11:35pm (EST)
1. Important Changes To Weekly Wrap
2. LEAPs – Bank of America (BAC) New Trade
3. Covered Call Trade – Dendreon (DNDN)
4. Strangle Trade – Best Buy (BBY)
5. Strangle Trade – Research In Motion (RIMM)
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1. Important Changes To Weekly Wrap
We wanted to take some time this week to talk to you about the Weekly Wrap. For those of you who are new, it is a simple, easy to read update on the market and certain stocks. We have been writing it for three years and recently we have added some new writers to our research team. Our goal is to expand the Weekly Wrap to include ALL kinds of option trades as well as buying stocks and using options with them.
The current market conditions have been tough to navigate but we are seeing incredible opportunities with options by using strangle and straddle trades. We also see the opportunity to add covered calls to your portfolio and we may also profile credit spreads in the future. Some of these will require a little monitoring but most of them will be easy ways to add options to your portfolio that will increase your returns.
We will also profile LEAP options which are call or put options that have 6 months to two years before they expire. This will help us take through the current trading range as well.
This will be our first issue with actual trade recommendations and we will hold ourselves accountable for the trades as always. The trade picks will include both buying stock (in some trades) and options. We will be looking to get into these trades on Monday morning, 9/13/10.
Our goal is to monitor these trades on a WEEKLY basis but we will cover them in the daily updates we do. The strangle and straddle options trades can be fast in nature so to follow them we suggest you subscribe to our daily updates. We hope you enjoy our new format as we look to bring your more exciting ways to grow your portfolio with options.
Due to the number of trades, this week’s edition will be trades only but we will be covering at least one or two companies a week starting with our next issue.
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2. LEAPs – Bank of America (BAC) New Trade
We covered LEAPs last week (9/6/10) and here were a few of our comments:
“We wanted to take some time this week to talk about Long-Term Equity Anticipation or LEAP options. LEAPs are simply call or put options where the original term can go as far out as two years from the issue date of the contract. We have profiled some of these types of options in the past and wanted to discuss how you can use them when looking to add them in your investment portfolio.
LEAPs are also useful when you believe an event will dramatically move a stock but the exact timing is unknown. A great example is a takeover target. If you believe a company is going to catch a bid from another but you are not sure of the timing AND you believe the stock will command a heavy premium, call LEAPs could be used.
One of the drawbacks of LEAPs is that they are so far out in terms of time frame, if you don’t get a decent move in the stock, you may not have the LEAP move enough to justify the trade. Generally, you are not going to be making an 1,000% return with LEAPs even if you do get the event you are looking for but we have seen some LEAPs soar in the past.” (END)
NEW TRADE!!!
Bank of America (BAC) LEAP Call Trade
Bank of America (BAC, $13.55, up $0.05)
Buy to OPEN 2011 February 15 calls (BAC110219C00015000, $0.78, down $0.01)
Action: We profiled some 2012 options a few weeks ago but we think Bank of America shares are really cheap at current levels. These options have 159 days, or over 5 months, before expiration. If the stock is at $17.50 by mid-February, you will double your money.
If shares are at $20 by mid-February, 2011, then these call options will be worth $5, or 525%, from current levels. Use limit orders up to $1.00.
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3. Covered Call Trade – Dendreon (DNDN)
This is a covered call trade which means for each option you sell, you must own 100 shares. Dendreon (DNDN, $41.93, up $0.46) has made a nice consolidation above $40 and although we like these call options straight-up, we want to own the stock as well. If shares fall below $40 then it buys us protection while the company rolls out Provenge, a prostate cancer drug that will be doing annual sales of $1 billion down the road.
NEW TRADE!!!
Buy to OPEN stock positions in Dendreon 10 minutes after the open.
Sell to OPEN October 45 call (DNDN101016C00045000, $1.28, up $0.14)
Action: If we go by Friday’s prices before the bell you would be in the position at $40.65. If the stock is above $45 by mid-October then you will have to sell the shares for $45 if they are “called” away. This would still give you a 10% return but you would miss out on further gains.
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4. Strangle Trade – Best Buy (BBY)
Here is a short summary we did on strangles trades a few weeks ago:
“We wanted to take some time to talk about a strangle option trade this morning that we were going to cover over the weekend but didn’t. The stock we were going to cover is a good candidate because we are expecting shares to move at least 10% or more over the next few weeks.
To find an attractive candidate, you need volatility.
If the stock makes a quick 5% move either way, the calls or puts would double and hopefully give you an overall gain of 10% or more. Then you would have the other side of the trade to wait for a rebound and possibly get out of the other side with a profit. That is not often the case but it does happen.” (END)
We recently profiled Best Buy (BBY, $33.88, up $0.32) in our August 1st Weekly Wrap when shares were at $34.66. Here were some of our comments:
“Currently there are 2 “Strong Buy” (recommendations), 5 “Buy”, 8 “Hold”, 1 “Underperform” and 1 “Sell” rating on the stock. Analysts will be tripping over each other if Best Buy is able to report a blowout quarter. The stock is trading at 11x forward earnings and Best Buy is buying back its own paper as last quarter showed a repurchase of 2.5 million shares.” (END)
The stock traded to a high of $36.21 the day after our update but has been consolidating in the lower $30’s since. The company will announce earnings on Tuesday.
NEW TRADE!!!
Buy to OPEN October 35 calls (BBY101016C00035000, $1.08, up $0.17)
Buy to Open October 32 puts (BBY101016P00032000, $0.95, down $0.08)
Action: Buy these options in equal amounts on Monday morning, 10 minutes AFTER the market opens. We think shares are going to move at least 6%-7% when Best Buy announces and the jury is split on how Wall Street is going to react to the news. Either way, shares should be on the move.
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5. Strangle Trade – Research In Motion (RIMM)
NEW TRADE!!!
Research In Motion (RIMM, $44.12, down $0.90)
Buy to OPEN October 50 calls (RIMM101016C00050000, $1.03, down $0.19)
Buy to OPEN October 40 puts (RIMM101016P00040000, $1.32, up $0.23)
Action: Make sure you buy an equal amount of calls and puts. Wait 10 minutes after the market opens and if shares open higher the calls and puts should be nearly equal in price. When one side of the trade offsets the cost of the other half then the goal will be to close that half of the trade and let the other side ride.
In other words, if the stock rallies going into earnings we make it a risk-free trade if the call options double. If the company misses earnings and shares drop then the puts would make a comeback as well. Or, if shares start the week lower and the company beats earnings then we could do the same thing.
We are looking for a 10% move in the stock or more. This trade will probably not need updating until Friday but we will be following it in our daily updates.
We will be back Monday morning at 9am with our next update!
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