Time for Protection

Roll into DIA March 126 Puts

Dear Bottarelli Research Member,

With the Dow down 80 points as I write, it’s time to re-up our insurance policy by adding a protection position in the DIA March 126 Puts (DAW OV). Similar to car and life insurance, this position protects you against a major market crash. Simply take a very small portion of your portfolio and add a few of these protective contracts to your ledger. Not only will these puts will offer you protection against a dramatic market collapse — but they’ll also allow ypu to use any market weakness to add strong upside calls to your ledger without any undue directional risk. So first and foremost, add the DIA March 126 Puts (DAW OV) today. If you’re still holding the DIA February 120 Puts (DAW NP), close out this protective position and roll forward into March.

PLAY: Buy the DIA March 126 Puts (DAW OV) at or under $1.55, good for the day. Current bid/ask spread is $1.40 to $1.50.

Despite the market weakness, I’m pleased to see our two call positions trading in the green today. Starting with Transocean (RIG – NYSE), the stock continues to trade in a tight trading range, but hopefully that’ll soon change. After all, there’s big earnings news today out of fellow oil driller Diamond Offshore Drilling (DO – NYSE), and this could be the upside catalyst that pushes the drillers over the top.

Diamond reported that their net income rose to $221.4 million ($1.60 per share) from $106.9 million ($0.78 per share) in the year-ago period. That’s a remarkable earnings report — earnings doubled! Of course, this handedly beat Wall Street estimates of $1.38 per share, but on the news DO is only up around $0.63, which I feel is nowhere near an appropriate upside move. Top-line rigs and day rate increases are allowing oil drillers like RIG and DO to report fantastic earnings, but the true reflection of this strength has yet to be priced into these stocks. That’s why our RIG March 80 Calls (RIG CP) continues to be a position we want to maintain.

The news is also strong for Celgene (CELG — NASDAQ), as their new cancer drug Revlimid shows all the signs of becoming true blockbuster. You already know that CELG’s quarterly revenues rose 84% to $275 million — making their adjusted earnings increase sixfold in the fourth quarter. Similar to RIG, the stock is just waiting to break out, so let’s also maintain our CELG March 55 Calls (LQH CK) for further upside.

As I mentioned last week, I’m getting ready to issue a fresh set of longer-dated and cheap options plays that all look to be 100% winners over the next 3-4 months. But at the same time, I’d also like to establish some longer-dated positions in stocks that I feel will continue rallying into the spring and summer months — which is why I’m taking a hard look at both Lockheed Martin (LMT – NYSE) and Allegheny Technologies (ATI – NYSE).

Starting with Lockheed, the story is quite simple. Virtually every defense and aerospace company has been experiencing tremendous upside lately — and LMT is the best of the best. Just look at this chart:

As you can see, the stock just popped above the $100 level, which means it could soon be trading for $120 to $130 by early spring. I’d like to wait for LMT to pull back into the mid-$90’s and then it’ll be time to establish a longer-dated call position.

Another tremendous upside story comes in the form of Allegheny Technologies (ATI – NYSE).If you’re familiar with our latest position on Titanium Metals TIE — NYSE), then you’ll know that specialty metals suppliers — like titanium — are experiencing bullishness like never before. The reason for the demand surge is that international airline growth has created a big demand for airline orders. Add rising fuel costs into the equation, and this is forcing airline manufacturers to use lighter metals to make more fuel-efficient planes. Since titanium is a high strength, light, and corrosion resistant metal, its’ the perfect solution.So a direct result of the aerospace bullishness noted above is also incredible bullishness for titanium producers — and the biggest player is ATI.

But that’s only half of the story. You see, ATI also looks to benefit from the ethanol boom — plus the development of next-generation processor chips from IBM and Intel. Let’s start with ethanol. In high concentrations, ethanol is highly corrosive — which means that it cannot be transported using the same pipelines as oil and other fuels.I think you see there this is headed. In order to increase ethanol production, which looks like a guaranteed certainty, refineries will likely be forced to recast their pipelines using titanium.

Not only that, but Intel and IBM are both redesigning their transistors to allow for lower energy loss — and the key to this process is a metal called hafnium (which is byproduct of zirconium). Experts are saying that hafnium will soon replace silicon as the driver behind these new chips, and I think you know where this is headed as well: Allegheny is one of the word’s top producers of hafnium.

Similar to our tactical thesis on LMT, let’s let ATI dip back down under $100 per share — and then use this weakness to establish a longer-dated position in upside calls.

Once again, we’ll look to establish these positions — along with our next round of cheap doublers — starting next week. As for tomorrow, I’ll be speaking at the Money Show in Orlando, so there will be no alerts that day. That means we’ll speak again on Monday, so until then…

Lock and load!

Sincerely,