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.

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!