VIX BW)
Date Purchased: 6/14/06
Current Price: $2.80
Comment: Hold
Company / Symbol: sanofi-aventis (NYSE: SNY)
Option / Symbol: Jan. 08 $60 call (WFK AL)
Date Purchased: 4/17/06
Current Price: $2.50
Comment: Hold.
Company / Symbol: Boston Scientific (NYSE: BSX)
Option / Symbol: Jan. 08 $30 call (WBX AF)
Date Purchased: 2/27/06
Current Price: $0.95
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: $11.15
Comment: Hold.
Bull & Bear Spreads
Company / Symbol: AMD Micro Devices (NYSE: AMD)
Option / Symbol: January 2009 $35 call (VVV AG)
Date Purchased: New
Current Price: $6.20
Comment: Buy.
Company / Symbol: AMD Micro Devices (NYSE: AMD)
Option / Symbol: January 2009 $45 call (VVV AI)
Date Purchased: New
Current Price: $3.70
Comment: Sell call against January 2009 $35 call position.
Company / Symbol: GoldCorp (NYSE: GG)
Option / Symbol: Jan. 09 $30 call (OPJ AF)
Date Purchased: 6/9/06
Current Price: $9.70
Comment: Hold.
Company / Symbol: GoldCorp (NYSE: GG)
Option / Symbol: Jan. 09 $40 call (OPJ AH)
Date Purchased: 6/9/06
Current Price: $6.50
Comment: Hold. Sold call against January 09 $30 position.
Company / Symbol: Teva Pharmaceutical (Nasdaq: TEVA)
Option / Symbol: Jan. 08 $40 call (WTX AH)
Date Purchased: 5/23/06
Current Price: $3.00
Comment: Hold.
Company / Symbol: Teva Pharmaceutical (Nasdaq: TEVA)
Option / Symbol: Jan. 08 $45 call (WTX AI)
Date Purchased: 5/23/06
Current Price: $2.00
Comment: Hold. Sold 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: $3.90
Comment: Hold.
Company / Symbol: Chesapeake Energy (NYSE: CHK)
Option / Symbol: Jan. 08 $45 call (WZY AI)
Date Purchased: 4/25/06
Current Price: $1.90
Comment: Hold. Sold call against January 08 $35 position.
Company / Symbol: Energy Select SPDR (AMEX: XLE)
Option / Symbol: Jan. 07 $39 put (ORJ MM)
Date Purchased: 3/1/05
Current Price: $0.75
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: $0.25
Comment: Hold. Sold put against January 07 $39 position.
