Dear Bottarelli Research Member,
I hope you’re beginning to see how my trading methodology works.
By always striving to own an equal balance of calls and puts, you are able to take winner after winner no matter what’s happening in the markets.
In our particular case, all five of our winners thus far have been calls. And no wonder. As of yesterday, the three major market averages all set new 52-week highs: The Dow set a new four-and-a-half year high at 11,159.18, the NASDAQ hit a new high of 3,795.06, and SPY hit a new high of 129.65.
When the markets are in rally mode, you realize gains on the call positions — and you also realize losses on your put positions. This is totally expected — and it’s factored into the system.
You see, inevitably there will be a market pullback. In fact, that very pullback could be taking place today. So the trick is taking profits on your calls during the upside push while holding onto your puts. This positioning strategy then gives you the ability to profit off the market’s downside once the inevitable pullback occurs.
Think of it as a constant game of chess — in which you’re always trying to gain control of the center of the board by maneuvering your pieces in the best strategic position. Trading is no different — you always want to stay in a neutral position and then pounce on the winners when the markets move in your direction. Unfortunately, 9 out of 10 investing newsletters out there today have no clue how this works. Luckily, you’re part of the one letter that has it figured out.
Let’s get into today’s trading action…
The one downside position you have open is the MDC June 65 Puts (MDC RM). This is a downside play on the homebuilder sector, which could be getting an important signal today from luxury homebuilder Toll Brothers (TOL – NYSE) who just posted quarterly earnings that beat forecasts but also hinted of a coming slowdown.
According to Robert I. Toll, "Speculative demand has ceased and speculators are now putting their homes back on the market … Markets such as metro Washington, D.C., which are sound economically and showing healthy job growth, will need to work through their excess supply before the imbalance once again tips in our favor."
This bodes well for our MDC June put position, as forecasted weakness in the housing sector could keep stocks housing stocks moving lower. Hold.
Another benefit of the neutral market position is that you can re-load the call side of your trading portfolio on market down-days. This allows you to get into further upside stock plays at momentary cheap prices. So I hope you’re ready for more trading, because it’s time to get some fresh plays (ordered chronologically from least risky to most risky).
The first new upside play comes courtesy of Eaton Vance (EV – NYSE).
The company is a top manager of investment funds in the United States — offering investment and counseling services to 150 funds and 1,300 separately managed individuals. The cover story of Barron’s this week says “Separately managed accounts are one of Wall Street’s hottest products.” Eaton Vance is in prime position to capitalize on this popular new trend.
On Tuesday, February 28, they’ll host a conference call to discuss financial results for their quarter that ended on January 31st – which also coincides with their first quarter earnings. As you can see, the stock has been rallying leading up to his announcement — and I think the rally will continue.
PLAY: Buy the Eaton Vance August 25 Calls (EV HE) at or under $6.00, good for the day. Current bid/ask spread is $5.10 to $5.90. Place a protective stop loss at $3.00.
TRADING NOTE: I decided to go out until August on this play simply because you’re paying virtually nothing for time. With an intrinsic value of $5.00, you’re paying less than $1.00 to hold this call for the next six months. That’s less than $0.20 per month in carry — a great deal!
The second new upside play is Moody’s (MCO – NYSE).
Moody’s it a top credit rating service in the world. They research, analyze, and offer opinions on debt instruments and securities in the capital markets. This is a huge industry — totaling $2.5 billion — and it’s dominated by only three players: Standard & Poor’s, Moody’s, and Fitch Ratings.
Moody’s just recently posted a 22% percent rise in net profit, brought on by surging demand for finance ratings. I see no signs that point to this trend coming to an end.
PLAY: Buy the Moody’s May 65 Calls (MCO EM) at or under $5.00, good for the day. Current bid/ask spread is $4.50 to $4.70. Place a protective stop loss at $2.00.
The third new upside play is Becton Dickinson (BDX – NYSE).
They manufacture and sell medical supplies like needles, syringes, intravenous catheters, insulin injection devices, and blood glucose monitors for the treatment of diabetes. As you know, diabetes is one of the fastest growing medical issues in the country, and BDX looks positioned to capitalize on this trend. Check out the chart:
Just recently, biotech company VaxGen announced they’ve entered into an agreement with BDX to evaluate their Micro Injection technology that delivers VaxGen’s recombinant anthrax vaccine (VaxGen’s anthrax vaccine has been approved by FDA, which means is could be used as the major anthrax vaccine for future generations). As vaccine delivery becomes a major medical need, BDX looks ready to provide all the tools necessary to outfit the major vaccine providers.
PLAY: Buy the BDX June 60 Calls (BDX FL) at or under $7.00, good for the day. Current bid/ask spread is $6.60 to $6.80. Place a protective stop loss at $3.00.
The forth new upside play is Chemed (CHE – NYSE).
They are the nation’s largest provider of end-of-life care, and they’re also the owners of Roto-rooter, the nation’s largest commercial and residential plumbing outfit. I personally find this a fascinating mix of business operations — which keeps the company’s earnings safe and well diversified.
Chemed’s Vitas segment focuses on non-curative hospice care for ill terminally patients — managing the full range of doctors, nurses, home health aids, social workers, clergy, and volunteers.
Chemed’s Roto-rooter segment provides plumbing and drain cleaning services in the United States, Canada, China, Hong Kong, Indonesia, Singapore, Japan, Mexico, the Philippines, and the United Kingdom.
The company reported solid Q4 earnings, noting a 10% revenue jump for Roto-rooter and an 18.8% jump for Vitas. For 2006, the company expects each segment to grow between 7% and 18% over 2005’s numbers. I rate this as the safest play simply because CHE has the aging demographic working for it — plus the diversification of the Roto-rooter segment. Heck, plumbers make great money. I don’t know about you, but in my book, cleaning up a soiled toilet drain is worth every penny.
PLAY: Buy the CHE April 55 Calls (CHE DK) at or under $4.50, good for the day. Current bid/ask spread is $3.80 to $4.30. Place a protective stop loss at $2.00.
Now, let’s keep the balance by adding a new downside play into the mix.
That downside play comes in the form of Lear (LEA – NYSE).
When I first noticed LEA on my screen, I thought the company was the operator of private jets. But that’s not the case. Lear designs and manufactures interior systems and components for cars and light trucks. Their weakness can most likely be attributed to the struggling auto sector.
Just today, in fact, Lear’s chief financial officer resigned. He plans to go work for defense and aerospace company Raytheon — which is a clear-cut signal that LEA will continue to face a difficult financial environment. Play it down.
PLAY: Buy the Lear April 25 Puts (LEA PE) at or under $3.80, good for the day. Current bid/ask spread is $3.50 to $3.60. Place a protective stop loss at $2.00.
And finally, a word on Intel (INTC).
As you probably know, Intel is struggling. Big time. Mounting competition from AMD has pushed the stock to a new 52-week low at $19.88. Now here’s the thing: Every portfolio manager and crack newsletter editor out there is calling this a buying opportunity on Intel. To me that means one thing: Do the exact opposite.
My one and only concern with Intel is that the stock could call support at the $20.00 level and rise from here. But then again, a drop under $20.00 could fuel an even stronger sell-off down to $15.00. So I’m pretty much torn down the middle. For that reason, I’m designating this play for “speculators only.” If you don’t consider your self a risk-taker capable of swallowing a loss, do not enter this play. But if you enjoy swinging for the fences, here’s the play:
SPECULATIVE PLAY: Buy the Intel April 22.5 Puts (NQ PX) at or under $2.40, good for the day. Current bid/ask spread is $2.20 to $2.30. Place a protective stop loss at $1.00.
And speaking of speculators…
SPECULATIVE UPDATE: Your Google June 240 Puts (GOU RH) were officially stopped at $2.00. The stock couldn’t mount any gain yesterday when the market were hitting new 52-week highs, but it rallies $12.00 today when the markets are selling off. I don’t get it. Either way, the speculative nature of this play was definitely apparent, as the homerun thesis didn’t pan out. The play is now closed.
Lock and load!