As regular readers know, on Wednesdays my column focuses on accountability with the "Stat Book." Instead of providing a new selection for today, I would like to revisit three of my "in play" selections -- Bank of America (BAC) - Get Bank of America Corp Report, Halliburton (HAL) - Get Halliburton Company Report and XM Satellite Radio (XMSR) .
However, before discussing stock selections, I would first like to take some time and rehash my deep-in-the-money calls strategy for new readers of my column.
When I trade, I seek stocks with both
technical strength, meaning that when a great company hits certain buy levels, I invest. My strategy is a hybrid of investing and trading. With margin completely out of the question, I use deep-in-the-money (DITM) calls to gain control of a particular common stock.
I look at the stock's
options chain to find DITM calls approximately four to six months out in time, where the premium is $1.00 or less. To calculate the premium for an option, you take the call price for the option, plus the option price. Next, you subtract the stock's present value from that number, which equals the premium.
In buying an option, I place a
good-till-canceled limit order for 10 contracts (equal to 1,000 shares) of the DITM call at a target price, and wait for my order to be filled.
Immediately after my order fills, I place a GTC limit order $1.00 above my purchase price. I do this because a gain is only a gain once it reaches your wallet. Many stocks rise, only to fall just as quickly. In selling 10 contracts for $1.00 above my purchase price, I ensure that my paper gains reach my wallet, ultimately yielding a $1,000 win.
If a stock I buy declines in value after I purchase my DITM calls, I only begin liking that company more, as long as it has no shocking new negative developments. A good company that declines in value becomes an even better company to invest in, especially when it hits a technically strong buying level. With DITM calls it is unnecessary to pick a new stock every day; the real key to success becomes managing your money properly, protecting your cash and, most importantly, buying at the correct levels. Discipline will give you the consistent success that we all should strive for.
On Tuesday I revisited my
selection and suggested implementing a
dollar-cost-averaging approach in order to lower the average purchase value and increase the potential gain.
Now let's take a fresh look at BofA, Halliburton and XM.
I first recommended buying the August 42.50 DITM(BACHV) calls in
Bank of America on March 23. At that time, the stock was trading at $51.64, and the calls were trading at $9.50. Bank of America's stock took a big hit earlier in the week when the company announced it would buy LaSalle Bank for $21 billion from
. (Wednesday morning, a group led by RBS made a competing bid that could hold up this acquisition.) If the original deal goes through, I am confident in the management at Bank of America, which has a proven track record in acquiring and integrating new regions into its network, as was evident with Fleet Bank in the Northeast.
In addition, these calls still have four months to increase in value. Therefore, I will implement the dollar-cost average strategy and place an order to buy 10 more contracts of the August 42.50 calls at $8.50 or better, bringing the average purchase price to $9.00. When my purchase order fills, I will immediately change my GTC sell price to $10.00, which would deliver me $2,000 in profit.
March 12 column, I highlighted the profit potential for the merger between XM and
as well the likelihood of the merger's approval, and bought 10 contracts of the October $7.50 calls (QSYJU) at $6.40.
I purposely selected options that gave me seven months for the planned merger to receive federal approval. These DITM calls are trading at a significant discount, so I will place a limit order to buy 10 contracts of the October 7.50s at $3.90 or better, bringing my average purchase price to $5.15. Upon filling this order, I will lower my GTC sell price to $6.15 and wait for the DITM calls to work their magic.
Lastly, let's revisit Halliburton, a stock that already provided a $1,000 win for me in February. I selected this stock once again in my
column on April 19, buying the October 27.50 calls (HALJR) at $5.90. Today, I will dollar-cost average and buy 10 more calls, placing a limit order at $4.90 or better, to bring my average purchase price to $5.40. Like always, upon the order filling, I will adjust my GTC sell price to $1.00 above my average purchase price. Halliburton reports earnings Thursday morning.
The operators on Wall Street have been selling this oil and gas behemoth at will, knocking Halliburton's stock price lower six days in a row. However, this is a company that defines consistency, as its performance and ability to provide excellent results make me very comfortable, so I am happy to control 2,000 shares all the way until the third Friday of October. Lock and load!
Now let's take a look at the Stat Book.
At the time of publication, Dykstra was long BAC, GE, HAL, XMSR.
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.