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.

Invest in Kraft Prudently with LEAPS

Kraft Foods Inc. [[KFT]] has strong fundamentals, excellent leadership, impressive stockholders and one of the best brand portfolios in the world. Despite these facts, the stock continues to trade near its 52-week lows as investors continue to sell regardless of intrinsic value. So, how can long-term investors build a strong position without losing out on any upside?

The first thing investors should look for is value with a catalyst. Kraft shares are trading lower despite a strong, recession-resistant brand portfolio and a healthy balance sheet. Meanwhile, lower commodity prices and an increasing move towards cooking at home could provide the catalyst needed to help boost earnings and the stock’s price. So, how can investors take a position without much capital?

Long-term options called LEAPS may be a prudent way for long-term investors to get involved in Kraft. Currently, the $25 January 2011 LEAPS calls are trading for $5.24 per contract with some 482 contracts open. This means that investors can purchase the rights to 100 shares anytime between now and January 21, 2011 for just $524 right now. The breakeven point would then be $30.24 per share.

The downside is that long-term options do not offer the strong dividend yield seen right now. However, LEAPS investors can treat their long-term options as a stock substitute and write shorter term call options against the position to collect premiums in a covered call. The risk is that they will be forced to sell earlier than expected, but it does provide some income in addition to capital gains.

See “Using LEAPS as a Stock Substitute” and “A Better Covered Call Alternative” for a more in-depth look at these strategies as well as our Tools & Products section for more ways to profit using LEAPS.

How to Recoup Rambus Losses Using LEAPS

Rambus Inc. [[RMBS]] shares plummeted today after the technology firm received an unfavorable ruling in a case against Micron Technology (MU). U.S. District Judge Sue Robinson ruled that 12 of Rambus’ patents are now unenforceable against Micron after a lengthy battle. The technology firm is no stranger to such patent lawsuits as it licenses its technology to companies for royalty fees. So, what does this ruling mean and how can investors recover their losses?

Rambus is well known among chip manufacturers for engaging in court battles over its intellectual property and its stock price tends to rise and fall on the ruling of these cases. For example, shares soared two months ago after the firm received a positive pre-trial ruling in California against Hynix Semiconductor, Samsung Electronics, Nanya Technology and Micron, who allegedly infringed upon certain aspects of Rambus’ patents. Shares may have fallen as a result of today’s ruling, but if history is any guide, the stock may recover on future litigation on the bullish side of things.

Investors confident in an eventual recovery in Rambus shares may want to consider instituting a stock repair strategy using long-term options called LEAPS. 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 is done by purchasing one long call while simultaneously writing two calls for every 100 shares owned. The premiums collected then offset the cost of the call while the 100 shares covers the second written call and the long call’s upside decreases the breakeven point.

See “Recouping Losses with the Repair Strategy” for more information on how to implement this strategy and check out our Tools & Products for more ways to profit from 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.

Dollar Retailers Stand Strong Despite Economy

Family Dollar Stores [[FDO]], Dollar Tree [[DLTR]], 99 Cents Only Stores [[NDN]] and other dollar retailers may be the last growing segment in retail. Family Dollar announced higher-than-expected earnings and boosted its outlook as more budget-conscious consumers flocked to the cheapest retailers in the market. Meanwhile, even discount retailers like Wal-Mart Stores [[WMT]] and Target Corporation [[TGT]] reported slower growth as the economy continues to take a turn for the worst.

Family Dollar reported first quarter profits that rose $59.3 million, or 42 cents per share, up 13.5% from the same quarter a year earlier. The dollar retailer also predicted that same-store sales would increase 3% to 5% with earnings per share between 48 cents and 52 cents during the second quarter. These numbers compare to Wal-Mart, which today announced cuts to its fourth-quarter earnings forecast while warning that its January sales may end up flat.

So, are the dollar retailers a buy at these levels? One of the best measures of value is the PEG ratio, which compares the price-earnings multiple to growth numbers. Family Dollar and 99 Cents Only Stores are currently trading with PEGs of around 1.40, which is in line with Wal-Mart but higher than the industry. Dollar Tree’s PEG ratio is a little more reasonable at 1.19.

Investors looking to take advantage of these values and outlooks may want to consider purchasing long-term options called LEAPS instead of stock. These options give investors the right, but not obligation, to purchase the stocks at a set price anytime over the next one or two years at a fraction of the cost. See “Using LEAPS as a Stock Substitute” for more information on this strategy.

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.

DKS Options Present Opportunity

Dick’s Sporting Goods, Inc. [[DKS]] beat out the competition last year and many analysts expect the winning season to continue. The sporting goods retailer has certainly felt the pains of slower consumer spending, but quickly took action to scale back 2009 store opening plans and cut costs. As a result, Dick’s Sporting Goods remains one of the best positioned sporting goods retailers in the market.

Last quarter, Dick’s Sporting Goods reported Q3 results that were in-line with analyst estimates while the retailer remains adequately capitalized. Inventories came in at 4.4% less per square foot than in 2007, which is good news when sales are expected to slow. The company expects Q4 earnings of $0.47 to $0.54 with comparable sales stores expected to drop 10% to 6% for the quarter.

Investors looking to establish a position in Dick’s Sporting Goods for the long-term have a unique opportunity to offset any near-term losses. The $15 January 2009 call options on the stock are currently trading at $0.90 per contract. This means that investors can make $90 by writing calls for every 100 shares they own. Since shares are trading at around $15 now, this represents a 5.8% return.

This return can be further boosted by using long-term options called LEAPS as a substitute for common stock when writing the call options. Currently, the $10 January 2010 LEAPS calls are trading for just $7.30 per contract. This means that investors can purchase the rights to 100 shares for $730 and write a $90 shorter-term call option to realize a return of 12.3% in just ten days!

Of course, the risk with both of these strategies is that Dick’s Sporting Goods may announce some negative news that will send shares down. So, investors executing this strategy should be willing to hold the stock long-term if necessary. In the end, this is a quick way to make some money while getting involved with DKS stock at these cheap levels.

See “A Better Covered Call Alternative” for more information on this strategy or check out our Tools & Products for more ways to make money in today’s market.

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.

Are Fertilizer Companies Set to Rebound?

Potash Corp. of Saskatchewan [[POT]], The Mosaic Company [[MOS]], Agrium Inc. [[AGU]] and other fertilizer producers may be sitting near their 52-week lows, but many experts insist that demand for fertilizers will rise when the credit markets are expected to improve over the next year. So, what’s the best way for investors to play these stocks going forward?

The unprecedented reduction in fertilizer use by farmers on a global basis comes largely as a result of the lack of credit. Many farmers are unable to obtain the credit needed to purchase fertilizer while others are holding out until the last second for fire-sale prices. Meanwhile, international demand has dried up thanks to a perfect storm of events – a drought in Argentina and the freezing of credit markets in Brazil and Russia.

The result had been disastrous for fertilizer companies in the fourth quarter of 2008. Nitrogen sales fell 20 percent while potash and phosphate sales declined nearly 50 percent. However, the three companies insist that the trend is demand deferral rather than demand destruction – that is, the sales will come back strong when the markets improve. The only demand destruction was seen in corn, which fell due to lower oil prices.

Many experts agree that nitrogen prices may have hit their lows as demand for the farmer’s choice fertilizer is expected to rise ahead of the growing season. Meanwhile, potash prices actually moved to a record high of $872.50 per ton at the Port of Vancouver for overseas sales. Regardless, the stocks themselves seem to correlate with corn and oil demand rather than their financial results. As a result, investors may have to wait for a recovery in these commodities before the stock soars.

One way for investors to buy into these stocks now at a fraction of the cost is through buying long-term options called LEAPS. These options provide investors with all the upside of the underlying stock at a fraction of the upfront cost. The result is a leveraged position – lower cost for the same gains – with less money at stake to lose in the event of further price erosion. The trade-off is that, if the price drops below the strike price, investors could lose their entire investment.

See “Using LEAPS as a Stock Substitute” for more information on this strategy or check out our new e-book, Trend Trading on Steroids, for our preferred strategy using LEAPS to profit off long-term trends.

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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