Two Speculative Puts

OIH and STMP

Dear Bottarelli Research Member,

Since our last correspondence, the Dow has fallen from an intra-day gain of 121 points to its current gain of 81 points. That’s a 40-point “softening” in the last two hours. This slight down-tick has carried over to all the major market averages, which trimmed the gains on most of the companies that were shooting higher this morning, including our latest upside play on Flamel Technologies (FLML – NASDAQ).If we don’t exit today for the $5.40 sell price, don’t worry. I purposely chose December call options to give us plenty of time to lock in profits.

In the meantime, I’d like to highlight two new downside positions that could prove to be nice additions to our ledger at the present time. The first is our old friend the Oil Services HOLDRs (OIH).

As I mentioned in last week’s alert, the market’s top oil companies are getting ready to report Q3 earnings starting this Wednesday. With oil prices off 25% since their last earnings reports, I suspect that Wall Street will be “disappointed” with whatever Big Oil has to say — regardless if the numbers continue to be jaw-dropping or not. As a result, we could witness weakness in the entire oil patch sector leading into Wednesday’s earnings — and I’d like to play this weakness using OIH November 125 Puts (OIH WE). In fact, today’s OIH move is a good example of what I’m talking about.

With oil prices down $0.49, literally every oil stock I watch is in the red today despite the Dow’s 100-point gain. Going into Wednesday, I think we could have enough volatility to take a quick profit playing the OIH, so let’s get positioned for a quick downside move:

PLAY: Buy the OIH November 125 Puts (OIH WE) at or under $3.10, good for the day. Current bid/ask is $2.90 to $3.00. Place a protective stop loss at $2.10.

The second downside play is a $15 stock that I personally feel could soon be trading for less than $5.00. I’m referring, of course, to a company called Stamps.com (STMP – NASDAQ).

Stamps.com allows you to buy stamps over the Internet. In addition, you can also print electronic stamps directly onto envelopes, plain paper, or labels using ordinary laser or inkjet printers. But what really has the company excited is PhotoStamps, a form of postage that allows consumers to turn digital photos, designs, or images into valid U.S. postage. Basically, you can take a picture of yourself and STMP can make that picture into a real postage stamp. Whoopee!!(*note sarcasm)

I admit, the internet site makes it all look kind of cool, but let’s get real. Who in their right mind will spend time printing stamps of themselves? Perhaps it’ll be a novel idea for one set of stamps, but I doubt the company will be able to maintain a high percentage of repeat customers. As you can see by the chart, the company’s latest quarterly report hinted at troubles ahead for the online stamp company, and the troubles don’t appear to be going away anytime soon.

To me, STMP smells too much of an internet business model loosely based on snail mail — which is a dinosaur in its own right! Therefore, I wouldn’t be surprised if STMP dipped under $10, and possibly traded as low as $5.00, by early 2007.

PLAY: Buy the STMP December 17.5 Puts (JXQ XW) at or under $2.90, good for the day. Current bid/ask spread is $2.60 to $2.85. Place a protective stop loss at $1.80.

Lock and load

Sincerely,