Setting the Table

Markets Soften Heading into the Holiday Weekend

Dear Bottarelli Research Member,

I’ve received a handful of emails from Charter Members that said “With the markets trading flat leading up to the holiday weekend, do you think we’ll have any more trades this week?”

In short, my answer has been “No, there will most likely not be any more trades this week, unless I see something that I simply cannot wait on.” And the reason for that is simple. Heading into a long holiday weekend, you can expect to see trading days just like today: low volume, minimal directional movement, and short on any significant economic news. As an options trader, situations like this lead directly to increased levels of time decay. And as you know, that’s not something we want to fight against.

Therefore, the smart thing to do is close down the trading ledger for the rest of this week, let time decay drop option premiums over the extended market holiday, and then look to pick up cheap options on the best trading opportunities early next week.

You see, with two days of low volume followed by a three-day holiday weekend, you essentially have five full days of time decay eating away at option premiums. For most traders, that leads to time decay losses. But for smart traders like us, that could lead to tremendous opportunity. You see, if we can pin-point some of the best trading opportunities now — and enter these plays next week — we could put ourselves in a great position to pick up great options on the cheap.

In other words, think of it like buying that $400 sport-coat from Nordstrom the day after Christmas for only $250. That’s exactly the situation we’re faced with today. So while we have a moment, allow me to highlight some potential trading opportunities I have lined up — while scanning the options market for that $400 sport-coat that will soon be market down to $250. Let’s start by doing a quick 2006 review of the commodities market:

As you probably know, it’s been a resurgent year for commodities. In mid-July, crude futures climbed to nearly $78 a barrel on the New York Mercantile Exchange. In May, gold futures reached a 26-year high above $700 an ounce. And not to be outdone, copper futures hit a record above $4 a pound, platinum reached an all-time high above $1,300 an ounce, and silver hit a two-decade high above $15. Even corn futures gained 40% from the end of last year, driven by the increasing demand for ethanol.

But the one commodity that I’ve been paying special attention to over the last few months has been uranium. When you look back at the price performance of uranium, you’ll notice that spot prices have increased from $7 in 2000 up to $56 today. That’s an eight-fold increase! Some experts, in fact, are calling uranium “the ultimate commodity bet for 2007.” And the reason is simple: Uranium suffers from growing demand and a severe deficit of supply. So even after the massive increases, prices are looking to move much, much higher.

You see, uranium is a radioactive metal that’s the basic material for nuclear technology. Acting as this key fuel, uranium is the key driver for nuclear energy — an energy source that remains a proven alternative to oil and coal on a mass scale. In fact, 16% of the world’s electricity is already generated from nuclear power. And when you compare the benefits with the risks, it’ll continue to grow even more.

For one, it is getting safer and cheaper by the day. And secondly, operating a nuclear plant produces zero greenhouse gases. Compare that with the average coal plant — which releases 3.7 million tons of carbon dioxide every year- and the difference is eye-popping. (*NOTE: If you have get to see Al Gore’s movie titled An Inconvenient Truth, rent it this weekend and you’ll realize the alarming effect of increasing carbon dioxide levels)

Now here’ the thing: For the last 10 years, the nuclear-power industry has consumed more uranium than has been mined. World consumption is estimated at around 171 million pounds while global supplies are estimated at about 102.5 million pounds. It doesn’t take an economics genius to see the supply/demand imbalance.

At the same time, uranium — as a pure commodity — doesn’t trade on any futures exchange. So unlike oil and gold, you can’t go to the New York Mercantile Exchange and invest in uranium. And this disequilibrium in uranium investing choices opens up the opportunity I’m targeting for early 2007. You see, there is only one pure uranium play on all of Wall Street, and it comes in the form of Cameco (CCJ – NYSE).

Of course, there are a handful of uranium exploration and development companies that trade on the Canadian TSX Venture Exchange, but none of them offer options. CCJ, on the other hand, has cornered the U.S. market as the biggest uranium player in the world — and they DO offer options. That’s like having the only gas station in the entire Midwest…or even the entire United States! Can you imagine?

Chart-wise, CCJ still has a little bit of room to come down before we should enter an upside play. As you can see from the chart, CCJ is a volatile mover (as evidenced by the 200-day MA being above the 50-day MA). This tells me that the near-term moves are quick and decisive, but the longer-term trend still remains to the upside.

In the near term, I’d like to see CCJ find support at the 200-day moving average before entering a new longer-dated call play. The idea here is to establish a longer-term upside position that allow us to capitalize in increasing uranium demand — and prices — throughout the entire 2007 calendar year. I don’t want to get caught up in day to day fluctuations — but rather profit off a 6 to 12 month rising trend-line. That means entering a position like the CCJ June 40 Calls (CCJ FH), which are currently trading between $4.10 and $4.30. Come next week, these calls may dip under the $4.00 level, which would probably be the ideal time to enter the play. I’ll keep you fully informed, as always.

Another possible uranium play comes in the form of global miner BHP Billiton (BHP – NYSE).

It’s recently surfaced that BHP is in negotiations for the sale of uranium from the US$5 billion expansion of its Olympic Dam mine. Right now, BHP’s Olympic Dam in South Australia contains the world’s fourth largest copper deposit, but it also contains the world’s biggest uranium deposit.BHP wants to expand their mine — which is projected to increase uranium output from 4,500 metric tons to 15,000 metric tons. That’s a three-fold increase in a commodity that’s in dire need of a supply increase! Subject to the approval of this expansion, BHP could be in prime position to capitalize on soaring uranium prices and demand. And of course, this would substantially add to BHP’s earnings estimates — which I don’t think are yet factored into the stock price.

Right now, it looks to me like BHP’s chart formation is handing us an absolute gift. As you can see, the 200-day and the 50-day moving averages have just crossed, which is usually a very strong support point over the longer-term lifespan of a stock. Right now, BHP is dropping underneath the crossing of the 50-day and 200-day averages, which signals that BHP could be trading for discounted values. The BHP August 40 Calls (BHP HH), currently trading between $3.80 and $4.00, look like a strong longer-term play if we can enter them in the mid to low $3.00 range. Just like CCJ, I’ll keep you fully informed as to when it’s time to make a play — possibly next week.

Another possible trading formation that’ll be “in play” next week is the classic “Head and Shoulders” formation that just formed on the Dow Transports.

As you can see, we have shoulder #1 in late October, head in mid-November, and shoulder #2 in early December. And now we’re witnessing a fall that could drop the index 400 points in one short month.

We’re already profited off this thesis using our FedEx (FDX — NYSE) puts, but an ominous formation like this warrants looking at all the other names included in the Transport Sector — notably Burlington Nothern Sante Fe (BNI – NYSE). As always, I’ll keep you fully apprised of the situation, but for now the best play is to sit patiently on the sidelines and get ready to strike when the timing is right.

Until then…

Lock and load!

Sincerely,