The Beat Goes On

Early Morning Action Once Again Sets the Tone

Dear Bottarelli Research Member,

We’re once again seeing a market situation where the opening session volatility is being dictated by the overseas markets — and the rest of the trading day remains “muted” as the bulls and the bears try to sniff out the next major move. As the DIA chart indicates, there is a major traffic jam between the 120.50 and 121.50 level — and the broad-based market has yet to decide whether or not to call this level near term support or near term resistance. Further complicating the debate is that this level falls smack-dab in the mid-point of the 50-day and the 200-day moving averages, making the indecision that much greater.

So while the markets continue to wrestle out the next move, the smart trading tactic is to continue holding a balanced ledger of both calls and puts — because this attack plan has been working out quite well. As you know, we sold our put play on PTR yesterday for impressive gains — which left us holding two upside positions on VLO June 60 Calls (VLO FL) and AGN April 115 Calls (AGN DC). And as it turns out, today’s market upside is benefiting both positions, thus navigating the intra-day volatility rather beautifully.

Based on this, let’s use today’s upside to add to our AGN April 115 Calls (AGN DC). As you know, I’m very bullish on Allergan, as they have one of the strongest cosmetic franchises on the world, and it’ll only get stronger. We originally entered these calls on February 26^th for $3.50 — and I’ve supported holding them throughout the selling pressure. A quick pop back above the 200-day moving average is the play here — and this action could easily make the April 115 calls a profitable opportunity. They currently trade between $1.10 and $1.20 per contract, so let’s lower our cost basis and add to the position now!

PLAY: Buy more AGN April 115 Calls (AGN DC) at or under $1.30, good for the day. Lower your protective stop loss to $0.50.

On the same hand, our VLO June 60 Calls (VLO FL) have done a wonderful job of maintaining value throughout the selling pressure. We originally entered them on March 1^st for $2.95 and they’ve currently traded as high as $2.80 in today’s action, so let’s certainly maintain this position as well.

Another interesting note hitting the mainstream media this week is something that I alerted you to in last week’s alerts — which is the effect that the heightened volatility levels have had on the publicly-traded exchanges. For example, International Securities Exchange (ISE – NYSE) was upgraded to buy today at Banc of America Securities, who said in a research note: "The recent spike in volatility has driven surging option volumes. We expect volatility to remain at elevated levels in the near-term, and we could be at the start of a cyclical turn to a higher volatility environment.”

This is exactly the situation I spoke about last week — which means the time could be coming soon for a longer-dated upside play on an exchange. But instead of ICE, I think the better opportunity falls in NASDAQ Stock Market (NDAQ – NASDAQ).

Rather than playing the super-expensive options on the ICE, we can use the same upside catalyst to play the super-cheap and extremely oversold NDAQ options. As you can see, a pop back above the 200-day moving average could represent a $3.50 up-move — which could easily double any upside call play. I’ll continue to monitor the situation and tell you exactly when it’s time to strike.

In the meantime, I’d like to add a new put to our ledger in the form of InterMune (ITMN – NASDAQ).

ITMN shocked investors today when they discontinued their Phase III clinical trial of Actimmune — which is a treatment for patients with idiopathic pulmonary fibrosis (aka scarring of the lungs). According to an independent data monitoring committee overseeing the study, patients treated with Actimmune did not survive longer than patients who received a placebo — thus making their Phase III trial a failure.

And here’ the thing: Actimmune was InterMune’s one and only product in Phase III trials. In fact, they don’t have a single product in Phase I or Phase II development, and IPF treatment accounts for more than 95% of ITMN’s sales. Now that the drug is shown to be ineffective, this means ITMN is a $22.00 stock with no lead products in development. A best-case scenario could have ITMN receiving $40 million in Actimmune sales by 2011, which is down from the $615 million in sales that some analysts had predicted. In short, the stock could trade for $10.00 and still be considered over-valued.

The one and only near-term catalyst will come later this year — when they receive early data from a pre-clinical trial of a drug called ITMN-191. But remember, this drug is only in pre-clinical trials — meaning it’s not even in Phase I yet. It’ll take years and millions upon millions of new investment dollars before anything comes of this treatment — assuming it shows any promise. In short, ITMN could be in serious trouble here, and that’s why I’d like us all to add put options on ITMN right now.

PLAY: Buy the ITMN April 20 Puts (IQY PD) at or under $1.00, good for the day. Current bid/ask spread is $0.75 to $0.85 per contract. Place a protective stop loss at $0.30.

Sincerely,