Play BX Puts

Plus, a Speculative Play on AMZN

By Bryan Bottarelli
Monday, July 30, 2007 12:51 PM EDT
Mon, 30 Jul 2007 16:51:00 GMT

Dear Bottarelli Research Member,

As you probably know by now, the Dow Jones Industrial Average just suffered its biggest one-week point decline in five years, losing 586 points (or 4.2%). Make no mistake, as we kick off this new week, I’m watching a multitude of potential trade opportunities that we could buy on this tremendous dip. Companies like CMG, BG, DRYS, and ITRI lead this group of potential stock plays, but in all honest, today’s choppy trading action means tells me that it’s too soon to make any decisive trading action.

So while we wait for a clear signal, I do have a downside play that we can initiate on The Blackstone Group (BX – NYSE). Ever since the private equity company went public on June 22nd for $36.58 per share, the stock has been crushing shareholders. As you can see by the chart, the stock has done nothing but fall, and things could get worse before they get better. Consider this:

BX

As you read this, investment banks have committed over $200 billion to fund deals that are due to close by year’s end. But as we re-evaluate those deals today, they’re not looking as good as they once did. For example, LBO companies like Harrah’s, Clear Channel, First Data, and Hilton are all going private — and every single stock is currently trading BELOW its takeover price. This is why Barron’s just wrote “with the financing spigot now turned off, its’ going to be very difficult for Blackstone and other private-equity firms to announce any new LBO soon.”

It really looks like the Blackstone IPO marked the top of the LBO boom, and to my eye, this means that shares of BX could easily trade under $20.00 in the near-term. Of course, this could set up a great put-buying opportunity, so let’s add September puts on BX now.

PLAY: Buy the BX September 25 Puts (BX UE) at or under $2.70, good for the day. Current bid/ask spread is $2.50 to $2.65. Place a protective stop limit at $1.50.

I also have a theory that I’d like to share with you on Amazon (AMZN – NASDAQ). I used to think that the shares are grossly over-valued. After all, when you compare their hideously high 78-times earnings multiple with eBay’s (EBAY – NASDAQ) 21-times earnings multiple, it’s easy to make the argument that AMZN could sell off.

AMZN

But here’s the thing: Every investor (plus their idiot brother-in-law) shares the same viewpoint. And when everyone on Wall Street thinks the same way, they’re usually wrong 9 times out of 10. So I’m thinking the overly-bearish view on AMZN could actually set up a short-squeeze situation that takes shares of AMZN over $100! So if you’d like to speculate on a trade that’s a little more risky than our standard plays, I’d like to play against the crowd for a potentially fantastic short-squeeze upside winner. Only play this one if you’re able to stomach big volatility, but if you’re willing to take on more risk for a larger reward, then here’s the play:

PLAY: Buy the AMZN September 85 Calls (ZQN IQ) at or under $4.50, good for the day. Current bid/ask spread is $4.20 to $4.40. Place a protective stop limit at $2.70.

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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