Email – #429
Every once in a while, an opportunity arises to really accelerate your profits at a very low price. Of course, every pick we make is at a very low price compared to what the underlying shares cost us. That provides us with some measure of security when things don’t go our way – like with our bank stocks right now. But we buy time and we have fewer dollars at risk.
I am a strong believer in supply and demand. It’s a concept that has not changed since the first entrepreneur charged more or less for something based on how much he had and how much he was selling. In the long run, prices will always settle at equilibrium, where supply meets demand. In the short-term – anything goes. This is why we go out almost two years on some plays – because a lot can happen in two years.
Today’s play is a contrarian speculative bet of the highest order. Every company in this industry should be out of business today. They should have been out of business a year ago. The raw material they need to survive has increased ten fold in ten years, and has doubled twice in the past three years. At the same time, their customers are getting squeezed by the economy. Yet they still survive. And they are using the current crunch to make modifications to their industry like a la carte pricing, which could ramp up profits in a hurry if the times change.
It’s an anti-oil play. Back to supply and demand. Today, oil prices are being driven by anything but demand. Oil prices are dependent on supply and demand in the long run, and by the financial markets in the short term. Right now, it’s traders and investors who are determining how high oil should be. Demand is falling, yet prices are rising. Supply is ample – there are no lines anywhere, yet prices are rising. The biggest consumer is changing its habits and using less, yet prices are rising. Producers are saying the prices are overvalued by a factor of two, yet they still keep rising. The second-largest consumer, China, is beginning to show signs of slowing, a slowing that will accelerate after the Olympics -in China this means 7% growth instead of 10%. They are even reducing subsidies on oil-related products.
Here’s the speculation:
Buy the USAir (NYSE: LCC) January 2010 $10 call (LUL-AB) currently trading at $0.85. Do not pay more than that – remember this is a speculation – do not chase the prices.
The company is in as bad a shape as the other airlines, except for Southwest. But they are making structural changes to their business from reducing capacity to raising prices and introducing a la carte pricing for everything from seat assignments to fuel to baggage – and these prices are sticking, and they are being implemented industry wide. If their biggest cost, oil, declines, look out above. It’s not what will happen this quarter or next quarter that counts – it’s what analysts will project for next year. The CEO just picked up a couple hundred thousand shares at a price $33 less than investors paid within the last 52 weeks – could be the buy of his career. The downside – USAir goes out of business – that’s why this is a speculation. Again, do not pay more than $0.80. We could see a double or triple in a heartbeat if oil prices fall to the low $100s – not something that is out of the question.
Karim
Current Portfoli
Company / Option: US Air Jan. 2010 $10 calls
Option Symbol: LUL AB
Current Price: $0.85
Comments: New. See above instructions.
Company / Option: Valero Energy Jan. 2010 $60 calls
Option Symbol: YPY AL
Current Price: $5.00
Comments: Hold.
Company / Option: Blackstone Group Jan. 2010 $25 calls
Option Symbol: KJL AE
Current Price: $2.25
Comments: Hold.
Company / Option: Unisys Jan. 2010 $5 calls
Option Symbol: WUI AA
Current Price: $1.00
Comments: Hold
Company / Option: Pfizer Jan. 2010 $25 calls
Option Symbol: WPE AE
Current Price: $0.45
Comments: Hold
Company / Option: Bank of America Jan. 2010 $55 calls
Option Symbol: WBA AK
Current Price: $0.40
Comments: Hold
Company / Option: Fifth Third Bancorp Jan. 2010 $30 calls
Option Symbol: YJF AF
Current Price: $0.30
Comments: Hold
Company / Option: Sun Microsystems Jan. 2009 $5 calls
Option Symbol: XOG AA
Current Price: $0.05
Comments: Hold
Company / Option: Mylan Labs Jan. 2010 $20 calls
Option Symbol: WYQ AD
Current Price: $0.95
Comments: Hold
Company / Option: Cirrus Logic Jan. 2009 $10 calls
Option Symbol: VUR AB
Current Price: $0.25
Comments: Hold
Company / Option: Coeur D’Alene Jan. 2009 $2.50 calls
Option Symbol: ZYB AZ
Current Price: $0.80
Comments: Hold
Company / Option: General Electric – bull spread
Jan. 2010 $35 calls (bought)
Jan. 2010 $45 calls (sold)
Option Symbol: WGE AG
Option Symbol: WGE AI
Current Price: $1.45
Current Price: $0.35
Comments: Hold
Company / Option: Microsoft – bull spread
Jan. 2009 $32.50 call(bought)
Jan. 2009 $40 call (sold)
Option Symbol: MSQ AZ
Option Symbol: MSQ AH
Current Price: $1.05
Current Price: $0.15
Comments: Hold
Company / Option: Tenet Healthcare – bull spread
Jan. 2010 $5 call (bought)
Jan. 2009 $7.50 call (sold)
Option Symbol: YTX AA
Option Symbol: ONZ AU
Current Price: $1.95
Current Price: $0.40
Comments: Hold