OX,
These suggestions were recently posted in the volatility newsletter, which I stole and posted here:
We also recommend the following, perhaps more aggressive trade (a straddle):
Buy 100 shares of Forest Labs (symbol FRX) at $69
Sell 1 FRX Aug 70 call (symbol FRX HN) (current bid @ 10 1/4)
Sell 1 FRX Aug 70 put (symbol FRX TN) (current bid @ 9 3/4)
Your cash outlay is $6900 - $1025 - $975, or $4900 per straddle. (Also, don't forget about the
margin requirements for the naked put - see STRATEGIES section...)
We recommend getting at least $19 on the straddle spread.
If FRX is at or above $70 in August, your put expires worthless and your shares are called away
by the covered call at a price of $70. Your return for seven months is then 43% (not bad!)
If FRX is below $70 in August, you can purchase the additional 100 shares of FRX at $70, for a
breakeven price of ($49+$70)/2, or $59.5 per share for your 200 shares. Seems like a great
deal.
Your downside breakeven point is $59.5, obviously.
OK, enough about Forest Labs. Here's another company we want in on...
Alza Corporation (AZA) is a pharmaceutical powerhouse who specializes in drug delivery
systems. Abbott Labs attempted to take over AZA recently; the takeover failed, and that has
punished the shares of AZA. We believe that AZA will be taken over in the future by a larger
drug company. Even if AZA is never taken over, (and we strongly believe that it will be), their
prospects for the future look bright. With a market cap of less than $4 Billion, AZA anticipates
having well over $1 Billion in sales in 2000. Much of this revenue will come from young
products.
We recommend the following trade:
Buy 100 shares of Alza Corp (symbol AZA) @ 37 15/16
Sell 1 AZA Jul 40 call (symbol AZA GH) (current bid @ 4 5/8)
Sell 1 AZA Jul 40 put (symbol AZA SH) (current bid @ 5 5/8)
Demand at least $10 for the options spread!
Cash outlay for this trade at these prices is $3793.75 - $462.50 - $562.50, or $2768.75.
If AZA is at or above $40 at July expiration, your $2768.75 investment will be worth $4000, for a
return of over 44% in six month's time ("yeah, Babie...")
If AZA is below $40 at expiration, we would recommend purchasing the additional 100 shares of
AZA for $40. Your downside breakeven here would be $34 / share, which is a STEAL, in our
opinion!
For those of you with more patience and who are a bit worried about the overall markets, here is
a relatively conservative spread you may want to consider (and yes, this will be added to our
portfolio, as well):
Buy 100 shares of Alza Corp (symbol AZA) @ $37 15/16
Sell 1 AZA Jan 2002 45 call (LEAP - symbol WZA AI) (current bid @ 9 1/8)
Sell 1 AZA Jan 2002 45 put (LEAP - symbol WZA MH) (current bid @ 12 1/8)
Demand at least $20 for the options spread!
Cash outlay for this trade is $3793.75 - $912.50 - $1212.50, or $1668.75.
If AZA is at or above $45 in January 2002, your $1668.75 investment will be worth $4500, for a
return of 170%!
If AZA is below $45 at expiration, we would probably recommend purchasing the additional 100
shares of AZA for $45. Of course, this is a couple of years out, so things could change
dramatically by then.
Your downside breakeven here is just over $30 / share.
Thanks for visiting! Have a great and profitable week, everyone!
Any thoughts on the combination long and short straddle positions?
Regards,
dave
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