The LEAPS Trader
105 W. Monument Street
Baltimore, MD 21201
Wednesday, August 29, 2007
Email – #391
** Put your head down and plow forward – and take profits on the S&P Mitts
Put your head down and plow forward – and take profits on the S&P Mitts
It’s times like these that many investors question everything related to investing. Should I buy now? Should I sell? What should I do?
There are no easy answers. There are LEAPS instead. With LEAPS, we can participate in a lot of opportunities without having to bet the farm.
We are going to take a deep-in-the-money position on Bank of America (NYSE: BAC), one of the strongest companies in the financial sector, and one that stands to benefit the most from what is happening in the marketplace.
BAC has been on a buying binge lately, taking a huge stake in Countrywide Financial. It’s huge for Countrywide, but really a drop in the bucket for BAC. This stake gives BAC the right to buy Countrywide shares at a discount, get paid handsomely in the meantime, and also buy the entire company if a suitor emerges. You’ve been hearing about the mess in subprime and how it is a contagion that is affecting everything else. True enough, it is a problem. But it is a manageable problem, and if you are cash-rich like BAC, it is an opportunity that comes around very rarely.
By having strong retail operations, a strong depositor base, minor exposure to issues like sub-prime, and the ability to buy companies that have a future at distressed prices, BAC stands to emerge stronger from the current crisis.
Countrywide is just one example of how BAC could supercharge its growth in the years ahead. Most of Countrywide’s portfolio is made up of prime loans, the types that homeowners repay because they have the capacity to repay. Its portfolio is not bulging with zero-down, negative amortization products. But it will suffer in the short term, and that is what made the BAC investment such a good deal… it was a desperate sale to quell any rumors of bankruptcy.
BAC has also picked up some unusual insider buying interest. During the worst of the meltdown two weeks ago, insiders bought shares for the first time in a long time. And, of course, the biggest announcement to emerge was that uber-investor Warren Buffett also joined the roster of investors.
How to play BAC. There is no doubt in my mind that BAC will emerge from the current crisis in better shape then it went in. And I have no doubt that the subprime crisis will fade away. But it will take time. And that is why we will go out more than two years with our LEAP play. Be aware, the price of this option is going to be volatile as a function of the market. But we are not going to pay much for the right to participate in the BAC story. In fact we will pay less than 10% of the underlying share price.
Here is what you should do:
Buy the Bank of America (NYSE: BAC) January 2010 $55 call options (WBA-AK) currently trading at $5.00 on the offer. Do not pay more than $5.00. Our target price for BAC is $70 within the next two years – a level at which it would still only be trading at about 12 to 15 times forecast earnings.
I don’t expect a rally in bank stocks overnight – so I intend to be in this position for a while. But when the recovery does occur, we will want to be in the strongest companies in the sector. And this is the type of position where if we do get a significant further correction, that will average down our cost. There is no way to predict a bottom in anything, but that should not preclude us from buying value when we see it – especially with a time horizon of two-and-a-half years.
In other news:
For new subscribers, Mylan is still a buy, as is Sun Microsystems (which changed its underlying symbol to JAVA from SUNW).
Also, we hit our sell-stop on our S&P MITTS (AMEX: MCP), so the position should be sold for a nice profit of over 30%.
Karim
Current Portfolio:
Company / Symbol: Sun Microsystems (Nasdaq: JAVA)
Option / Symbol: Jan. 09 $5 call (VSU AA)
Date Purchased: 8/1/07
Current Price: $1.10
Comment: Hold.
Company / Symbol: Mylan Labs (NYSE: MYL)
Option / Symbol: Jan. 10 $20 call (WYQ AD)
Date Purchased: 6/18/07
Current Price: $2.70
Comment: Hold.
Company / Symbol: Cirrus Logic (Nasdaq: CRUS)
Option / Symbol: Jan. 09 $10 call (VUR AB)
Date Purchased: 6/1/07
Current Price: $0.70
Comment: Hold.
Company / Symbol: Coeur D’Alene (NYSE: CDE)
Option / Symbol: Jan. 09 $2.50 call (ZYB AZ)
Date Purchased: 4/17/07
Current Price: $1.35
Comment: Hold.
Company / Symbol: S&P 500 MITT (AMEX: MCP)
Date Purchased: 7/18/03
Current Price: $13.21
Comment: Take profits. Stock hit our trailing stop.
Company / Symbol: Advance Micro Devices (NYSE: AMD)
Option / Symbol: Jan. 09 $35 call (VVV AG)
Date Purchased: 6/21/06
Current Price: $0.15
Comment: Hold.
Bull & Bear Spreads
Company / Symbol: GoldCorp (NYSE: GG)
Option / Symbol: Jan. 09 $30 call (OPJ AF)
Date Purchased: 6/9/06
Current Price: $2.40
Comment: Hold.
Company / Symbol: GoldCorp (NYSE: GG)
Option / Symbol: Jan. 09 $40 call (OPJ AH)
Date Purchased: 6/9/06
Current Price: $1.10
Comment: Hold. Sold call against January 09 $30 position.
Company / Symbol: Microsoft (Nasdaq: MSFT)
Option / Symbol: Jan. 09 $32.50 call (VMF AZ)
Date Purchased: 5/25/07
Current Price: $2.05
Comment: Hold.
Company / Symbol: Microsoft (Nasdaq: MSFT)
Option / Symbol: Jan. 09 $40 call (VMF AH)
Date Purchased: 5/25/07
Current Price: $0.55
Comment: Hold. Sold call against January 09 $32.50 position.
Company / Symbol: Chesapeake Energy (NYSE: CHK)
Option / Symbol: Jan. 09 $35 call (VEC AG)
Date Purchased: 5/25/07
Current Price: $4.10
Comment: Hold.
Company / Symbol: Chesapeake (NYSE: CHK)
Option / Symbol: Jan. 09 $45 call (VEC AI)
Date Purchased: 5/25/07
Current Price: $1.35
Comment: Hold. Sold call against January 09 $35 position.
