A Dose of Perspective

Plus: Add CRM and DECK Puts

*PLAY: Buy the CRM November 55 Puts (CRM WK) at market, good for the week. Place a protective stop limit at $2.10 and implement our scaled-selling technique to lock in portions of your profits as these calls achieve 50% returns (and greater).

PLAY: Buy the DECK September 90 Puts (QUK UR) at market, good for the week. Place a protective stop limit at $2.10 and implement our scaled-selling technique to lock in portions of your profits as these calls achieve 50% returns (and greater).

PLAY: Add to the PBR, RIO, AMX, HOV, & WFT positions as indicated below.

Dear Bottarelli Research Member,

I have a number of issues to address in today’s LEAPS alert, so let’s dive right in.

The most critical issue, in my opinion, is the recent movements of some of our LEAPS positions. I’ve received a number of emails from members concerned about the value of their LEAPS moving down in the midst of the bear market conditions.

Now I admit, it’s certainly not my intention to select LEAPS positions that decrease in value. But it’s absolutely critical that we frame our concerns around the proper perspective. You see, if we were holding call options with a July or August expiration, then I would share in your concerns. But that is NOT the situation that we have here.

Rather, all of our current LEAPS positions have expiration dates ranging from November of 2008 to January of 2010. This extended time value is absolutely critical to our profit methodology. You see, the benefit of LEAPS is that they offer you the tremendous leverage of options combined with an extended expiration cycle. Combine each of these benefits and you are able to hold your LEAPS throughout any near-term market turbulence without suffering losses associated with quick- and short-term trading methodologies.

To put it another way, consider this…

We officially launched Bottarelli Research LEAPS on June 3^rd, which means we’ve now been holding our LEAPS positions for just over one calendar month. Considering that the majority of our positions have a January 2009 expiration, that means we’ve only used up one (1) out of a total of seven (7) expiration months. Granted, this one month (notably June) offered quite a downside thrust to the markets, but don’t forget about the profits we have already taken. Specifically, we locked in gains on our entire position in the Fording Canadian Coal Trust September 90 Calls (FDG IR). Looking at the FDG chart, our sell timing could not have been better! (For more on this position, see the “Follow Up” section below).

We also locked in a 50% profit on half of our Weatherford International January 2009 50 Calls (WFT AJ). And we came a mere ten cents away from locking in another 50% return on our Petroleo Brasileiro January 90 Calls (PMJ AR) and our Entergy January 140 Calls (ODF AH).

Plus, let’s also consider Friday’s movement of Overseas Shipholding Group (OSG – NYSE).As you know, we entered the OSG January 95 Calls (OSG AS) on June 23^rd, and then watched as the stock subsequently engaged in a rapid sell-off. But instead of panicking, we held our ground and added to this position last week. And low and behold, despite 200-points of market selling pressure on Friday, shares of OSG bounced nearly $6.00 higher, and this single-day move helped blast our entire OSG position back into the black. See for yourself:

NOW THIS IS IMPORTANT: Moves like this can occur in any one of the LEAPS positions that we currently have open. Therefore, it’s imperative that we remain properly positioned to capitalize on any of these forthcoming upside moves. As you can see from OSG, all it takes is one week (or even one day!) to blast a LEAPS position back from obscurity, so be sure to hold your ground and maintain your positions.

All told,our collection of LEAPS positions are indeed offering us the ability to achieve strong returns even in the midst of one of the weakest market months in history. And in that context, just imagine the returns we’ll see once the market stabilizes.

In all honesty, I firmly believe that the current market is handing us the buying opportunity of a lifetime. So instead of panicking, I want to take full advantage of this opportunity by adding to our LEAPS positions. Unless you think the U.S. economy is headed for a full-blown depression (which it is not), then adding to our LEAPS positions at these levels could very well be the savviest move you’ve ever made.

Remember, we’re currently positioned in the strongest companies operating in the strongest market sectors. And although the current bear market has done a good job of making even the best stocks look like dogs, we cannot lose sight of the powerful investment thesis behind each and every one of our current LEAPS positions.

So for today, the first order of business is to reset our current market perception — and use the temporary selling pressure to our advantage. With two full quarters of expiration time left, I want you to lower your cost basis and add to the following five (5) LEAPS positions now. A full position list (and explanations) of each trade are listed below:

LEAPS ADD-ON PLAY #1: Companhia Vale do Rio Doce January 37.5 Calls (VOH AU): Here we have the world’s top iron ore producer based out of Brazil. You cannot produce steel without iron ore, and this makes RIO a global infrastructure play that’ll remain bullish for years to come. After entering these calls on June 30^th for $3.90, a temporary oil, energy, and commodity sell-off pushed shares of RIO into over-sold territory. With these calls currently trading for $2.40, let’s lower our cost basis and add to our position. Buy more RIO January 37.5 Calls (VOH AU).

LEAPS ADD-ON PLAY #2: Weatherford January 2009 50 Calls (WFT AJ): Here we have one of the world’s top oil service plays, which has already handed us a 50% return on half of our position. We entered these calls on June 16^th for $4.40 and watched them trade as high as $6.90. With them now back down at $3.00, let’s lower our cost basis and add to this position as well. Buy more Weatherford January 2009 50 Calls (WFT AJ).

LEAPS ADD-ON PLAY #3: Petroleo Brasileiro January 90 Calls (PMJ AR): Here we have the most explosive oil play your investment dollars can buy. Off the coast of Brazil could lie the largest oil discovery in over 50 years, and PBR will be the company that is the prime beneficiary of these vast deposits. I consider PBR a long-term hold in every stock, mutual fund, or hedge fund portfolio, and I certainly feel that we need to capitalize on this buying opportunity in a big-time way. We entered these calls on June 4^th for $2.75 and saw them trade as high as $4.00, nearly triggering a “sell half” action at the 50% profit mark. With these calls now trading down at $1.35, we’re being handed a remarkable second-entry opportunity. Let’s not pass it up. Buy more PBR January 90 Calls (PMJ AR).

LEAPS ADD-ON PLAY #4: America Movil January 2009 70 Calls (AMX AN): Here is the one LEAPS position that has drawn the most concern. The original basis for the pick was two-fold. First off, AMX is one of the most rapidly-growing International telecom stocks in the world. With access to the powerful Latin American markets, they’re the equivalent of investing in names like AT&T or Verizon back in 1990. Also, the stock recently experienced a downside gap (as you can see from the chart below). In my experience, all gaps of this magnitude eventually get filled. It doesn’t matter if they’re upside gaps or downside gaps, I always (and I mean always!) see these sort of gaps get filled. Therefore, as a way to benefit from AMX’s telecom exposure combined with the filling of the gap, we entered these calls on June 4^th for $2.00. As you can see from the AMX chart, shares have continued to fall, which has lowered the current value of these calls down to $0.50. While the initial reaction is to sell, I see this as a low-cost opportunity to add to our position. After all, if that gap does indeed get filled, that could result in an explosive winner unlike anything we’ve ever experienced before. And for only $0.50 per contract, the risk versus reward scenario is squarely in our favor. Therefore, let’s buy more America Movil January 2009 70 Calls (AMX AN).

LEAPS ADD-ON PLAY #5: Hovnanian January 2010 12.50 Calls (YZX AV): And finally, this is the one LEAPS position with the most expiration time. We have until January of 2010 on this play, which is based on a 2-year housing rebound. While I admit that the entire housing sector is in the soup right now, we must also keep in mind that there will always be a need for housing. Whether the market is good or bad, homebuilders will always be a critical aspect of the marketplace. And with shares of a top homebuilder like HOV now trading for the bargain-basement price of $5.00 per share, you have to wonder just how much lower can they go? To my eye, this looks like another remarkable opportunity to take advantage of an overblown sell-off going into January of 2010. We entered these calls on June 4^th for $1.45 and they’re now trading for $0.85. With so much time for shares of HOV to recover, the risk versus reward scenario is once again squarely in our favor. Therefore, let’s add buy more HOV January 2010 12.50 Calls (YZX AV).

Now, after adding to all five (5) LEAPS positions above, I would also like to add two new LEAPS put positions that offer us protection in a downside market. In fact, over the last few weeks, I’ve received a number of questions about adding LEAPS puts to our ledger on companies that I feel are destined for a fall, so here are some of my top downside plays.

One such downside candidate is a company like Lifetime Fitness (LTM – NYSE). Studies show that the first discretionary item to be eliminated from an average consumer’s monthly expenditures in times of recession are gym memberships, and LTM is one of the largest publicly-traded gym companies on Wall Street. Therefore, longer-term puts on LTM could be a viable play.

Another candidate is a company like Salesforce.com (CRM – NYSE). The company is an Internet software and services firm that provides on-demand customer relationship management (CRM) services to businesses and industries worldwide. For reasons that I cannot figure out, Wall Street absolutely loves the company, which is why it currently trades for 100x forward sales and a trailing P/E ratio of 300. I kid you not. How any stock can maintain such valuations in a recessionary market is a mystery to me. As a means of comparison, CRM’s top competitor is Oracle (ORCL – NASDAQ), and they are currently trading at a trailing P/E ratio of 20. Something doesn’t add up, and it appears like CRM’s current valuation is grossly overvalued. So let’s go ahead and play a downside move in CRM by adding puts now.

PUT PLAY #1: Buy the CRM November 55 Puts (CRM WK) at market, good for the week. Place a protective stop limit at $2.10 and implement our scaled-selling technique to lock in portions of your profits as these calls achieve 50% returns (and greater).

The third downside candidate that I’ve found comes in the form of Deckers Outdoor (DECK – NASDAQ).The company offers outdoor footwear and sandals under various proprietary brand names such as Teva, UGG, and Simple. As I write, DECK stock trades for $110.00 per share, and this valuation looks primed for an extended fall. After all, consider the recent fate of another once-popular footwear stock, Crocs (CROX – NASDAQ). Once a $70.00 stock, shares of CROX have quickly fallen under $10.00 per share. This was a devastating blow, which shows you just how quickly the fortunes of a fickle retail footwear stock can rise and fall.

As I review the DECK chart, it appears that the stock has established a double-top formation at $145.00. And now that it has penetrated its 200-day moving average, the shares have no viable safety net until at least the $90.00 level. Therefore, let’s play this downside action using a new put position.

PUT PLAY #2: Buy the DECK September 90 Puts (QUK UR) at market, good for the week. Place a protective stop limit at $2.10 and implement our scaled-selling technique to lock in portions of your profits as these calls achieve 50% returns (and greater).

UPDATES

Foster Wheeler November 75 Calls (UFB KO): Our latest pick from July 7^th remains underneath our entry price, but I continue to like the idea of maintaining this top global infrastructure play until November. On Friday, shares of Jacobs Engineering Group (JEC – NYSE) jumped 5% after being upgraded by Friedman Billings, and this bullish view in engineering should also be positive for FWLT. Hold.

CBOE Volatility Index October 25 Calls (VIX JE): Our “hedge” against further market downside is doing its job, trading for a high of $3.30 this week. That’s a modest 17.85% gain from your $2.80 entry price, so maintain this protective position for more gains.

Overseas Shipholding Group OSG January 95 Calls (OSG AS): As mentioned above, our decision to add to this position last week is now looking good. We’re now holding these calls with an average cost basis of $5.38, and they traded as high as $5.90 on Friday. Any forthcoming upside action will quickly move us towards the 50% profit level, so maintain this position for more upside.

Entergy January 140 Calls (ODF AH): Here is the strongest position in our ledger, as these calls are on the brink of handing us a 50% return. This past week, they reached a high of $4.00, good for a 48.15% gain off our June 4^th entry of $2.70. The moment these calls hit 50%, be sure to take half of your profits off the table!

Former Position Follow-Up:

Fording Canadian Coal Trust September 90 Calls (FDG IR): As I mentioned above, we locked in a great return on these calls just in the nick of time, as shares of FDG got clobbered over the last two weeks. This appears to be nothing more than Q2 profit-taking, which could soon present us with an opportunity to re-establish another January call position for rock-bottom prices. Stay tuned for this possible re-entry in a forthcoming LEAPS alert.

ONE FINAL NOTE: Before I sign off, I’d like to highlight (what I consider) an important market reaction that was glossed-over by the mainstream media (due to oil prices, Fannie Mae, and other more pressing financial stories).

On Tuesday, July 8^th, Dow component Alcoa (AA – NYSE) kicked off Q3 earnings season by reporting numbers that were far below last year’s results. But low and behold, the stock ended up rallying on the news because their numbers actually came in above the analysts’ “expected” number.

In my view, this is a very critical reaction — simply because it could mean that the market’s expectations have now been lowered to a realistic level. And if that’s the case, it could be an early sign that we’re close to a near-term bottom. So be sure to add the LEAPS positions listed above, because if the market does hit a floor and bounce, we’ll be in a wonderful position to achieve some stunning returns going into the final two quarters of the 2008 investing year.

And on that note, have a wonderful weekend.

Sincerely,