Lenny's Letters: Listen Up and Profit

The 'disciplined trader' answers his mail and reviews his deep-in-the-money call strategy.
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Besides the fact that: "Intel (INTC) - Get Report is Intel," as you said on Cramer's radio show, tell me why I should buy the stock. I am short the name. AMD (AMD) - Get Report is eating their lunch. Dell (DELL) - Get Report is having problems and will be giving AMD a nice piece of their business. -- Neal G.

Dear "Negative Neal," you just don't get it, do you? To start off, you need to listen better, or read better!

I

never

said "buy the stock." What I did say was to buy the July $17.50 calls for $3.20. If you would have listened instead of slinging mud, you could have made money.

I started a "new" position today. I scooped up the July $17.50 deep-in-the-money calls for $3.

I was able to buy at $3 for one reason only. I had a standing "GTC" buy order with a limit at $3. Also, the calls I purchased this morning at $3, I was able to sell this afternoon at $3.30 and $3.40 for a sizable gain.

I could do that because Intel remains the best chip company in the world. It is just in a slump! Hence, Intel retains its position at the top when it comes to "ammunition." For instance, consider the two companies' levered free cash flow (LFCF). According to Yahoo! Finance, Intel had $7.75 billion in LFCF over the past 12 months vs. AMD's LFCF of $288 million.

Veteran players like Intel know when they are going bad and make adjustments, which will put them back on top in a matter of time, and given their cash, Intel can do the necessary research to make those adjustments.

By the way, to me, AMD is closer to a short than a buy. Don't forgot how this game works. The operators on Wall Street run them up, and then they run them down.

Where is there more risk? Intel at $20 (but I am only risking $3.20 per call)? Or AMD on its way to Pluto? One thing goes wrong at AMD, one quote from the CEO is taken the wrong way, and this stock will get hammered so fast you won't know what hit you. And the profit you had? Poof, it'll be gone.

I just keep chipping away, $2,000 here, $500 there, just chipping away; the next thing you know you are making some serious greenbacks! -- Nails

I have been fascinated by your recent articles about deep-in-the-money calls. As a university student with only a few thousand dollars to invest, I was drawn to this strategy even before I began reading your columns. In fact, I was trying to explain the strategy to my uncle and a cousin (both of whom are fairly successful investors). They would hear nothing of the strategy. They said options are nothing but a gamble. I told them that deep-in-the-money options mitigate the risk significantly (I was talking about buying options that are a year or more away from their expiration date). They disagreed. I believe their disagreement came largely from the lack of understanding of how options work. My question to you is as follows: Is the deep-in-the-money call option strategy still effective if you are only putting roughly $500 on a position (significantly less than your "sweet spot" figure). By my calculation, the commissions for a buy-and-sell order cut into 4% of your profits on a $500 trade. I figure that a moderately successful trade should yield results in excess of this. What's your opinion? Thanks, Mikhial

Hi Mikhial,

Obviously, you are a smart guy, and on top of that, you are open to learning. With that said, let me recommend some help regarding that 4% commission you are still paying. You do not need to pay that, especially with all of the great stock trading companies that are out there: Scottrade, Charles Schwab, Ameritrade, etc. All of these names are quality.

By the way, when you go out to the next year, those are called "LEAPs," or long-term equity anticipation securities. Those are the definition of safe. You don't need to go out that far -- you'd have to pay much more in premium doing so.

Now, as far as the money? Don't worry about the amount -- the key is that you are learning how to properly invest. Remember, the money? It's all relative. It doesn't matter if you're investing $500 or $50,000 -- you're investing, and you're investing the correct way,

low risk, high reward

.

By the way, your uncle and your cousin? You

nailed

it: They don't understand deep-in-the-money calls, because if they did, they would be following my picks and making much more money -- in a shorter period of time! -- Nails

At the time of publication, Dykstra was long Intel calls.

Nicknamed "Nails" for his tough style of play during his Major League Baseball career, Lenny Dykstra was an integral member of the powerful Mets of the mid-1980s, including the world champion 1986 squad, and the Phillies in the early 1990s.

Today, Dykstra manages his own stock portfolio and serves as president of several of his privately held companies, including car washes; a partnership with Castrol in "Team Dykstra" Quick Lube Centers; a state-of-the-art ConocoPhillips fueling facility; a real estate development company; and a new venture to develop several "I Sold It on eBay" stores throughout high-demographic areas of Southern California.