Bernie's Long-Term Options

02/27/2004 12:00 am EST


Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

While many view options as simply a short-term speculation, Bernie Schaeffer shows how options can also be used as a leveraged, longer-term play. Here, he focuses on two bullish stocks and two bearish stocks, and recommends options that expire in January of 2005.

"Pessimism has been on the rise toward coffee guru Starbucks (SBUX NASDAQ). Short interest is more than six times the stock’s average daily trading volume, raising the likelihood of a covering rally. Wall Street is skeptical, with ten of the 15 analysts following SBUX rating it a ‘hold’ or worse. Any upgrades could boost the security higher. A continuation of this fundamental and technical strength could force pessimism to unwind, further fueling the stock’s rise. We recommend the January 2005 30 call.

"It appears black gold has lost its glitter among options players, as pessimism continues to build toward ChevronTexaco (CVX NYSE). The number of shares sold short skyrocketed 44% in December to 10.2 million, which could provide ample fuel for a covering rally. Wall Street has its doubts, with ten of the 18 analysts following CVX rating it a ‘hold’ and four rating it a rare ‘strong sell’. An unwinding of this pessimism could push CVX higher. We recommend January 2005 80 call.

"J.P. Morgan (JPM NYSE) continues to be a favorite among its fellow brokerage firms. According to Zacks, nine of the 13 analysts following the firm rate the stock a ‘buy’ and not one rate it a ‘sell’. Options players have also piled into JPM calls. Adding to the optimistic sentiment, the number of JPM shares sold short slipped 10% over the most recent reporting period. Technically speaking, the equity’s recent rally has carried to potential resistance in the 40-41 area and a rejection at this level could turn current optimism into selling pressure. We recommend theJanuary 2005 45 put .

"Optimism has been on the rise toward Home Depot (HD NYSE). The number of shares sold short plunged 36% in December. Wall Street also favors the stock, with 13 of the 24 analysts following the firm rating it a ‘buy’ or better while not one rates it a ‘sell’. This leaves ample room for future downgrades that could further hinder the shares. Fundamentally, this time of year has been grim for the stock. Last year, HD cut its 2003 earnings forecast, and another negative warning from the company could send the security plummeting. We recommend the January 2005 40 put ."

(Editor's Note: Bernie Schaeffer will be giving a Keynote Address at the Opening Ceremonies of The Las Vegas Money Show, May 10-13, Paris/Bally's Resort.)

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