An Interesting Development

Publisher Decision Could Harm Certain Brokers

PLAY: Buy the OXPS September 25 Puts (QYB UE) at or under $4.00, good for the day. Set a protective stop loss at $2.30.

Dear Bottarelli Research Member,

Last Friday, a very significant SEC case reached a settlement — and I’m not talking about the rejection that the SEC received in their bid to regulate hedge funds.

The settlement I’m referring to was a SEC investigation that begun in 2003 involving Weiss Research, a Jupiter, Florida publishing company that has one of the largest newsletter circulations in the country. Last Friday, Weiss agreed to pay nearly $2 million to settle a case involving auto-trading.

Ever since its inception, auto-trading has blurred the line (in the eyes of the SEC) between an “advisor” who is subject to strict regulation — and a “publisher” who has free-speech protections under the First Amendment.

Up until this point, there has been no resolution on this matter. But now that Weiss has agreed to settle, a precedent has been set that could have a major trickle-down effect across the industry. According to Martin Weiss himself, “I think the settlement clarifies that publishers have a choice of either avoiding involvement with auto-trading, or registering as an investment advisor."

I bring this matter to your attention for two reasons.

1. Effective July 1^st, I can no longer send alerts directly to any auto-trade broker. Although I just established this relationship very recently, this new development has changed the way publishers must act with auto-traders. Of course, this doesn’t mean your accounts can no longer be utilized — there are solutions available to you. The easiest would be calling the broker and having them place any trades for you. I also grant you full authority to forward your alerts onto your broker, if you wish. I just cannot send alerts directly to brokers — and this recent development makes the issue as straightforward as that. And remember, this isn’t something that’ll only pertain to you in Bottarelli Research. This response, without question, will be the same for every other newsletter out there — so I thank you in advance for your understanding. And that leads right into issue #2.
2. I think we have an opportunity to use this development for a wining trade on OptionsXpress (OXPS – NASDAQ). You see, OXPS is one of the best auto-trading firms in the business. In fact, they’re probably the best. They’re consistently ranked #1 by Barron’s and their staff’s knowledge of trading is unmatched within the industry. I personally have the utmost respect for the company and their associates — but I believe this recent settlement will act as a severe blow to their business model. As other publishers come to the same conclusion about auto-trading, I think you’ll see commission fees at OXPS significantly take a hit, which could push their stock down from its current levels at $22.15.

If you look at the OXPS chart, you’ll notice that the company moved 13% lower last Wednesday. That’s when they warned about a recent slowdown in their business — as May numbers came in 2% below April. In the company’s own words, they cited “significantly lower activity rates and new accounts.”

If the markets assign a 13% stock sell-off to a mere 2% slowdown in their business, just imagine what could potentially happen if OXPS reports a 4%, 6%, or even 10% slowdown due to the trickle-down effect of this new auto-trading case. I would think that a future price similar to that of Charles Schwab (SCHW – NASDAQ) at $15.60 could be a more acceptable valuation, especially since OXPS carries a market cap of $1.39 billion compared to Schwab’s $19.82 billion.

The bottom line is that slowing growth is the #1 killer of stock price appreciation, and this could be the catalyst that does just that for OXPS. As much as I admire the company, I think it’s a good idea to enter into September put options.

PLAY: Buy the OXPS September 25 Puts (QYB UE) at or under $4.00, good for the day. Current bid/ask spread is $3.60 to $3.90. Set a protective stop loss at $2.30.

TACTICAL NOTE: Since there was only a $0.30 price difference between the August and the September put options (August 25 puts currently trade between $3.40 and $3.60), I decided to give you an additional month of time and play the September series.

In other news, we should really get positioned to the upside soon in Celgene (CELG – NASDAQ). If you recall, I highlighted the company on June 6^th when they created a tremendous buzz at the annual American Society of Clinical Oncology in Atlanta. During that meeting, Celgene introduced data that showed their drug Revlimid improves the overall survival in relapsed/refractory multiple myeloma (which is a specific type of blood cancer which does not have a cure and kills 12,000 Americans each year). The FDA is set to give their decision on Revlimid on Friday, June 30th, which means we could have a potentially explosive play on our hands. As you can see by the chart, the stock has hit a new 52-week high in anticipation of this announcement.

Like I mentioned last week, I’m hesitant to initiate any new upside positions around a Fed meeting, but I think it’s safe to say that I’ll probably be adding calls on CELG early next week. Until then…

Lock and load

Sincerely,