Dear Bottarelli Research Member,
It’s time to get positioned in our first round of trades.
But first, I’d like to kick things off by revealing to you two trading secrets that were NOT revealed in your special reports.
Both secrets are used by pro floor traders to quickly identify bullish and bearish stock candidates in a matter of seconds…and then get positioned in a “delta-neutral” trading position that makes money no matter what happens on the Dow, NASDAQ, or S&P 500.
It sounds confusing, but it’s really not.
Here’s the inside scoop…
Secret #1 is based off two descriptions of stocks. One is called a “Sell Off High” and the other is called a “Rally Low.”
A “Sell Off High” is any stock that’s hitting a new 52-week high on a day that the broader markets are experiencing a heavy sell-off. For example, if you can identify those special stocks that are hitting new highs despite 9 out of 10 stocks on the major market exchanges are trading in the red, you to take an extremely strong upside bias for this company.
On the flipside, a “Rally Low” is any stock that’s hitting a new 52-week low on a day that the broader markets are experiencing a huge up-move. For example, if you can identify those special stocks that are hitting new lows despite 9 out of 10 stocks on the major market exchanges are trading in the green, you know to take an extremely strong downside bias for this company.
Secret #2 is how to trade these two stocks. You see, the big reason CBOE floor traders make so much money is that they’re continually keeping their positions balanced by owning the same number of calls as puts. This is called a “delta neutral” position, and it’s so important because it makes the floor trader unaffected by directional market moves. By owning the same number of calls as puts, they’re making money either way — and simply banking the spread between each contract.
That’s why we’ll adopt this secret into our trading. In BottarelliResaerch, we’ll always try to own calls on the strong stocks and puts on the weak stocks — at the same time. This ultimately gives you a “delta neutral” trading position — one which makes you money in any market environment.
So with that, I’d like to introduce two new plays. One upside play and one downside play (weighted on both the Dow and the NASDAQ for diversification purposes)
The upside play is a stock called Freightcar America (RAIL – NASDAQ).
The company manufactures aluminum-bodied and steel-bodied railcars for hauling coal, bulk commodities, steel, forest products, and automobiles in North America.
On February 7th, the company posed an excellent Q4 profit. The next day, on February 8th, they declared their regular dividend. This is all great stuff for investors to hear.
Their net income for Q4 05 was $17.6 million — compared to a net loss of $9.4 million for Q4 ’04. That’s an amazing one-year turnaround. Orders for new railcars totaled 5,305 units in the fourth quarter of 2005, a 120% increase compared with 2004. Plus, their backlog of unfilled orders reached a record 20,729 units at December 31, 2005, compared with 11,397 units at December 31, 2004. All this points to sustained growth for RAIL. As long as the commodity boom continues, I’d expect gains for RAIL. The company just hit a new 52-week high today of $64.30, so here’s the play:
PLAY: Buy the RAIL March 60 Calls (RQN CL) at or under $6.50, good for the day. Place a protective stop loss at $3.00.
The downside play is a stock called MCD Holdings (MDC – NYSE).
The company builds single-family detached homes and town-homes in Virginia and Maryland. Through its subsidiary, HomeAmerican Mortgage Corporation, it also brokers mortgage loans for the company’s homebuyers.
MDC just hit a new 52-week low today of $59.71, which signals the troubles ahead facing the overheated housing sector. On Friday, January 20th, The Wall Street Journal Online ran a story titled “Home Construction Falls Sharply.” This is one of many articles signaling tough times ahead for the homebuilders.
Based on the new low, and the cooling of the housing market, let’s get positioned to the downside in MDC. Here’s the play:
PLAY: Buy the MDC June 65 Puts (MDC RM) at or under $$7.50. good for the day. Place a protective stop loss at $3.50.
FOR SPECUATORS ONLY:
Sometimes in Bottarelli Research, I’ll be offering up plays that carry heavy risk in return for a handsome reward. I only want you to take these plays if you’re an experienced trader, and you’re willing to withstand some exceptional volatility. Do not place a lot of money on the speculator trades. In fact, trade only one forth of the typical allotment you’d place on a normal trade.
Having said all that, I think it’s a good time to buy a “lottery ticket” on Google (GOOG – NASDAQ).
As you know, GOOG has been one of the best-performing stocks in all of Wall Street. It IPO’ed at $80 and rallied all the way up to the mid-$400 level. But recently, shares of GOOG have experienced some chinks in the armor. In the past few weeks, shares have dropped 25%. This morning, spurred on by a bearish cover story in Barron’s, shares are down another $17 in early afternoon trading.
Three things are happening to cause the weakness.
- GOOG is getting increased competition from Microsoft and Yahoo, yet it’s trading at a market valuation double of that of its peers.
- Googe insiders are selling heavy amounts of shares. Co-founders Brin and Page have each sold more than $1.5 billion of their own stock, and the CEO, Senior Vice President, and Director have each sold over $400 million.
- All the recent euphoria about their earnings are now fully priced into the stock valuation. Any slip up in earnings, and Wall Street will punish the stock.
Based on these facts, I’d like to place a small amount of money on a longer-dated, out of the money Google put option. Most likely, making this trade will lose money. But if Google does indeed start falling, it could pay of 10 to 1. Like the lottery, you risk a tiny amount to get a potential windfall. But in this trade, it’s like buying a lottery ticket knowing three of the seven numbers going in!
Remember, this is a speculative trade only. Expect it to lose — but maybe return a massive gain. With that, here’s the play:
PLAY: Buy the Google June 240 Put (GOU RH) at or under $5.00, good for the day. Place a protective stop loss at $2.00.
Lock and load!