Dykstra: Filling Up on Anadarko Petroleum

Tuesday was a perfect example of why we buy deep in-the-money calls. It was the Dow's worst point decline since Sept. 17, 2001, the first trading day after the terror attacks, and intraday, the market was down as much as 546 points.

Standard & Poor's reported that the drop across the major U.S. exchanges hit every industry, and that a total of $632 billion in value was lost on the exchanges Tuesday.

This sort of day exemplifies why I keep my strategy simple. Buy quality stocks that are undervalued, without margin. By using my deep in-the-money call options, I don't have to panic when a crazy day occurs. Traders who use common stock must endure stock market swings that can be very painful. Deep-in-the-money calls, on the other hand, give us a significant time frame, usually four to six months, and we put very little cash at risk to control 1,000 shares.

Remember, this is not a "buy and hold" operation. Our goal is all about making money. We want to reap at least a $1,000 profit after we purchase our calls. To help us do that, we set a good till cancel (GTC) limit sell order, typically 1 point above our buy price.

That way, I protect my investment and don't have to watch the tape every second the market is open. If the stock makes a nice move and spikes up during the trading day, the order will automatically get filled because you set a GTC limit sell order. This allows me to capture that $1,000 gain without making a phone call or watching the computer all day.

That all said, let's get to today's trades, where I'll add in-the-money calls in one company and increase three other positions.

Anadarko Petroleum(APC Quote) will be the new stock.

I am going to buy 10 August 30s (APCHF) at a limit price of $10.50. APC recently sold off 11% of its 2004 reserve base, and in 2006 the company acquired Kerr-McGee and Western Gas Resources for a combined $23.3 billion. At the end of the day, Anadarko will be roughly the same size company in terms of proven reserves that it was before the transactions.

The key difference between the old and new Anadarko is the fact that the firm is now significantly more leveraged to the deepwater Gulf of Mexico and Rocky Mountain regions. Bottom line: Anadarko is making a big bet on natural-gas prices, while placing great faith in its ability to convert Kerr-McGee's and Western Gas' probable reserves. The stock is oversold and near its 52-week low here. All of which leads me to say: Lock and load!

Now for the additions to my existing positions. I currently own 10 Amgen(AMGN Quote) 55s (YAAGK) at $12.70, and I am going to buy 10 more deep in-the-money calls at $11.20. Assuming this order gets filled, it will bring my average cost to $11.95.

I also own 10 Altria(MO Quote) June 75s (MOFO) at $10.50, and will now buy 10 more at $9.20. Assuming this order gets filled, it will bring my average cost to $9.85.

Comcast(CMCSA Quote) needs a special note this week. The stock split 3-for-2 on Feb. 21. So the calls were adjusted. The 10 calls now control 1500 shares, and the strike price of 35 is now 23.375. Now I am going to buy 10 more in-the-money July $23.375 (CWNCW) for $3.30. If this order gets filled we'll have control of 4500 shares at an average cost of $4.57 average.