New Longer-Dated Plays

Updates & Trades on WFMI, CAT, DIA, BBH, ADM, an

Dear Bottarelli Research Member,

On one hand, I’m happy to see our upside plays in WFMI January 45 Calls (FMQ AI) and CAT January 65 Calls (CAT AM) participating in today’s up-swing. On the other hand, I’m one again amazed that the Dow continues to push upward at such a tremendous velocity.

Last week, for example, the Dow closed in the red all five trading days, which amounted to a total weekly loss of 100 points. Then yesterday, in one trading day, all 100 of those points were made up as the Blue Chip average gained 120 on the day. As I’ve said before, this velocity cannot be sustained, which is why we’re holding protection in the form of DIA November 120 Puts (DAW WP). But now that we’re getting closer to November expiration, it makes sense to “roll” this position into December — which means we sell the DIA November puts and simultaneously use the proceeds to buy DIA December puts. I’ll explain more about this when it’s time to make this trade.

In the meantime, I think it’s time we get positioned in the Biotech HOLDRs (BBH – AMEX).

As I mentioned yesterday, a Democratic vote today could lead to increased bullishness in the BBH. And as you can see by the chart, this upside momentum has already begun, indicating that the BBH could soon break through the $192 level and possibly trade up to $200. Plus, when you consider the recent upside momentum in some of my past trading names like Flamel (FLML – NASDAQ) and Celgene (CELG – NASDAQ) it’s clear that the biotech sector is once again getting hot. So let’s play it up!

PLAY: Buy the BBH December 195 Calls (BBH LS) at or under $2.80, good for the day. Current bid/ask spread is $2.50 to $2.70. Place a protective stop loss at $1.70.

Another interesting play comes in the form of Archer-Daniels-Midland (ADM – NYSE).

As you can see by the chart, the stock has gotten absolutely clobbered ever since reporting better-than-expected earnings on October 31st, which is when we took our call profits off the table. The reason for the big downside move is because corn prices hit 10-year highs on the Chicago Board of Trade, trading for $3.4475 per bushel. As a corn sweetener producer, ADM gets negatively affected by such a steep rise in corn prices, which is promoting the sell-off. But Wall Street is failing to realize is that ADM is also an oilseed and an ethanol producer, which are two sectors that benefit from rising corn prices. As a result, I think ADM’s recent sell-off is overblown, which is why I’d like to add longer-dated January calls. Consider this a trade for anyone who wants to take on a longer-term upside play (Many Charter Members have been asking for plays that last longer than one or two days — so here you go!)

PLAY: Buy the ADM January 35 Calls (ADM AG) at or under $1.60, good for the day. Current bid/ask spread is $1.50 to $1.55. Place a protective stop loss at $0.80.

And finally, take a look at Provident Energy Trust (PVX). This is one of those Canadian crude oil and natural gas trusts with operations in Alberta and Saskatchewan as well as California and Wyoming. As of last year, PVX had proved plus probable oil and gas reserves of 134 million barrels of oil equivalent.

I bring this up because PVX was recently hammered, alongside the rest of the Canadian-based stocks, as the government proposed a new tax arrangement that could extract money out of trusts like the PVX. Specifically, Canada’s finance minister Jim Flaherty announced that the government proposes to tax trust distributions at regular corporate income tax rates, effectively eliminating the chief advantage of the trust structure as a flow-through entity (in true politician style, Mr. Flaherty and his party pledged less than a year ago not to impose additional taxes on the trusts, but obviously things have now changed)

As a direct result of this proposal, many trusts got slammed, dropping 12% to 15% in one day. Now here’s the thing: Under the proposal, existing trusts would be given an exemption from paying any modified tax until 2011. That’s 5 years down the road! Who knows what could happen five years from now? What I do know is that buying longer-dated calls in PVX at current levels could pay off handsomely, as many consider the huge sell-off a knee-jerk reaction. Let’s capitalize on it!

PLAY: Buy the PVX March 10 Calls (PVX CB) at or under $1.25, good for the day. Current bid/ask spread is $0.95 to $1.15. Place a protective stop loss at $0.40.

*NOTE: PVX trades on the US exchanges and offers options, which is why we’re able to capitalize on a Canadian trust here in the US!

Lock and load!

Sincerely,