Closing Day Observations

“TIE” Up a Nice Gain!

Dear Bottarelli Research Member,

I’d like to share with you a few thoughts as we close the book on today’s trading action.

First of all, I’d like to pat everyone on the back for a great trade in Titanium Metals (TIE – NYSE).Shortly after issuing my “take profits” alert, TIE engaged in an all-out rally that pushed your TIE December 30 Calls (TIE LF) all the way up to $4.10 per contract, handing you a potential gain of 28.12% in one day.

As the trading week progresses, I’m going to try taking similar quick-hit gains in positions that are on the verge of breaking into profitability, notably our FLML December 20 Calls (FLU LD), ANF December 80 Calls (ANF LP), and STMP December 17.5 Puts (JXQ XW).In terms of Flamel, maintain your sell prices at or above $5.00 and let’s see if we get executed at the open of trading tomorrow.

Second of all, I’m getting very close to adding onto our position in the DIA November 120 Puts (DIA WP) hedges. As you recall, we entered these hedges on 10/18/2006 for $1.50 and they’re currently trading between $0.70 and $0.75 per contract. I don’t know about you, but it’s quite clear to me that the markets can’t go up forever. All it’ll take is one or two strong downside days for these puts to break into profitability, which is why now could be the right time to add onto them at current levels.

With a November expiration cycle, we’re simply betting on a market pullback anytime between now and November 17^th. It’s only a matter of time before we witness said pullback, and I want to be sure we’re positioned to profit off it, so expect this “add-on” trade anytime over the next week.

Thirdly, I’ve received some inquiries about the strength displayed today in the Oil Services HOLDRs (OIH), which registered a $4.81 gain. Although impressive, I feel these gains (which probably came due to the fact that oil ticked up $0.54 in today’s trading) could be short-lived. After all, tomorrow marks the first of many earnings announcements from Big Oil, and any “disappointment” could result in a sector-wide sell off.

When you think about it, today’s gains could actually work in our favor — simply because today’s upside action gives the OIH more room to fall. If this trading thesis comes true, then we’ll have some very profitable downside opportunities on the oil patch sector moving towards the end of the week — so stay tuned. (*of course, if Wall Street applauds the coming earnings announcements, the OIH could easily rally back up to $142.50, which could be a very profitable upside move. Either way, we’ll know more about how to play it starting tomorrow)

Finally, I’d like to address the “Downside Gift Gap” that we just experienced in Caterpillar (CAT – NYSE). If you recall, a Downside Gift Gap is a dramatic downside move that occurs on an otherwise strong stock. The last time we witnessed a Downside Gift Gap, 3M (MMM – NYSE) reported poor sales of flat-screen panel displays in early July which sparked a down-move that trimmed $13.50 off MMM’s stock price and carried all the way into mid-August. Here’s a graphic look at what I’m describing:

To play this Downside Gift Gap, I recommended the MMM January 80 Calls (MMM AP) for $0.90 on September 5^th. Today these calls trade between $2.65 and $2.75 per contract, a whopping 205% above our original entry price. (*I already took profits on these calls, of course, but I bring this to your attention simply to show you the explosive nature of the Downside Gift Gap strategy).

The point is, dramatic gaps like this always get filled.It’s just a matter of time. As you can see in MMM, the stock rebounded at $67.50 and has moved all the way back up to $80, effectively filling the monster gap set in July in only three short months. I bring this 3M example to your attention because we could have the same situation right now in Caterpillar (CAT – NYSE).

As you can from the chart above, CAT’s dramatic $12.00 down-move has created an enormous Downside Gift Gap that’ll eventually get filled. The only difference between MMM and CAT is that MMM lost $13 over a month and a half, while CAT lost the same amount in one day. The trick is isolating CAT’s ultimate bottom and using that bottom to enter into longer-dated calls.

Right now, I’m looking at the CAT January 65 Calls (CAT AM) which currently trade between $1.60 and $1.65 per contract. If CAT fills the gap and rallies $9.00 by January 2007, these calls could trade for $4.75, good for a potential 187% gainer. When the time is right to make this play, you’ll be the first to know. Until then…

Lock and load!

Sincerely,