The LEAPS Trader
105 W. Monument Street
Baltimore, MD 21201
Friday, February 23, 2007
Email – # 359
** Gas and Gold – Coming Through Better Than Expected
Last night, Chesapeake Energy (NYSE: CHK) came through with stellar results. Revenues, profits and reserves increased dramatically.
For 2007, the company is looking at close to $4 per share in earnings, giving it a forward P/E of less than 8.
The problem is that CHK continues to issue new shares to fund acquisitions. So, whenever the shares get some momentum going, they sell off on fears of more supply. Of course, the price of natural gas fluctuating by 20% on a monthly basis does not help either.
For CHK, we own the January 2008 $35 LEAP calls. Our play is based on two things. First, increased usage of natural gas or a shortage because of a catastrophic weather event. Of course, I would much rather the shares moved up because of their own merits as a great investment. Chesapeake has much of its gas and oil hedged at much higher prices, which means the profits will keep rolling in. But, as a natural resource company, it is subject to the vagaries of natural resource prices on a day-to-day basis.
Chesapeake is finally over $30 again, which is a key technical level. It needs to stay up here and move higher in order to establish a new trend. It has spent months consolidating below $30, unable to break through. If it does stay above this level for a few days, the next move should be to the $32 level – which would put us back close to profitability in this position. If not, we will have to wait until the summer hurricane season heats up to realize an appropriate exit price.
Gold Grabbing Momentum
Gold has been moving sharply higher, and our Goldcorp (NYSE: GG) spread is coming to life.
We still have almost two years left on this play and are looking for a move in gold prices to the mid-$700s, which are the most recent highs, to clean up on this play.
Yesterday, Goldcorp announced an updated reserve position, showing almost 40 million ounces of gold and 701 million ounces of silver that can be mined in the years ahead. It has truly reached “major” status after it recent acquisition of Glamis.
Regardless, that is not what will propel its shares higher. As a “gold” stock and an unhedged producer, the only way Goldcorp and any other major gold stock will move higher is on the back of higher gold prices. Fortunately, governments worldwide, and especially in the U.S., are making sure that gold has a place in every investment portfolio for years to come, by continuing to print money at incredible rates. Add to this continued, and growing demand from Asia, and we have a very good chance of seeing a continued rally in gold shares.
While there is not less gold in the ground, the cost of getting to it and getting it out is increasing substantially, evidenced by the recent spate of mergers and acquisitions in the resource sector.
For us, gold is about $50 per ounce away from where we will start cleaning up with our spread, and we have almost two years for this to happen. Remember, our spread position has allowed us to reduce our cost in this position to a point where we need a move in GG shares of about 20% to 25% – less than its previous all-time highs – to lock in some nice triple digit gains.
Karim
Current Portfolio:
Company / Symbol: Nasdaq 100 Index (Nasdaq: QQQQ)
Option / Symbol: Jan. 08 $40 put (WD MN)
Date Purchased: 11/27/06
Current Price: $0.90
Comment: Hold.
Company / Symbol: Nasdaq 100 Index (Nasdaq: QQQQ)
Option / Symbol: Jan. 08 $48 call (YWZ AV)
Date Purchased: 11/27/06
Current Price: $2.45
Comment: Hold.
Company / Symbol: Microsoft (Nasdaq: MSFT)
Option / Symbol: Jan. 08 $30 call (WMF AF)
Date Purchased: 8/8/05
Current Price: $2.07
Comment: Hold.
Company / Symbol: S&P 500 MITT (AMEX: MCP)
Date Purchased: 7/18/03
Current Price: $12.87
Comment: Hold.
Company / Symbol: Chesapeake Energy (NYSE: CHK)
Option / Symbol: Jan. 08 $35 call (WZY AG)
Date Purchased: 4/25/06
Current Price: $1.65
Comment: Hold.
Company / Symbol: Advance Micro Devices (NYSE: AMD)
Option / Symbol: January 2009 $35 call (VVV AG)
Date Purchased: 6/21/06
Current Price: $0.65
Comment: Hold.
Bull & Bear Spreads
Company / Symbol: Schlumberger (NYSE: ALL)
Option / Symbol: Jan. 08 $60 call (WUB AL)
Date Purchased: 1/19/07
Current Price: $11.50
Comment: Hold
Company / Symbol: Schlumberger (NYSE: ALL)
Option / Symbol: Jan. 08 $65 call (WUB AM)
Date Purchased: 1/19/07
Current Price: $8.50
Comment: Hold. Sold call against Jan. 08 $60 position.
Company / Symbol: GoldCorp (NYSE: GG)
Option / Symbol: Jan. 09 $30 call (OPJ AF)
Date Purchased: 6/9/06
Current Price: $6.50
Comment: Hold.
Company / Symbol: GoldCorp (NYSE: GG)
Option / Symbol: Jan. 09 $40 call (OPJ AH)
Date Purchased: 6/9/06
Current Price: $3.50
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: $2.50
Comment: Hold.
Company / Symbol: Teva Pharmaceutical (Nasdaq: TEVA)
Option / Symbol: Jan. 08 $45 call (WTX AI)
Date Purchased: 5/23/06
Current Price: $1.10
Comment: Hold. Sold call against January 08 $40 position.
