Friday Position Update

Puts Come Into Play as Market Falls

Dear Bottarelli Research Member,

I’d like to begin by addressing our play on Southern Copper (PCU – NYSE) because if you have yet to enter a position in the PCU January 52.5 Calls (PCU AX), that should be your first priority today.

You see, three things are simultaneously happening that could all be considered bullish catalysts for PCU — and as I write our calls are trading between $3.60 and $3.85 per contract — just around our original entry price of $3.80.

First off, workers at Peru’s #4 copper producing mine Cerro Verde returned to work after a 48-hour strike that did not effect production. You may have seen some antsy traders sell off their PCU positions with a strike threat looming, as this could’ve been a negative catalyst for the copper producers. But the crisis was averted.

Second, we kicked off this week with major merger and acquisition news in the copper sector as Freeport-McMoRan agreed to acquire Phelps Dodge, a move that pushed PD shares up $26.24 (a 28% gain) in one trading session! This could signal even more merger news in the sector, which could drive upside speculation on other copper names, especially ones like PCU that carry an attractive forward P/E multiple of 6.78. Just look what the takeover speculation did to Titanium Metals (TIE — NYSE). The same upside potential could be seen in PCU.

And third, with gold rallying around $11 in yesterday’s session, I don’t think PCU has yet to receive the upside jump that it deserves. As you can see by the chart, today’s down-tick still makes PCU’s near-term bias to the upside, which is why I still think the shares will make a move back up to its $56 high in the near term. All things considered, hold your PCU January 52.5 Calls (PCU AX). And if you have yet to enter this position, do so now!

Looking at Pacific Ethanol (PEIX – NASDAQ), shares had a great little run yesterday as higher oil prices renewed demand for alternative energy sources like ethanol. As we head into the winter months, any jumps in oil prices (and I expect a lot of them) should bode well for corn and ethanol producers. Hold your PEIX January 17.5 Calls (PFQ AW).

The most concerning upside position today is CBOT Holdings (BOT – NYSE), which I suspect is experiencing a classic “sell on news” scenario. You see, the Chicago Board of Trade announced today that its volume for November reached a record 83,596,033 contracts, an increase of 38% over November 2005. Average daily volume also set a new monthly record with 3,980,763 contracts trading each day, also up 38% from the same month last year.

This is great news for BOT, but unfortunately the shares are selling off on the news. If we can maintain the upside bias, I think BOT could rally as swing traders look to buy the dips early next week. Hold your speculative BOT January 165 Calls (BOT AV).

One stock that was unable to withstand this week’s downside was Charles Schwab (SCHW – NASDAQ) which has officially stopped us out of our January 17.5 Calls (SHQ AW). Let’s take the cautions approach here and close off the position, as our money could be working more effectively in something else.

Looking at our downside put positions, I like what I see in our ATK January 75 Puts (ATK MO), our MON January 50 Puts (MON MJ), and our DIA December 120 Put Hedges (DAW XP).All three are moving down on today’s weakness, which is exactly what they’re designed to do. Maintain all put positions for more gains.

One stock that I may play to the upside next week is Allergan (AGN – NYSE) because the company is a“triple play” when it comes to female beauty.

First off, AGN makes skin care products for plaque psoriasis, acne, and facial fine wrinkling. Secondly, they also make the ever-popular Botox, which is used for neuromuscular disorders. In shopping for Christmas presents for my wife, I learned that Botox is becoming an extremely popular gift among upper-class women, which could boost AGN’s numbers in the November and Decmber months.

The third part of AGN’s “triple play” is their silicone-filled breast implants. As you probably know, silicone-filled breast implants were banned by the FDA for the past 14 years because of their tendency to rupture. But now that ban has been lifted, which means AGN is one of two companies in the country that received approval to market these implants once again.

From what I’ve read (aka, no field testing here) silicone implants look and feel more natural than their saline counterparts, which should dramatically expand a US market for breast implants that logged 360,000 augmentations in 2005. Although implants represent Allergan’s smaller lines of business (Botox sales are expected to be five times higher in 2006), the combination of skin crèmes, botox, and breast implants makes AGN an attractive 2-3 month upside play. If the stock finds support at the 50-day moving average (marked above in blue), then I may issue a new call play on AGN early next week. Until then…

Lock and load!

Sincerely,