Dykstra: Going Deep

For example, I repeatedly recommended the Symantec April $15 calls, most recently on Nov. 28 when I wrote:

If you bought 10 of these calls for $3.40 per on Nov. 25, with the expiration date being Friday, April 21, you enabled yourself to control 1,000 shares of Symantec stock at the price of $18.40 (the strike price of $15 plus the option premium of $3.40). Bottom line: For $3,400, you are now in control of 1,000 shares of Symantec until April 21, as opposed to spending $17,640 for an equivalent position in the common stock. What's more, this opportunity comes in a company with a forward P/E ratio of 15.24, $4.43 billion in cash, and $842.7 million in free cash flow. All I can say is, "Lock and load!"

If you followed that advice, you're sitting pretty now as those options settled at $4.45 on Friday. I personally bought 50 Symantec April $15 calls in November for $2.90 for a total cost of $14,500. I sold them at $4.20 on Dec. 4, netting a profit of $6,500. (Remember, an options contract represents 100 shares for one equity option unless it has been adjusted for a special event such as a stock split or dividend.)

Symantec is a perfect example of how deep in-the-money-calls can give you upside exposure to a high-quality stock experiencing short-term weakness.

A second example, ConocoPhillips ( COP ), was a stock I wanted to own. I felt it was oversold and being unfairly punished for the Burlington Resources acquisition. But the price to buy the common stock was (and is) just too high. The only way I was able to participate was because I have learned how to use in-the-money calls.

On Jan. 5, I bought 10 May ConocoPhillips calls at $10.70, which I summarily sold the next day at $11.90, netting a profit of $1,200 in just one day.

For my next trick, which hopefully will also be a "treat," I bought 10 Wal-Mart (WMT) June $40 calls for $6.70 Monday morning. At this price we're only paying 82 cents in premium to control 1,000 shares.

The end result: For $6,700 (the maximum investment, no matter what happens), we are in control of $45,880 worth of stock of the world's largest retailer, all the way until the third Friday in June.

Why Wal-Mart? With a forward price-to-earnings ratio of 15.40, return on equity (ROE) at 22.79%, and free cash flow coming in at $4.8 billion (yes, that's with a "b") we agree with the title of a Dec. 12 Barron's article: "Wal-Mart's Still a Bargain."

Given our view that the market will come back to re-embrace this world-class company, we will stick with our game plan and buy deep-in-the-money calls.

Remember: Life is a journey, enjoy the ride!

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