Align Technology Options Present Opportunity

Align Technology, Inc. [[ALGN]] shares may need a little doctoring, but the stock’s options are presenting a great opportunity for covered call investors. Long-term investors can purchase 100 shares of ALGN for $762, write a $7.50 February 2009 call option contract, and gain $110 in profit on their investment. This represents a 14.4% return on investment in just 22 days until the options expire.

The risk is that Align Technology stocks declines more than 14.4% and the shareholders are left holding onto the shares at a loss. Long-term investors that are bullish on the company’s prospects may be willing to take that risk over the long-term, but there may be another solution for short-term investors looking to reduce their risk and increase their returns.

Long-term options, called LEAPS, offer an opportunity for these investors. These options can be used as a stock substitute in a covered call. Currently, the longest term options available are the $5.00 July 2009 call options trading for just $3.50 per contract. This means that investors can purchase rights to 100 shares for $350 and immediately sell those rights for $110 for a 31.4% return on investment.

See “A Better Covered Call Alternative” for more information on this strategy or check out our Tools & Products for more ways you can use LEAPS to reduce your risks and increase your returns.

Burlington Jumps on Buffett Buy

Burlington Northern Santa Fe Corporation [[BNI]] shares moved sharply higher after billionaire investor Warren Buffett’s Berkshire Hathaway purchased 4.3 million shares ahead of earnings. The move represents a vote of confidence on the part of the legendary investor and puts the investor’s total stake at more than 20 percent of the nation’s second largest railroad.

It is no secret that Burlington Northern is cheap with a price-earnings to growth ratio of just 0.81, indicating that the stock is undervalued given its growth rates. The stock also generates strong levered free cash flows of $1.52 billion with relatively low debt, making it a clearly Buffett-worthy investment. Finally, investors are also able to get some downside protection from a 2.5 percent dividend yield.

Investors looking to gain exposure to the upside of Burlington Northern without putting as much capital at risk may want to consider long-term options called LEAPS. Currently, investors can purchase the right to 100 shares anytime during the next 359 days, at $65 per share, for just $1,050 down now. This compares to $6,500 required to buy the underlying stock. The downside is the $75.50 breakeven point.

See “Using LEAPS As a Stock Substitute” for more information on this strategy or check out our Tools & Products for more ways to profit from LEAPS options.

Lennar Options Present Opportunity

Lennar Corporation [[LEN]] shares may have already posted a modest recovery as Obama’s economic policies come to light, but the firm’s call options still offer would-be long-term investors an attractive entry point.  The construction service company’s call options offer an attractive premium for long-term investors willing to consider a covered call position.

Lennar’s $7.50 February 2009 call options are currently selling for $1.20 per contract. This means that investors can purchase 100 shares of the underlying stock and immediately sell the rights to that stock for $120 for a return of 14.93% in just about a month. This represents an attractive annualized return that also gives long-term investors downside protection.

The worst case scenario for the position is that the stock drops and investors are forced to hold onto the shares. However, there is a built-in 15% downside protection because investors get to keep the options premium as profit to offset losses. Alternatively, if the stock moves past the $7.50 pricing point and the option is exercised, then the investor will be forced to either buyback the option or give up their shares.

Investors looking to reduce the risk of this position further while leveraging their position may want to consider using long-term options called LEAPS as a stock substitute. Currently, the $5 January 2010 LEAPS call options are trading for $4.20 per contract. This means that investors can pay $420 for the rights to 100 shares and immediately resell those rights to $120 for a 28.5% return on investment.

See “A Better Covered Call Alternative” for more information on this strategy or check out our Tools & Products for more ways to profit using LEAPS.

Forestar Group Options Present Opportunity

Forestar Group, Inc. [[FOR]] shares have recovered over the past month, but the real estate firm’s call options may be the real opportunity for profit. Long-term investors who are bullish on Forestar’s prospects may want to consider establishing a covered call position to squeeze some extra profits out of their investment. However, with earnings coming up, is there a less risky way to profit?

Forestar’s $7.50 February 2009 call options are trading at a premium of $1.35 per contract with shares trading at just $7.80 a piece. This means that investors can purchase 100 shares for $780 and immediately resell the rights to those shares for $135, which will net them a 13.49% return on their investment in just about a month’s time.

The risk is that Forestar could fall after its earnings announcement scheduled for February 4th. The real estate business hasn’t exactly been in the best shape, especially for the single-family residential and mixed-community investments that the firm owns. So, is there another way to capitalize on these high options premiums without all the risk?

Long-term options called LEAPS can be used as a substitute for the underlying stock in a covered call. Instead of purchasing 100 shares of Forestar for $780, investors can purchase the rights to 100 shares over the next 218 days at $5.00 for only $450 down. This means that investors can invest just $450, sell the rights for $135, and realize a 30% return on investment.

The risk in this strategy is that Forestar shares fall sharply lower. While there is 30% downside protection by the premium sold, the option’s market is more illiquid and it may be difficult to sell. That’s why it is recommended that investors using this strategy are long-term investors looking to own the stock regardless of where the price goes in the short term.

See “A Better Covered Call Alternative” for more information on this strategy or check out our Tools & Products for more ways to profit from LEAPS.

Overstock Options Present Opportunity

Overstock.com, Inc. [[OSTK]] shares are almost as cheap as its products after continuing their drop today. Retail sales data came in lower for a sixth straight month as consumers continued to tighten their spending. However, there is one deal at Overstock that investors may be overlooking – the premiums on their call options. As a result, covered call investors may be able to benefit handsomely.

The $10 February 2009 call options are trading with a premium of $1.35 per contract despite a stock price of just $9.89 per share. This means that investors can purchase 100 shares of stock for $989 and immediately sell the rights to acquire that stock at $10 for $135 – a 13.65% return on investment in just about a month. However, there’s another way investors can profit using long-term options.

Investors worried about Overstock’s future may not want to commit that much capital to a position. Instead, they may want to consider using long-term options called LEAPS as a stock substitute in a covered call write. Currently, the $5 January 2010 LEAPS calls are trading at an ask price of $6.20 per contract. Using this as a substitute would reduce the capital by about a third while jumping the ROI.

The resulting diagonal spread – that is, a covered call with LEAPS – would cost $620 to establish and provide a return on investment of 21.77%. The downside is that investors may be faced stuck holding the options if the price declines or sell at nearly breakeven, since the bid price of $5.10 plus the $1.35 gained barely offsets the $6.20 purchase price (not including commissions).

See “A Better Covered Call Alternative” for more information on this strategy or see our Tools & Products section for more ways to make money using LEAPS.

Retail Stocks Are on Sale

The loss of 2.6 million jobs and declining home and retirement fund values have squeezed consumer spending. Retail sales dropped for the sixth consecutive month as consumers cut spending to save for the future, according to the U.S. Commerce Department. The decline is the longest since comparable records began in 1992 and there is still no end in sight as the economy continues to deteriorate.

Retailers have been struggling with this lower spending after one of the worst holiday seasons in history. Sales are down sharply as consumers shied away from stores while margins were pressured by steep discounts offered across the board. Unfortunately, these measures were necessary to get rid of large inventories built up when the economy was on track six months ago.

These losses may begin to curtail as pricing stabilizes and inventories are emptied. Shoppers accustomed to bargain prices now may find those gone within a month or two as retailers scale back and revamp their pricing to meet with market demand. This action should help stabilize margins, reduce losses, and create the grounds for a recovery in the troubled sector.

While consumers may be hard pressed to find deals at stores, investors will then have plenty of bargains to choose from among retail stocks. Earnings multiples are already near record lows for many stores while some have fundamental prospects that are enviable for any public company. And with inventory gone and pricing restored, they might just be stable enough to buy.

Some retailers like Wal-Mart [[WMT]] saw their first quarterly declines, but may end up being the strongest players going forward. Others like Target [[TGT]] are sitting on strong assets that hold substantial value when the market recovers. Finally, those clothing retailers that have seen discretionary spending disappear may begin to move upwards from their depressed levels.

Investors looking to get involved with these trends early on without putting a lot of capital at risk may want to consider using long-term options called LEAPS. These options give investors the right, but not obligation, to purchase shares anytime over the next one or two years at a fraction of the cost of buying the stock outright. This equates to reduced risk and increased leverage.

See “What are LEAPS Options?” for an introduction to these securities or check out “Using LEAPS as a Stock Substitute” for more information on this strategy.

General Mills Weathers the Storm

General Mills, Inc. [[GIS]] continues to see its products fly off the shelves as consumers eat at home to conserve money, but higher costs for key ingredients and a stronger dollar may end up eating into its performance. Regardless, the cereal-maker announced that it would meet or exceed its goals for fiscal 2009 while many analysts also remain confident in the company’s prospects.

“We believe the company’s strategy to remain focused on new product innovation supported by increased consumer marketing spending is well conceived and should drive consistent earnings growth at General Mills for years to come,” wrote Citi Investment Research analyst David Discoll in a research notes to clients after reiterating his rating on the company.

Other experts aren’t so confident in the future of the U.S. food sector after it lost 27 percent in 2008, according to the Dow Jones U.S. Food Producers Index. The costs of key ingredients like corn and oil rose to record highs over the summer, which hurt margins despite efforts to raise prices to offset the costs. Meanwhile, several large industry players were even forced to declare bankruptcy.

Luckily, General Mills and others with strong brands and pricing power were not so affected by the downturn. These strong brands have seen great sales in recent months as cash-strapped consumers looked to save money this year on food costs by purchasing from grocery stores rather than going out to eat. Meanwhile, some hedges against commodity costs have turned out to be successful.

Investors looking to capitalize on these positive trends may want to look at long-term options called LEAPS. Currently, investors can purchase $50 January 2011 LEAPS calls for just $13.10 per share. This means that investors can purchase the rights to 100 shares at $50 during the next 738 days for just $1,310 down. The breakeven point would then be $63.10 per share over the next two years.

See “Using LEAPS as a Stock Substitute” for more information on this strategy or check out our Tools & Products for more ways to make money using LEAPS.

Intersil Options Soar Ahead of Earnings

Intersil Corporation [[ISIL]] options trading was off the charts Tuesday ahead of the semiconductor industry’s earnings season. The company saw 4,609 call option contracts trade hands, which is 15x its normal volume of 304 contracts. The majority of the volume was seen at the $7.50 and $10 strike prices for the February and April 2009 call option contracts.

Rival Intel Corporation [[INTC]] took the rare step of revising its fourth quarter sales guidance twice due to deteriorating market conditions ahead of its earnings announcement on Thursday. The firm, along with others in the industry, has been devastated by a slowdown in consumer demand for personal electronics as well as corporate demand for new technologies using semiconductors.

Intersil has reported solid earnings for the past three years, but analysts only expect the company to earn $0.09 cents per share on average in the fourth quarter. The estimates vary substantially, however, with the low estimates being for -$0.01 cents and the high estimates set at $0.11 cents per share. The firm has historically announced its fourth quarter results between January 23rd and 25th.

The recent options activity suggests that many investors are bullish on the prospects for the semiconductor firm over the next few months. However, the earnings at Intel and other semiconductor firms may provide additional guidance as to what investors should expect. These rival reports have also impacted the stock itself in anticipation of its results. So, investors must wait and see…

Place a Prudent Bet on ProLogis’ Future

ProLogis [[PLD]] has nearly tripled from its 52-week lows, but many investors remain cautious ahead of its earnings announcement. The self-managed real estate investment trust operates a network of industrial distribution properties that has remained profitable despite a turbulent real estate market. Continued access to financing has kept its deal flow alive while its operating income remains strong. So, is now the time to invest in this REIT or is there trouble looming ahead?

ProLogis’ problems began when the REIT cut its funds from operations (FFO) guidance for 2008 and 2009 last October. Standard & Poor’s reacted by cutting the firm’s credit rating to BBB- with a negative outlook, which is one of the lowest levels before so-called “junk” status. The ratings agency, along with many analysts, reasoned that lower cash flows were bad news with a $9 billion mountain of debt. If the company couldn’t afford its debt service, the results could be disastrous.

ProLogis was quick to react by announcing a plan that included re-financing or re-negotiating debt maturities on its balance sheet and in its property funds, halting new development starts, shrinking the development pipeline, de-levering the balance sheet, and retaining capital through G&A cuts and a reduction of the dividend. These actions were implemented to improve the REIT’s balance sheet and reduce the risk of failure going forward.

These plans ended up doing the trick for ProLogis and shares quickly tripled to their current levels. However, many investors remain cautious as mere plans do not guarantee results. The company still has a large amount of debt on its balance sheet and, while the real estate market shows some promise of turning around, there is still a lot of work to be done. So, how can investors get involved with this stock without putting a lot of capital at risk?

Long-term options called LEAPS are one way to gain exposure to a stock’s upside without committing a lot of capital. Currently, ProLogis has $5 January 2010 LEAPS calls available for an asking price of $8.60 per contract. This means that investors can purchase the rights to 100 shares of ProLogis anytime during the next 367 days for just $860 down right now. The breakeven point on the position is therefore $13.60 per share, which is a small premium from the current share price.

Investors looking to make an additional extra buck may be interested in a covered call opportunity. The $12.50 February 2009 call options are trading with a premium of $2.00 per contract. This means that LEAPS investors can purchase their long-term options for $860 and immediately resell the rights for $200 to realize a 23.2% return on investment in just about a month. If the stock goes down, you still own the rights and if the stock goes up you can sell for a profit!

See “A Better Covered Call Alternative” or “Using LEAPS as a Stock Substitute” for more information on this strategy or checkout our Tools & Products for more ways you can profit from using LEAPS.

What are LEAPS Options?

Many investors are familiar with the term stock options, but relatively few understand what they are and how they work. Stock options are simply contracts that give buyers the right, but not obligation, to buy or sell an underlying stock at a specific price on or before a certain date. LEAPS – or long-term equity anticipation securities – are simply long-term stock options. Read more

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