Addressing Your Questions

Markets Strong & Housing Weak

Dear Bottarelli Research Member,

I received two very good customer questions that I’d like to share with you. But first, allow me a quick comment on today’s market and your open positions — because I find it very significant that the S&P 500 today hit its best level since May 2001. Combine that with subsequent new highs on the Russell 2000 and the NASDAQ, and it looks like the market is a lot stronger than many experts predicted.

With today’s up-move, it’s good that we’ve got a full basket of call positions — most of which are all drifting higher. The key here is to continue picking off the call winners while remaining balanced with put options that’ll participate in the next fall-off.

One of those put options is our MDC June 65 Puts (MDC RM). If you recall, MDC was a play on the weak housing sector — a stock that was hitting new 52-week lows. Today, MDC has experienced weakness because the January housing data came in a lot weaker-than-expected. According to the Commerce Department, sales of new homes fell 5% to 1.233 million in January, their lowest rate of the year. As you can see by the chart, MDC looks to have exhausted its recent upside push — which means we could set a fresh 52-week low this week. Hold.

Another nice turnaround play today was Chemed (CHE – NYSE). As the chart indicates, the bears tried to push CHE lower, but the stock proved too resilient and keeps fighting hard to maintain its upside momentum. I’m not one to bet against this trend. Hold.

Eaton Vance (EV – NYSE) and Moody’s (MCO – NYSE) each posted new 52-week highs today, which reiterates their upside strength. And BDX is showing only a $0.03 loss as I write. Hold all your upside positions — as well as your downside put positions. If any market moves should warrant trading action, you’ll be alerted tomorrow.

Now, onto your questions…

Richard C. writes about my aggressive play in ISRG — a stock which was not issued as a buy recommendation to you but does remain open in the model portfolio.

Richard writes, “I am a new subscriber. I noted one of your open trades is ISRG. I made the same assumption you did when it “gift gapped” and then saw it falling further. However, it has bounced nicely off the 200 day MA and seems to show some health. My question is, as a new subscriber, do you think this is worth of entry now by buying a slightly out of the money call? It certainly has the capabilities to zoom north quickly since it has made the deep correction. Or, is it better to pass it by altogether?”

This is a good question, as ISRG has fallen a lot lower than I expected. Just look at the chart:

In response, I love the company — I feel their da Vinci Surgical System is truly one of the most important medical breakthroughs in recent history, especially for the increasing number of colon caner operations in men. But at this point — I’d be very weary of adding calls. The stock may have found support, but I’m not 100% certain. As of late, the path of least resistance has certainly been down, and I don’t want to get in the way of that falling trend. At this point, I’d recommend that you steer clear — at least for now.

The second question comes from Greg K. who writes about the RAIL trade.

He says, “I know that you do not look back on past trades much, but I would very much appreciate any insights you might have on the RAIL (RQN CL) calls that you originally bought for $6.1 and sold for $7.10 that are now trading at $10.20 or so. I understand that 16% in two days was a great first trade for new members, but capturing the additional 40%+ would help the overall performance of the system, especially when the original risk was $3.50 or about 53% of the buy up to $6.5 recommendation. I don’t want to be too much of a cowboy as that often leads to losing $$$ or profits on options that move quickly, but reading your documentation about the ’Secrets’ you are employing raises questions on just how long one should be patient for the new 52 week Highs and/or Lows to play out?”

Here is an updated chart on RAIL…

As you recall, I issued the “take profits” alert right before the recent down-day. Then, the stock quickly recovered and continued to rally even higher. I told Greg that my primary rationale behind that quick sale was getting you comfortable with the method my showing you a quick gainer. If this trade had been 3 months later, I would’ve held on for more — and most likely taken a higher percentage gainer.

But to begin, I simply wanted to show you the profit potential of the system by getting a few winners under your belt. Then, as you grow more comfortable with the system, we can get more aggressive. As you can see by the RAIL chart, this often times lead to much bigger profit margins.

Lock and load!

Sincerely,