Options - buys and sells

My IBM option turned out to be a good speculation, even though I've learned that it was very risky to purchase such a short-term option. So, the experiment continues...

Yesterday I sold my IBM option as the stock price seems to be hovering around 109 for now. It expires next Friday, two days after the earnings announcement. Even though there could be some upside after the earnings, if the street doesn't like what the CFO says, I could lose all my gains in a day. I got out while the gettin' was good.

Cost: $283 (includes Scottrade fees)
Proceeds: $462 (includes Scottrade fees)
Holding period: roughly one month
ROI: 63%!

While a 63% return for one month is fantastic, I contribute this almost entirely to the level of risk involved. While I did have a good feeling about IBM, I could've just as easily lost most of my investment.

The lesson learned was that I was very limited on when I could sell because the holding period was so short. I also know that I will have to pay short-term gains tax (32% I believe) on this, which turns my ROI into 42% or so. Still, good, but that's a lot of tax. To fight both of these drawbacks simultaneously, I have purchased two new options, both for January 2009 expiration. This will allow me a far great window of opportunity to sell. It also gives me the option to hold more than 12 months which would put me in the long-term gain tax category (15%, currently). Both are appealling and both came at a cost. The farther off the expiration date, the pricier the option. A lot can happen in 18 months, so it's understandable.

Both base stocks I picked are grossly undervalued, in my opinion. They are also both uncommon stocks. This is something like the Buffett approach to investing (I'm trying it on for size) , but a little riskier because of the options.

First new stock option: Coeur D Alene Mines Corp (CDE) Price - $4.11
Purchased: Jan 09 Call Option @ $5
Cost: $80
P/E: 16.2
F P/E: 12.5
PEG: 0.8

CDE is a global gold and silver mining company. Market cap is just over $1 billion. The fairly low P/E combined with the VERY low PEG shows this company is undervalued. That caused me to dig deeper, where I found they missed their last earnings estimates substantially, causing a major selloff. As usual, it was oversold. To justify the current price, the company would need to make zero profit. For $80 it was an easy buy.

Second new stock option: BankUnited Financial Corporation (BKUNA) Price - $19.42
Purchased: Jan 09 Call Option @ $17.5
Cost: $600
P/E: 7.5
F P/E: 6.7
PEG: 0.6

BKUNA has over 80 bank branches throughout Florida, where they are headquartered. I can only guess that I am not seeing something here. I have been looking at this for days as one that is too good to be true. 7.5 current P/E with growth prospects? Several analysts have just initiated "Buy" ratings on this stock. They have not missed earnings estimates, but surpassed them many times. It seems that for no reason the stock plunged. I don't understand it. To justify the current price, the bank would need to report quarterly LOSSES of $0.20/share. The estimate about to be released is for PROFITS of $0.67/share. Something's not right! I estimate that this stock should be valued around $30/share, if not higher. Having a Jan 09 expire should give me plenty of time to realize that change.

Other than that, the stock market has been doing great. Including the IBM option, I am up around 10% in just a month. In no way do I expect that kind of return on a regular basis, but am clearly happy thus far.

In a few days I'm going to transfer more real estate proceeds into my Scottrade account in the amount of $10,000. I am going to try and be less risky and put most of it into mutual funds for the long term. I'll keep $1-2k to play with, though - I need to continue my stock option research! :)