Mid-Day Update

Addressing All Positions

Dear Bottarelli Research Member,

It’s been an odd day of trading, to say the least.

We opened the morning on a strong note, as our FMCN February 80 Calls (QOH BP) triggered for $3.10 before hitting a high of $3.50. This locked in a very nice two-day gain of 40.91%.

At the same time, shares of Norfolk Southern (NSC – NYSE) were getting hammered, a welcome sight after yesterday’s mid-session reversal to the upside. I tried to sell our NSC March 50 Puts (NSC OJ) for our original $2.00 sell price, but stubborn floor traders held the line and topped the put prices off at $1.95. Not wanting to forego profits, I lowered our sell price down to $1.80, and as I write, we’re moments away from getting filled. Maintain your $1.80 sell orders, good for the day.

While those two trades offered nice returns, we’re seeing surprising weakness today in shares of Archer-Daniels-Midland (ADM – NYSE).

As you know, ADM is one of the nation’s top producers of ethanol — which is a substance produced by converting crops like corn, sugar cane, barley, wheat, and biomass into simple sugars — and this ethanol blend is then combined with gasoline to improve emissions quality. One blend called E85 contains 85% ethanol and 15% gasoline — which caused several auto manufacturers to design flexible-fuel vehicles that run on E85.

After last night’s State of the Union speech, where President Bush proposed a 20% reduction in gasoline usage in the next ten years as well as an increase in the supply of alternative fuels, it’s clear that ethanol has support across the board: in Congress, in the White House, you name it.

Mr. Bush also called for a mandatory Fuels Standard to require 35 billion gallons of renewable and alternative fuels in 2017. That’s five times the current target!

In addition, ethanol stocks look to benefit over the next two or three months, as a February 1^st biofuels meeting by the Senate Energy and Natural Resources Committee could push the sector forward. But despite all the positive developments, we’re seeing a “sell on news” scenario today that’s going overboard — especially in the case of ADM.

You see, unlike other small ethanol companies, ADM is a strong and established company with revenues of $37.42 billion. Compare that with Pacific Ethanol’s (PEIX – NASDAQ) $181 million in revenues, and you’ll clearly see the difference in the companies financial positions.

Chart-wise, I expected to see ADM break about its 50-day moving average, which would have set in motion a stock price re-rating, but instead this level is once again acting as resistance. As you know, we entered cheap ADM March 35 Calls (ADM CG) for $0.95 with a tight $0.60 stop, which as of today has been triggered. Make no mistake — I fully expect ADM to rally over the next 2-3 months, as the $30 level looks to be very solid support. But as of today’s move, the position is now closed. I’ll look to establish a new longer-dated position in ADM once the speculative trading based on last night’s speech dies down.

Trading right at our entry price today is our LFC February 50 calls (LFC BJ), as the stock continues to hammer out a bottom near the $45 level. As I mentioned when opening the play, LFC has the ability to make big up-moves — very quickly — and I wanted to be positioned to capitalize on any such rallies. Hold your calls.

Also looking good is our longer-dated positions. Both our BBI January 2008 10 Calls (YCQ AB) and our CHINA January 2008 7.5 Calls (WRW AU) are exhibiting nice upside strength today, as BBI has hit a new 52-week high at $6.81 and our calls are now showing a 50% gain. Hold both positions.

The one position that continues to be a concern is our TIE February 30 Calls (TIE BF), as the stock has been unable to break above the $30 level. If you recall, we added to our calls on January 9^th and lowered our protective stop loss down to $0.70. From a tactical standpoint, this position is beginning to boarder on the “holding too long” side, as we patiently wait for TIE to break-out. I say we give it one more week before pulling the plug.

After all, one of TIE’s chief competitors, Allegheny Technologies (ATI – NYSE), just reported Q4 profits that rose 41% and beat expectations, as improved sales of high-performance metals fueled a very strong quarter. If this strength can creep over into TIE, we can (hopefully) witness the upside jump that looks eminent at any time.

And finally, it may be time once again to roll our protective DIA put hedges ahead another month. Why do we keep putting money into this hedge position, you ask? Many reasons, really. First, a protective downside put allows us to play the current up-trend without fear of a substantial correction. Second, the market has gone longer than any period in history without said correction, so the likelihood of something breaking to the downside certainly exists. And third, I’ll refer to a quote from Michael Schwarz, the chief options strategist at Oppenheimer, who was published in Barron’s as saying, “If the pros are hedging their existing positions, that means the upside is cloudy. So consider spending a little money for insurance rather than having sleepless nights and weekends.”

Using this protective mentality, we’ll look to roll our DIA February 120 Puts (DAW NP) ahead into March puts when the timing is right. Until then…

Lock and load!

Sincerely,