Option Investor

Weekly Newsletter, Sunday, 12/03/2006

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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

Will This Be the Breakout?

After two months of wandering between $63.50 and $60 I think we have a good chance of seeing a breakout soon. This is the 5th time in two months we have tested $63.50 on the January contract and factors are finally lining up in our favor. We have cold weather, possible civil wars and the likelihood of another OPEC production cut pushing prices higher.

The cold front covering much of the US is still pounding everybody from Utah to New York with frigid cold and causing heaters to run continuously. With just the initial edges of the front hitting last week gas supplies saw a -32 bcf draw and the fourth draw in the last five weeks. Substantial draws this early in the winter could set up a shortage in February. The draw down for this week could be much stronger. Gas prices rose over $9 on Thursday but eased on Friday on profit taking after weathermen said temperatures could warm late next week. Since oil and gas prices trade in tandem on a btu basis the rise in gas helped support the rise in crude even though the crude spike was due to other issues.

Saudi King Abdullah warned that Iraq was not the only country in the region with internal problems. He said we could easily see civil war breakout in 2-3 other countries if tensions were not eased. Since every other country in the region is an oil producer that caused prices to tighten in fear of a future supply problem.

Also on Friday the OPEC President Edmund Daukoru said another cut of at least 500,000 bpd was likely at the Dec-14th OPEC meeting. He said OPEC was still not fully satisfied with the level of oil prices. He said, "I am beginning to be happy with the current prices but not fully happy yet." Considering OPEC agreed to support the OPEC basket of crude at $50 at the last meeting and it is trading today at $55 they should be happy. With light sweet crude at $63.50 they should be ecstatic. Funny thing about addictions, enough is never enough. We may be addicted to the black crude running through our mechanical veins in the US but OPEC is also addicted to our dollars, which support them and their lavish lifestyles.

Oil traded in the $25 range as late as fall 2003 before it began its rise to the recent high of $78.50 in July of this year. The current price of $63.50 was not reached until July of 2005. That is more than double the price just a year earlier. Today $63.50 is not enough to make them happy. How quickly they became addicted to the higher prices. This should emphasize to everyone that oil prices are NOT EVER going significantly lower.

Dec-2007 Crude Chart - Monthly

Once OPEC saw that the world did not come to an end with $60 or even $80 oil they realized that maintaining their prior $28 target was ridiculous. You can bet that their target, now close to $60 for the OPEC basket of crude, will continue to rise. Previously their fear was a global slowdown if oil prices rose too high as well as increased exploration outside of OPEC adding to the supply of oil and reducing their pricing power. That fear no longer holds since they have seen no material slowdown from the price spike. Global exploration has intensified but global discoveries have not. They no longer need to fear a sudden surge of outside oil.

Discoveries of new oil have declined sharply since the late 1970s and have averaged only about 8-9 billion bbls per year since 1990. We consume 32 billion bbls per year. Do the math. OPEC has nothing to fear from exploration outside of OPEC.

If OPEC cuts another 500,000 bpd they might actually get to the -1.2 mbpd cut they made on Nov-1st. According to a survey by Reuters the cuts actually made amounted to only 785,000 bpd and were mostly in the high sulphur crude that is harder to sell and refine. There was very little cut from production of light sweet crude. Another 500K cut in high sulphur crude would be mainly symbolic and still not impact the overall supply glut. Their storage tanks are probably full of the high sulphur product and they need to cut production because they have no place to put it.

For those readers new to this newsletter there are multiple grades of oil. To simplify the explanation there are heavy and light crudes and sweet and sour crudes. Sour crudes are high in sulphur and very few refineries can use them. The same goes for the various grades of heavy crude. The product needed by the majority of refiners is the light sweet crude. This is the easiest to refine and produces the most gasoline per barrel. Refineries are like your car. They are setup to refine certain types of crude only and cannot use the other types. Just like your gasoline powered car cannot use diesel a light sweet crude refinery cannot process heavy sour crude. We could be floating in heavy crude and gasoline could be $10 a gallon if there is a shortage of light sweet crude. Roughly 80% of the US refineries require light sweet crude. This is the grade of crude you see quoted on TV and in the press. The price for other grades is never mentioned. According to the EIA the global demand for light crude has been rising over the last decade while the demand for heavier crude has been declining. Some of this is due to rising emission standards making it less profitable to refine sour crude and by the rising demand for gasoline and middle-distillates. The EIA also said the global refining capacity for heavy crude has been declining since the early 90s as refiners elected to shutdown older heavy crude refineries rather than spend billions upgrading them to current emission standards. There were 320 refineries in the US in 1980 and that number has fallen to just over 170 today. Total global refining capacity at the end of 2005 was just under 85.4 mbpd. Heavy oil capacity was less than 27.5 mbpd or less than 30%. Much of that heavy capacity is dedicated to producing other products rather than gasoline because the oil has different properties than that used to make gasoline. As demand for gasoline increases the demand for sweet crude will also increase. The IEA estimates that refinery demand will reach more than 95 mbpd by 2010. That would require the addition of 9.6 mbpd of capacity or 48 average sized refineries. This is NOT going to happen. There are refineries planned and under construction but they require a 4-6 year construction cycle. Those under construction only add about 3 mbpd to capacity through 2011.

Hearing in the news that there is 100 million bbls of excess oil in the system as we heard from Saudi last week, is meaningless. If that was all sweet crude oil prices would be plunging. The price of oil is set by the refiners, not OPEC, not the drillers or producers. Refiners buy oil in advance of their needs for future delivery and you can bet they would not pay $63.50 a bbl if they could buy it cheaper. It is a bidding war for sweet crude and it will only get worse as gasoline demand increases. This is why Valero is in the right spot at the right time. Valero made a decision years ago to increase their refining capacity for sour crude into gasoline. Sour crude typically sells at a $10-$12 discount to sweet crude. Based on current trends it was the right decision. Their margins will rocket higher as gasoline from sweet refiners is priced higher to offset the price of the higher crude. Valero will still be receiving the higher gasoline prices but paying lower crude prices.

Back to the original topic the price of sweet crude will continue to rise long term. OPEC has figured out that higher prices did not hurt the market and I am sure they have a $100 price target in mind for the years to come. It makes no difference how much heavy crude is in the market, sweet crude will continue to be in strong demand. Raising prices though market manipulation is another way to punish the US for attacking Iraq. The US consumes 26% of the world's oil and much of that comes from OPEC countries. This is a way to get back at us while smiling and maintaining a politically correct posture.

While I would like to believe oil prices will breakout of the $63.50 resistance next week I am not convinced it will happen. Factors may be working in our favor but that is strong resistance and there is only two weeks left on the January contract. Trading terminates on Dec-19th. This suggests we could see some profit taking because any refiner who actually wanted to take delivery has probably already bought what they needed. However, the February contract has already broken over it's corresponding resistance at $64. I do expect the later contract months to continue rising. In the short term any profit taking in the front month January contract should provide additional entry points for those considering additional positions.

On Tuesday afternoon I sent out a new play on Sinopec (SNP) when the drop in the dollar knocked it back to $74. SNP does not have LEAPS so I recommended the July $80 calls then trading at $5.40. SNP closed the week at $81 and those same calls are now $9.20. There was a volume of 14 and open interest of 94 when I sent the email. Volume jumped to 140 before the day was out and open interest is now 292 with no corresponding increase in any of the other strikes. It is encouraging to see that many readers respond to my email and it is fulfilling to see them so richly rewarded. Congratulations to all who acted on that recommendation.

With the addition of Sinopec and Cheniere Energy, which was triggered on the watch list we are up to 30 total positions. I was not going to be adding any new positions until some were removed but after reading the news on RIG this week I had to add TODCO to the watch list. The game plan was to load the boat on an October dip in oil prices and we did that with great success. Now we need to let these positions mature and then collect profits. Continue to read the play descriptions on any position you hold. I am going to be changing the stops and insurance over the coming weeks.

It was a great week to be long oil and we saw major moves in many of our positions! Like George Peppard used to say in the A-Team series on TV, "I love it when a plan comes together!"

January Crude Oil - Daily

February Crude Chart - daily

December Gas Futures Chart - 90 Min


Changes in Portfolio

New Energy Plays


New Non-Energy Plays


Dropped Plays


New Watch List Plays Triggered
LNG Cheniere Energy

Portfolio Listing & Top Picks

New Plays

Most Recent Plays

LNG - $31.25 - Cheniere Energy ** Stop Loss $27.00 **

Cheniere Energy, Inc. is engaged primarily in the business of developing and constructing, and then owning and operating, a network of three onshore liquefied natural gas (LNG) receiving terminals, and related natural gas pipelines, along the Gulf Coast of the United States. The Company's immediate focus is on its LNG receiving terminals being developed in western Cameron Parish, Louisiana on the Sabine Pass Channel and near Corpus Christi, Texas. Cheniere Energy is also engaged, to a limited extent, in oil and natural gas exploration and development activities in the Gulf of Mexico. Exploration efforts are focused on the shallow waters of the Gulf of Mexico offshore of Louisiana and Texas and consist primarily of active interpretation of seismic data and generation of prospects, through participation in the drilling of wells, and through farm-out arrangements and back-in interests whereby the capital costs of such activities are borne primarily by industry partners.

LNG has taken off like a scared rabbit after getting financing approval for the next step in its LNG terminal construction phase. After six months of declines to $25 LNG rocketed back to $30 last week and shows no indications of slowing down. The game has changed for LNG and for Cheniere. All the news is suddenly positive and the shorts are getting pummeled.

The $30 LEAP was quoted at $8.20 with the $35 LEAP at $6.20. I would gladly pay the extra $2 for another $5 in the money at expiration plus an even money strike in case of a future stock split.

Breakout target $31 triggered 11/30/06

Position 2009 $30 LEAP ONP-AF @ $8.50

No insurance: $25 is out of range and $30 is too expensive


Play Updates

Existing Plays

The current format of the Play Updates has changed. Only the pertinent data that has changed from the prior week will be shown in an effort to concentrate more on new commentary on new plays rather than restating existing positions. Each play has a link back to either its last full commentary or its initial description.


SNP - $81.00 +6.56 Sinopec

The two-day drop in equities from China provided a buying opportunity in Sinopec (SNP) on Tuesday. The two-day sell in Chinese equities knocked Sinopec back to strong support at $74. I sent an email on Tuesday afternoon with the Sinopec recommendation. Sinopec is China's largest refiner and recently saw a sharp spike to $81.10 on its inclusion into the Hang Seng Index. This was on top of an already positive trend.

I would be a strong buyer here on this weakness. There are no LEAPS so I would use the July $80 calls SNP-GP currently $5.40.

Company description:

China Petroleum & Chemical Corporation (Sinopec Corp.) is an integrated energy and chemical company with upstream, midstream and downstream operations. The Company and its subsidiaries operate mainly in the People's Republic of China. The principal operations of Sinopec Corp. and its subsidiaries include exploring for and developing, producing and trading crude oil and natural gas; processing crude oil into refined oil products, producing refined oil products and trading, transporting, distributing and marketing refined oil products, and producing, distributing and trading petrochemical products. Sinopec Corp. has five operating segments: exploration and production, refining, marketing and distribution, chemicals, and corporate and others.

Entry $74.44 11/28/06

Position: July $80 Call SNP-GP @ $5.40

No insurance


FXI $94.15 -$1.99 - FTSE/Xinhua China 25 Index Fund

FXI took the same hit as Sinopec and PetroChina on the falling dollars but did not recover completely. The gap open the prior week gave us a bad entry but $93 is strong support.

The iShares FTSE/Xinhua China 25 Index Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the FTSE/Xinhua China 25 Index.

Component list: http://tinyurl.com/y9fv6a

This iShare focuses on the largest companies in China (58% of it positions) and Hong Kong (42%). These are the most liquid companies in these markets. With Asia growing by leaps and bounds the FXI generated a +40% return in 2005 without using options. We hope to do better using LEAPs.

Breakout target: $94.50 hit 11/22/06 on gap open to $95.80

Position: 2009 $100 LEAP Call VHF-AT @ $13.50

No insurance


MRO $95.53 +4.36 - Marathon Oil

Marathon broke out to a new historic high on Monday and never looked back. There was a small dip on Friday morning after a downgrade from FBR and Citigroup on valuation but that dip was quickly bought. No change in play.

To see the initial commentary on this position click here:

Position 2009 $100 LEAP Call VXM-AT @ $12.60

Insurance put: None


HES - $50.22 +4.98 - Hess Corporation (Formerly (AHC))

Outstanding! HES spiked above initial resistance on Tuesday and set a new three-month high. After the close on Friday HES announced the mandatory conversion of 13.5 million shares of its convertible preferred stock into common stock. No change in play.

To see the initial commentary on this position click here:

11/05/06 2009 $50 LEAP Call VHS-AJ @ $6.80

No insurance due to cheap LEAP, strong support and positive trend.


BHP - $40.89 +0.15 - BHP Billiton

BHP may be starting to show signs of life as traders forget about the possible bid for Phelps Dodge. BHP continues to hold above support despite those rumors that it could outbid Freeport for PD. We have a good insurance put position in case they do something stupid. No change in play.

To see the initial commentary on this position click here:

10/29/06 2009 $40 LEAP Call ZPK-AH @ $11.10

Insurance Put:
11/12/06 Feb $40 Put BHP-NH @ $1.50


BTU - $46.97 +4.34 - Peabody Energy

BTU surged for a nice gain on a strong break above resistance. BTU announced a contract to supply Powder River Basin coal to the TransAlta Centralia power plant in Washington. On Tuesday TransAlta announced it had closed its 35-year-old Centralia coal mine. This is a completely new contract for Peabody and a source of new revenue. It was announced the prior week that Peabody would replace HCA in the S&P-500 on some future date. That date has not yet been set. This should continue to provide a floor over the next couple of weeks. No change in play.

To see the initial commentary on this position click here:

Earnings: Oct 19th .53 cents, up +26%

10/22/06 Jan-2009 $50 LEAP Call ZZT-AJ @ $8.70

No insurance put at this time.


DVN - $73.49 +3.10 - Devon Energy

Devon surged higher on no news to break resistance at $72. Cramer continues to pound the table on Devon on his Mad Money show on CNBC. Keep it up Jim, we were in it before you! No complaints and no change in play.

To see the last full commentary on this position click here: http://tinyurl.com/yest3l

Earnings: Nov 1st, $1.66, beat by +14 cents

LEAP Position:
10/03/06 Position: 2009 $70 LEAP Call VVH-AN @ $9.00

Insurance put:
Buy Apr-2007 $60 Put DVN-PL only if DVN trades at $67 again.


RIG - $78.84 +3.62 - Transocean Inc

RIG announced a settlement with TODCO on Thursday that would result in $50 million of revenue to be recognized in Q4. RIG spun off TODCO (THE) in Dec-2004. Based on the THE chart maybe they should be a play as well. No change in play.

Their rig report released Dec-1st: http://tinyurl.com/y3shx7

To see the last full commentary on this position click here: http://tinyurl.com/yest3l

Earnings: Nov 2nd, 83 cents, 12 cent beat

LEAP Position:
10/03/06 Position: 2009 $80 LEAP Call VOI-AP @ $12.90

Insurance put:
Buy Jan $65 PUT RIG-ML only if RIG trades at $71.


TSO - $71.49 +3.32 - Tesoro Corporation

TSO broke above another level of resistance at $70 as I predicted last week. This is a new three month high and no complaints. No news and no change in play.

To see the last full commentary on this position click here: http://tinyurl.com/yest3l

Earnings: Nov 2nd, $3.92, 66 cent beat

LEAP Position:
10/04/06 Position: 2009 $70 LEAP Call ZGC-AN @ $7.70

Insurance put:
Buy Feb $55 PUT TSO-NK only if TSO trades at $59


APC - $48.90 +1.49 - Anadarko Petroleum

APC is struggling higher as the new rules in Algeria are prepared for distribution. APC is pressing Algeria for terms of the new windfall profits tax that will become effective in 2007. So far Algeria has failed to disclose the details other than the tax will provide an extra $1 billion in revenue for the country. Claiming the tax is much fairer than the nationalism of assets in countries like Bolivia and Venezuela the Algerian minister invited all oil companies to his office for coffee and a chat if they wished to discuss the terms. The current contracts were signed when oil was $15 and Algeria feels it is time to adjust those terms. APC is the largest independent company in Algeria. No change in play.

To see the last full commentary on this position click here: http://tinyurl.com/yest3l

No change in play.

Earnings: Nov 7th, +$1.75 vs +$1.12

LEAP Position:
9/20/06 Position: 2009 $50 LEAP Call OCP-AJ @ $6.90

Insurance put: 9/25
Position: Jan $40 PUT APC-MH @ $2.35, profit stop @ $35.00


CEO $87.52 -0.33 - Cnooc Ltd

CEO is consolidating its gains from last week after setting a new three month high at 89.67 on Wednesday. Profit taking on Friday returned CEO to initial support. No news and no change in play.

To see the last full commentary on this position click here: http://tinyurl.com/yest3l

No insurance put

Earnings: Oct-31st, $2.33B rev, +25%, no EPS given

Position: March $90 Call CEO-CS @ $2.40 (no leaps)


SU $79.04 +2.39 - Suncor Energy

Suncor is fighting resistance at $80 but we should be good for a =$5 pop once that level is broken. No news and no change in play.

To see the last full commentary on this position click here: http://tinyurl.com/yest3l

Earnings: Oct 26th, $1.48 vs $0.57 year ago qtr

LEAP Position: 9/11/06
Position: 2009 $80 LEAP Call OYX-AP @ $14.30

Insurance put: 9/18
Position: Dec $60 Put SU-XL @ $2.10, no stop


SLB $68.34 +2.98 Schlumberger

SLB finally broke out to a new seven-month high at just over $69 and there was little profit taking on Friday. SLB announced it was acquiring Norwegian Oil Well Completion Specialist Reslink. Terms were not disclosed. No change in play.

To see the last full commentary on this position click here: http://tinyurl.com/yest3l

Earnings: Oct 20th: 81 cents vs 44 in Y.A.Q.

LEAP Position:
1/2 9/11/06 @ $8.60
1/2 9/12/06 @ $8.00
Position: 2009 $70 LEAP Call VWY-AN @ $8.30

Insurance Put: 9/18
Position: Jan $50 Put SLB-MJ @ $2.00, no stop


NBR $34.57 +1.88 - Nabors Industries

Nabors rose to a new three-month high on Friday at $34.57 on no news. It appears the speculation from the prior week about a LBO was just that, speculation. OR, this week's rise could be buying as inside news is leaking to the public. It will be interesting to see what the next month brings.

Link to recent presentation: http://tinyurl.com/o5jmy

To see the last full commentary on this position click here: http://tinyurl.com/yest3l

Earnings: Oct 25th, $1.02 vs 0.55 in YAQ

LEAP Position:
9/12/06 2009 $40 LEAP Call VRB-AH @ $4.50

No insurance


UPL $54.20 +2.89 - Ultra Petroleum

Ultra finally find some traction as gas hit $9 last week. No news and no change in play.

UPL said recently that their profit margins at $4 gas were +30%, $6 gas 50% and $8 gas 100%. They have a 16-year inventory of wells to be drilled.

OGIS Investment Conference on Oct-4th. hhttp://tinyurl.com/y6xsq3
Enercom Oil and Gas presentation: http://tinyurl.com/kn5cb

To see the last full commentary on this position click here: http://tinyurl.com/yest3l

Earnings: Oct 31st, +33 cents

LEAP Position:
9/12/06 Position: 2009 $60 LEAP Call OZH-AL @ $10.60

Insurance Put:
9/18 Position: JAN $40 Put UPL-MH @ $2.85, no stop


SUN $68.98 +5.10 - Sunoco

Outstanding! SUN finally escaped from three weeks of selling by somebody with a large position. The spike began on Monday and gathered speed all week as shorts scrambled to unwind positions. Friday's close was a new two-month high. No change in play.

To see the last full commentary on this position click here: http://tinyurl.com/yest3l

Earnings: Nov 1st, $2.76 vs $2.39

LEAP Position:
9/12/06 Position: 2009 $70 LEAP Call VUN-AN @ $13.50

Insurance Put:
Position: Jan $55 Put SUN-MK @ $2.40, no stop


PXP $47.55 +3.21 - Plains Exploration

PXP finally broke that resistance at 44.50 and surged to a new historic high. Our patience paid off and we could be in blue sky soon. PXP announced a new discovery in 3800 feet of water at their Friesian Prospect in the Green Canyon block 599. Shell is a 50% partner with PXP. No production data is available until the well is completed. PXP also agreed to acquire a 60% interest in nine prospects owned by McMoRan Exploration. No change in play.

OGIS Investment Conference on Oct-4th: http://tinyurl.com/y7vn2w

To see the last full commentary on this position click here: http://tinyurl.com/yest3l

Earnings: Nov 9th, +91 cents vs +37 cents

LEAP Position:
9/12/06 Position: 2009 $50 LEAP Call ZXL-AJ @ 7.50

Insurance Put:
9/25 Jan $40 Put PXP-MH @ $1.90, $35 stop


FST $35.64 +1.48 - Forest Oil

FST finally cracked the $35 barrier that held it back for the last six months. Hopefully we are off to the races now. No news and no change in play.

Enercom conference presentation: http://tinyurl.com/ggzmv

To see the last full commentary on this position click here: http://tinyurl.com/yest3l

Earnings: Nov-8th, +1.21 vs +0.05

LEAP Position: 9/12/06
Position: 2009 $40 LEAP Call OJG-AH @ 4.50

No insurance due to cheap LEAP


XTO $50.44 +3.51 - XTO Energy

XTO broke over resistance at $48 and rocketed to a new historic high on Thursday. Limited profit taking on Friday but the high ground held. No change in play.

OGIS conference presentation on Oct 4th: http://tinyurl.com/v6ram
Enercom presentation: http://tinyurl.com/qorbr

To see the last full commentary on this position click here: http://tinyurl.com/yest3l

Earnings: Oct 24th, $0.99 vs $0.85 in YAQ

LEAP Position:
9/12/06 Position: 2009 $50 LEAP Call OUO-AJ @ $6.50

Insurance Put:
Feb $35 Put XTO-NG @ $1.40, no stop


VLO $55.85 +3.54 - Valero Energy

Valero finally broke resistance at $54 and closed at a new three month high on Friday. No news and no change in play.

To see the last full commentary on this position click here: http://tinyurl.com/yest3l

Earnings: Oct 31st, +$2.42 vs $2.30

LEAP Position:
9/24/06 Position: 2009 $60 LEAP Call VHB-AL @ $7.70

Insurance Put:
Position: 9/25 Jan $45 Put VLO-MI @ $2.25, no stop


PBR - $93.90 +3.40 - Petroleo Brasileiro

PBR rebounded about +$6 off last week's lows but still remains stuck under resistance at $95. No change in the play.

To see the last full commentary on this position click here: http://tinyurl.com/yest3l

Earnings: Nov 10th, +29%

LEAP Position:
9/08/06 Position: 2009 $100 LEAP Call VDW-AT @ $14.90

Insurance put:
9/11 January $70 PBR-MN @ $1.80, no stop


DO - $80.59 +4.07 - Diamond Offshore

DO broke initial resistance at $78 and closed just over stronger resistance at $80. There was no news but the trend on DO is accelerating. No change in play.

To see the last full commentary on this position click here: http://tinyurl.com/yest3l

Earnings: Oct 27th. $1.19 vs $0.60 in YAQ

LEAP Position:
8/29/06 Position: 2009 $80 LEAP Call VCT-AP @ 14.20
Cost reduction: Oct $70 Put profit -3.15, cost now $11.05

Insurance Put:
10/08 Dec $60 Put DO-XL @ $2.40, no stop

Position closed:
10/03 October $70 put DO-VN @ $1.65, exit @ $4.80, +3.15


CSX - $36.06 -0.16 - CSX Corp ** Stop Loss $35 **

NNot a good week for the transports with oil surging and the economy weakening. If we don't see some improvement soon I may exit this transport play. CSX is not impacted by a slower economy with much of its profits coming from energy and commodity transport from Canada. Unfortunately it is guilty by association with the transport sector. Set a stop at $35 and we will exit on any further weakness.

To see the last full commentary on this position click here: http://tinyurl.com/yest3l

Earnings schedule: Oct 17th, 54 cents, +50%

LEAP Position:
9/03/06 Position: 2009 $35 LEAP Call OBC-AG @ $4.90
11/17 Cost update - expired Nov $30 put +1.40 = $6.30

Insurance put:
9/11 November $30 Put CSX-WF @ $1.40, expired


ATPG - $45.00 -1.32 - ATP Oil and Gas Corp

After a strong run from $35 to $47 ATPG rested for the entire week. They announced a deal to repurchase all their series A and B preferred stock for $325 million after drawing on their credit line to do so. This probably produced some confusion and it appears somebody is setting on $46 with a large quantity for sale. No change in play.

To see the last full commentary on this position click here: http://tinyurl.com/yest3l

OGIS Investment Conference on Oct 5th. http://tinyurl.com/y5jod2

Earnings schedule: N/A

LEAP Position:
8/20/06 Position: 2009 $40 LEAP Call VCL-AH @ $11.70

Insurance put:
9/06 Position Dec $35 PUT HKU-XG @ $1.50, stop at $30


PTR - $128.10 +4.68 - Petrochina

Definitely no complaints here! PTR added to its prior weeks gains making it a +$12 move for the two week period. We were very patient with PTR, which we have held since May when we bought a dip to $116 that turned out to be the beginning of a crash instead. We have finally recovered all our losses and are profitable once again. I still believe this stock could be well over $150 before our 2008 LEAP comes due. No complaints and no change in play.

To see the last full commentary on this position click here: http://tinyurl.com/yest3l

Current recommendation: Buy under $110

Earnings: August 24th, $10.1 billion, +29%

LEAP Position:
5/14/06 Position: 2008 $120 LEAP Call LJC-AD @ $16.20
Cost adjustment: Close short Dec $115 call +1.30 = $17.50
Cost adjustment: Close long July $90 puts +3.00 = $20.50
Cost adjustment: Close long Sept $110 put -2.60 = $17.90

Insurance put: (9/11)
Position: December $100 Put PTR-XT @ $2.20, stop $90

Insurance put: (8/13)
Position closed:
Sept $110 Put PTR-UB @ $2.40, stop @ $106 @ $5.00, +2.60

Insurance combo: Closed
Short: Dec $115 Call PTR-LC @ $3.20, 6/13, exit $4.50, -1.30
Long: (2) July $90 Puts PTR-SR @ $3.70, 6/13, exit $0.70, -3.00

Insurance puts: (Closed 6/7)
Closed: June $105 PUT PTR-RA, @ $4.20 (5/22), exit 6/7 @ $4.30

Non-Energy Positions

PCU $54.18 + 1.07 - Southern Copper

PCU finally started moving higher after a two week consolidation on strike news and a dip in copper prices. The Freeport bid for Phelps Dodge put an end to copper price worries and PCU announced this week that the strike at Cerro Verde had ended. No change in play.

To see the initial commentary on this position click here:

Breakdown triggered at $51 on 11/14/06

Position: JUNE $55 Call PCU-FK @ $3.80
(no leaps)

Insurance Put:
PCU-XW Dec $47.50 put only if PCU trades at $49.50


CAT - $61.19 -1.68 - Caterpillar ** Stop loss $58 **

CAT crashed on Friday giving back all its gains from the prior week after the ISM suggested the economy was weaker than expected. This may be a rocky play as we await some positive economic news. No change in play.

To see the initial commentary on this position click here:

10/22/06 JAN-2009 $70 LEAP Call VKT-AN @ $7.20

Insurance Put: none


TEX - $55.98 -1.61 - Terex Corp

TEX, another ISM casualty, gave back almost exactly what it gained the prior week but remains very close to an all time high at $58. No news and no change in play.

To see the initial commentary on this position click here:

Earnings: Oct 25th, $0.98 vs $0.51 in YAQ

10/23/06 Jan-2009 $60 LEAP VXQ-AL @ $10.90

Insurance Put:
10/23/06 Jan-$50 PUT TEX-MI only is TEX trades at $54.


DHI - $26.59 +1.33 - DR Horton

DHI broke out to a new six month high after some positive news in the housing market and upgrades from BAC and JPM. Our 2009 LEAP is now in the money and we have a long time for housing to improve. No complaints and no change in play.

To see the last full commentary on this position click here: http://tinyurl.com/yest3l

Earnings: Nov 14th, 88 cents vs analysts est of 69 cents

LEAP Position:
9/24/06 Position: 2009 $25 LEAP Call VEI-AE @ $5.10

Leaps Trader Watch List

Dropped Entries
MDR McDermott Intl.  - Got away from us

New Watch List Entries
TODCO (I know, I said no more positions)

Current Watch List


TODCO is a provider of contract oil and gas drilling services, primarily in the United States Gulf of Mexico shallow water and inland marine region, an area that TODCO refers to as the United States Gulf Coast. TODCO operates a fleet of drilling rigs in the United States Gulf Coast, which include 64 drilling rigs consisting of 27 inland barge rigs, 24 jackup rigs, three submersible rigs, one platform rig, and nine land rigs. Forty-eight of these rigs are located in shallow and inland waters of the United States with the remainder in Angola, Colombia, Mexico, Trinidad and Venezuela. TODCO reports the results of those operations in four business segments which, for its contract drilling services, correspond to the principal geographic regions, in which TODCO operates: United States Inland Barge Segment, United States Gulf of Mexico Segment, Other International Segment and Delta Towing Segment.

I know I said no more positions but after seeing the chart when I was writing about Transocean today I could not resist.

Breakdown target $39
Breakout target $41

Buy 2009 $40 LEAP ZYU-AI


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