Email – #453
Petrobras just announced discovering 2 billion barrels of oil last week, a major discovery to say the least.
When they made a similarly big discovery last year, the news was greeted with shares making a multi-dollar gain in one day. On Friday though, while the shares moved, it was really only because of the market and not for any other reason.
If this economy is to recover, it will do so because consumers begin to spend. Lower oil prices – off more than $94 since this summer are a key component that will underpin any growth. Lower heating oil prices, lower gasoline prices, lower prices for commodity inputs for transportation- these are all bullish factors for both the consumer… and oil prices.
Oil prices moved up in the past two years because of speculation and demand. It turns out there was more speculation than demand. In fact, fair value for oil probably lies between $40 per barrel and $100 per barrel. That’s a lot of room for error and for profits.
Making money these days is not going to be easy. The market is still “whacked out” and prone to major corrections and moves up as well. I have to stress again that with The 400 Report Strategy, we are making big bets, but with “small money.” We don’t risk the boat, just a small fraction, usually no more than 10% to 15% of the underlying price.
Making Money On Petrobras
On Petrobras we have a slew of ways to make money:
First, the dollar printing press should lead to commodity inflation at some point in the near future when people realize that all this printing will lead to higher values for tangible goods – last week’s rally in gold was just the beginning.
But, it will take a few months before people, especially investors, realize this. We’re early on this one, but we have over two years.
Second, economic stimuli should result in higher demand at some point. The markets react before that point is reached, so oil prices should move long before the headlines hit the press.
And finally, Petrobras gives us emerging market exposure. When markets move, emerging markets move in much more volatile fashion which could provide us with explosive gains.
Here is the play:
We have to use a spread for this play because the options are so expensive, reflecting the underlying volatility. Buy the Petrobras (NYSE: PBR) January 2011 $30 calls (VDW AF) currently trading for $7.
Against this position sell the Petrobras January 2011 $45 calls (VDW AI) currently trading for $3.70.
This means your cost for the spread will be about $3.30 to make $15- almost a 5 to 1 return proposition if PBR closes at or above $45 by January 2011.
Of course we could close out earlier if we are solidly profitable. Execute the trade as long as your net cost is no more than $3.60 (the difference between your buy and your sell prices). Be sure to take your time and try to buy and sell between the bid and offer.
Our cost works out to between 15% and 20% of the underlying share price for more than two years of potential.
Our five put sells in November were all profitable for us. MSFT returned us 16%, Intel 12%, GE 10%, JPM 15% and WFC 18%. Sometimes you have to take action and use a different strategy to take advantage of what the market offers. Look for more put sells when the opportunity presents itself.
Karim
Current Portfoli
Company / Option: Petrobras – bull spread
Jan. 2011 $30 call (bought)
Dec. 2011 $45 call (sold)
Option Symbol: VDW AF
Option Symbol: YDM AI
Current Price: $7.00
Current Price: $3.70
Comments: See above instructions.
Company / Option: Microsoft Nov. 2008 $10 puts
Option Symbol: MQF WB
Current Price: n/a
Comments: Took profits of 16%.
Company / Option: Intel Nov. 2008 $10 puts
Option Symbol: NQ WP
Current Price: n/a
Comments: Took profits of 12%.
Company / Option: General Electric Nov. 2008 $20 puts
Option Symbol: GEW WF
Current Price: n/a
Comments: Took profits of 10%.
Company / Option: JP Morgan Nov. 2008 $20 puts
Option Symbol: JPM WD
Current Price: n/a
Comments: Took profits of 15%.
Company / Option: Wells Fargo Nov. 2008 $17.50 puts
Option Symbol: WFC WT
Current Price: n/a
Comments: Took profits of 18%.
Company / Option: Yamana Gold Jan. 2011 $11 calls
Option Symbol: VPP AB
Current Price: $1.85
Comments: Hold.
Company / Option: Powershares QQQ Trust Jan. 2010 $40 calls
Option Symbol: WD AN
Current Price: $1.29
Comments: Hold.
Company / Option: Sanofi Jan. 2010 $30 calls
Option Symbol: WFK AF
Current Price: $3.10
Comments: Hold.
Company / Option: Valero Energy Jan. 2010 $60 calls
Option Symbol: YPY AL
Current Price: $0.33
Comments: Hold.
Company / Option: Blackstone Group Jan. 2010 $25 calls
Option Symbol: KJL AE
Current Price: $0.10
Comments: Hold.
Company / Option: Unisys Jan. 2010 $5 calls
Option Symbol: WUI AA
Current Price: $0.30
Comments: Hold
Company / Option: Pfizer Jan. 2010 $25 calls
Option Symbol: WPE AE
Current Price: $0.50
Comments: Hold
Company / Option: Bank of America Jan. 2010 $55 calls
Option Symbol: WBA AK
Current Price: $0.17
Comments: Hold
Company / Option: Mylan Labs Jan. 2010 $20 calls
Option Symbol: WYQ AD
Current Price: $0.35
Comments: Hold
Company / Option: MGM Grand – bull spread
Jan. 2010 $45 call (bought)
Dec. 2010 $60 call (sold)
Option Symbol: YDM AI
Option Symbol: YDM AL
Current Price: $0.31
Current Price: $0.21
Comments: Hold
Company / Option: Motorola – bull spread
Jan. 2010 $7.50 call (bought)
Dec. 2010 $10.00 call (sold)
Option Symbol: WMA AU
Option Symbol: WMA AB
Current Price: $0.48
Current Price: $0.30
Comments: Hold
Company / Option: USAir – bull spread
Jan. 2010 $10 call (bought)
Dec. 2008 $12.50 call (sold)
Option Symbol: LUL AB
Option Symbol: LCC LV
Current Price: $1.65
Current Price: $0.10
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: $0.39
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: THC AU
Current Price: $0.10
Current Price: $0.05
Comments: Hold