DryShips Restructuring Could Mean Opportunity

DryShips [[DRYS]] share surged higher after the company reached a preliminary agreement to restructure $220 million worth of loan facilities with Piraeus Bank. The stock fell sharply last week after the company violated some debt terms thanks to buyers that backed out of deals to purchase three ships. The new agreement waives financial and net asset coverage through January of 2011 and reduces the amount of principal paid by 47% in 2009 and 21% in 2010.

DryShips share have been hurting amid a sharp decline in the price of commodities. The lower pricing has led to a slide in demand for shipping services overseas. Lower spot and contract rates for DryShips and others in the sector have led to lower valuations. In fact, DryShips is now facing a price-earnings multiple of 0.27x and a PEG ratio of just 0.01. The reason: Many investors believe that the company may face bankruptcy.

The prospect of bankruptcy for DryShips has been reduced, however, after these debt covenants were waived. Still, some investors believe that the company could face trouble down the road. So, how can investors take a stake in this company without putting their portfolio at risk? One solution may be long-term options called LEAPS. LEAPS give investors the timeframe needed for long-term investment with the leverage offered by options.

Currently, investors can purchase the rights to 100 shares of DRYS at $5.00 anytime between now and January 21, 2011 for just $390 down. This compares to a $609 cost for purchasing the underlying shares while the breakeven point is just $8.90 per share. If commodity prices for drybulk recover, then companies like DryShips could see their stock rise to previous levels. LEAPS enable long-term investors to bet on this future while limiting their capital at risk.

See “Using LEAPS as a Stock Substitute” for more information on this strategy or check out our Tools & Products for more ways to use LEAPS to profit in any market.

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.

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.

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…

Protective Life Options Revive Hopes

Protective Life Corporation [[PL]] shares may not be the most attractive in the market, but the options market is offering investors another opportunity. Call options are trading at a substantial premium, which has created opportunity for covered call investors. However, savvy investors can use long-term options as a stock substitute to leverage returns even higher. This article will explore how…

The first decision investors must make is whether or not they want to own the Protective Life. The life insurance company saw its shares fall sharply in 2008 with the rest of the sector as several securities that they owned turned bad. However, the firm applied to become a bank holding company in November, which would give it access to government funds. Meanwhile, the company has worked to stabilize itself despite some poor investment decisions.

The $12.50 February 2009 call options are currently trading with a premium of $2.20 per contract. This means that investors can purchase 100 shares for $1,300, sell a call option for $220 and realize a 13.08% return on investment in just about a month. Alternatively, investors can purchase long-term options at a lower cost, sell the same call for $220 and realize an even higher return on investment. This strategy is known not as a covered call, but rather a diagonal spread.

While Protective Life doesn’t trade LEAPS options, there are July 2009 call options available as stock substitutes. The $10 July 2009 calls are trading for $6.60, which means investors can purchase the rights to 100 shares for $660 and immediately resell those rights for $220 – a 33.33% return on investment. The risk is that the written option gets called and the investor may need to exercise the senior calls or that the stock declines below the $10 strike price of the senior option.

See “A Better Covered Call Alternative” for more information on this strategy or checkout our Tools & Products section for more ways to profit using long-term options called LEAPS.

Sequenom Options Entice Investors

Sequenom, Inc. [[SQNM]] has been a beacon of light in an otherwise dark market, but the stock’s options are what’s turning on the bulb for many covered call investors. These investors write – or sell – call options against their existing stock position and collect the option’s premium as profit. The bullish strategy is typically used by long-term investors looking for some extra income, but some opportunities like this one also open the door for active traders.

Sequenom’s $25 February 2009 call options are trading at a premium of $3.90 per contract. This means that investors can sell the right to purchase 100 shares of their stock at $25 in exchange for $390 cash. Investors who purchase the stock right now, at $23.36 per share, can sell the same rights and make a 15.98% return on their investment when the options expire next month. This is a large annualized return, especially given the stock’s bullish performance.

It is important to remember, however, that option premiums are always high for a reason. In this case, Sequenom has clinical trial data that is still not public. Poor results from this data could mean substantial downside for the company’s stock. And any loss in the value of the stock means investors writing covered calls could lose more than the $390 that they gained by establishing the covered call position. However, many investors, including analysts at Soleil, are excited about the potential for the firm’s new drugs.

Investors interested in reducing their risk and leveraging their returns may want to consider establishing a diagonal spread with instead of a covered call. This involves purchasing long-term options, called LEAPS, as a stock substitute, and using them as a basis to sell shorter term options against. Currently, the $15 January 2010 LEAPS calls are trading with an ask price of $13.40 per contract. This means that investors can purchase long-term rights for $1,340 and sell short-term rights for $390 – a 29.1% return.

The amount of money at risk is reduced from $2,320 to $1,340 while the return jumps from 15.98% to 29.1%, but there are many additional risks. For a comprehensive overview of this strategy, check out “A Better Covered Call Alternative” and check out our Tools & Products for more innovative ways to make money with LEAPS options, including our Covered Call Screener software.

Recoup Your ENDP Losses More Quickly

Endo Pharmaceuticals [[ENDP]] shares dropped sharply after the drug company announced that it would acquire Indevus Pharmaceuticals [[IDEV]] for $370 million, or $4.50 per share in cash. Typically, shares of acquiring companies fall to reflect the added risk of a merger and the increased leverage needed to finance the merger. However, a successful merger can mean a higher share price for all parties involved, which means that this move could be temporary. So, how can investors get back their money quickly be leveraging their stock position?

“This merger reflects our desire to expand our business beyond pain management into complementary medical areas where we can be innovative and competitive,” said Endo Pharmaceuticals President and CEO David Holveck. “We believe this expansion of our product line has significant growth potential because of the therapeutic value of the Indevus product portfolio, the unique expertise of both companies, and the demographic, health care and reimbursement trends that favor the consideration of new products to address unmet needs in urology and endocrinology.”

Existing Endo Pharmaceutical shareholders looking to leverage their position to recoup these losses quickly may want to consider using long-term options called LEAPS in a repair strategy. The strategy involves building an options position around an existing stock position in order to lower the breakeven point without committing any additional capital. This can be done by purchasing one long call while simultaneously writing two calls for every 100 shares owned. The premiums collected typically more than offset the cost of the call while the 100 owned shares covers the second written call. Meanwhile, the long call’s upside will decrease the breakeven point and leverage the position.

The key is confidence that shares of Endo Pharmaceuticals will eventually recover. Shares that continue to decline will continue to lose money; the option’s premium obtained will only slightly offset the losses. However, if the stock recovers past the breakeven point, then investors have some different options. These options involve getting out of the position at relatively breakeven and re-establishing a position, whether it be by delivering the written options or simply selling them off before expiration. Either way, this strategy can help investors recover their losses more quickly.

See “Recouping Losses with the Repair Strategy” for more information on how this strategy is implemented and check out our Tools & Products for more unique ways to make money with LEAPS.

Cypress Options Present Opportunity

Cypress Bioscience, Inc. [[CYPB]] has been a strong performer in recent weeks, moving up over 20 percent during the past four weeks. The biotechnology firm’s newest drug candidate in Phase III trials, milnacipran, is set to receive FDA approval during the first quarter of 2009. Given the data from the third positive Phase III trial, many analysts and investors are confident in an FDA approval of the drug. Many investors expect this to be a transformational event for the drug company as it will become almost immediately profitable based on royalties from partner Forest Labs [[FRX]].

The key FDA decision has also created another opportunity in the firm’s call options. Traders looking to profit from a FDA approval without taking on the risk of stock ownership are flocking to buy call options. As a result, call options on Cypress Bioscience’s stock are trading at a sharp premium given the current stock price. Investors confident in an approval may want to consider writing a covered call in order to maximize their upside over the next quarter when the decision is expected to be made.

Cypress Biosciences stock is now trading $7.48 per share while the $7.50 January 2009 call options are trading at $1.10 per contract. This means that investors can purchase 100 shares of stock for $748, write call options for $110, and make an immediate 14.7% return on their money instantly! The downside is that the investor would be forced to sell their shares if the stock rose above $7.50 when the FDA decision is made.

Investors looking to increase their returns using this strategy may want to consider using long-term options called LEAPS as a stock substitute. Currently, the January 2010 $5.00 LEAPS calls are trading for $3.30 per contract. This means that instead of spending $748 to buy 100 shares, investors can purchase the long-term rights for just $330. Once the same January 2009 calls are written, this jumps the return on investment to 33% compared to just 14.7% using the underlying stock.

See “A Better Covered Call Alternative” for more information on this strategy or check out our Covered Call Calculator software for a way to quickly find opportunities like this one.

Recoup Your DOW and ROH Losses

The Dow Chemical Company [[DOW]] and Rohm and Haas Company [[ROH]] may be trading lower after their merger financial fell through, but clever shareholders bullish on a recovery still have options to speed up their recovery. The so-called Repair Strategy can be used to reduce investors’ breakeven point and speed up a recovery of the losses experienced.

The Dow Chemical Company and Rohm and Haas Company announced that financing for the deal fell through, but they would continue to work diligently towards completing the proposed transaction in early 2009. This means that many of the losses today could end up being offset in the future upon a consummated transaction assuming that the pricing remains attractive.

Concerns about the viability of this merger were already present in the options pricing over the past few weeks. The premiums being paid on long-term call options of Rohm and Haas offered large premiums – a great risk/reward for existing shareholders. The high premiums suggested that many investors were hesitant to get into the stock until the merger was completed and opted to purchase options instead. So, how can those investors remaining bullish reduce their breakeven point for free?

The repair strategy involves building an options position around an existing stock position in order to lower the breakeven point without committing any additional capital. This is done by purchasing one long call while simultaneously writing two calls for every 100 shares owned. The premiums collected typically more than offset the cost of the call while the 100 shares owned by the investor covers the second written call. Finally, the long call’s upside will decrease the investor’s breakeven point.

The viability or profitability of these positions depend on the individual investor’s entry price and other factors. See “Recouping Losses with the Repair Strategy” for a detailed look at how this strategy works and how it can be executed and checkout our Tools & Products for more ways to make money with LEAPS.

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