Recoup Your ENDP Losses More Quickly

Endo Pharmaceuticals (ENDP: 20.25 -15.80%) shares dropped sharply after the drug company announced that it would acquire Indevus Pharmaceuticals (IDEV: 5.38 +73.55%) 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: 14.90 +0.34%) 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: 7.74 -3.25%) 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: 25.39 -3.17%).

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: 83.87 +1.51%), The Mosaic Company (MOS: 38.56 +2.36%), Agrium Inc. (AGU: 37.70 +0.80%) 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: 16.05 +6.64%) and Rohm and Haas Company (ROH: 61.54 -3.57%) 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.

Amazon’s Holiday Results Raise Questions

Amazon.com, Inc. (NDAQ: AMZN) is one company that tends to profit when others in its industry do poorly. The retail industry has been crippled by sharply lower consumer spending and higher costs, which has begun to shift the trend towards online retailers like Amazon.com. The book store turned everything store recently reported its best Christmas ever in a recent press release.

The press release drew some criticism from the investment community as it lacks some key facts. CNBC’s Fast Money noted that it contained a lot of “black holes” with no mention of “margins” and “promotional activities”. The market reacted by opening higher and then falling all the way until the close while selling continued into today’s session.

The concern is that Amazon.com’s margins may have been hurt while trying to boost its sales. The factors behind the higher shipment numbers may have more to do with tax savings, bad weather, comparison shopping and discounted prices. As a result, the actual impact of the higher top-line sales on bottom-line results remains to be seen.

So, how can investors bullish on Amazon.com participate in the stock’s upside without taking the risk of stock ownership. One way is to purchase long-term options called LEAPS or long-term equity anticipation securities. These options allow investors to purchase the rights to shares over one or two years time at a fraction of the cost of underlying stock ownership.

Currently, investors can purchase $40 January 2011 LEAPS call for just $21.85 per contract compared to $49.50 per regular share. As a result, investors can spend $2,185 for the right to buy 100 shares anytime during the next 753 days versus spending $4,950 to purchase 100 shares of the underlying stock. Investors looking for a lower breakeven and shorter timeframe can also look at the January 2010 calls.

See “Using LEAPS as a Stock Substitute” for more information or check out our Tools & Products section to find more ways to profit using LEAPS.

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!

Hedge Your Bets on Target with LEAPS

Target Corporation (NYSE: TGT) may be hurting from lower retail sales, but at least one investor has found value in the stock. Pershing Square’s Bill Ackman believes that the real estate under Target’s stores could be worth much more than its current market capitalization. As a result, the activist investor proposed spinning off the land into an REIT that would lease it back to unlock value.

The problem with the plan is that it is seen by Target as being risky in today’s environment. The new REIT may have a great renter and properties collateralized by hundreds of millions of dollars in buildings, but the retailer that is left over may be left in a weaker position. As a result, Pershing Square opted to wait until after the holiday season was over before resuming discussions.

The season is now over and investors are left with a predicament. The retail sector is expected to have one of the worst holiday seasons ever, which has pushed down shares of all retailers. However, Pershing Square’s analysis has clearly shown substantial value in Target’s real estates. So, how can investors get exposure to Target while reducing the risk of further declines in retailers?

The answer is simple: Hedge your bets using broad industry indexes! The Retail HOLDRs (NYSE: RTH) exchange traded fund is considered to be the best retail industry index. Investors looking to hedge against a decline over the long run may want to purchase LEAPS puts to hedge out their retail exposure. Currently, the $70 January 2011 LEAPS puts are trading for just $14.90 per contract. This means that investors can purchase roughly 100 contracts to offset every 200 shares of Target.

The resulting position is one that is hedged against a decline in the retail sector. As a result, investors can only make money when Target outperforms the retail sector as a whole and lose money when Target underperforms the retail sector as a whole. Since Target’s real estate is undervalued, this outperformance will occur when the value is unlocked over the next two years.

See “Using LEAPS as a Hedge” for more information on this strategy or take a look at our Tools & Products for more ways to make money!

Brooks Automation Seen as Undervalued

Brooks Automation (NDAQ: BRKS) shares have recovered from their lows, but many value investors insist that the stock remains undervalued. David Nierenberg of D3 Family Funds is one of these investors that first made a case for the stock at this year’s New York Value Investing Congress. Despite the compelling arguments, Brooks’ stock continued to slide to their current levels.

Brooks Automation is now trading for roughly its net asset value, which makes it an attractive stock in the eyes of Jonathan Heller of Value Investing Congress. The CPA noted in the organization’s blog that buying the stock at its current price of $5.10 is like buying $2.25 in cash, $1.17 in other assets, and getting an additional $5.11 in long-term assets, $1.82of which are PP&E and LT marketable securities.

Despite the deep value, many investors are concerned about Brooks Automation’s recent earnings. The company reported progressively worse earnings throughout 2008 and is expected to report growing losses into the third quarter of 2009 before things begin turning around. This cash burn could end up reducing the amount of cash on the books and deteriorating the value of the stock.

The bright side of the situation is that Brooks Automation has accrued more than $114 million in net operating loss carry-forwards to offset taxes on future income. Moreover, the company has no debt on its books and a strong capital position, which means it would likely have no problems if it were to obtain debt to pay its bills and use the cash to unlock value through a buyback or other action.

So, how can investors take advantage of this steep discount while committing less capital upfront? One way may be to use long-term options. While there are no LEAPS available on the stock, investors can purchase options with an expiration date set in April of 2009. Currently, the $2.50 April 2009 call options are trading for $2.60 per contract. This means investors can purchase the right to 100 shares at $2.50 anytime over the next 115 days for just $260 versus $510 purchasing the underlying stock.

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.

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.

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