Adding More Calls to Your Ledger

Balance Your Two Open Puts With Two New Calls

Dear Bottarelli Research Member,

In the world of “lock and load” trading, things sometimes move fast.

Very fast.

Case in point, our trade on RAIL from earlier this week.

As you know, I instructed to you take profits and sell your RAIL March 60 Calls (RQN CL) at or above $7.10. At the open of trading yesterday, your $7.10 orders triggered, making the position is officially closed in the Bottarelli Research track record. In retrospect, this sell order was timed perfectly.

As I write, RAIL is selling off, trading down $1.33 as I write. The calls you sold for $7.10 yesterday are today trading for $5.30. That’s quite a difference — and this brings up an important issue that I’d like to address right here at the beginning of our profitable journey together.

When it comes to reporting gains and losses on trades, I report to you a “model” portfolio. How I get the entry and exit prices that I report is by sending out my alert — waiting five or ten minutes — and then taking the last executed price on my real-time options ticker. As you can imagine, your prices could be different from my prices. So when it comes time to sell your trades, I ask that you use a little of your own discretion.

For example, if I’m reporting an entry price of $6.10 on RAIL and I’m issuing a sell price for $7.10, that’s a 16% gainer. If you entered RAIL for less than $6.10, say $5.80, that means you’re getting a better price than my model portfolio. In this case, you know that you can lower your sale price to say, $6.90 and not relinquish any of your own personal profits. Of course, it’s my job to give you continual guidance on trading — and I’ll do that to the very best of my ability. But you know your situation better than I do, so I simply ask that you use a little discretion of your own when trading. This way, it works out better for both you and me!

Ok, so let’s get into today’s action…

Yesterday, I issued two “take profit” alerts on both of your call positions. That means your open positions consist only of two downside put plays. To remain delta-neutral, which is the #1 profit secret of CBOE floor traders, we must add two new call positions to our trading ledger. Luckily, two beautiful plays just registered as “buys” on my screener.

The first upside company is called Thomas & Betts Corporation (TBC – NYSE), a $47.00 stock that’s part of the S&P 400 MidCap index. To be quite honest, the company is quite boring. They manufacture electrical connectors used in electrical, steel structures, and HVAC (heating, ventilation, and air-conditioning).

What’s interesting is that the stock just hit a new 52-week high at $47.50 when they reported a 6.6% rise in profits for the fourth quarter. TNB earned $25.8 million compared with $24.2 million, or 40 cents a share, a year earlier. What I like about them is that ALL of their business segments are humming along. Each segment is growing at a double-digit clip, which bodes well for the coming spring and summer months. Let’s get positioned in an upside call play:

PLAY: Buy the TNB June 45 Calls (TNB FI) at or under $5.00, good for the day. Current bid/ask spread is $4.50 to $4.80. Place a protective stop loss at $2.00.

The second upside play is Cummins (CMI — NYSE), the very best diesel and natural gas engine company in the world. When it comes to engines, these guys have it licked. Their engine segment pumps out diesel and natural gas-powered engines for heavy and medium duty trucks, buses, recreational vehicles, light-duty automotives, agricultural, construction, mining, marine, oil and gas, rail, and governmental equipment markets. As you can see, that’s quite an impressive list. I find it interesting that all of these “heavy-machine” stocks today are hitting new 52-week highs. CMI is one of them, and Caterpillar (CAT – NYSE) is another. Perhaps Wall Street is gearing up for the coming spring and summer road construction season?

Last month, Cummins reported net income of $550 million on sales of $9.9 billion for 2005, a 57% increase over 2004’s $350 million. That’s probably why Forbes named them “among the Best Mid-Cap Companies in America.” Don’t let the $100 price-tag fool you — CMI is still a great value. Trading at a forward P/E of just 12.25, the stock could realistically move up to $120 and still be a bargain. On Monday, CMI declared a $0.30 per share cash dividend and today, the stock hit a new 52-week high of $105.44. To me, it looks like a safe bet to get positioned to the upside.

PLAY: Buy the CMI June 100 Calls (CMI FT) at or under $9.10, good for the day. Current bid/ask spread is $8.60 to $8.90. Place a protective stop loss at $4.00.

Now, onto a more speculative downside play…

To be perfectly honest, I’m going back and forth on what I think of the satellite-radio market. On one hand, I have XM Radio and I love it. On the other hand, XMSR and Sirius are both spending obscene gobs of money to grow their customer base, and yet they’re still struggling to post a decent profit.

Today, shares of XM Satellite Radio (XMSR – NASDAQ) hit a new 52-week low at $22.94 when their director stepped down and warned of a coming cash crisis. This happened the same day that XM reported a quarterly loss of $268.3 million compared with a loss of $188.2 million a year earlier. As you can see, the more customer they’re getting, the more money they’re losing.

The trend of luring celebrity hosts with windfall cash payments (like XM’s $55 million deal with Oprah and Sirius’ $500 million deal with Howard Stern) may pay off in the long run — but as for today — the expenses are mounting. As a pure speculative play, I’d like to get some longer-dated put options on XMSR. I think the stock could dip under $20 in the near-term as impatient investors get nervous and sell off.

But again, this one is for the true speculators only. That means, like Google, you will most likely have to withstand some volatility. If that’s too much for you to stomach, sit this puppy out.

PLAY: Buy the XMSR April 25 Puts (QSY PE) at or under $2.35, good for the day. Current bid/ask spread is $2.15 to $2.25. Place a protective stop loss at $1.10.

And finally, I’d like to end today’s alert by doing a little “trash-talking.” As you probably know, trash-talking is what professional athletes like Charles Barkley do to psyche out their opponents and make them play poorly. Today, I’m going to do a little trash-talking of my own on a $24.00 stock that I feel shouldn’t be a penny over $10.00 a share.

The company is called IRobot (IRBT – NASDAQ).

IRBT is the manufacturer of the Roomba, the robotic-powered vacuum cleaner. The company was blasted into the spotlight when Oprah Winfrey endorsed the Roomba on her “Favorite Things” episode — which sent housewives across America running out to buy them. My mother was one of them — and lucky me — she also bought a Roomba for me. (Note: This will be the last time I mention Oprah two times in the same alert. I sincerely apologize.)

I must tell you, I think the Roomba is the biggest piece of junk I’ve ever seen. It gets stuck under my dining room table, its tiny bag fills up after ten minutes, and it misses the larger crumbs that my 14-month old daughter throws on the floor. For $350, I’d rather hire a full-time maid and get the whole house cleaned for six months.

Now here’s the thing…

Yesterday, shares of IRBT fell sharply after the company said it plans to increase its research and development and marketing budgets. These increases will lead to a decrease in their 2006 results. On that news, the stock dropped 21% to $26.19 setting a new 52-week low.

Why do I think the shares are not worth a penny over $10.00? On Tuesday, the company reported a net income of $12,000. That’s it, a lousy twelve grand! That’s break-even per share compared with net income of $214,000 (a penny per share) a year ago. Thomson Financial was calling for earnings of 4 cents per share. Without question, these results are putrid.

So when I learned that options do indeed trade on IRBT, I got excited. But then I noticed the liquidity of the options, that excitement quickly faded. To be blunt, there is absolutely no liquidity available in the IRBT pits. The bid/ask spread on the options are $1.50 to $5.00. That means a floor trader will sell you a contract for $5.00 and then immediately try buying it back for $1.50.

With those spreads, we can be dead-on target with our forecast — and we’ll still lose money. In fact, I’m sure the IRBT pit is being manned by one floor trader leaning back on his chair — passing time by struggling through the New York Times crossword puzzle.

So if there’s no play, why bring this to your attention?

Well, quite frankly, I want you to know that I’m watching the IRBT trading, and if the liquidity begins to pick up, I’ll be out with a longer-dated put recommendation. You may consider shorting the stock, but since this is not a stock service, I won’t make that recommendation here. I will be watching IRBT though. My 12-month price target is $10.00, with reflects the value of the company’s governmental robot segment. I personally think their retail segment is worthless.

Oh, one more thing about IRBT. They’ve just launched their newest innovation called the Scooba, a robotic mopping system. I think any customers who bought the Roomba will certainly not be lining up to shell out another $350 for a Scooba.

In fact, the same Scooba has been sitting in the window of the Sharper Image down the street from my house for the last four months.

UPDATES

Your MDC June 65 Puts (MDC RM) that you bought for $7.10 trade between $5.40 and $5.60 today. The reason they’re down is that MDC has attempted to call their 52-week low at $62.71 a bottom base for support. For the last three days, the bulls have tried to take over MDC, but quite honestly, I don’t think it’ll last much longer. If you look at the recent MDC chart, you’ll notice that the bulls can only pull together three or four days of upside strength before getting completely exhausted — thus dropping the stock lower. We have until June on these, so that’s plenty of time to re-establish the down-trend. Hold.

You now know why I designated the Google trade for super-speculators only. As I write, Google just jumped up $15.00, and the GOOG June 240 puts (GOU RH) you bought for $4.50 currently trade for $3.20. What’s amazing is that these same puts traded as high as $4.80 yesterday, which was giving you a profit. This is why I gave you plenty of time on this one — going out until June expiration. Like I said, this is a lottery ticket play, but I still feel it’ll pay off if we hang in there. If you cannot stomach these volatile days, please don’t trade the plays I designate as “speculative.” Hold.

Lock and load!

Sincerely,