On America's birthday, let me take the opportunity to introduce you to a new monthly feature in which I will review my picks and my performance for each month. I recognize that many fans like to keep score; now I'm providing them a way to do so. Remember, with my low risk/high reward strategy utilizing in-the-money call options, we insulate ourselves from the drastic market swings that the ordinary trader must endure. We accomplish this by giving ourselves a significant time frame, approximately four to six months, before our in-the-money calls expire. That doesn't mean, however, that we can't achieve our goal, a $1,000 profit, in just a few days or weeks. This is demonstrated by my
June 12 pick, the Dow Chemical ( DOW) December $30 in-the-money calls. We purchased these calls at $8.80 and they turned out to be exactly what I said they would in my column: the best risk/reward opportunity I had seen with this stock. Faithful readers may note that I have mentioned Dow Chemical frequently in past columns. In fact, I have mentioned it in 11 columns. Trading in and out of a high-quality company like Dow Chemical when its stock falls and its in-the-money-calls are priced attractively is a great example of how I approach the market. Remember, this is not a "buy-and-hold" operation. Our goal is all about making money. We want to reap at least a $1,000 profit after we purchase our deep in-the-money calls. To help us do that, we set a good-until-canceled (GTC) limit sell order. This way, we don't have to watch the tape every second the market is open. We are protecting our investment -- if the stock makes a nice move and spikes up during the trading day, your order will automatically get filled because you set a GTC limit sell order -- typically 1 point above our in-the-money call price. This will allow you to capture that $1,000 gain without making a phone call or watching your computer all day. And now, on to our other picks from June, all of which I'm still long as of this writing.
On June 26, I
recommended buying the Newell Rubbermaid ( NWL) December $20.00 in-the-money calls. The reason this particular in-the-money call makes sense is the small cost -- 26 cents -- of the premium we are being charged to control 1,000 shares of a quality company for approximately six months. The math for calculating the premium is relatively simple. Newell was recently trading at $26.04, and our December $20 (strike price), deep in-the-money calls cost us $6.30. This is actually $26.30 when we add the cost of the call to the strike price. Then we look at the cost of the common stock, which was $26.04 at the time. Subtract that from $26.30, and we're left with 26 cents. This is what we call an "edge," something you need to become familiar with if you want to play and win in this league. Instead of taking $26,140 out of our bank account to buy 1000 shares of Newell common stock, we only need $6,300 to control those shares via the options, which closed Monday at $6.50. Buying deep in-the-money calls gives us both the opportunity to wait until market conditions improve -- until the third Friday in December in this case -- or book our profits sooner if the stock cooperates. On June 19, I recommended the General Dynamics ( GD) November $55 calls, which we bought for $11.50.
Our GTC limit sell order is set at $12.50, and I believe we will have an opportunity to lock up our $1,000 profit before the end of July. With General Dynamics releasing earnings on July 19, this position has a really good chance to hit pay dirt. Finally, on
June 5 I recommended the Headwaters ( HW) August $25 calls. Headwaters' common stock has been completely decimated since May 18, when it lowered guidance to reflect the idling of synthetic fuel facilities because of volatility in oil prices and customers' uncertainty over the phasing out of certain tax credits. When we purchased the August $22.50s, the price was $4.60. As of Monday, the in-the-money calls were trading at $3.80. Am I hitting the panic button? No -- the company is just too good for this stock to keep going down -- and (more crucially, perhaps) we still have approximately six weeks until expiration day. Again, that is the beauty of my deep in-the-money-calls strategy: Time is on your side. (Yes it is.)
On this most American of holidays, I would like to take some time to acknowledge international sporting events presently taking place. The Tour de France, cycling's premier event, had an inauspicious start, with pre-race favorites Jan Ullrich and Ivan Basso and their respective teams suspended from competition amid doping allegations. The race is now wide open, with Americans George Hincapie, Floyd Landis, and Levi Leipheimer all having legitimate shots at wearing the champion's yellow jersey and following in the pedals of seven-time champ Lance Armstrong when the race culminates on Paris' Champs-Élysees. A sport famous for Pele's bicycle kick, soccer, has four survivors vying for the World Cup. The French, perhaps disheartened by the perpetual failure of a countryman to win the Tour de France, are undoubtedly buoyant with the performance of their futbol team. Led by Zidane and Henry, France upset Brazil, the pre-tournament favorite, to earn a spot in the semifinals against Portugal. Italy is pitted against the host nation, Germany, in the other semifinal, with the winners meeting July 9 for the title. Over in the U.K., Agassi took his final bow on the grass at Wimbledon after a straight-set loss in the third round to a young Spanish phenom, Rafael Nadal, whose style and flair are somewhat reminiscent of a young Agassi. Andre's exit, on the heels of the departure of Pete Sampras a few years ago, leaves a giant void in American men's tennis. Our recent performances at Wimbledon have been lackluster at best. Nonetheless, 230 years ago, a competition was waged on this side of the pond against the British. We were not competing for a trophy or any other symbolic representation of excellence. We were fighting for our independence. We emerged triumphant, and the rest is history. It is important, particularly on this day, to reflect on how truly fortunate we are to live in this great country, despite its shortcomings.
The All-Star roster from 230 years ago included names such as Ben Franklin, Sam Adams, John Adams, Thomas Jefferson, John Hancock, Benjamin Harrison and George Washington. Rest assured, not one of them received a signing bonus, nor did any of them have an incentive-laden contract. No, they did it for love of country. For them, the pursuit of independence was worth any imaginable sacrifice. While they understandably received the accolades, there have been, and will continue to be, hundreds of thousands of men and women, known primarily only to their families, who have made the ultimate sacrifice for the pursuit and preservation of our independence. We must always remember them, for they delivered for Team America. With that in mind, I join with you in saluting all those who have enabled us to live free in America, the most prosperous of nations. Remember: Life is a journey, enjoy the ride!