The Volatility Trader
105 W. Monument Street
Baltimore, MD 21201
Tuesday, April 24, 2007
Email – #264
Volatility Trader Alert
Dear subscribers,
Today, there’s a development in our portfolio is very encouraging.
Existing home sales came out this morning and are far below what was expected, showing that real estate markets are definitely in trouble. Specifically, existing home sales fell 8.4% in March, one of the worst declines to date.
This news bodes well for our put positions in Digital Realty Trust (NYSE: DLR). While DLR focuses on commercial office space for technology, the old adage that “rising tides lift all boats” will come into play in the REIT market. Even if commercial REITs show signs of life, the broader real estate problems will sink most of the stocks within the entire industry.
And, Digital Realty Trust is overvalued anyway, so it’s a double-edged sword. I expect the puts to start performing soon.
** NEW TRADE **
Adding a new position to the portfolio, we’re going to get long coal.
Over the past two years, supply in the coal markets has exceeded demand, which caused the price of coal to decline and the stocks in the sector to fall. Add in several coalmine cave-ins, and heightened regulatory issues, and the overall performance of the sector has certainly been under par.
But here’s the thing: The Energy Information Center and several coal watch groups are expecting supply to shift over the next two years. In addition, energy demand is expected to surge with a blistering summer (Read: global warming). Coal is a great buy at present beat-up levels.
As the chart below indicates, coal has just recently begun to rebound after a year of falling prices.
Thus, today we’re going to buy the James River Coal Company (Nasdaq: JRCC) June 2007 $7.50 calls (JQM-FU) for no more than $2.20.
James River was hit hard in 2006, as the price of coal fell and the company struggled with regulatory issues in its mines. And Moody’s just lowered the company’s debt rating to junk.
The bad news is built in, and I’m expecting the company to announce good news on its mine and coal price outlook in the earnings statement due on May 10th.
What’s more, we’re buying in the money, so as the price ascends, we will have a 1:1 movement with the stock, which should improve returns.
I’m going to keep a close leash on this trade, and if the stock starts to fall again, I will pull the trade pretty quickly. I’ll keep you posted right here.
In the meantime, as summer begins to heat up, I expect electricity demand to hit all-time highs… and the price of coal to rocket.
Exit is everything,
Mark Whistler
Current Portfolio:
James River Coal Company (Nasdaq: JRCC)
Jun 07 $7.50 calls JQM-FU
Purchased: New
Current Price: Buy for no more than $2.20.
Plantronics Inc. (NYSE:PLT)
Nov 07 $22.50 calls PLT-KX
Purchased: 4/13/2007
Current Price: $3.70
Scientific Games (Nasdaq: SGMS)
Oct 07 $35 calls TUJ-JG
Purchased: 3/28/2007
Current Price: $1.80
InterContinental Exchange (NYSE: ICE)
Jun 07 $100 puts ICE-RT
Purchased: 3/21/2007
Current Price: $.30
June 07 $155 calls IHH-FK
Purchased: 3/21/2007
Current Price: $2.50
Digital Realty Trust (NYSE:DLR)
July 07 $40 puts DLR-SH
Purchased: 3/14/2007
Current Price: $1.70
