Dykstra: Soak Up Some Sunoco Options
Lenny Dykstra
11/05/07 - 09:15 AM EST
With crude oil pushing well above $90 a barrel, I want to take a look at
Sunoco(SUN Quote).
At its close on Friday of $71.41, Sunoco is trading well below its 52-week high of $86.40, and as the price of oil continues to rise, it's difficult to find cheap deep-in-the-money calls in the sector.
The peripheral oil industries like drilling have been a favorite of mine of late. However, we have an opportunity with Sunoco now.
At the start of 2007, the company owned and operated 3,800 miles of crude oil pipelines and 1,650 miles of refined product pipelines, and the company's profit margins should continue to improve as oil becomes more expensive. At its present value, Sunoco's stock is trading with a P/E of 8.76 and a PEG of 0.46. The company comes in with a return on equity of 47.55%, quite impressive, as is Sunoco's total debt to equity, which is low.
Sunoco is simply an awesome company. With that in mind, I will place a limit order to buy 10 May 60 DITM calls (SUNEL) for $13.90, or better.
Going Back to the Basics
Since returning to
TheStreet.com in February I have written 182 columns devoted to my deep-in-the-money (DITM) calls strategy. In each column I attempt to illustrate the reasons behind each recommendation, provide a little history on the stock and explain why it would make a good choice for a DITM calls play.
In addition, I endeavor to explain the strategy behind my methods. Today I am going to go back and revisit a few basic tenets of trading deep in-the-money call options.
First, what is a deep-in-the money call?
In the world of options trading, a call is defined as an option contract that grants the holder the right to purchase the underlying security at a specified price, on or before a certain date. When the strike price is less than the current trading price of the underlying security, it is termed "in the money." With declining strike prices, the greater the difference between the strike price and stock price, the deeper in-the-money the call option is considered.
For active traders like me, trading DITM calls becomes a "stock replacement" strategy. I am not in the business of buying and holding; I am in the business of ringing the register.
I buy DITM calls with a limit order, I take my profits and I move on. Trading DITM calls allows me to trade the world's best companies for a fraction of the cost if I were to purchase the underlying common stock.
Once my buy order is filled, I then place a good-till cancel (GTC) order to exit the trade with a profit of $1,000 profit. Bottom line: I do not wait around to sell my winners -- I take them when I can.
Again, make sure to have a GTC order in to capture profits when they come. Profits can disappear just as fast as they come. My strategy allows me to get to know a basket of stocks that I can play multiple times.
In closing, the following quote by the eccentric J. Paul Getty: "Buy when everyone else is selling and hold until everyone else is buying. That's not just a catchy slogan. It's the very essence of successful investing." I live by those words!
Always remember: Life is a journey, enjoy the ride!
