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Potash Smokes Higher

Thursday, October 30th, 2008

Like a tide that lifts all boats, the market’s recent rally has helped push shares of Potash (POT, $84.71, up $5.31) higher over the past three trading sessions. The stock hit a low of $60 last Friday and has quickly reversed course and held above $80 all day.

On October 21 and 22, I profiled the November 80 calls (PVZKP, $11.30, down $3.50) and the 2010 January 180 calls (WPTAW, $6.10, up $3.50) as high risk/ high reward trades. The November 80 calls have returned 140% as they were trading for $4.70 at the time. The January 180 calls are way out-of-the-money but have value simply because Potash can be an explosive stock. These calls were trading for $3.00 at the time of the blog and have easily doubled.

The trade was balanced so that if the November calls did not perform up to expectations then we still had insurance with the January 2010 calls which do not expire for another 16 months. Today, we got the best of both worlds as Potash looked strong all day.

The market has shown some strength this week and it looks like we may get out of October without another bomb dropping. The short-term oulook is up especially with the election right around the corner. This is normally a bullish time for the market and this rally could continue into next week. However, place stops accordingly, at least 75%-100% above your entry prices.

Rick Rouse
Rick@OptionsMentoring.com

Tags: LEAPs, Potash, Potash call options
Posted in Company Commentary | No Comments »

Market Rallies as Financial Sector Soars

Thursday, July 17th, 2008

The market went on a tremendous run yesterday as the Financial stocks had a banner day after a good earnings report from Wells Fargo (WFC, $27.23, up $6.72). Many of the financial stocks that have been getting trounced came back strong as many investors are starting (or hoping) to believe the sector may have hit a bottom. The Dow ended the day up 276 points to 11,239, or 2.5%. The S&P 500 mirrored the Dow’s percentage gain as it closed 30 points higher to finish at 1,245. The Nasdaq posted the biggest gain, 3.1%, and closed at 2,284, up 69 points.

The turnaround in the market is amazing considering the Dow touched a low of 10,731 on Tuesday and has bounced 500 points off that low. The volatility has been so strong that you could have made a mint by buying some cheap calls on hopes that when Bernanke spoke the Financials would listen. And they did with the help of Wells Fargo.

We were stopped out of the Merrill Lynch (MER, $28.00, up $3.31) July 32.50 puts (MERSA, $4.75, down $2.85) as our $7.00 stop was hit. The puts were set to expire on Friday and by having our stop in place, it automatically took us out of the trade. The puts were profiled at an entry price of $2.15 so by having this stop in place you can see how we were protected.

Elsewhere, Wachovia (WB, $10.54, up $1.46) powered higher by 16%, Citigroup (C, $16.47, up $1.91) added 13%, while Fannie Mae (FNM, $9.25, up $2.18) and Freddie Mac (FRE, $6.83, up $1.57) each gained 30%. Goldman Sachs (GS, $172.86, up $15.06) also made a nice move after touching $152 on Tuesday. U.S. Bancorp (USB, $26.74, up $4.04) also rallied 18% despite reporting a bigger-than-expected drop in its earnings on Tuesday, as it tripled its provisions for loan losses. It’s hard to imagine after reporting such a lousy quarter the market would take USB that much higher but it did.

Let’s see how this plays out as Merrill Lynch and Citigroup are expected to report another quarterly loss today and Friday respectively. I believe we are at a point to where the Financial stocks are cheap but it could be two or three years before their earnings improve significantly.

As lottery plays you could keep these 2009 LEAP call options on your trading radar.

Citigroup January 20 call (CAD, $1.25, up $0.47)
Goldman Sachs January 260 calls (GPYAC, $1.07, up $0.28)
Merrill Lynch January 35 call (MERAG, $1.90, up $0.60)
Wachovia January 15 call (WBAC, $1.30, up $0.45)

We could see some banks get bought out and I think Wachovia could be the first to go. Again, these calls may get lower in price if the Financials do another U-turn and head south but with an average cost of about $125 per contract these calls will be a steal in six months if the Financials catch fire. Buy half now and if they go lower maybe buy the other half later.

Rick Rouse
Rick@OptionsMentoring.com

Tags: Financial Sector, LEAPs
Posted in Market Analysis | No Comments »

Harley-Davidson's LEAP of Faith

Friday, June 13th, 2008

Shares of Harley-Davidson (HOG, $38.93, up $0.84) have been in a downtrend for 18 long months as the stock has fallen from a high of $75 to its current price. It has been a tough road for America’s favorite motorcycle maker as the company recently cut its short-term production to preserve the brand’s integrity.

Back in April, Harley-Davidson reported 1Q earnings of $188 million, or $0.79 a share, versus $192 million, or $0.74, last year. Revenue checked in at $1.3 billion, a decent 11% rise. Naturally, the slowing U.S. economy had a big impact on Harley which was reitterated several times in their conference call. Although declining sales to the tune of 14% in the U.S. are a concern, the company expects market share to increase abroad. Losses at its in-house consumer loan division have also weighed down the stock.

With shares sitting at an eight-year low, the stock is beginning to look attractive. As more baby-boomers get older Harley will certainly rebound but the question is when?

To start, I would wait for the company to report 2Q earnings which should be sometime mid-July. Usually it’s better to wait and see if a company’s products are back in demand before trying to time a bottom which I’m not quite sure if Harley has hit or not. It’s hard to say what the demand is after Harley’s 1Q report but the weather is warmer and gas keeps going higher. These two factors aren’t likely to help the stock in the short-term and I doubt the company says anything exceptional in its next earnings report.

Based on these assumptions, the stock could be range bound over the next few months with the possibility of heading even lower. If you want to own Harley now, maybe you could sell puts with the stock getting put to you at 35 or 37.50. Check out the premiums and go from there. Some option traders sell puts on stocks they don’t mind owning as they collect the premium which reduces their cost basis.

The other side of the spectrum would be to buy calls but we’ve already established that the stock could trade in a tight range or even head lower. So any near-term calls wouldn’t support our theory. However, LEAPs give us a much longer time horizon for the stock to rebound.

The January 40 calls (OAIAH, $4.00) and the January 50 calls (OAIAJ, $1.15) are an option. So are the 2010 January 40 calls (YBYAH, $6.50) and the January 50 calls (YBYAJ, $3.40). I’d wait for the stock to get above $42 before seriously considering any LEAP call options and if the stock continues to drift sideways or lower, they might get cheaper. Let’s keep Harley-Davidson on our Watch List and revisit the story a month from now.

Rick Rouse
Rick@OptionsMentoring.com

Tags: Harley-Davidson, LEAPs
Posted in Company Commentary | No Comments »

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I see that you took a loss on some of these. It’s all good. I look to trade your “ideas” not your exact calls. I THANK YOU! For your ideas and commentary. Keep up the good work. And keep those ideas coming.

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SHAUN
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TERENCE
“Rick – Thanks for Dendreon – it has made all the headlines today! I missed on RIMM earlier, but I’ve been holding onto DNDN calls since 3rd week March. Of course today it all paid off today, as DNDN rocketed up.”

Posts Tagged ‘LEAPs’

Potash Smokes Higher

Market Rallies as Financial Sector Soars

Harley-Davidson's LEAP of Faith