Low Volatility, Big Bargains

Setting the Table for Next Week (Pun Intended)

Dear Bottarelli Research Member,

One look at the CBOE Volatility Index (VIX) and it’s clear why the markets are so uneventful today. With the VIX hitting a new 52-week low at 9.84, the markets have become so accustomed to upside that they’re completely ignoring even the possibility of downside selling pressure. This could certainly take the markets by surprise, which why it’s a good idea to maintain our protective DIA December 120 Puts (DAW XP).

At the same time, plummeting volatility figures also equate to reduced option premiums. That means right now could be a great time to enter into longer-dated calls or puts for bargain basement prices. After all, reduced volatility means that we pay less for time carry, similar to buying name-brand clothes for 30% to 50% markdowns. And it gets even better. With the Thanksgiving holiday breaking up the trading week, we’ll witness even more time decay over the next three trading days — making Monday the ideal time to buy longer-dated calls (or puts) in the stocks exhibiting the propensity to continue their recent trends. With that backdrop, let’s “set the table” for some trades that could be top play candidates early next week. Some of my top plays are as follows:

Pacific Ethanol (PEIX — NASDAQ) is a name we’ve made nice gains on before and it looks like we could do it again. Today, PEIX announced that they swung to third-quarter net profit of $2.7 million (or $0.07 a share) a net loss of $923,000 ($0.03 a share) one year ago.

Plus, revenue more than doubled to $61.1 million from $26.4 million last year, which certainly means that PEIX is a company on the move. In fact, let’s go ahead and add the PEIX January 17.5 Calls (PFQ AW) to our ledger now so we don’t miss out on an extended rally tomorrow. Since this is a longer-dated play, I plan to hold longer than my typical one week time frame.

PLAY: Buy the PEIX January 17.5 Calls (PFQ AW) at or under $2.44, good for the day. Place a protective stop loss at $1.30.

Also making the short list is Titanium Metals (TIE – NYSE). Similar to PEIX, TIE is a name we’ve successfully played before — and with a broad-based recovery in the metals sector — TIE looks to extend their recent gains leading up until Christmas.

As you know, Titanium Metals Corporation produces titanium melted and mill products that result from melting sponge and titanium scrap with various alloys. If you look at TIE’s chart, you’ll notice something very interesting. Both the 50-day and the 200-day moving averages are moving up at a near parallel trajectory, which means TIE’s current levels represent a very, very strong support point. I’d expect to see a move back up to the recent high just under $34 in the near term, which supports a future upside call play. Stay tuned.

On the downside, we have Alliant Techsystems (ATK – NYSE). Although we successfully played call options on ATK back when the Republicans were in control, a Democratic power shift could equate to future struggles for the top producer and supplier of ammunition to our troops in Iraq. Chart-wise, a move back down to $76 could easily be in the cards, so keep an eye out for forthcoming puts.

And finally, our earnings play on Nordstrom (JWN – NYSE) is coming in today, as the stock is rallying almost 5% higher and setting a new 52-week high at $50 after the high-end retailer’s numbers echoed the positive growth that what we saw out of Kohls and Dillards late last week. Although we already took profits on our Nordstrom January 45 Calls (JWN AI), if you’re still holding these calls, you’re getting an even better exit price today. If you held onto this trade into today’s earnings report, take your money and run!

In terms of our current trades, everything is looking good. Charles Schwab hit a new 52-week high this morning at $19.36, which is helping our January 17.5 Calls (SHQ AW) trade as high as $2.20, good for a 15.7% gain above our entry price. NDAQ has also reversed an early-session loss, which is holding our NDAQ January 40 Calls (NQD AH) right at break even. And my $200 price target for Goldman came within $0.22 of hitting this morning, so if you have yet to take your profits, continue working a sell order on your GS December 200 Calls (GPY LT).

Oh I almost forgot, the reduced volatility figures are presenting fantastic opportunities in literally every oil and oil service name I watch. Playing longer-dated upside calls in this explosive sector could pay off handsomely as we close out the 2006 calendar year, so keep a lookout for more oil plays early next week. And as always…

Lock and load!

Sincerely,