Dykstra: Going Deep With Battered Yahoo!

Its selloff sets up a deep-in-the-money call play.
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A lot of people voiced their skepticism of my

Amgen

(AMGN) - Get Report

selection, with comments ranging from academically critical to rage-like fury.

People questioned my investment strategy when I would

dollar-cost average into positions, as well as the merits of Amgen as an investment. Little did they know they were missing out on

a nearly $20,000 gain

.

These people missed out because they did not trust the system. Actually, I have found a "loophole" in the system. The real definition for my strategy comes down to this: I have found a way to participate in the market, and trade stocks, by using minimal cash.

On average, I will invest anywhere from $2,000 to $15,000 to control 1,000 shares of some of the best companies in the world. It doesn't matter if the stock cost $67.48, which is where

United Technologies

closed last Friday. (I booked my second $1,000 win with United Technologies last week.)

Please understand, I use deep-in-the-money calls (DITM) to preserve cash so I can participate in major league companies such as

UPS

(UPS) - Get Report

, another stock I cashed in on last week, which would have cost you $72,820 to buy 1,000 shares. And I still haven't mentioned what I consider to be the most valuable attribute of trading DITM calls: You do not use margin, the "Lucifer" of Wall Street.

DITM calls can provide excellent profits when traded correctly. After all, if you really think about it, the Amgen calls had three more months before we hit our expiration date.

My strategy is more a hybrid of trading and investing -- I look for companies that are worthy of investment at the values they presently trade at. This involves finding stocks that are both

fundamentally and

technically strong. Amgen fit the bill in both regards.

If the stock happens to move against you, you have to be prepared to buy more at the next "buy level." You must surround yourself with a great team, as we are playing for real money. I use ValuEngine,

RealMoney

contributor Richard Suttmeier and my broker Paul Hollins.

Going out four to six months and buying at the correct level are two of the most important things one can do. When Amgen moved against me, I bought more at the correct levels, and for that, got paid almost $20,000. When given the opportunity to buy stocks at a discount, you must have the confidence to execute your strategy. Today I am going to pick another stock that can be bought for an incredibly discounted price:

Yahoo!

(YHOO)

, a stock that lost about 12% of its value after a disappointing earnings report last week.

Although the company came out with disappointing earnings again, the drop was too severe. On Friday, Jim Cramer, one of the best in the business, outlined

three ways to win with Yahoo!. The market tends to over-exaggerate extremes in both directions -- positive and negative -- and this is just one example. The stock took such a large hit that it's just screaming to be bought right now.

Yahoo! finally released its new ad system Panama during the first quarter. It didn't have enough time to affect Yahoo!'s earnings for the quarter, but Yahoo! remains committed to taking market share away from

Google

(GOOG) - Get Report

, and Panama should boost Yahoo!'s performance in the Internet advertising field. Yahoo!'s management has cautioned that the benefits of Panama would not be evident in earnings reports until the second half of 2007.

Further boosting Yahoo!'s value is a multiyear, exclusive advertising deal with the media conglomerate

Viacom

(VIA.B)

. Through this deal, Yahoo! obtained the right to advertise on 33 of Viacom's Internet sites, including MTV, Comedy Central and Nickelodeon, and this arrangement could ultimately reach 140 additional sites.

This came right around the time Yahoo! announced a partnership with

SanDisk

(SNDK)

to provide a new MP3 player. While SanDisk does not come near the market share of

Apple's

iPod, this does offer an opportunity to boost Yahoo!'s revenue and exposure. Toward the end of March, Yahoo! introduced its mobile ad system in 19 countries, and that has Yahoo! reaching out to a relatively new arena of advertising.

Last October, Yahoo! announced a five-year, $3 billion share-repurchase program. I would look for Yahoo!'s management to take advantage of the discounted share price and be a ready buyer. I frequently highlight the benefits of a share-repurchase program, and this is no exception.

Clearly, the company is making moves that will strengthen the stock. The stock price may not regain all of its value in the near future, but it should regain some of the value it lost last week. Using my DITM call strategy, I will buy 10 October 22.50 calls (YHQJX) for $5.90 or better. Once my order fills, I will immediately place a

good-till-canceled sell order for my calls $1 above the purchase price and wait for the strategy to play out. (

Click here

for a list of Stockpickr portfolios with Yahoo! in them.)

Game of Life

As spring-like temperatures finally embraced the country, the divisional races in baseball are beginning to take shape.

In the NL East, the Braves and Mets are virtually deadlocked in first place. The Brewers have a one-and-a-half-game lead on the Astros in the NL Central, while the Dodgers enjoy a similar lead on the Padres in the NL West.

Meanwhile, the A's, the only team in the AL West above .500, have a one-game lead on the Angels. The Twins have a one game lead on the Tigers in the AL Central, with the Indians and White Sox another half game back. The Red Sox have a one-and-a-half game lead over the Orioles in the AL East, after their three game sweep of the Yankees at Fenway Park. This represented the first Red Sox sweep of the Yanks in Boston in 17 years.

Individually, Barry Bonds has hit game-winning home runs in the last two games and now has 740 career homers, just 16 shy of Hank Aaron's record of 755, and A-Rod continues his sizzling start, as he now has 12 home runs and 31 RBI in 17 games.

In college basketball, to the surprise of nobody, Ohio State's freshman sensation, Greg Oden, declared his intent to enter the NBA draft in June. His fellow Ohio State freshman stars, Mike Conley, Jr. and Daequan Cook, also announced their intentions to enter the NBA draft. With the plethora of underclassmen declaring for the draft, in conjunction with a group of international players, this is quickly becoming one of the most anticipated drafts in NBA history.

Speaking of the NBA, the playoffs got under way this weekend with Detroit the seeming favorite to emerge from the East. The West appears somewhat more uncertain, with Dallas, Phoenix and San Antonio equally likely to be the representative in the NBA Finals.

In the NHL, the first round of the quest for Lord Stanley's Cup is nearly complete. Thus far, Buffalo, New Jersey, the New York Rangers, Ottawa, Anaheim, San Jose and Detroit have advanced, with the Vancouver vs. Dallas series to be decided in game seven tonight.

Periodically, I mention the dominance of Roger Federer in the world of tennis. Yet, despite his continual brilliance, Federer cannot master the young Spaniard, Rafael Nadal, on clay. As a matter of fact, Nadal has proven himself to be virtually unbeatable on clay, as witnessed by his 67th consecutive victory on that surface yesterday, with Federer the victim. Nadal's win secured him the championship in the Monte Carlo Masters in Monaco.

Inevitably, Nadal's magnificent winning streak on clay will come to an end, much as Federer's consecutive win streak on all surfaces ended earlier this year. The Players Club, through our strategic partner, endeavors to ensure that guaranteed recurring cash flow does not end abruptly, regardless of the conditions of the playing surface or the status of the players that day. Winning streaks are remarkable in that you fear they will end. Guaranteed recurring cash-flow should be a given: a winning streak devoid of any fear of ending.

Always remember: Life is a journey; enjoy the ride!

At the time of publication, Dykstra was long YHOO and SNDK.

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.