Lenny Dykstra Out At TheStreet.com

UPDATE – Lenny Dykstra Actually Is Bankrupt

Things must truly be getting truly awful for Lenny Dykstra, because it looks like he’s out at TheStreet.com:

Lenny’s “Nails on the Numbers” newsletter has been renamed “Deep-in-the-Money Calls” and is now written by options-market star and all-around nice guy Jon Najarian. I can’t say I’m surprised at this turn of events. While Lenny was a major profit-generator for TheStreet.com, the bad press was starting to make Lenny more trouble than he’s worth.

And if they had to replace a former baseball player, who better than a former football player, especially one that actually knows options?

This story may get spun as Lenny taking personal time to handle his divorce, but time has been running out for him. I have no doubt that TheStreet.com would have eventually pulled the plug on Lenny because they can’t have a financial wreck pitching investment advice to the masses.

Lenny’s going bankrupt. How do I know?

It’s simple. I’ve never met a rich person that tried so hard to look rich.

Lenny Dykstra Was in Bed With AIG

UPDATE: Lenny Dykstra is Out at TheStreet.com

ESPN wrote a pretty in-depth article on Lenny Dykstra’s life in the business world, coming to the conclusion that “either Lenny hates to pay his bills, or he's a financial train wreck.”

The ESPN article was incredibly revelatory, and I’m not talking about the lawsuits or what’s happening with Wayne Gretzky’s old house (which will never sell at a decent price because of the media attention). Nope, I mean Lenny Dykstra’s Ties to AIG.

When you hear AIG (AIG), you may think mismanagement, bailouts, and corporate welfare but that has no relevance here. For the purposes of this article, just think about them like they’re any other insurance company.

Let’s take a look at what ESPN said about Lenny’s connection to AIG:

Dykstra apparently hasn't handled any player investments yet, and it's difficult to determine whether any athletes seriously consider his financial advice, either in the magazine or through his subscription financial service. The early plan was for an athlete to invest at least $250,000 with professional money managers of Dykstra's choosing. Former employees say Dykstra made the rounds in New York trying to line up a financial partner, but the closest he came was with AIG, now a corporate poster child for outrageous greed.

An AIG executive and Dykstra offer conflicting opinions on who backed away from the deal. AIG spokesman Charles Armstrong says it was the company's decision not to go forward. But Dykstra produces a copy of a Dec. 10, 2007, letter from an AIG vice president reaffirming the company's interest in being an "exclusive strategic partner." An accompanying commission schedule proposed to pay The Players Club $90,000 per player recruited to both the AIG universal life insurance and income annuity programs in the first year. There was a caveat, though: Dykstra had to bring in at least 100 athletes.

So Lenny Dykstra would be paid $90,000 for every pro athlete he turned over to AIG?

That’s just not cool.

What are the chances that the only financial services company who was willing to make Lenny a commissioned salesman had the right annuity for everyone? What if Legg Mason (LM) was on board? Or Citigroup (C)? Or Bank of America?

Lenny loves to talk about helping pro athletes hold onto their money but that’s pure BS. He had no interest in finding athletes appropriate financial products – his only goal was to sell AIG products that lined his own pockets. If Lenny gave a damn about his prospective clients’ finances, he would have shopped around for what was right for them, not himself.

More on Lenny Dykstra:

Should We Be Listening to Lenny Dykstra?

Inside Lenny Dykstra’s 99-1 record

Lenny Dykstra Gets Lucky With Intel

Freddie Mac CFO Found Dead, Suicide Suspected

Reports are flying around that David Kellermann, acting CFO of Freddie Mac, has been found dead, the cause apparently being suicide. Freddie Mac hasn’t reported much good news in recent years, but this takes the cake in terms of negativity. I’ll never know what was going on in Mr. Kellermann’s personal life, but one question on my mind is:

Did Freddie Mac push him over the edge?

I can’t imagine working as the acting CFO of Freddie Mac is an enjoyable job when you think about the crappy housing market. It’s probably a 24/7, non-stop stream of putting out fires, dealing with politicians, and trying to placate the public – enough to make anyone mad.

It’s a sad reality that the poor economy is taking a toll on people’s mental health. Here’s an interesting report from the NY Times:

In an American Psychological Association poll in September, 80 percent reported the economy’s causing significant stress, up from 66 percent last April. The National Sleep Foundation said 27 percent of people surveyed last fall had sleeplessness because of economic anxiety.

National Suicide Prevention Lifeline calls jumped to 50,158 in January 2009 from 39,465 a month in January 2008, and economic stress more frequently “played a central role,” said Richard McKeon, the group’s federal project officer.

And it’s not just Americans:

A poll of 2,246 people found that 77 per cent of respondents believed the world had become a more dangerous place and that 37 per cent felt "more frightened and anxious."

When asked about the financial crisis, a huge 66 per cent said that they experienced "fear or anxiety" about the future.

Anxiety UK, the largest anxiety disorders charity, revealed that it had received double its normal number of calls in the first two months of the year.

So if you’re feeling down because of the recession, try to remember that you’re not the only one, and help is out there. There’s always a better solution than death.

Barron's Top 100 Financial Advisers - Just What the World Needs

This morning, I clicked over to Barron’s and was greeted with its rankings of “The Best Advisers,” which I’m sure I’ll find relevant when I no longer live on Ramen noodles and dented cans of tuna.

I can’t think of an article more useless to the average investor, because Joe Six Pack (drink!) is not in the position of being able to invest with any of these advisers. In fact, he’s probably suicidal from not being able to afford the new GI Joe with the Kung-Fu grip for his kid, and if his wife aint gonna make love to him, does getting into John Paulson’s new hedge fund really matter?

But let’s put that aside for now and dig in.

Have you ever met anyone that tells everyone who’ll listen that their cardiologist/dermatologist/mechanic/drug dealer is the best in New York? This is the Wall Street equivalent. So you can thank annoying people like that for giving lists like Barron’s Top 100 Financial Advisers, Barron’s Top 1000 Financial Advisers, Barron’s Top 100 Women Financial Advisers, Barron’s Top 100 Independent Financial Advisers, and Barron’s Top 100 Eskimo Financial Advisers a reason to exist.

And why can’t I just call them advisors, with an O, like I want to?

Unfortunately, Barron’s is robbing some otherwise-qualified advisers advisors of priceless marketing by excluding the following 24 folks who switched firms:

Name	Old Firm	New Firm
Christopher Aitken	Smith Barney	Merrill Lynch
Nick Bapis	Morgan Stanley	Hightower Securities
Richard Blosser	Morgan Stanley	UBS
Roger Carter	Morgan Stanley	Merrill Lynch
Robert Coleman	Morgan Stanley	Merrill Lynch
Rick Davidson	Credit Suisse	Morgan Stanley
George Dunn	Smith Barney	Convergent Wealth
Robert Dunn	Morgan Stanley	UBS
David Hou	Merrill Lynch	Luminous Capital
Michael Johnston	Citi Family Office	Merrill Lynch
Sanford Katz	UBS	Credit Suisse
Gregory Kern	Bank of America	Deutsche Bank
Kevin Knobloch	JP Morgan	Wachovia
Steve Levine	Credit Suisse	UBS
Kenneth Moffet	Morgan Stanley	Hourglass Capital
Andrew Perry	Deutsche Bank	UBS
Peter Rukeyser	Morgan Stanley	UBS
Mark Sear	Merrill Lynch	Luminous Capital
Kurt Sylvia	Wachovia	UBS
Dean Trindle	Merrill Lynch	Morgan Stanley
Lori Van Dusen	Citi Institutional	Convergent Wealth
Alexander Williams	Morgan Stanley	UBS
Eric Yamin	Morgan Stanley	UBS
Richard Zinman	Smith Barney	Credit Suisse

According to the article “Barron's keeps such advisers off the list for a year, to see how their accounts shape up at the new firm.”

That statement strikes me as a bit odd, because Barron’s also says “Investment returns aren't an explicit criterion, because advisers aren't required to file audited statements. But honest advisers operating on this scale tend to have strong returns -- that's how they get and keep so many clients.”

So if returns for these advisors aren’t monitored, why even worry about how their accounts “shape up at the new firm?” These are relatively high-powered operators, often managing billions of dollars, so if they retained their clients during their switches to new firms, then why couldn’t they stay on the list?

Isn’t getting and keeping clients what counts?

I’ll say this: Leaving troubled firms like Citigroup (C) is a sign that folks like Lori Van Dusen and Michael Johnston probably care quite a bit about their clients, who’ve learned over the past year that financial services is one area in life where size doesn’t matter.

I could also rant about the conflicts of interest involved in letting firms nominate their own advisors, but I’m too tired, I’m too old, I’m too f*cking blind.

Besides, what do you care? You don’t have enough money to work with any of these advisors anyway.

American Apparel vs. Woody Allen Heats Up

American Apparel (APP) is coming out swinging against filmmaker Woody Allen, who is suing the Los-Angeles based retailer for using his image on billboards in Los Angeles and New York. Let me tell you, if I ever have to defend myself against a lawsuit, I want to hire this David Slotnick guy.

While Hollywood and the mass media pretty much ignore the fact that Woody Allen married his stepdaughter, he came out and said what the silent majority are thinking:

"Certainly, our belief is that after the various sex scandals that Woody Allen has been associated with, corporate America's desire to have Woody Allen endorse their product is not what he may believe it is."

Woody Allen most certainly has a case against American Apparel for using his image without permission, but I get the feeling that this case will get dropped, or settled cheaply and quietly. By calling Woody Allen out on his controversial past, American Apparel has very quickly turned the tables, and it’s great marketing because it gets them in the news.

I’m sure Woody would like the world to forget about his misdeeds, so if he’s smart, he’ll let this one go. The harder he fights, the worse it will get.

Lenny Dykstra Gets Lucky With Intel

Adam Warner at the Daily Options Report made the following observation about Lenny Dykstra’s massive Intel (INTC) options trade recommendation:

As some of you may know, Lenny's 10 lot of INTC Deeps mushroomed into an 880 lot of ATM calls. Specifically the April 15 calls.

Lenny owns them at an average price of $1.40, and has apparently kept lowering the offer down to $1.50.

Well, a funny thing happened. INTC rallied a bit, and with earnings on, the calls carried a modest premium over the stock. And as luck would have it, topped at exactly $1.50. In fact 92 traded.

So it looks like Lenny got awfully lucky with his Intel recommendation.

I just wonder about all the subscribers who put in GTC sell orders at $1.50. Given how many times Lenny recommending averaging down (going from 10 contracts worth about $6K to gambling $132K on 880 contracts is no laughing matter), a great deal of the open interest in the Intel $15 Call (ticker: NQDC) were probably his subscribers.

And if just 92 contracts traded at $1.50, that means basically all of Lenny fans were holding the bag as the stock got creamed. Had he actually owned 880 calls, his own position may never have been filled.

Well Lenny, sometimes when you win, you really lose. And sometimes when you lose, you really win. And sometimes when you win or lose, you actually tie. And sometimes when you tie, you actually win or lose. And sometimes when you win, and the people who listen to you don’t have over a hundred grand to average down on a ridiculously super-high risk options trade, THEY LOSE. 

But what do you care?

Want to read more about Lenny Dykstra and his deep-in-the-money call option strategy? Just click these links:

Should We Be Listening to Lenny Dykstra

Inside Lenny Dykstra’s 99-1 Record

Lenny Dykstra Was in Bed With AIG

Introducing VideoGameStocks.net!

Hello all,

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I've moved all my postings on video-game stocks from LongShortTrader to VideoGameStocks.net, so please bookmark the site or track the RSS feed. And if you head there right now, you can find out what I think about Onlive.

*****************

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Goldman Sachs: Real Men of Genius

This in from Bloomberg:

Goldman Sachs Group Inc., the sixth-biggest U.S. bank, raised a fund with about $5.5 billion in capital commitments to purchase private-equity assets on the secondary market.

The GS Vintage Fund V, Goldman Sachs’s fifth dedicated private-equity secondary fund, will acquire portfolios ranging from $1 million to more than $1 billion, the New York-based company said today in a statement.

Private-equity investors such as Harvard University are taking losses, and other schools are selling their future commitments to funds on the secondary market at discounts as high as 50 percent. In 2009, investors may dump as much as $130 billion in commitments, according to David De Weese, a New York- based general partner at Paul Capital Partners, which has $6.6 billion of assets under management.

It’s moves like this that are keeping Goldman Sachs on top. The fund will be buying private equity assets at a significant discount to underlying value, from sellers that are desperate to get out. That is a surefire recipe for big winnings five to ten years down the road, when hopefully, the economy picks up and exit multiples are higher.

By buying at such a big discount, Goldman has a HUGE margin for error on these deals. It’s also using other people’s money rather than its own capital, so it should be able to keep Geithner’s paws out of these dealings, which should fall into the asset-management category.

Inside Lenny Dykstra’s 99-1 Record

UPDATE: Lenny Dykstra is Out at TheStreet.com

(note: This is the second of a series of three many posts focused on Lenny Dykstra’s trading strategy. I strongly recommend you read the first post, Should We Be Listening to Lenny Dykstra?, before this one. Subscribe to LongShortTrader's RSS feed to be sure you get the conclusion to this series!)

In this second part to my series on Lenny Dykstra, I’ll be providing some color on Lenny Dykstra’s track record in his “Nails on the Numbers” investment newsletter. Just last week in a column for TheStreet.com, he made the following statement:

In this period of market pessimism, investors have taken many solid companies to the wood shed. In the case of really well-run companies, this is an overreaction that will eventually correct itself. The value of solid companies will reassert itself in time. Subscribers who follow my deep-in-the-money newsletter, Nails on the Numbers, will be rewarded when the market corrects. My system has a win record of 99-1.

So with the help of a subscriber to the service, I dived in and took a look at Lenny’s record. I mean, he’s advertising it, he must want us to examine it!

Is Lenny 99 and 1? Yes, but only if you don’t believe in mark-to-market accounting for a portfolio with readily-available prices for all securities. Notice the lack of a current market price for any open position:

(I’m not naming names here because this is a paid subscription service)

Lenny doesn’t count a position as a loser until it is closed out. Until then, it is considered to simply be on the “Recommended List”. In fact, a current accounting for Lenny’s open positions reveals that he is down over $300,000 on them as of yesterday’s close, including three positions which are down over $50,000 each due to averaging down on hundreds of options contracts.

And as for that 99 –1 record, the one loss came with a price tag of $201,350.

Does that make any sense in a system that aims for $1,000 gains? You’d have to pick an awful lot of winners to make up for big losers like that.

As others have pointed out, we don’t know the size of the portfolio, which prevents anyone from making an informed judgment on Lenny’s performance. Saying you’re 99-1 is meaningless when 1) the one loser comes close to wiping out the 99 wins, and 2) the losses on open positions outweigh the gains on closed positions.

So what do we actually know about Lenny’s track record? Not much, because not knowing the size of Lenny’s portfolio makes it impossible to judge his performance. In fact, his performance might compare fairly well to the S&P 500 – but we just don’t know. He’s in the green on closed positions, even including the big loser, but in the red if you add in closed positions, which is appropriate for a portfolio of actively traded call options. And remember given the sheer volatility of a call options portfolio, he can swing wildly to either direction in the matter of a few days.

Stay tuned for the conclusion to this series, which will include some takeaways that may surprise you - like when Lenny Dykstra will make you rich.

More About Lenny Dykstra:

Lenny Dykstra Gets Lucky With Intel

Lenny Dykstra Was in Bed With AIG

Berkshire Downgraded by Moody’s

This just in, courtesy of Bloomberg News:

Billionaire Warren Buffett’s Berkshire Hathaway Inc. had its top-level Aaa credit rating cut by Moody’s Investors Service because of the falling value of stock markets and the impact of the recession on profit.

The rating was cut two levels to Aa2 on “the severe decline in equity markets over the past year as well as the protracted economic recession,” Bruce Ballentine, a Moody’s analyst, said in a statement about Omaha, Nebraska-based Berkshire.

Moody’s joins Fitch Ratings in cutting Berkshire after the firm’s worst year since Buffett took over in 1965. Standard & Poor’s last month said it was putting the firm on watch for a possible downgrade.

James Altucher Discusses Facebook IPO

In this video, James Altucher of TheStreet.com discusses the possible beneficiaries of a Facebook IPO.

Amazon.com (AMZN) – “Everyone building applications on top of Facebook or Twitter is gonna use AMZN’s cloud services to host all their applications to handle the growth.”

Valueclick (VCLK) – “Company trades for just 6 or 7 times cash flows, they have a ton of cash in the bank, I think there’s gonna be a resurgence in Internet advertising advertising as everyone realizes what a scam all other forms of advertising are.”

Google (GOOG) – I also like happen Google here, because I like their advertising, the cost-per-action advertising. And believe it or not, Facebook drives much of the page views of Google, so I think Google is gonna benefit from  any surge in popularity that occurs with a Facebook IPO.

There aren’t bad ideas, but I think the Facebook IPO represents a new stage of maturity rather than a new catalyst for hyper-growth. Of the three, I like Amazon the best because as Facebook’s growth slows, the new focus will be increasing the time users spent on Facebook rather than adding new users.

That means any company or person using Facebook as a promotional tool will be building more complex apps – and Amazon is top dog in the cloud computing category.

Here’s another interesting video from James on what he believes are the “Greatest Scams of the Century:

Nouriel Roubini vs. Jim Cramer in Steel Cage Match

Having finished tangling with Jon Stewart, Jim Cramer is facing another critic in noted economist Nouriel Roubini. Roubini, a.k.a. Dr. Doom, made the following comments about Cramer at the "A Night with the Bears" event in Toronto event:

"Cramer is a buffoon," said Roubini, a New York University economics professor often called Dr. Doom. "He was one of those who called six times in a row for this bear market rally to be a bull market rally and he got it wrong. And after all this mess and Jon Stewart he should just shut up because he has no shame."

Jim Cramer, having no fear of a fight, gently responded back in this CNBC interview:

“Well we got that guy Nouriel Roubini, and he attacked me today, which I regard as a great badge of honor. As all my attackers, I always welcome you on Mad Money.”

Now if Jim Cramer could bring Nouriel Roubini on Mad Money for the business news equivalent of a good old fashioned steel-cage match, CNBC would be sitting on ratings gold. However, after Cramer essentially let Jon Stewart bully him around on air, the CNBC brass likely doesn’t want to risk any bad press for their biggest star. Roubini has a lot more credibility in the economic/financial world than Jon Stewart, so his criticism carries a hell of a lot more weight.

Keep your eyes and ears peeled, because this rivalry is just getting started.

Pulte Homes + Centex = Love

Wow! Pulte Homes (PHM) is taking over Centex (CTX) in a $3.1 billion deal. Considering how lousy the housing market is, it’s pretty amazing they got this deal done.

Centex shareholders will receive 0.975 shares of Pulte each share of Centex they own. Based on Pulte’s close yesterday, the deal has a value of $10.50 per Centex share, a premium of 32.6% to the 20-day volume weighted average trading price of Centex's shares. The combined company currently would have an equity market capitalization of $4.1 billion and an enterprise value of $7.2 billion. On closing of the deal, Pulte shareholders will own 68% of the combined company, and Centex shareholders will own about 32%.

While I don’t have the cajones to buy a homebuilding stocks, this deal could make Pulte a monster in the long run. An awful lot of small homebuilders are going out of business because of liquidity/credit concerns, and this transaction is a major market-share builder.

So the missing part of the equation remains, when? Unemployment is on the rise and consumers are rightfully fearful of the future. Housing prices still need to come down to spur mass buying again.

Five Cool Things That Happened On My JetBlue Flight to Vermont

Call me crazy, but I love just about everything to do with flying. I can’t stand security, but I love sitting in airports, wandering around overpriced gift shops, and watching all the various characters that end up in the terminals.

I even love airplane food because it reminds me of TV dinners. I swear, one of the best meals I’ve ever had was on an Air France flight to Paris. Maybe it was all the wine, beer, and cheese I had, but that was one of the most satisfying pieces of plain old chicken I’ve ever been served.

And just today, I flew to Vermont to visit my main squeeze, who is recovering from knee surgery up in the beautiful Green Mountain State. As is usual with domestic flights, I took JetBlue (JBLU), which won me over a few years go by returning a lost necklace to my mother. They actually looked us up from the seat number, and called me less than an hour after we landed to tell us they would hold it. That really impressed me.

I have a lot of great memories from flying, and today’s trip gave me a few more.

So without further delay, here are five cool things that happened on my JetBlue flight to Vermont:

1) I Learned About Captain Hook

I sat next to a mother with two young children, a three-year-old boy and a one-year-old girl. The elder of the two was watching Peter Pan on a portable DVD player, and took it upon himself to explain to me that “Captain Hook is a bad guy” and that “you should never trust him because he’s mean!” Hey, the kid’s three years old, but he’s right.

2) A Baby Pulled My Finger

The aforementioned one year-old kept pointing at me, so I had no choice to point back. It’s only fair, right? Well, she didn’t flinch one bit, and grabbed my finger and pulled it. I thought to myself, “this baby thinks I’m afraid to fart in front of her.” Well, she was right. Score one for the baby.

3) I Heard a Twenty-Minute Version of Twinkle, Twinkle, Little Star

This kid was no Smokey Robinson or Pavarotti, but I have to say, it was the most charming rendition of “Twinkle, Twinkle, Little Star” I’ve ever heard. He was a little hoarse and a tad off-key at times, but his stamina is worthy of praise. I bet we’ll see this kid on “American Idol” one day – after all, he just wouldn’t give up.

4) I Came Closer to Beating Bubble Bobble

You could say I have a slight obsession with Bubble Bobble. Yes, a grown man playing a game featuring little dragons blowing bubbles, but what can I say? I played it as a kid at the Lee Mark Lanes in Brooklyn and on the original Nintendo, and now I play it on the DS. I am determined to beat this game on single player, and am willing to ride the emotional rollercoaster it takes to win at Bubble Bobble.

5) The Flight Attendant Couldn’t Stop Laughing

Now I don’t know what was going up in front of the plane, but when the flight attendant came on the mic to give the “welcome to Burlington…” speech marking the end of the flight, he was laughing so hard that he couldn’t make it through. Maybe the pilot was tickling his butt or something, but the guy just couldn’t hold it together.

However, there couldn’t be a more perfect end to a flight. Well done, passengers and crew of JetBlue Flight 66 to Burlington, VT!

GM Speeding to Bankruptcy, Taxpayers to Own HUMMER

That’s what people are telling Bloomberg News:

General Motors (GM) is speeding up preparations for a possible bankruptcy filing even as directors seek deeper savings this week to avoid that outcome, people familiar with the plans said.

The bankruptcy readiness focuses on forming a new company from GM’s best assets if necessary, said the people, who asked not to be named because the matter is private. The cost-cut discussions center on how to go beyond GM’s proposal to slash debt by 46 percent and shed 47,000 jobs in 2009, and will include talks with Treasury officials, the people said.

The moves are a response to President Barack Obama’s March 30 rejection of GM’s bid to keep $13.4 billion in federal loans. With bondholders and the United Auto Workers balking at concessions, a push for more savings makes bankruptcy more “probable,” Chief Executive Officer Fritz Henderson has said.

This is probably a good thing. The sooner GM gets into the bankruptcy process, the sooner they can restructure and get on the road to recovery. Rick Wagoner is already gone, a positive first step, but the company desperately needs to reduce its debt load, both on balance sheet and off.

But one thing I don’t like is the idea of forming a new company with GM’s best assets. Call me crazy, but that sounds like GM keeps the good stuff, while the taxpayers end up with parts of the company like Oldsmobile and HUMMER, and probably billions in pension and health benefit obligations.

Obama and Geithner are only playing tough with the automakers because people are ticked that the problems have been so obvious for so long, and yet no one’s done anything about them.

At the end of the day, the government will give General Motors (GM), Ford (F), and Chrysler the money they need to squeak by. It’s only fair when you think about the trillions handed over to the banks. Michigan is a battleground State, and neither party will want to piss off the citizens there by officially breaking Humpty Dumpty.

Should We Be Listening to Lenny Dykstra?

UPDATE: Lenny Dykstra is Out at TheStreet.com

(note: This is the first of three many posts focused on Lenny Dykstra’s trading strategy. Subscribe to our RSS feed to be sure you get the rest!)

Baseball great turned options-trading maven Lenny Dykstra is not a stranger to bad press. He’s faced steroid allegations, been sued by his publishing partners, and most recently, he was portrayed as a dishonest, homophobic racist in GQ magazine.

But I’m not hear to talk about that. I’m here to answer one important question that the mainstream media hasn’t bothered addressing:

Should investors be listening to Lenny Dykstra?

In 2005, Lenny began writing for TheStreet.com (TSCM), a former employer of mine. He quickly stood out for his baseball fame and unique investment strategy based around buying deep-in-the-money call options. He’s risen to writing the “Nails on the Numbers” newsletter for TheStreet.com, and remains a popular columnist for the site.

I met Lenny once at TheStreet.com’s offices and he was one heck of a nice guy with a great sense of humor. Back in the mid-to-late 1980’s, EVERY young Met fan loved Lenny Dykstra – he gave his all 100% of the time, and I’ll never forgive the Mets for trading him to the Phillies. But let’s forget all that for now and dig in. We’ll start with the most obvious question:

What the heck is a deep-in-the-money call option?

A deep-in-the-money call option is a call option with a strike price that is well below the current market price. Think of it this way - the lower the strike price versus the current market price, the deeper the call. As an example, here’s Research In Motion’s (RIMM) May call options:

(click to enlarge)

Since RIMM closed on Friday at $59.29, all call options below that price (shaded in the example above) are considered to be in the money. And as you go to $50, $45, and so on, the deeper in the money the call options are.

Lenny’s strategy consists of entering an order for 10 contracts (he has explained that his system is scalable for those with less capital) of a particular deep-in-the-money call option at a price below the current market price. If the trade is executed, he enters a good till cancelled (GTC) sell order at $1.00 above the price of the trade. So if a trade executed at $10, he immediately enters a sell order at $11.

Here’s Lenny in his own words, explaining what he believes are the advantage of this system:

In-the-money calls work to our advantage because of the leverage they provide. They give us exposure to a stock with significantly less money at risk vs. a cash or margin purchase for that same stock. Unlike buying a stock with cash, your risk on a call position is limited to the cost to buy the option. And be warned: Buying on margin is a dangerous game that I strongly urge you to avoid.

This is where I start having issues with Lenny’s strategy.

Lenny’s claim that DITM calls “give us exposure to a stock with significantly less money at risk vs. a cash or margin purchase for that same stock” is true if you care about the number of shares you are buying. But he fails to point out that there is a major difference between buying a stock on margin and DITM call options.

DITM call options can easily go to zero if a stock drops 25-30%. If you purchased a stock on margin and it drops, there is still a good chance you’ll have something left over, even with a margin call. Of course, that’s assuming the stock in question wasn’t something like Bear Stearns, Citigroup (C), or General Motors (GM).

And by saying your “…your risk on a call position is limited to the cost to buy the option,” he seems to be implying that this isn’t a significant risk when in fact it represents 100% downside risk. It is possible to lose more than 100% by buying on margin, but you would most likely receive a margin call and be forced to sell before that happened.

Add it up, and it’s obvious that buying DITM call options is equal to or more risky than buying stock on margin, which Lenny writes off as “a dangerous game.”

Lenny also advocates averaging down on his picks, saying the following in a recent article for TheStreet.com:

Sometimes our prediction is a little off at the outset. Inevitably, some picks will fall further before coming back into their own. And when stocks fall, we turn that to our advantage by averaging down. When the price of a stock goes down, a DITM-option price drops as well. That's our opportunity to buy more contracts at lower prices. I do this in order to lower my average entry price.

Here's an example. We got the call options in my pick Cisco (CSCO) at an average price of $8.10 a share on Dec. 12, when the stock closed at $16.99. I recommended placing a good-till-canceled sell order $1 above our entry price -- in this case at $9.10.

In mid-January, the stock began to drop. When that happens, my system calls for subscribers to place re-buy orders at specified price levels. When shares of Cisco fell to $15, we bought 10 more call contracts at a lower price. This lowers the average cost of each contract and each GTC order. Because options trade in 10-cent increments, some rounding may be necessary as the price of GTC orders drops.

Essentially, Lenny aims to lock in $1,000 gains, but fails to implement similar limits on downside risk. Throwing good money after bad doesn’t make an awful lot of sense to me, especially when the upside potential is purposely limited.

Make no mistake about it, like all unhedged options trading strategies, buying DITM call options carries high risk. And a portfolio of DITM calls is nothing but a leveraged bet on the market, even if you only select the most conservative, well-managed companies. If the market goes down 30%, you’re broke. If it goes up 30%, you’re rich.

Can you handle that without vomiting?

If people fully understand and embrace the risks of DITM calls, then more power to them. I won’t get in their way, but I will present what I view as the dark side of Lenny’s strategy. Hopefully, I’ll help investors make an informed decision as to whether Lenny’s style is appropriate for them.

Read more about Lenny Dykstra:

Inside Lenny Dykstra’s 99 – 1 record.

Lenny Dykstra Gets Lucky With Intel

Lenny Dykstra Was in Bed With AIG