Three New Puts

MEDI, CDWC, and OIH Appear Weak

Dear Bottarelli Research Member,

As we kick off a trading week full of earnings reports, the markets are still undecided about their future direction. Although the pre-market futures pointed down, the US indices actually opened on a high note — trading 57 points higher on the Dow. But as quickly as those gains came, they gave them all back and turned negative in less than one hour — only to jump back into the positive minutes later. With this indecision still rampant in the markets, we should take a cautionary stance and protect ourselves to the downside via put options, and today’s put candidate comes in the form of MedImmune (MED – NASDAQ).

MEDI is a biotech company that I’ve followed my entire career. Their lead product is Synagis, a humanized monoclonal antibody for the prevention of lower respiratory tract disease in infants and small children. They also have been pouring a ton of money into developing FluMist, a treatment for influenza A and B that eliminates the need for a flu shot. While promising, the treatment has yet to catch on — which is why MEDI is a struggling stock trading at a new 52-week low. As we’ve seen recently with the biotech sector, only a handful of stocks are liked by Wall Street, and even they get hit hard sometimes. With MEDI clearly in a downtrend, let’s play it lower into August.

PLAY: Buy the MEDI August 27.5 Puts (MEQ TY) at or under $2.30, good for the day. Current bid/ask is $2.00 to $2.10. Place a protective stop loss at $1.30.

Another put candidate I’m monitoring, which is a little more speculative, is CDW Computers (CDWC – NASDAQ). Based out of Vernon Hills, Illinois, the company is ranked #343 on the Fortune 500 because they’re the 8^th largest online retailer in America — providing technology names such as Adobe, Apple, Cisco, HP, IBM, Lenovo, Microsoft, Sony, Symantec, and Toshiba to governments and businesses worldwide.

If you consider the current status of technology spending (and the resulting stock performance of the top techs) — and then look at the list of technology names CDW sells, you can probably see where I’m going with this. No matter if CDW hits their analyst estimate of $0.79 or not, I think they’ll warn of a possible sales slowdown for the rest of the year, which could push CDWC shares lower. The company reports earnings before the bell on Wednesday, so as a more speculative play on earnings, lets’ enter into some cheap puts that could make a big jump if CDW disappoints.

PLAY: Buy the CDW August 50 Puts (DWQ TJ) at or under $1.35, good for the day. Current bid/ask spread is $1.15 to $1.25. Place a protective stop loss at $0.65.

Another downside candidate that popped up today was the Oil Service HOLDRS (OIH – AMEX). At first I was rather surprised to see the OIH on the downside candidate list, since the Oil Service HOLDRS represent a group of oil service stocks in the drilling and well site management sector. Names like Baker Hughes, Halliburton, Schlumberger, Transocean, and Rowan are all included within this oil service basket.

With oil steamrolling towards $80 a barrel, you would think the oil services group would benefit — but that’s actually not the case anymore. Because of the rush on oil properties spurred by sky-high prices, lease holds have, in turn, gone up like crazy. This added up-front expense of oil drilling means a slowdown in oil-service business, which is detrimental to the oil service sector. You can clearly see this negative pattern in the OIH stock chart:

With the OIH setting a series of lower-highs, this points to more downside for the group. If you’re willing to pay up for some OIH puts, here’s the play:

PLAY: Buy the OIH August 145 Puts (OIH TI) at or under $8.10, good for the day. Current bid/ask spread is $7.70 to $8.00. Place a protective stop loss at $5.00.

In addition to adding these puts to the ledger, I’d also like to add to two of our longstanding upside call positions today. The recent market weakness sparked by the Middle East conflicts have opened up strong entry prices for your Caterpillar CAT November 75 Calls (CAT KO) and your Celgene October 50 Calls (LQH JJ). In fact, I just received a note from Charter Member F.W. that said, “Hi Bryan, I entered the call play on CAT KO a while back and then took a modest profit. I am now considering entering that trade again. Should I still pick CAT KO?”

In short, my answer is yes. When you play long-term, slightly out of the money calls, you will experience the strongest run-up as the stock price nears your strike price. With the CELG calls $6.00 out of the money and the CAT calls $5.00 out of the money, you have plenty of time (November and October, respectively) for each stock to move up to these levels. If you do not own the CAT or CELG plays, you now have a great entry price. If you own these plays already, add to your positions now.

PLAY: Buy the Caterpillar CAT November 75 Calls (CAT KO) at or under $3.00. Current bid/ask is $2.70 to $2.90.

As you can see by the chart, CAT is finding support right under the $70 level, which could set a higher-low (as compared to the early June low) which sets up anther upside run above the 50-day moving average.

PLAY: Buy the Celgene October 50 Calls (LQH JJ) at or under $3.00. Current bid/ask is $2.65 to $2.85.

As you can see by the chart, CELG has moved right down to its 50-day moving average, which looks to be the next support level.

Lock and load

Sincerely,