Option Investor
New Plays

New Plays

HAVING TROUBLE PRINTING?
Printer friendly version

OIX - $581.61 - Oil Index Portfolio Hedge

The CBOE Oil Index consists of 11 energy stocks of primarily integrated oils. The index reacts sharply to changes in the price of oil and gas.

The focus of this play is to hedge our current energy positions against a decline in oil prices as the summer draws to a close. The options are expensive but the Friday spike will allow us to enter the September $550 put for $14.50 or less on Monday. Each reader will have to decide how many contracts needed to hedge their current positions. You do not want to be moving in and out of the OIX position given the relatively wide bid/ask spread.

A drop to $540 should double the premium paid and a drop to $500 should produce a $50 premium or $5000 per contract. At Friday's closing price of $14.50 or $1450 that represents $3500 profit per contract. That would hedge several of our current positions very easily.

Index Components:

Position:

Buy Sept $550 Put OIX-UJ currently $14.50, no stop.

WLT - $48.36 - Walter Industries

Walter Industries is a diversified holding company that owns among other things 700 million tons of high quality low sulphur metallurgical coal. The company has a market cap of $2.1 billion, which includes $1.2 billion in stock of MWA a recent spinoff of their water products company. That values the rest of WLT at barely $900 million or less than half of the value of the rest of their enterprises not counting their coal asset. I heard an analyst preaching the merits of WLT on Friday and after doing some research I have to agree. The company posted a +84% increase in earnings in Q1 and a jump in revenue from $366 million to $753 million. Very few companies can boast of those numbers. They expect to post earnings of $5.65 for the year in 2006. Walter coal is one of the highest quality, low-vol coking coals in the world. It is sold to major buyers in Europe and South America for about $115 per ton FOB Mobile Alabama. Do the math, 700 million tons x $115 = $80 billion. That is very nice insurance of strong income potential for a long time to come.

WLT was hammered by the recent sell off and by a drop caused when Muller Water (MWA) IPOed on May 30th. The spinoff of a business segment always devalues the parent company but coupled with the May correction this dip is overdone. Decent support just below at $45 and very string support at $40.

Company Info:

Walter Industries, Inc. (Walter) is a diversified company with seven operating segments: Mueller, Anvil, Industrial Products, Natural Resources, Homebuilding, Financing and Other. The Company's seven segments are further grouped into Water Products, Natural Resources, Homebuilding and Financing, and Other. The Water Products group, which consists of Mueller (WMA), Anvil and Industrial Products segments, manufactures water infrastructure and flow control products. The Natural Resources segment consists of coal mining and methane gas operations. Walter markets and supervises the construction of detached, single-family residential homes, primarily in the southern United States, through the Homebuilding segment. The Financing segment provides mortgage financing on such homes and purchases mortgages originated by others. The Other segment includes the manufacturing of foundry and furnace coke, slag fiber and specialty chemicals, as well as the Company's land division.

Position:

Buy 2008 $60 LEAP Call YZG-AL currently $7.30

Entry $48.39 (6/26)

Leaps Trader Play Archives