Option Investor

Weekly Newsletter, Saturday, 12/17/2005

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Table of Contents

  1. Commentary
  2. Changes in Portfolio
  3. Portfolio Listing
  4. New Plays
  5. Existing Plays
  6. Watch List

Leaps Trader Commentary

Futures Implosion

The quadruple expiration of futures and options took a heavy toll on oil prices and energy stocks. Even after a stronger than expected draw from gas storage there was a significant sell the news event in gas plays. I mentioned on Tuesday in the Option Investor Daily that I expected a sell the news event but I admit it exceeded my expectations. The expiration of futures and options forced traders to take profits and it was the perfect combination of circumstances to facilitate this event. The January Natural Gas contract hit its high at $15.78 on Tuesday before the inventory report and it was all down hill from there. January oil topped at $61.95 before a three day decline to close at $58 on Friday. These highs gave traders the perfect exit for long options/futures positions and they took it.

Despite the selling we only lost two positions and one was not an energy position. Titanium Metals was in full drop last Friday and I mentioned I would have liked to wait until a rebound began before entering the position. Unfortunately until the new trade alerts start in January I had to make a go/no go decision last Sunday. I elected to enter at $68 and that entry lasted about 30 minutes after Monday's open before being stopped out at $62.50. Monday was the low for the week and I am reentering that position again this week.

The VLO split play is now official with VLO trading at the post split numbers. I am looking at holding VLO long term with insurance.

The CAM split play was dropped after the market maker failed to list any new options. See the play description for details.

I am taking BTU off the watch list and adding it as a new play this weekend. The decline back to $81 was a -$6 drop and right back to the uptrend support line. It was on the watch list at $80 so I am only jumping the gun slightly.

With cold weather depleting gas supplies by -202 bcf last week another protracted bout could pull even more out of storage. 55% of the homes in America are heated with gas. The weather never returned to normal around the country and colder temperatures are predicted for next week. As I type this in Denver on Friday night the temp is 8 degrees and the high for the next five days is expected to be 24. The next cold front is coming and as you can see by the map it is wide and cold. The majority of the country should eventually be affected.

Weather Map as of Friday Night

In light of the predictions I am going to continue to hold energy plays until January and then pare back according to what the market gives us. Once the spring decline begins we will switch to long term buy mode with March entries the expected target.

In order to give us something to do while we wait for the next cycle I am going to add a few fringe plays like gold, copper and alternative energy. The addition of Evergreen Solar and Titanium Metals last week were a couple of those plays. I am adding Freeport McMoran to the watch list this weekend.

This was a bad week for profits due mostly to the Conoco/Burlington announcement. Sometimes you just get lucky like that where everything turns against you. This reinforced the need to use alternate methods of reducing risk. Some of those methods will be selling calls against our leaps and insurance puts. The plays will continue to be laid out with a variety of insurance options and it is up to you to decide which appeals to you.

The Conoco drop ended at about -$6 for the week. If you remember I had cancelled the insurance put several weeks ago after COP had risen well over the October lows. The stop was raised to only $59 to avoid a volatility dip with COP in the $63-$65 range. That conservative play change came back to bite us with a -$3 drop in the LEAP price. If you are still long COP there are multiple ways to play this.

1. Close your position for a loss.
2. Sell a call option against the LEAP.
3. Buy a put to prevent any further loss.

I will describe the various options in the COP play description. If we were not stopped I would still have dropped it from the portfolio. I still have vivid memories of how long it took us to recover from the Chevron/Unocal acquisition drop.

I told you last week I expected some volatility due to futures/options/rebalancing and it played out as expected only a little harsher in the energy sector. This week I expect an upward bias that will last until the 29th give or take a day. Let's profit from it and then take some chips off the table.

Natural Gas Chart - Daily

Crude Oil futures Chart - Daily

Changes in Portfolio

New Plays
TIE $64.95 Titanium Metals
BTU $81.86 Peabody Energy

Dropped Plays
$64.95 Titanium Metals ** Stopped @  $62.50 **
COP $63.17 Conoco Phillips ** Stopped $59 **
CAM $42.00 Cooper Cameron ** Dropped No Entry **

New Watch List Plays Triggered
PBR $69.17 Petroleo Brasilerio

Portfolio Listing & Top Picks

New Plays

Most Recent Plays

BTU - $81.88 - Peabody Energy ** Stop Loss $78.00 **

Peabody has been a favorite play as the costs of energy climbs. Unfortunately it has become almost too volatile to play unless you buy a strong dip. The -$6 drop this week qualifies with a move back to uptrend support. Most of the drop came on expiration Friday suggesting it was purely options related. I am betting on it.

I can't justify an insurance put today because put options are inflated by the drop and by the roll over pressure. I am putting a tight stop on it and we will add a put next Sunday hopefully cheaper and from a higher level. If you are concerned about a loss of premium you could sell the March $95 call against the position. This would defray your cost in the position by $2.50 but also limit your upside. Any way we play this today there is about a $2 risk.

Company Info:

Peabody Energy Corporation (Peabody) is a private-sector coal company in the world. During the year ended December 31, 2004, the Company sold 227.2 million tons of coal. It sells coal to over 300 electricity generating and industrial plants in 16 countries. The Company owns, through its subsidiaries, majority interests in 32 coal operations located throughout all the United States coal producing regions and in Australia. Most of the production in the western United States is low-sulfur coal from the Powder River Basin. In the West, it owns and operates mines in Arizona, Colorado, New Mexico and Wyoming. In the East, it owns and operates mines in Illinois, Indiana, Kentucky and West Virginia. The Company owns four mines in Queensland, Australia. Most of the Australian production is low-sulfur, metallurgical coal. In addition to the mining operations, the Company markets, brokers and trades coal.

Buy March $85 Call BTU-CQ Currently $5.80

Insurance Put: None, tight stop until next week.

Insurance Call: None

Entry $81.88 (12/19)

PBR - $69.17 - Petroleo Brasilero ** Stop loss $65 **

Petrobras declined to our trigger point at $70 on Thursday and only gave up another buck on Friday. Most of the drop was attributed more to a smaller than expected rate cut in Brazil than to oil weakness. Brazil's central bank cut rates by a half point to 18% on Wednesday. This was the fourth cut and investors were hoping for a bigger cut to jumpstart the economy. With 18% interest I can see were only 1/2 point would be a big disappointment.

Options are so cheap on Petrobras it does not make sense to utilize any insurance this week. If we do get a rebound the $65 put should decline as roll over premium bleeds off. This would allow us to add insurance next week.

Company Info:

Petroleo Brasileiro S.A. - Petrobras (Petrobras) is a wholly owned government enterprise responsible for all hydrocarbon activities in Brazil. The Company also has oil and gas operations in international locations, with the significant international operations being in Latin American countries. Petrobras is engaged in a range of oil and gas activities, which include segments like exploration and production; refining, transportation and marketing; distribution; natural gas and power; international, and corporate. During the year ended December 31, 2004, the Company had estimated proved developed and undeveloped crude oil and natural gas reserves of approximately 11.82 billion barrels of oil equivalent in Brazil and other countries.

April $75 Call PBR-DO @ $3.50

Insurance Put: None

Insurance Call: None

Entry $70.00 (12/15)

TIE $65.10 - Titanium Metals ** Stop Loss $60 **

Let's try this again. TIE found a bottom around $62.50 and traded sideways all week after a free fall open on Monday. Insurance puts are still too expensive until after expiration settlement on Monday. By Tuesday afternoon we should be able to enter the January $60 for about $2 but that may be wishful thinking.

TIE moves very quickly and I am not very comfortable suggesting running naked on this play. You could use the Jan-$60 put but only if TIE trades at $61.50. It would probably cost you $2.50 on Tuesday but may not be the best defense.

If you chart the $75 call option TIE-CO it traded for $5.00 both times TIE declined to $61.50. That would only be an 80-cent loss from where it is this weekend.

Given the choices I would elect to go naked to $61.50 and take an early stop instead if we get another dip.

Company Info:

TIMET is the world's largest supplier of high quality titanium metal products. With its unique combination of strength, light weight, corrosion resistance and other metallurgical properties, titanium is used in hundreds of diverse aerospace, industrial and emerging applications where no other metal is as reliable or economical, especially on a lifecycle costing basis.

As a fully-integrated titanium manufacturer and distributor, TIMET's activities span every phase of titanium research, manufacturing and sales. We convert rutile ore into sponge; melt and refine ingot and slab; manufacture mill products; and distribute our products globally. We have the financial strength, capacity and technical solutions to meet the established demands for titanium and, as new uses for titanium accelerate, to lead the industry into the future.

Titanium Metals Corporation (TIMET) is a producer of titanium sponge, melted products and a variety of mill products for aerospace, industrial and other applications. For the commercial aerospace industry, the Company supplies titanium products to manufacturers of commercial airframes. Outside of aerospace markets, the Company manufactures a range of products for customers in the chemical process, oil and gas, consumer, sporting goods, automotive, power generation and armor/armament industries. Approximately 17% of the Company's sales revenue, during the year ended December 31, 2004, was generated by sales into industrial and emerging markets. TIMET markets and sells its products in the United States, the United Kingdom, France and Italy.


Buy March $75 Call TIE-CO Currently $5.80

Optional Insurance: January $60 Put TIE-ML

I prefer an early stop instead at $61.50. The official stop is $60 to allow support at $61.50 to work. If you are planning on using the put I would try to buy it around $2.00. Once bought I would move the stop to $55.

Entry $64.95 (12/19)


Play Updates

Existing Plays

VLO - $52.30 Valero ** No Stop **

Valero declined from its $111.20 high on Tuesday as the split run faded. It closed at $106.75 on Thursday with Friday the ex-date for the split. We got what I consider was a very favorable entry on the 2007-$60 LEAP and VLO is holding on support at $52.

I picked the March $45 put for insurance but I do not want to enter unless VLO trades at $50. If we do get a bounce next week I will raise the put strike to $50 as conditions warrant.

VLO should be a strong performer in 2006 with refining margins better than anyone else in the game. VLO has already made its low sulfur conversion in preparation for the new 2006 rules. According to VLO the new rules will remove 500,000 bpd of diesel from the market at a time when diesel usage is increasing. This will make the price for sweet crude rise while VLO is profiting from processing sour crude. If we can get one more good oil/gas spike into year end I want to take out the insurance and then forget about VLO for the rest of the year. We could easily see the price return to the $100 range if oil demand continues to rise.

Company Info:

Valero Energy Corporation (Valero) owns and operates 15 refineries having a combined throughput capacity, including crude oil and other feedstocks, of approximately 2.5 million barrels per day. Valero produces environmentally clean refined products, such as reformulated gasoline (RFG), gasoline meeting the specifications of the California Air Resources Board (CARB), CARB diesel fuel, low-sulfur diesel fuel and oxygenates (liquid hydrocarbon compounds containing oxygen). It also produces conventional gasolines, distillates, jet fuel, asphalt and petrochemicals. Valero markets branded and unbranded refined products on a wholesale basis in the United States and Canada through a bulk and rack marketing network. It sells refined products through a network of more than 4,700 retail and wholesale branded outlets in the United States, Canada and Aruba. Valero's retail operations include approximately 1,500 company-operated sites that sell transportation fuels and convenience store merchandise.

2007 $60 LEAP Call VHB-AL @ $6.60

Insurance Put: March $45 Put VLO-OI currently $1.45
Enter put if VLO trades at $50.00

Entry $52.30 (12/16)

CAM $41.29 - Cooper Cameron *** Dropped ***

CAM split 2:1 on Friday 12/16. We wanted to buy the 2007-$50 LEAP after the split and after the options settled. The market maker for CAM failed to add in the new strikes on Friday. The highest strike listed was the 2007 $35 LEAP. Obviously we are still on the sidelines on this play. In the play description I suggested waiting until Mon/Tue of this week before making an entry. The market maker assisted us in making our decision.

When a market maker is this lax with his options it causes me to question whether I want to trade his options. Bid/Ask may not be maintained and spreads can tend to be out of line when a market maker is not managing his business correctly.

While I like CAM I am going to remove this potential play from the portfolio. We will look at it again later. There are far too many other candidates to play options roulette with the CAM market maker.

Company Info:

Cooper Cameron Corporation is an international manufacturer of oil and gas pressure control equipment. It also manufactures centrifugal air compressors, integral and separable gas compressors and turbochargers. The Company's operations are organized into three separate business segments: Cameron, Cooper Cameron Valves (CCV) and Cooper Compression. Cameron is a provider of systems and equipment used to control pressures and direct flows of oil and gas wells. CCV is a provider of valves and related systems primarily used to control pressures and direct the flow of oil and gas as they are moved from individual wellheads through flow lines, gathering lines and transmission systems to refineries, petrochemical plants and industrial centers for processing. Cooper Compression is a provider of reciprocating and centrifugal technology applications, and related aftermarket parts and services.

2007 $50 LEAP Call - Entry cancelled

ESLR $12.00 - Evergreen Solar

Evergreen Solar is a leader in the struggling solar space with installations all over the world. The key to any solar technology is volume and the California initiative officially announced on Tuesday would install one million solar assisted homes could be the push that makes solar finally affordable.

The California P.U.C. approval is the only roadblock and it is expected to be approved sometime in January after a 30 day comment period. ESLR is a competitor with improving technology and a real business model. They are yet to be profitable but are closing in on that goal. A true volume spurt as they would get from the million home project should assure that profitability through scale. Solar is the way of the future and the million roof project could be the key. The California initiative would also require home builders in CA to offer a solar component to any buyer by 2010. That would cover 150,000 homes a year.

California would subsidize up to $3.2 billion in solar roofing at the rate of $2.80 per watt over the next ten years starting in 2006.

Description of the plan:

There is no guarantee this will be approved. I believe in solar enough that I am willing to take the risk on ESLR even without the California initiative. Options are cheap and there is a strong upside if this catches on. Unfortunately there are no leaps. We will buy the June calls and move up to a farther date later if the play progresses successfully.

The Dept of Energy also has a million roof program in progress. http://www.millionsolarroofs.org/

Other companies in the sector are GE, Shell Solar, BP Solar, Kyocera Solar, PowerLight and SunPower (SPWR).

Company Info:

Evergreen Solar, Inc. develops, manufactures and markets solar power products enabled by its String Ribbon technology that provides reliable and environmentally clean electric power throughout the world. Its products are targeted at on grid and off-grid applications. The Company is developing technology at the wafer, cell and module stages of manufacturing, and it holds patents and other intellectual property in all three areas. In the String Ribbon technique, strings are pulled vertically through a shallow pool of molten silicon and the silicon solidifies between the strings to form a continuous ribbon of crystalline silicon. The ribbon is then cut and prepared for cell fabrication.

Buy June $12.50 Call QLU-FV @ $2.35

No insurance

Entry $11.71 (12/12)

TIE $65.10 - Titanium Metals ** Stop hit at $62.50 **

TIE opened in freefall on Monday and continued its drop from the prior week to hit the stop at $62.50 almost before options opened for trading. I suggested in last weeks play description to wait for a rebound before entering. Given the opening freefall it appears from the time and sales the first option traded was about 11:30 and TIE hit the stop price at 10:25. Since it appears nobody bought an option before the stop price was hit this play was ruled dead.

I am reentering it again this weekend.

Company Info:

TIMET is the world's largest supplier of high quality titanium metal products. With its unique combination of strength, light weight, corrosion resistance and other metallurgical properties, titanium is used in hundreds of diverse aerospace, industrial and emerging applications where no other metal is as reliable or economical, especially on a lifecycle costing basis.

As a fully-integrated titanium manufacturer and distributor, TIMET's activities span every phase of titanium research, manufacturing and sales. We convert rutile ore into sponge; melt and refine ingot and slab; manufacture mill products; and distribute our products globally. We have the financial strength, capacity and technical solutions to meet the established demands for titanium and, as new uses for titanium accelerate, to lead the industry into the future.

Titanium Metals Corporation (TIMET) is a producer of titanium sponge, melted products and a variety of mill products for aerospace, industrial and other applications. For the commercial aerospace industry, the Company supplies titanium products to manufacturers of commercial airframes. Outside of aerospace markets, the Company manufactures a range of products for customers in the chemical process, oil and gas, consumer, sporting goods, automotive, power generation and armor/armament industries. Approximately 17% of the Company's sales revenue, during the year ended December 31, 2004, was generated by sales into industrial and emerging markets. TIMET markets and sells its products in the United States, the United Kingdom, France and Italy.


Buy March $80 Call TIE-CP - no entry

No insurance this week.
We will buy Jan puts once December rolls over.

Entry $68.80 (12/12)

OSTK $36.72 - Overstock.com ** Stop Loss $42 **

Not a bad week for OSTK with a -$3 loss from last Friday's high. I believe the end of the holiday selling season will provide yet another opportunity for retailers to decline. Q4 earnings should provide another opportunity for OSTK to disappoint investors.

I lowered the stop to $42 just in case lightning strikes.

Play Description:

Probably the worst managed retail site on the Internet. The President, Patrick Byrne, blamed the poor performance of his stock on an evil "Sith Lord." (A Star Wars Character) Patrick continually ranks in the top five worst performing executives of a public company as rated by the Motley Fool. His latest claim to poor stock performance is the possible existence of "millions of counterfeit shares of OSTK trading on the Nasdaq." I am not kidding. He blames the SEC with being in collusion with the Nasdaq for refusing to disclose the number of counterfeit shares in the system. He warned "shareholders that the only prophylatic against hedge fund counterfeiting was to obtain the actual certificates from your broker and store them in a safe place." This would of course prohibit your shares from being traded. This was in response to a "Get Shorty" article in the WSJ.

Overstock has filed suit against several research firms claiming a conspiracy to drive its stock price down. Patrick claims research firm Gradient Analytics and Rocker Partners were at the center of a vast conspiracy aligned against Overstock. He warned that the criticism of Overstock.com will not go unpunished.

Patrick was forced to give up his role as Chairman in October with his father John Byrne taking back control. Patrick remains the president but that has not diminished his wild accusations.

The company has a good business model but has failed to execute on so many levels that it should be criminal. They have the worst customer service of any E-Commerce site I have every visited. I have made several purchases in the past from OSTK and all but one were botched terribly. The products come in an unlabeled box with no return address label and no invoice. You can't return them without some serious effort. Consumers will not put up with this when other companies like Amazon.com, NewEgg.com and Ecost.com are models for the industry.

Sales at OSTK have slowed and operating expenses are growing faster than revenue and marketing costs nearly doubled in Q3. Cost of acquisition for new customers rose +30% over the prior quarter. This is a signal that competition is winning the battle and prior customers are not returning. OSTK has a huge debt load and slowing sales will not help. Morningstar gives them a D+ for financial health and an F for profitability. Analysts are dropping estimates for the stock into the high $20 range and well below current prices.

In August, Patrick Byrne held a conference call in which he basically said that everyone from hedge funds to journalists to regulators had all been scheming to destroy his company. He said the plan was being orchestrated by someone he identified only as the "Sith Lord." He really said that. Rob Plaza at Zachs Investment Research said when a CEO is putting the focus on things he can't control like short interest there could be a bigger problem he does not want you to see. He said an even bigger problem is when management blames regulators for stock manipulation you have a real problem.

The last really dumb statement, or was it, came from Patrick on Nov-10th. He said "I don't give stock advice but the average investor should probably steer clear of Overstock." That advice I will follow.

Company Info:

Overstock.com, Inc. is an online closeout retailer, offering discount, brand-name merchandise for sale primarily over the Internet. The Company's merchandise offerings include bed-and-bath goods, home decor, furniture, kitchenware, watches, jewelry, computers and electronics, sporting goods and apparel and designer accessories. It also sells books, magazines, compact discs (CDs), digital versatile discs (DVDs), videocassettes and video games (BMV). The Company also offers limited travel services. Overstock.com offers approximately 50,000 non-BMV products and approximately 500,000 BMV products in eight departments on its main Website, www.overstock.com. Overstock.com has a direct business in which it buys and takes possession of excess inventory for resale. It also has another worldstock Website, www.worldstock.com, through which artisans in the United States and around the world can sell their products.


June $35 Put QKT-RG @ $5.00

No insurance.

Entry $38.51 (12/12)

KKD $ 6.03 - Krispy Kreme Doughnuts ** Stop Loss $7.25 **

Something is up at KKD. Support has appeared at $6 despite an impending delisting from the NYSE. The NYSE has given them until mid January to file their reports or be booted from the exchange. However, the creditor deadline for financials of Dec-15th was suddenly extended to April 30th. Despite a resignation from the board and an admission on Tuesday that losses were going to be higher than previously expected the stock refuses to fall. Every dip is quickly bought but we are seeing increasing selling pressure as well. On Friday the stock traded in only a one-cent range for nearly all the day. Very strange behavior. This stock could either break or spike very soon and for reasons not readily apparent.

I added a stop loss at $7.25 but with a $1.25 option it is not going to matter much other than ending the play. The difference in option price will be negligible.

Play Description:

Trouble is mounting for KKD. They have not filed financials since November 2004 and they are probably going to miss the Dec-15th deadline imposed by creditors. They warned this would happen about 10 days ago. They are having to restate financials for several years due to errors in accounting for expenses, loans and franchisee info.

The CEO Scott Livengood and other top executives were ousted earlier this year on allegations of financial misdealing and securities fraud. Suits are mounting from numerous groups, debtors, employees, franchisees and vendors over all types of non payment, fraud and failure to follow through with agreements.

Stephen Cooper, a turnaround specialist, took over the reins when the officers were evicted. So far the news has only gotten worse. Stores are closing rapidly including prior showplace stores and once leading producers. Cooper has worked on prior disasters including Polaroid, TWA, Enron and Boston Chicken. That list should give you a clue what is ahead for KKD.

Cooper said the chain cannot operate 4,000 square foot stores profitably and will try to reinvent itself as a smaller, leaner company. They are closing unproductive stores in a reasonable and rational fashion according to Cooper. He wants to focus on increasing sales of coffee and other beverages.

I have written about the similarity between KKD and Boston Chicken for several years and warned numerous times at much higher levels that KKD would end badly just like Boston Chicken. Now the Boston Chicken CEO is running KKD. Amazing prediction.

Yes, Boston Chicken was turned into a profitable entity once again. However it was done at the expense of shareholders. The common stock was cancelled the ownership of the stores was turned over to the debt holders. Boston Chicken wins, investors lose.

I believe that the NYSE will eventually tire of the endless deadlines for financials and will delist them. If that happens it will be the kiss of death for funds still holding the stock and hoping for a miracle return to the $105 levels of yesteryear.

Options are cheap and the KKD story is just waiting for Cooper to write the last chapter. KKD wins, shareholders lose.

Company Info:

Krispy Kreme Doughnuts, Inc. is a specialty retailer of doughnuts. It owns and franchises Krispy Kreme doughnut stores where the Company makes and sells over 20 varieties of doughnuts, including its Hot Original Glazed variety. Each of its traditional stores is a doughnut factory with the capacity to produce from 4,000 dozen to over 10,000 dozen doughnuts daily. Its sales channels consist of on-premises sales and off-premises sales. The Company has two complementary business units: its company and franchised stores, which Krispy Kreme refers to, collectively, as Store Operations and Krispy Kreme Manufacturing and Distribution (KKM&D). At February 1, 2004, there were 357 Krispy Kreme factory stores in operation, of which 338 are located in the United States. During the fiscal year ended February 1, 2004 (fiscal 2003), it acquired the remaining 33% interest in Golden Gate Doughnuts, LLC that it did not already own.

2007 $5.00 LEAP Put OKK-MA @ $1.35

No insurance

Entry $6.01 (12/12)

HW - $35.26 - Headwaters ** No Stop **

I am starting to lose patience with Headwaters but I don't know why. When I look at the chart it has flat lined between $35-$36 for nearly a month. However, when you compare it to other stocks in the sector it takes on a new appearance. Other stocks like BTU have been volatile with BTU crashing back to earth last week. HW is holding its own and consolidating from its November gains with no material loss. I can't complain since the market has been moving sideways for most of this period also. Put HW on the back burner and forget it. Stocks like this tend to revive suddenly and when it does we will be ready.

Headwaters (HW) has a compound annual growth rate of more than +120% mainly because it deals with the ash left over from burned coal. Coal generates a lot of ash and it is a problem the electric generating plants have to deal with when these cold fronts really suck up their coal supplies. Headwaters has three separate businesses from that ash. They have a business that buys and sells it for various purposes. Second they have produced a bonding agent to that makes it easy to transport without blowing out of the rail cars. They sell this to others for profit. Third they have a patented process for converting this ash into a synthetic fuel, which is licensed to plants that actually do the conversion.

They also make building materials and a cement substitute that uses this ash to make concrete more durable. Considering the thousands of tons of ash generated each week this appears to be a gold mine for Headwaters. When electric plants fight the tons of daily ash Headwaters is there to help and converts that ash back to dollars. This sounds too good to be true and I think that was the real problem with the decline from $46 in August to the $30 level in October. The ramp from IPO in April from $30 to $46 and decline back to $30 is complete. Those that got in on the good IPO story took their profits as energy prices declined. Now may be the time to jump back on the coal train with Headwaters rather than Peabody.

Company Info:

Headwaters Incorporated is a diversified company providing products, technologies and services to the energy, construction and home improvement industries. Headwaters conduct its business primarily through four business units, including Headwaters Resources, Headwaters Technology Innovation Group (HTI), Headwaters Construction Materials and Headwaters Technology Innovation Group. In September 2004, the Company acquired Tapco Holdings Inc., a manufacturer of building products and professional tools used in residential remodeling and construction. In June 2004, the Company acquired Eldorado Stone, LLC, a manufacturer of architectural manufactured stone based in San Marcos, California. Eldorado Stone is being purchased from Graham Partners, a middle-market private equity firm. Eldorado Stone will be integrated into Headwaters' coal-based construction materials operations.

2007 $40 LEAP Call ZPP-AH @ $4.30

Insurance Put:
Enter Feb $30 Put HW-NF if HW trades below $34

Entry $35.50 (11/22)

CHK - $32.03 Chesapeake Energy ** No Stop **

CHK rallied to a new two month high on the gas storage news but suffered profit taking on expiration Friday with the rest of the gang. Colder weather should continue to push gas prices higher along with the gas stocks. $34-34.50 is current resistance. We are protected from any serious drop with the April put but we are far enough above it that a loss of gains would be painful. Choose your own stop if support at $31 breaks.

Company Info:

Chesapeake Energy Corporation is an oil and natural gas exploration and production company engaged in the acquisition, exploration and development of properties for the production of crude oil and natural gas from underground reservoirs and the marketing of natural gas and oil for other working interest owners in properties that it operates. The Company's properties are located in Oklahoma, Texas, Arkansas, Louisiana, Kansas, Montana, Colorado, North Dakota and New Mexico. The proved oil and natural gas reserves as of December 31, 2004 were approximately 4.9 trillion cubic feet of gas equivalent (tcfe). At December 31, 2004, approximately 89% of the Company's proved reserves (by volume) were natural gas, and approximately 70% of its proved oil and natural gas reserves were located in the primary operating area, the Mid-Continent region of the United States, which includes Oklahoma, western Arkansas, southwestern Kansas and the Texas Panhandle.

2007 $35 LEAP VEC-AG @ $4.00

Insurance Put:
April $25 CHK-PE when CHK traded at $28 on 11/07 @ $2.30

Entry $29 (11/04)

UPL - $55.83 Ultra Petroleum ** Stop loss $52 **

UPL hit a new all time high on Tuesday at just over $60 and then crashed back to earth with a -$3 loss on Friday. I believe it was just options/futures expiration pressure and would use this dip as a new buying opportunity. Colder weather should continue to push it higher.

I lowered the stop back to $52 just in case we get some carry over selling on Monday.

Company Info:

Ultra Petroleum Corp. is an oil and gas company engaged in the development, production, operation, exploration and acquisition of oil and gas properties. The Company's operations are focused in the Green River Basin of southwest Wyoming and Bohai Bay, offshore China. During the year ended December 31, 2004, it owns interests in approximately 166,974 gross (92,997 net) acres in Wyoming covering approximately 260 square miles. The Company owns working interests in approximately 241 gross productive wells in this area and is operator of 41.5% of the 241 gross wells. Through Pendaries Petroleum Ltd., it is active in oil and gas exploration and development in Bohai Bay, China. The Company also owns interests in 15,518 gross (14,652 net) acres in Pennsylvania, as well as interest in approximately 720 gross (320 net) acres and interests in three productive wells in Texas.

MARCH $60 Call UPL-CL @ $5.20

Insurance Put: Dec $45 Put UPL-XI (cancelled not triggered)

Entry $55 (11/02)

COP - $57.35 Conoco Phillips ** Stopped $59 **

There is a big difference between struggling to break the $65 resistance and closing at $57. The COP announcement they were going to buy Burlington Resources for $35 billion at the historic top of the gas market was too much for investors to bear. COP plummeted on the initial rumor then crashed when it was confirmed. Remembering the pain we suffered when Chevron made the bid for Unocal makes me glad we were stopped out.

For those who don't use the stops there are several ways to play this. First, be perfectly clear that the odds for a COP rebound in the next couple months are very slim. There is always the chance for another bidder to appear or for gas prices to implode making BR seem like less of a bargain at $35 billion. There are many reasons COP will remain under pressure and only one that could produce a rebound. That one would be a cancellation of the offer.

If you are still in the play you have four options. Close it and take the loss, leave it open and uncovered, sell a call against your LEAP or buy a put to protect against further losses.

It is normally a better option to just close the transaction and take the loss. The brain damage of managing it for the next year can be mentally damaging. Once close it is gone but leaving it open can lead to months of regret.

If you choose to leave it open the best option is to sell a call against your leap. This can be a lower strike or a higher strike. Selling the 2007 $60 LEAP call would take you out of the initial play for a break even but you would still be liable for any eventual move back over the $60 strike. $65 would be the breakeven point with a potential $5 loss if COP moved back over $70 by Jan-2007. Actually that is a very good possibility so that would not be my choice of action.

You could sell short-term calls like the Feb-$60, currently $1.60 and hope that COP remains under your sold strike until that call expires. Then sell another call a little farther out say the May $65 for another $2. This method slowly reduces your cost while tracking the price of COP over the next year as the acquisition completes. Just remember to keep stops on your short calls just in case something happens in the oil market to send prices sharply higher. Many investors using the covered call strategy forget to use stops and find their profits erased by sudden spikes.

The last option would be to buy a put to protect against a further drop. I could see a drop to $50 before a rebound begins. Buying a February $55 put for $1.50 would be throwing good money after bad but would protect you against further loss until late February. Unfortunately that is when oil prices could be at their 2006 low. Using the February puts would only be a stopgap solution at best.

What I believe is the best solution would be to sell the Feb $60 call, currently $1.60 and use the proceeds to buy the May $55 put currently $2.70. You would be out $1.10 but protected until after the deal completes and still have your upside protected. Maintain a stop on the call to avoid a price spike. Consider selling the put should COP reach $50. That should be the maximum decline before the summer. The put would be worth something over $5 and the call option worthless. Close them both and double down on the LEAP strike of your choice depending on where COP is at the time. Your cost in the initial LEAP would be something in the $2.50 range. Oil is not going lower for long and oil stocks will go higher by Jan-2007.

I hope this helps those who are still long Conoco. Managing a losing position is much more difficult than simply closing and taking the loss. How much money could you have made with the $3.50 remaining in the COP LEAP in another position over the next year?

Company Info:

ConocoPhillips is an integrated energy company. The Company's business is organized into six operating segments. The Exploration and Production segment primarily explores for, produces and markets crude oil, natural gas, and natural gas liquids on a worldwide basis. The Midstream segment gathers and processes natural gas produced by ConocoPhillips and others, and fractionates and markets natural gas liquids. The Refining and Marketing segment purchases, refines, markets and transports crude oil and petroleum products. The LUKOIL Investment segment consists of the Company's equity investment in LUKOIL, an international, integrated oil and gas company. The Chemicals segment manufactures and markets petrochemicals and plastics on a worldwide basis. The Emerging Businesses segment encompasses the development of new businesses, including new technologies related to natural gas conversion into clean fuels and related products, technology solutions, power generation and emerging technologies.

2007 $70 LEAP Call OJP-AN @ $6.40, Stopped 12/13 $3.75, -2.65

Insurance Put: Cancelled - no entry

Entry $63.25 (10/31)

UNH - $63.15 Unitedhealth Group ** Stop Loss $61 **

UNH is wedging up at $64 and waiting for the market to give it life. I was encouraged to see no selling this week as options expired. I was afraid there was enough profit in UNH to push funds into taking some chips off the table. It appears instead that they want something strong in their year end portfolios to impress investors.

Play Reasoning:

UnitedHealth is the leader in the managed heathcare sector. Earnings are soaring, +31% in Q3 to $2.43 billion and the outlook is only up. With health care costs rising more and more companies will turn to UNH to lessen their benefit expenses. We are also expecting a seasonal bounce now that October is behind us. There were two strong sell cycles in October as funds took profits from a long period of gains. Historically health care companies have done very well over the next three months as funds look for safe havens for year-end cash. UNH gained +37% from the October lows for the same period in 2004. Buyers appear on every dip to the 100-day average currently at $55.

Company Info:

UnitedHealth Group Incorporated is a diversified health and well-being company, serving approximately 55 million Americans. The Company provides individuals with access to healthcare services and resources through more than 460,000 physicians and other care providers, and 4,200 hospitals across the United States. It manages approximately $60 billion in aggregate annual healthcare spending on behalf of more than 250,000 employer-customers and the consumers it serves. The Company conducts its business primarily through four operating divisions: Uniprise, Health Care Services, Specialized Care Services and Ingenix. On July 29, 2004, the Health Care Services business segment acquired Oxford Health Plans, Inc. (Oxford). Oxford provides healthcare and benefit services for individuals and employers, principally in New York City, northern New Jersey and southern Connecticut.

2007 $60 LEAP Call VUH-AL @ $6.40

March $50 Put UHB-OJ

Entry $56.75 (10/31)

Leaps Trader Watch List

Dropped Entries


New Watch List Entries
FCX $53.77

Current Watch List

FCX - $53.77 - Freeport McMoran

Freeport-McMoran Copper & Gold Inc. is a copper and gold mining and production company. The Company's principal asset is the Grasberg mine. Grasberg contains gold reserve and copper reserves. Its principal operating subsidiary is PT Freeport Indonesia. The Company owns approximately 90.64% of PT Freeport Indonesia, and the Government of Indonesia owns the remaining approximate 9.36%. PT Freeport Indonesia mines, processes and explores for ore containing copper, gold and silver. It operates in the remote highlands of the Sudirman Mountain Range in the province of Papua, Indonesia, which is on the western half of the island of New Guinea. PT Freeport Indonesia markets its concentrates containing copper, gold and silver worldwide. The Company also smelts and refines copper concentrates in Spain, and markets the refined copper products through Atlantic Copper, S.A., the wholly owned subsidiary of the Company among others, such as PT Irja Eastern Minerals and FM Services Company

Breakdown target: $52.00
Buy 2007 $55 LEAP Call OMT-AK

Breakout target: $55.50
Buy 2007 $60 LEAP Call OMT-AL


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