A Good Day to Be Long

New Call & Put Opportunities Open Up

Dear Bottarelli Research Member,

With the Dow once again jumping up 150-points to break through the 11,000 level, it solidifies the point that we must keep using daily strength or daily weakness to take quick profits on our directional plays. After all, recent trading patterns indicate that a 100-point up-day (like today) could easily give way to a 100-point down-day by tomorrow. The trick, of course, is to be tactically nimble on your shorter-term positions while maintaining your upside bias on your longer-term plays.

Looking at our longer-term upside plays, I like what I see today.

After an infuriating trading day on Friday (one which saw shares dip on blowout earnings), shares of Caterpillar (CAT – NYSE) have put together a nice upside gain in today’s action. CAT just announced that they’ve agreed to build a new wheel loader manufacturing facility in Suzhou, China. The 57-acre facility would be a great way to increase CAT’s international exposure in China, a country that shows no slowdown in infrastructure demand. Hold your CAT November 75 Calls (CAT KO).

Alliant Techsystems (ATK – NYSE) is also jumping today on news that, with the help of Lockheed Martin (LMT – NYSE), they’ve impressed the U.S. Navy by successfully test firing a first-stage booster motor under the Submarine Launched Intermediate Range Ballistic Missile (SLIRBM) Booster System Demonstration.

At ATK’s test facility in Promontory, Utah – the test demonstrated how ATK’s motor works with Lockheed Martin’s flight control and steering commands – a good sign for further development and governmental contracts. Looking at the chart, ATK has made a strong move above the 50-day moving average, which points to more upside to come. Hold your ATK November 80 Calls (ATK KP).

Also making a nice upside move is Celgene (CELG – NASDAQ). The stock is rallying leading up to their Q2 earnings announcement scheduled for July 27^th, and if you look at the recent trends, the large-cap biotech companies have been reporting very strong numbers. ImClone, Amgen and Gilead Sciences have all reported better-than-expected quarterly results, but the trick, of course, is guessing whether or not Wall Street embraces those numbers. Case in point, Amgen was the only one of the three biotech companies to rally on their good news.

With our Celgene position now showing a profit, I may decide to take at least half of our profits off the table leading up to Thursday’s earnings call – even though all indications are that CELG will soon break to a new high above $48 a share. For now, hold your CELG October 50 Calls (LQH JJ).

Also turning positive (finally!) is Barrick Gold (ABX – NYSE). The stock was off this morning on news that hey offered $1.29 billion cash for NovaGold to consolidate their mines in Alaska and Canada.

Over the longer-term, I think ABX is in a strong position to act as a safe-haven play against international tension or geo-political jitters, which look to be here to stay. Since the stock is now finding a support point right around $28, I may decide to add more ABX calls is the timing is right. For now, hold your ABX October 30 Calls (ABX JF).

When I scan for new upside positions, I get a handful of interesting plays. The first one comes in the form of Titanium Metals (TIE – NYSE), a stock I’ve mentioned many times before as a strong upside play – but only when the timing is right.

This morning, TIE announced that their second-quarter net rose 62% to $54.3 million ($0.31 cents a share) versus $33.6 million ($0.20 cents a share) a year ago. This huge jump pushed TIE’s revenue from $183.7 million up to $300.9 million – a very impressive performance. On the news, TIE is up 6.5% to $26.50. As you can see by the chart, the stock could easily rally up to $32.50 if they get any upside momentum. Keep this one on your watch list as a possible upside play in the near future.

Also making a strong case for a longer-term position is eastern railroad operator CSX (CSX – NYSE).Last Wednesday, the company announced three critically important bullish indicators listed in my “Automatic Money Principles” report.

First off, they posted strong second-quarter results – which saw their revenues jump 12%. In the same breath, the company also announced a 2-for-1 stock split effective August 3^rd, followed by a 54% increase in their quarterly dividend, and concluded with a $500 million share buyback program over the next 12 months. That, my friends, is as bullish as you can get.

It’s my guess that CSX will witness buying strength leading up to their August 3^rd split and dividend date, as investors get positioned to capitalize on the increased dividend payout while they still can. As you can see from the chart, this could easily push CSX back up to $67.00 and even possibly $70.00 a share. Combine that with strong revenue growth and a share buy-back program, and I like the upside thesis on CSX. In fact, I’d like to add CSX as a new longer-term upside play right now.

PLAY: Buy the CSX November 65 Calls (CSX KM) at or under $4.20, good for the week. Current bid/ask spread is $3.80 to $4.00.

NOTE: After the August 3^rd stock split date, you will receive two(2) November 32.5 calls for every one (1) November 65 call you own. That’s how you handle a stock split when you are holding options.

On the downside, I have identified Capital One Financial (COF – NYSE). I’m sure you’ve noticed that COF got clobbered on Thrusday, as their Q2 profits of $552.6 million ($1.78 per share) came in below the $531.1 million ($2.03 per share) they earned in the year-ago quarter. The expectation was the COF would earn $2.06 per share, and when they reported lowered results, the stock dropped down towards its 52-week low of $71.15.

When you consider COF’s poor second-quarter results and reduced earnings visibility, you could make the case for lower prices in the future – especially since COF has not been able to use today’s upside strength to mount any comeback. As I write, shares are down $0.45 on a day the Dow is up 150. If you recall, 3M (MMM – NYSE) recently had a similar downside move that lasted twelve trading days after their initial sell-off. We could have this same trading pattern in COF, so let’s enter into COF puts:

PLAY: Buy the COF August 80 Puts (COF TP) at or under $3.80, good for the day. Current bid/ask spread is $3.40 to $3.60. Place a protective stop loss at $2.70.

Speaking of MMM, let’s revisit them as they get ready to report their Q2 earnings tomorrow. To refresh your memory, I noted that we could have a possible “Downside Gift Gap” in MMM when the stock dropped from $80 down to $71 in twelve trading days due to an earnings warning on July 7th. Now, as the company is set to report their actual numbers, it’s my opinion that all the bad news has already been priced into the stock.

The expectation is that 3M earns $5.68 billion in revenue, which comes out to $1.07 per share after you exclude $0.10 from an anticipated tax gain. If Wall Street embraces their announcement, we could have a strong upside call buying opportunity, as investors realize they punished shares too severely. Stay alert for a possible upside recovery play.

Sticking with the earnings theme, we could have a downside play on Station Casinos (STN – NYSE). Tomorrow at noon eastern, the casino operator announces their Q2 earnings. As you can see from the chart, this announcement comes as the stock trades at a fresh 52-week low.

STN operates 12 casinos around the metropolitan section of Las Vegas – and the thinking is that STN could really suffer if the Vegas housing market begins to soften. Some have already said the Vegas housing market is overvalued by 42%, which is why publications (like Barron’s) have said STN’s stock could fall by 50%. If tomorrow’s earnings report looks bleak, we could have a longstanding downside play in STN.

Oh, and I almost forgot. Despite the strong upside day, MDT has not participated in the move, which makes me comfortable maintaining our MDT August 50 Puts (MDT TJ).

Lock and load!

Sincerely,