Rohm and Haas Options Present Opportunity

Rohm and Haas Company (NYSE: ROH) manufactures specialty materials but options traders may find something else special with the company’s stock. The company’s $65 January ’09 calls are currently trading with a return on investment approaching 12.5%, making it a very strong covered call play for conservative options investors.

A covered call involves writing calls against stock that the investor already owns in order to collect the options premiums. In this case, ROH investors that own 100 shares can write call options against the position and collect $800 per 100 shares they own. With a current market price of $63.36, or $6,336 for 100 shares, this equates to a return of roughly 12.5% in just 21 days until expiration.

The risk with establishing this position is that the underlying shares will decline and you’ll lose money on the stock that exceeds the $800 that you gain for writing the option. Moreover, if the stock goes above $65, you will be forced to sell the shares at that price and make only about $1,000 on the position. However, if the stock remains roughly the same, you’ll make about 12.5% on the firm.

Investors looking to make even more money with less money at risk may want to consider using LEAPS calls as a stock substitute. Instead of owning 100 shares for $6,336, investors can instead purchase the right to 100 shares over the next year at $55 for only $1,700 total down. This equates to a hefty 47% return on investment with the additional risk being that you could lose $900 – or 14.2% if you owned the stock itself.

See “A Better Alternative to Covered Calls” for more information on this strategy or check out our Tools & Products for more strategies that can help you make money!

Is Activision Undervalued?

Activision Blizzard, Inc. (NDAQ: ATVI) consumers may be playing games, but the company is making some serious cash. The videogame manufacturer has seen its shares cut in half over the past 52-weeks, but the industry is very resilient and several big name titles could provide a much needed catalyst. So, when is a good time for investors to pick up a stake?

Activision Blizzard is well known for its strong portfolio of notable titles. Guitar Hero has become a household name with commercials featuring NBA All Stars and singers. Meanwhile, World of Warcraft has grown to become the largest online multiplayer game – it even has a rock legend in its commercials! And the company’s upcoming release of StarCraft promises to be another blockbuster release.

Activision Blizzard is also very strong from a financial standpoint. The firm has no debt with a relatively modest price-earnings ratio of 24x. The company also continues to benefit from low overhead costs via online sales and limited capital expenditures. In fact, Activision is one of the few remaining profitable companies in its industry, unlike competitors like Electronic Arts (NDAQ: ERTS).

Overall, Activision represents a strong growth play that could pay off in the long-run despite some short-term volatility. Investors looking to buy into Activision without taking on all the risk might want to take a look at long-term options called LEAPS – or long-term equity anticipation securities. These options can help investors dramatically improve their return on investment while putting less capital at risk.

Currently, investors can purchase $10.00 January 2011 LEAPS calls for just $4.00 per contract. This would give investors the right to 100 shares at $10.00 per share anytime during the next 760 days. The breakeven point would then be $14.00 per share – a 40% premium over the next two years. Meanwhile, investors would risk only $400 upfront versus the $918 required to buy the underlying stock now.

See “Using LEAPS as a Stock Substitute” for more information or check out our e-book “Trend Trading on Steroids” for a more comprehensive strategy.

InterMune Options Present Opportunity

InterMune, Inc. (NDAQ: ITMN) shares may present an opportunity to investing experienced writing covered calls. Currently, the $12.50 January 2009 calls are trading for $2.30 per contract while the stock trades for just $11.79 per share. As a result, shareholders who purchase 100 shares for $1,179 can earn a 19.5% return on investment in just around one month. The trade-off is that the shareholder takes on the risk if the stock declines during that time period.

InterMune is set to report its Pirfenidone data in the first quarter of 2009 before the call option expires. This has led to a high level of expected volatility which increases the options premiums demanded by those that write options. The success or failure of these results will likely determine whether or not these options are in the money. Investors unwilling to risk 100 shares worth of capital instead purchased the options at a cheaper cost for upside.

Luckily, long-term options called LEAPS can help shareholders reduce their risk and increase their returns. By using these long-term options as a stock substitute investors can reduce their capital at risk to just $680 versus the $1,179 needed to purchase the actual stock. How? The $10 January 2010 LEAPS calls are trading for just $6.80 per contract (ask price), which means investors can buy the right to 100 shares for just $680 down. The return on investment for writing the short-term calls would then be around 33%.

Using LEAPS investors can increase their returns while reducing their capital at risk. The only downside is that if the stock’s price rises above $12.50 over the next month or so, the investor will either have to buy back the call option at a loss (offset by the increase in LEAPS value) or exercise the LEAPS option and immediately sell the shares to make good on the written call. Typically, it is cheaper to simply buy back the written call option and take the profit on the LEAPS as it involves less transactions costs.

InterMune is a biotech company focused on developing and commercializing therapies in pulmonology and hepatology. Shares of the company rose $0.27, or 2.33%, to $11.48 during Friday’s session.

See “A Better Covered Call Alternative” for more information on this strategy.

Altria Options Pack a Punch

Altria Group, Inc. (NYSE: MO) may not be in the most glamorous industry, but some investors believe the stock is a smoking hot deal. The cigarette-maker has been struggling with higher raw material costs and weaker consumer demand, but the firm’s recent earnings announcement topped analyst expectations and surprised the street.

Third quarter earnings fell 67 percent but rose on an adjusted basis as Altria Group’s cigarette business delivered strong results. The company also reaffirmed its 2008 earnings guidance from continued operations while managing to sell some debt issues, which both helped to calm jittery shareholders concerned about the recent market turmoil.

Meanwhile, many investors are growing attracted to Altria Group’s high 8.34 percent dividend yield and strong balance sheet to back it up. The firm generated some $10.86 billion in levered free cash flow last year, according to Yahoo! Finance. Meanwhile, the firm still has about $915 million in cash on its books and has maintained a minimal 0.212 debt-to-equity ratio.

Investors interested in Altria Group’s long-term capital appreciation may want to consider purchasing long-term options called LEAPS. Currently, the $15 January 2011 LEAPS calls can be purchased for $2.65 as investors flee towards the stock’s high dividend yield. This means that for just $265, investors can purchase the rights to 100 shares of Altria anytime over the next 768 days.

See “Using LEAPS as a Stock Substitute” for more information.

Boeing Shares Shot Down As Outlook Dims

The Boeing Company (NYSE: BA) shares dropped sharply after the International Air Transport Association warned that the global airline industry may face the worst revenue crisis since the end of World War II amid slower consumer spending around the world. In fact, only U.S. carriers may profit in 2009 since they have already made the dramatic cuts necessary to cope with shrinking demand.

The news is bad for aircraft manufacturers like Boeing, who may begin to see a rise in cancellations. China is perhaps the most notable industry facing decline as the government encouraged domestic carriers to cancel their orders and reduce capacity in anticipation of future declines. Other governments are likely to follow suit as well given the substantial decline in consumer spending.

Existing shareholders sitting on losses may want to consider hedging their portfolio against further losses. One way this can be done is by purchasing long-term put options on their stock, which gives them the right but not obligation to sell their stock at a certain price. Currently, investors can purchase this hedge at $40 per share for just $9 per share.

The price of this hedge can be offset by writing short-term call options against the same position to recoup the cost. For example, the $50 January 2009 calls can be written for $0.70 a piece. By writing out-of-the-money options, investors can recoup the cost of insurance over time without taking on any risk, other than selling at a price they set and potentially giving up upside potential.

See “A Better Covered Call Alternative” for more information.

Recession-Proof Your Portfolio with LPHI

Life Partners Holdings (NDAQ: LPHI) is one of the few companies not affected by the global economic slowdown. In fact, any decline in consumer wealth could spur demand for its service – the monetization of life insurance policies. Life Partners helps policy holders sell their life insurance policies to investors and funds looking for returns uncorrelated to those of the stock market. So, is this a stock for investors to buy at these depressed levels?

Life Partners is trading well off of its 52-week lows of $12 per share at over $30 per share this past week. Analysts believe that the company is well positioned to profit despite economic conditions as the market for life settlements is expected to grow more than 15% annually over the next five years. Notably, these returns are not correlated to the stock or commodities market while providing strong cash flows with little to no leverage required to grow.

However, the stock has dropped in recent days as legal troubles surfaced in Colorado. Judge Robert McGahey issued entered a permanent injunction requiring the company to disclose to investors the method by which life expectancy of the policyholder is determined, and that if the viator outlived the life expectancy, the investor was liable to make the premium payments. Investors are also fearful of additional government regulation and the company’s ability to predict life expectancies.

So, does Life Partners represent a good value at these levels? The company will certainly grow over the next five years and significantly outperform the overall market; however, legal risks will also remain over the heads of shareholders. In the end, investors looking to recession-proof their portfolio without using LEAPS and other alternatives may want to take a look at stocks like these that are uncorrelated to the financial markets.

InterMune Options Present Opportunity

InterMune (NDAQ: ITMN) shares have risen off of their 52-week lows despite heavy short interest in the stock. The movement has created a unique opportunity in the biotech firm’s options – investors can now establish a covered call position with a 17% return on investment. However, LEAPS investors can make an even larger return through what’s called a diagonal spread.

The $15 January 2009 calls are trading with a price of $2.30 per contract with shares of the stock trading at just $13.23. As a result, investors can write one o f these calls options for a return of $230 on their investment of only $1,323 when 100 shares are purchased. This represents a return of over 17% in just about one month, which is much larger in annualized terms.

The problem is that the position carries an element of risk. If InterMune shares drop sharply lower, then the investor’s entire $1,323 investment is at risk minus the $230 in written calls. One way to reduce this risk is to purchase long-term options called LEAPS as a stock substitute and then write the calls against that position to lower risk and leverage returns.

The $7.50 January 2010 LEAPS calls are trading at a price of just around $7.00 per contract. This means that investors can invest a total of just $700 instead of $1,323 required with the underlying stock. This increases the return on the position to 32.8% while reducing the risk to just $700.

The only additional risk is that the stock rises above $15 and investors may need to exercise the LEAPS and sell the stock to the holder of the short-term call. This can be a complex transaction and may cost some money in commissions, but it is likely that a profit will still be realized on the position. And if the written call expires worthless, then the LEAPS position can simply be sold.

See “A Better Alternative to Covered Calls” for more information on this strategy.

Mosaic Seen as Long-term Buy

The Mosaic Company (NYSE: MOS) may have fallen from its throne of popularity but some investors believe the firm is setup for a turnaround. Shares of the fertilizer-maker have fallen as production cuts have failed to stabilize phosphate and potash prices around the world. However, many investors look towards declining inventories of soybeans, corn and wheat as a catalyst for an eventual recovery.

Mosaic recently announced phosphate volumes of just 1.3 million tons, which is far less than the reduced estimate it put out just one month ago. The company is also calling for additional costs of 1 million in 2009, citing an unprecedented global economic and credit downturn. The cuts come amid congested supply chains around the world that have dropped spot prices sharply.

Bullish investors believe that much of this downside has already been priced into the stock. Moreover, today’s production cuts across the industry may dry up supply down the road just when crop shortages my spur additional demand. As a result, Mosaic could be seen as a strong long-term investment, according to Stephen Leeb and other analysts.

So, what’s the best way for investors to capitalize on this long-term opportunity while taking on minimal risk? One solution may be long-term options known as LEAPS – or long-term equity anticipation securities. Currently, the $30 January 2010 calls are trading for around $9.00 per contract. This means that long-term investors can purchase the rights to 100 shares at $30 in 404 days for just $900 down.

See “Using LEAPS as a Stock Substitute” for more information.

FSYS Options Present Opportunity

Fuel Systems Solutions (NDAQ: FSYS) stock has been soaring in recent weeks as analysts continue to raise their estimates. Combine that with a history of beating earnings by an average of 147% over the past four quarters, and it’s easy to see why the stock rose some 48% during the past week. However, the sharp increase has also left many investors looking for a good entry point.

During the third quarter, Fuel Systems announced earnings that soared past analyst expectations by more than 217% with revenues that jumped 62% on strong performance in its OEM and aftermarket transportation segments. Many analysts see these trends continuing as well with an increased focus on alternative fuels for the automotive industry, especially under an Obama presidency.

Many investors are struggling to find an entry point in the stock that is up so sharply this year, however. One solution may be long-term stock options, or LEAPS, which can be used as a stock substitute. Currently, the in-the-money January 2010 calls with a strike price of $30 are trading for around $15.80 per options contract.

Investors can therefore purchase the rights to 100 shares at $30 per share for $1,580 cash. The breakeven point is then $35.80, but the total cash invested is half that of purchasing the stock. If the price rises to $45 within the next 407 days, LEAPS investors can then realize a profit of around $10 per share on an investment of just $15.80 per share – a 60%+ return on investment. If the stock drops, the LEAPS investors losses are capped at $1,580 versus $3,260 for those purchasing the stock itself.

Grey Wolf Options Present Opportunity

Grey Wolf (AMEX: GW) may be suffering from lower crude oil prices, but the driller’s stock options present an interesting opportunity. Analysts believe that the third largest land driller in the country is well positioned to weather the economic slowdown in the long run, but a clever options strategy may be the best way to capitalize on these trends in the short-run.

The $5 December ’08 call options are trading with a premium of $0.50, which represents an 11.24% return on investment for investors writing covered calls against their existing stock position. These returns can be magnified by using long-term equity anticipation securities (or LEAPS) options as a substitute for the underlying stock.

The $2.50 January ’10 LEAPS calls are listed with an ask price of $2.55 per contract. Investors can therefore establish a diagonal spread by purchasing one of these LEAPS contracts while simultaneously writing one shorter-term call option. The result is an income of $50 on an investment of $255 – a 19.6% return on investment in just 17 days.

The maximum loss possible on the options position is $205 – that is, $255 loss on the LEAPS offset by the $50 premium paid for the option. However, investors can also face potential losses if the stock moves above the strike price of $5 as the written option will be called. Luckily, investors can still pull a small profit by simply selling the written call at a loss or rolling out the expiration date or rolling up the price.

The best case scenario is a move just below $5 where the $50 can be gained on the $255 investment while the existing LEAPS position can then be held or sold. Investors confident in a continued recovery can also continue to write shorter-term call options against the LEAPS position.

See “A Better Covered Call Alternative” for more information on this strategy.

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