A Full Blown Update

Plus Two New Buys

PLAY: Buy the AVID August 35 Puts (AQI TG) at or under $3.00, good for the day. Place a protective stop loss at $1.95.

PLAY: Buy more LVS July 70 Calls (LVS GN) at or under $2.00, good for the day. Place a protective stop loss at $1.15.

Dear Bottarelli Research Member,

As of mid-afternoon, the markets are once again unable to extend their previous day’s gains. In fact, the Dow has been unable to put together three consecutive up-days in over a month. This choppy-action causes option premiums to gyrate, which is the reason our positions are experiencing such wide price swings on a daily basis.

Before I begin today’s alert, I received two questions today that I’d like to share with you — and then I’ll address our current holdings.

Charter Member H.T. writes in about FedEx. He says, “Based on how strong FDX was today, and its position above the major moving averages, it might break $121.50 before July 21 anyway and put everyone in the money. Only $7-8 away now”

When it comes to our FedEx position, I’m still shocked that the calls did not participate in the $5.00 up-move. Even the most conservative option pricing model called for a $5.00 up-move to push the calls up to $1.20 per contract, but as you know, that didn’t happen. As it stands, the basket is now worth a total of $0.80, but as H.T. says, we still have two things going for us.

First, we have a full calendar month until July expiration, so we still have time on our side. Second, FedEx could easily rise or fall another $7 or $8 over this timeframe, which should be all it takes for either side of the position to come into the money.

Leading up to FedEx’s earnings announcement, each side of the position moved up and gave us a momentary basket gain of around 24%. These premium increases were most likely pumped-up volatility being priced in prior to the earnings news — which were then erased once the earnings were made public. It appears that he lowering volatility negated any price increases on the calls — which is why the calls did not make a bigger up-move. Either way, both the calls and the puts should now get back to standard price movements now that the announcement is yesterday’s news. And I still think each position is grossly undervalued. For comparison’s sake, look at the pricing string of Goldman Sacs July options.

The GS July 155 calls, which are similar to the FedEx July 120 calls in the sense that they’re $8.00 out of the money, are trading for $1.80. The GS July 140 puts, which are also $7.00 out of the money, are trading for $1.75. Taken together, that’s a $3.55 basket value! That’s remarkable when you consider that the FDX July 100 puts are $0.30 and the July 120 calls are $0.50. Granted, GS is a $147 stock and FDX is a $112 stock, but nevertheless, the $30 difference in share price (in my view) should not lead to such a drastic variance in out of the money July options.

The bottom line is, FedEx could still have a lot of movement in it before the July 21^st expiration, so let’s hold each side and see what happens. Similar to Goldman, I think this combined basket (not just one side, mind you) should be trading around a fair value of at least $1.80. That alone could be a 36% gain from your entry prices.

The second question comes from Charter Member B.D.M. who writes about a fall rally. He says, “I have heard and read that the fall rally begins with institutions and shrewd investors starting their accumulation in July/August, then wait for the rally and sell for considerable profits. Are you aware of any signals that can be spotted in the charts and specifically candlesticks to show which stocks are being targeted. We all know what the institutions can do to price movement. Perhaps we all can keep an eye open for such signals and then enter into some longer dated options to take advantage of it. I’m sure your subscribers would all be happy should a few of these trades work out, just in time for the holiday season”

This is a great observation from B.D.M. because I’ve noticed that the markets always tend to launch into a strong rally sometime in the 4^th quarter. In fact, this rally has started to come in earlier and earlier each year, as pattern investors attempt to accumulate stock positions in preparation for this move ahead of time — which subsequently sparks the beginning of the up-move!

In many respects, this is why I’ve been accumulating longer-term positions in our “Aftermath Report” picks dated into October, November, and December. By establishing a solid base-position in these picks, we should be able to participate in this up-move by owning the call options in these plays.

In terms of our existing positions, we have interesting news out of both PEP and LVS today. Starting with Pepsico (PEP – NYSE), beverage analyst Mark Swartzberg just upgraded the stock to “buy” based on an international business that looks to keep growing profits at double-digit clip. Their 25% to 30% growth in China alone could push PEP’s international earnings up 12.4% to 14.4%, which would come in well above the 9% annual average over the past four years.

As it stands, Swartzberg is sticking to his $68 price target on PEP, which represents a 15% increase from current levels. Your PEP October 60 Calls (PEP JL) currently trade between $2.20 and $2.35, just under our average buy price of $2.45. Hold.

Looking at Las Vegas Sands (LVS – NYSE), they just announced a huge development in the retail section of their Cotai Strip(TM) casino in Macao. LVS has now reached commercial terms with 200 premium retailers who have committed to bring 250 branded stores to the company’s casino-based malls. William Weidner, president and chief operating officer of Las Vegas Sands called this move “unprecedented.”

This agreement means The Venetian Macao will have three times the number of retailers as The Grand Canal Shoppes in Las Vegas. In just the last 30 days, in fact, LVS has attracted 45 new retailers to the Cotai Strip. Without question, this project is becoming the epicenter of high-end retail in Macao. When it’s completed in 2007, it’ll be the largest entertainment and shopping facility in Asia.

As you can see by the chart, LVS is down $1.10 today — and it’s once again settling in right at its 50-day moving average. With LVS quickly becoming the dominant player in both domestic and international mega-casinos, let’s use today’s momentary weakness to add to our LVS July 70 Calls (LVS GN) at or under $2.00.

PLAY: Buy more LVS July 70 Calls (LVS GN) at or under $2.00, good for the day. Current bid/ask spread is $1.90 to $2.10. After adding to the position, set a protective stop loss at $1.15.

When it comes to our protective DJX July 110 Puts (DJV SF), they were unfortunately stopped out on yesterday’s up-move at $1.00. This goes to show you the market gyrations I referred to above, because today, these very puts are back up to $1.50 on the overall market weakness. If you’re still holding these puts, you are in good shape. In fact, I’d think you will turn a profit on them with any subsequent market weakness. But for the purposes of our model portfolio, I must call this position stopped at $1.00.

To regain some downside exposure, I noticed that Avid Technology (AVID – NASDAQ) just broke their long-term support point and hit a new 52-week low at $32.95 despite announcing today that one of China’s leading television operators successfully installed their multi-million dollar production equipment. The stock has been trading in a 52-week range between $33.96 and $59.10, so today’s down-move under $33.00 busted this long-term support level. The stock has since moved back up to $33.74, but nevertheless, the new 52-week low is certainly significant. This signals a subsequent move under $30.00, so let’s play AVID down.

PLAY: Buy the AVID August 35 Puts (AQI TG) at or under $3.00, good for the day. Current bid/ask spread is $2.75 to $2.90. Place a protective stop loss at $1.95.

The upside story today has discovered big-mover Pacific Ethanol (PEIX – NASDAQ). The company produces renewable fuels in the western United States, highlighted by their ethanol production facility in Madera County, California.

And as you can see by the chart, the stock has made quite an impressive up-move followed by an equally impressive down-move. As it stands right now, it appears like the stock has found a strong base of support right at the $20.00 level, and today’s $1.00 up-move among a weak market environment supports this thesis. Trading between $3.60 and $3.90, I’m closely monitoring the PEIX August 20 Calls (PFQ HD) for a buying opportunity. Until then,

Lock and load!

Sincerely,