Fed Raises, Market Drops

Add a Put to Your Ledger

By Bryan Bottarelli
Tuesday, March 28, 2006 3:22 PM EST
Tue, 28 Mar 2006 20:22:00 GMT

PLAY: Buy the LLY May 60 Puts (LLY QL) at or under $4.00, good for the day. Current bid/ask spread is $3.90 to $4.10. Place a stop loss at $2.30.

Dear Bottarelli Research Member,

Well, well…

The Fed raised interest rates — as everyone expected — and offered language that signaled more increases down the road. This expectation that the Fed will raise rates to 5% on May 10th and continue raising them has caused the Dow to quickly drop 100 points. Luckily, this sudden drop has not yet effected the call positions we opened this morning — which signals the strength in each of the three plays.

But, I would like to balance out the call/put ratio with a downside play on struggling Big Pharma company Eli Lilly (LLY – NYSE).

The stock it taking a big hit today on the news that it received two downgrades — one from Merrill Lynch and another by Friedman Billings Ramsey.

Both parties offered different views concerning the downgrade — but they basically revolved around the idea that LLY is struggling to gain prescription share — especially in their antidepressant medication Cymbalta — leading to declining growth combined with a lackluster late-stage pipeline.

LLY

Not only that, but their one and only new product launch this year, Arxxant, failed in a key test during clinical trials. As you can see by the chart, the stock has a lot of room to fall. So let’s enter some puts.

PLAY: Buy the LLY May 60 Puts (LLY QL) at or under $4.00, good for the day. Current bid/ask spread is $3.90 to $4.10. Place a stop loss at $2.30.

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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