One Copper Call, One Health Care Put

Play FCX Calls, AET Puts

PLAY: Buy the FCX August 35 Calls (FCX HG) at market, good for the day. Place a protective stop limit at $2.05 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

PLAY: Buy the AET July 30 Puts (AET SF) at market, good for the day. Place a protective stop limit at $1.35 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

Dear Bottarelli Research Member,

In today’s issue, we’ll add two news positions — both of which are designed to achieve strong returns as the global recession drags on.

First, we’ll re-establish a broad-based upside position in metals. Based on the strong returns of IAG and ABX here in 2009, it makes sense to increase our longer-term metals exposure.

Second, we’ll enter a new downside position in the third-largest U.S. health care insurer. From both a technical and a political standpoint, this health care insurer looks like it’s ready to move lower — making it a strong LEAPS candidate.

So on that note, let’s get started!

Our metals play comes in the form of exploration, mining, and production company Freeport-McMoRan Copper & Gold (FCX – NYSE).FCX specializes in a wide range of metals, including copper, gold, molybdenum, and silver — from properties located in Indonesia, North America, South America, and Africa.

As of last December, FCX had recoverable proven and probable reserves of 93.2 billion pounds of copper, 41.0 million ounces of gold, 2.0 billion pounds of molybdenum, 230 million ounces of silver, and 0.6 billion pounds of cobalt. As you can see, that’s a massive amount of metal, which makes FCX one of the strongest all-around metals plays your money can buy.

Considering that FCX is sitting on 93.2 billion pounds of copper, that’s clearly the primary upside price trigger. Now, I’m sure you know that copper got clobbered in 2008, which pushed FCX down 75% last year (the same story applies to fellow LEAPS play PCU, which dropped 50% in 2008). But if you look closely, you’ll notice that the luster is quietly starting to return to copper.

This past January, for example, was the first month that copper prices rose since June of 2008. In January, copper prices increased 3.4%, which helped FCX gain 20% year-to-date. Based on that ratio, simple math tells you that Wall Street pushes shares of FCX 5.8% higher for every 1% that copper prices move up. That’s really nice leverage, especially with copper prices so low. Going forward, any promising news (or even news that is less bad than expected) from the construction, housing, or electrical markets could be an upside catalyst for copper — and thus move FCX higher as well.

From a near-term chart perspective, FCX is looking to break out of the $30.00 level right now, which could translate into an up-side price move.

Over a longer-term perspective, you can see just how violently FCX has fallen. But like I mentioned above, an up-tick in copper prices could easily push FCX back up the $60.00 level, which coincides with the crossing of the 50-day and the 200-day moving averages. Based on this situation, let’s add longer-dated calls on FCX now.

PLAY: Buy the FCX August 35 Calls (FCX HG) at market, good for the day. Place a protective stop limit at $2.05 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

Today’s second play comes on the form of Aetna (AET – NYSE). Aetna is a health care benefits company that provides health care insurance plans for medical, pharmacy, dental, group life, and disability. Their business segments are are broken down as follows:

• AET’s Health Care segment provides medical, pharmacy benefits management, dental, and vision plans on an insured and employer-funded basis.
• AET’s Group Insurance segment offers life, disability, and long-term care to employers that sponsor its products.
• AET’s Large Case Pension segment manages various retirement products, including pension and annuity products for tax-qualified pension plans.

The stock originally came to my attention when the daily technical chart showed strong resistance at the 200-day moving average, depicted below:

Then, AET’s bearish pattern was also supported by their weekly chart, which also indicated resistance at their 50-day moving average. See below:

And as I studied the company’s fundamentals, the idea of puts became even more attractive. First of all, AET reported heavy investment losses this past Thursday, which dropped their Q4 earnings -57% over last year. But strangely, shares opened sharply lower on the day, and then recovered once investors realized that most of the losses were attributed to declines in AET’s investment portfolio.

I don’t know about you, but I don’t see anything occurring over the next few quarters that will quickly repair AET’s investment portfolio. Therefore, I certainly don’t see this news as a reason to “bottom feed” and buy AET’s stock.

Furthermore, AET still faces the same problems as its competitors, which include difficulties passing along price increases, dealing with Medicaid cuts, and, most of all, addressing the new Obama healthcare reforms that threaten to limit AET’s future profitability. All things considered, I feel AET has troubled waters ahead, and this supports the decision to add puts to our LEAPS ledger. So here’s the play…

PLAY: Buy the AET July 30 Puts (AET SF) at market, good for the day. Place a protective stop limit at $1.35 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

POSSIBLE “EXPLODERS”

In addition to today’s two newest picks, I’d like you to keep two so-called “exploders” on your radar. An “exploder” is a stock that has gotten severely punished in recent trading — but at the same time carries the ability to quickly bounce back on any strong buying momentum. At current levels, adding January 2010 or January 2011 LEAPS on these “exploders” could represent a very strong play. When the timing is right, I’ll officially make the recommendation. But until that day comes, keep a close eye on the two names below.

Exploder #1: DryShips (DRYS – NASDAQ)

Headquartered in Athens, Greece, DRYS operates a fleet of 46 dry bulk carriers. With a combined deadweight tonnage of 4 million tons, DRYS transports commodities such as coal, iron ore, grains, bauxite, phosphate, fertilizers, and steel. You’re probably familiar with DRYS because it was one of the stocks I recommended in my “5 Best Stocks Under $5.00” special report. If you recall, we added DRYS under $4.00 and watched it quickly shoot up to $16.00, good for a 300% gainer. But once again, shares have now fallen back down to around $5.00. But let me back up a second…

You see, in order to fully understand DRYS, you need to first see a chart of the Baltic Dry Index (BDI), noted below:

As you can see, the BDI went from a high of 12,000 in mid-June 2008 down to a low under 1,000 by November of 2008. That’s a free-fall of over 93% in less than five months. Remarkable! But lately, the BDI has started to recover, and this should provide some life to dry bulk shippers like DRYS. In fact, look at the DRYS chart and you’ll see similar patterns of extreme price volatility.

Now here’s what I find interesting…

Unlike the recovery on the Baltic Dry Index, shares of DRYS recovered but then gave back most of those gains. What’s the reason for the reversal? Well, this past Tuesday, a South Korean shipping company called Samsun Logix filed for the equivalent of bankruptcy protection. This caused concern for DRYS investors because DRYS had chartered some of their vessels to Samsun Logix.

So as it stands today, there is still a great deal of uncertainty with DRYS about the future viability of their contracts with Samsun Logix. That’s why DRYS has moved lower while the BDI has moved higher. But here’s the thing: If any news comes out that indicates that the Samsun Logix bankruptcy will not effect their contracts with DRYS, you could see an explosive upside move on DRYS.

After all, the BDI is rebounding, but DRYS is being held back due to the actions of one of their customers. If things sort themselves out in a way that protects DRYS, the stock could sharply increase. I’ll continue to monitor this situation, and if the time comes to add January 2010 or January 2011 LEAPS, you’ll be the first to know.

Exploder #2: Mueller Water Products (MWA – NYSE)

Mueller Water Products provides water infrastructure products in the United States and Canada. As you can see from the chart, the global construction slow-down has crushed the shares, but it’s easy to understand that this is only a temporary event. After all, any up-tick in water infrastructure could quickly pull shares of MWA higher. And with revenues of $1.81 billion (which amounts to $15.75 in revenue per share), it’s clear that MWA could be a big-time upside mover on any infrastructure initiatives going forward. With customers such as Home Depot and American Water Works, it’s worthwhile to keep this one on your watch list. Should the time arise to add longer-dated LEAPS, you’ll be the first to know.

Now onto today’s updates…

UPDATES

United States Oil Fund January 2010 30 Calls (KWW AD): From an oil price standpoint, you better believe that OPEC and Russia are not happy with oil prices at such reduced levels. Therefore, I wouldn’t be surprised to get a classic oil price shock very soon. Because of this viewpoint, I’m willing to add to this position on any further price dips. I truly believe that the “fair value” of crude oil lies around $55 to $65 per barrel. Therefore, if oil prices tick back up (as I expect), these USO calls could be a powerful winner. Hold.

IAG September 5 Calls (IAG IA): I remain very confident in holding gold plays, especially in a market like this. On Thursday, we locked in profits on half of our IAG calls. Hold the remainder for more upside. Hold remainder of position.

DIA April 70 Puts (DIJ PR) & VIX May 60 Calls (VIX EN): These two positions represent our safety net. I have an underlying fear that if the current economic stimulus package does not work, the psychological effect on the markets could be devastating. For example, if both the Republicans and Democrats each spend countless trillions to “fix” our economy and neither plan works, we could realistically see a 1,000-point sell-off on the Dow in a single day. Now, it’s not my intention to spread fear. And of course, I hope that this does not occur. But I’d be financially irresponsible if I did not prepare you for this possible event, especially when the future impact of the market hinges on the effectiveness of the latest stimulus efforts. Therefore, maintain both of your “CYA” positions. Hold.

CELG July 55 Calls (LQH GK), GERN January 2010 7.5 Calls (WNM AU), & Teva Pharmaceuticals January 2010 45 Calls (WTX AI): I think we’ve come to a moment where it makes sense to add to two of these positions. TEVA is one of them, and as you can see from the chart below, the stock is threatening to break out above its 200-day moving average. If it can bust above the $44.00 level, we’ll be in great position to lock in a strong winner. We originally entered the TEVA January 2010 45 Calls (WTX AI) on November 17^th for $5.80, and they’re currently trading for $4.20. Let’s lower our cost basis and add to the position now.

PLAY: Buy more Teva Pharmaceuticals January 2010 45 Calls (WTX AI) at market, good for the week. Maintain your protective stop limit at $2.90, and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

The same goes for our GERN January 2010 7.5 Calls (WNM AU).As I mentioned, our new political leaders are creating a very positive environment for stem cell companies like GERN. Therefore, I expect big things from them here in 2009. On Friday, the stock moved lower by $1.00 after announcing a public offering of 7.25 million shares of common stock. Geron intends to use the net proceeds from this offering for R&D and clinical trials, so I don’t see Friday’s dip as a longer-term cause for concern. GERN is simply building their cash position to help them prosper in an era that’s now bullish on stem-cell research. Therefore, I’d like to capitalize on Friday’s dip to add to our position.

PLAY: Buy more GERN January 2010 7.5 Calls (WNM AU) at market, good for the week. Maintain your protective stop limit at $0.50 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

Salesforce.com May 25 Puts (CRM QE) & Cubist May 20 Calls (UTU ED): As noted earlier this week, both of these positions have triggered our protective stop losses. If you have yet to do so, close both positions now. Sold.

Genentech March 80 Calls (DWN CP): Our decision to “roll” our DNA calls out into June looks like it was a good idea, as the stock has indeed bounced off the 200-day moving average as expected. Hold.

Yellow Roadway January 2011 2.5 Calls (VYX AZ): Our powerful recovery play continues to look good. I expect continued upside. Hold.

Verizon April 30 Puts (VZ PF): I continue to feel that the VZ chart looks extremely bearish. In fact, in the chart below, I circled the levels where I feel VZ will be trading at very soon. Therefore, maintain your puts. Hold.

MCD June 55 Calls (MCD FK) & YUM January 2010 30 Calls (WRJ AF): As you know, McDonalds was the top performer on the Dow last year, gaining 11.22%. And according to all of the recent earnings news, there’s no sign of slowing down. In fact, a report out of New York says that Manhattan executives are now giving up their three-martini lunches at popular steakhouses and opting to gather at McDonalds. How’s that for a sign of the times? At the same time, McDonalds just reported another 5% increase in sales, and they plan to spend $2.1 billion to open 1,000 new restaurants worldwide in 2009.

In times of recession, companies that fulfill a major need (like the need to eat) at a reduced price should be in prime position to prosper. That’s why MDC and YUM both appear in great shape right now. In fact, we already locked in 50% profit on half of our McDonald’s position, which leaves us holding the remaining half for more upside. Ordinarily, news like this would warrant us holding both positions going forward. But as I study the charts of both YUM and MCD, I do not like what I see.

For example, similar to VZ above, MCD has just broken below its two key support levels, which indicates that shares could fall into the circled section. And if MCD falls, you better believe that YUM will fall alongside it. That’s why I’d like to officially close off both positions now.

Perhaps I’m being too cautious here, but I simply don’t like how the MCD chart pattern is shaping up — all in the face of good news. When you see stocks drifting lower during strong news and even stronger earnings, it’s typically a good idea to take a cautious approach. Therefore, let’s prematurely close both positions now.

PLAY: Sell your MCD June 55 Calls (MCD FK) at market, good for the day.

PLAY: Sell your YUM January 2010 30 Calls (WRJ AF) at market, good for the day.

ADM January 2010 20 Calls (WRA AD): On a more positive note, shares of ADM are showing signs of a strong upside breakout. As you can see below, the stock has just traded above its 50-day and 200-day moving averages, which could lead to a full-blown breakout move. As you know, we entered the ADM January 2010 20 Calls (WRA AD) on November 10^th for $7.80, and we sold half of the position when these calls traded up to $11.80. They’ve now moved back to $10.50, and I still consider them a good buy. For now, we’ll hold the position. But I’ll certainly add more on any future dips. This one looks very strong. Hold.

Tesoro January 2011 5 Calls (ZGC AA): We sold the reminder of our position on Thursday for a strong 89% gainer. Congrats on a nice winner! Sold.

AK Steel January 2010 15 Calls (YDF AC) & Southern Peru Copper January 2010 25 Calls (YPV AE): Both stocks are still holding strong at their 50-day moving averages, which bodes well for our longer-term recovery thesis. Hold.

Sincerely,