On the Eve of the Fed

Playing the Coin Flip

Dear Bottarelli Research Member,

I don’t expect to see too much market activity prior to the Fed’s announcement this afternoon, so we’ll stand pat with our current ledger.

Looking at our “December Brokerage Straddle,” which is what I’m calling the basket of LEH December 65 Puts (LES XM) and GS December 40 Calls (GPY LH), you’ll most likely see one of these two positions break out after the Fed announcement. It’s still a coin flip whether it’ll be the GS calls or the LEH puts, as the market continues to handicap the likelihood of a 25 of 50 basis point cut. If I were to wager a guess, I’d say that Ben cuts 50 and the markets roar higher, but I’m no economist. Therefore, the best course of action is to play it both ways by owning both upside and downside exposure going into this afternoon.

Armed with our LEH puts and GS calls, and we’ve put ourselves into a position where any strong move (in either direction) should increase the total cost of our December Brokerage basket past our $5.40 entry price. And depending on how the trading goes, I may “leg out” of one side and keep the other side open (leading into LEH’s earnings on Thursday, for example), but we’ll refrain from making any of these decisions until we see how the market reacts to the Fed this afternoon.

So while we have a moment, I’d like to discuss the recent activity of our longer-dated play, the DR Horton January 2010 10 Calls (YRI AB). As you may or may not know, we entered these calls on August 2^nd to position ourselves to profit off any housing recovery that occurs between now and January of 2010. Based on the minuscule cost of carry, combined with the complete devastation that has occurred in U.S. Housing stocks, I felt like this position could make you a handsome return over a longer-dated timeframe. And although this position has been down, it’s making a rather strong recovery.

Yesterday, for example, homebuilder stocks received a huge boost when the National Association of Realtors released a 2008 sales forecast that said that sales will rise slightly in 2008. At the same time, they also raised their 2007 forecast after cutting this outlook for nine straight months. But most comforting was the medial home price numbers — which said that the median home price will fall only 1.9% in 2007, and then rise 0.3% in 2008! To many housing experts, this could mean that the bottom is in, and as a result, U.S. housing stocks jumped across the board.

Looking specifically at DHI, you can clearly see the effect this news has had on the stock, taking shares from $10 up to $15 in the blink of an eye. It’s this powerful upside ability that makes me very comfortable holding our DHI January 2010 10 Calls (YRI AB).After all, we’ll never be able to “time” the bottom, but holding these calls gives us the flexibility to profit off any housing recover between now and 2010. Considering the fact that we’re already seeing some early signs of recovery, I continue to like this position. Hold for more upside. And if you have yet to buy this position, you should consider adding it to your ledger sometime this week.

Switching over to some administrative news, I received some emails from readers who misplaced our special End of Year renewal code, so here it is once again:

END OF YEAR SPECIAL OFFER:

https://www.bottarelliresearch.com/renew/?service=opt&offer=E0R2663KRR

As a quick refresher, this special offer gives loyal readers like you the opportunity to lock in 9 more months of Bottarelli Research before the membership prices increase in 2008. Not only that, but you receive these additional 9 months of service for the discounted price of $1,400. At today’s rates, that’s like getting 3 months of service for free. And once the prices go up in 2008, this special 9-month offer equates to a 49% discount off the published membership rates.

Make No Mistake: This is a super deal, and if you’re planning on continuing your Bottarelli Research membership into 2008, then you need to take advantage of this offer right away. After all, this discount is only available until Monday, December 24^th, and considering how crazy things get around Christmas time, it makes the most sense for you to lock in this special offer now, while it’s fresh in your mind. So give yourself an early Christmas present and lock in 9 more months of service now!

To take this special offer, simply follow the discounted membership link below and select the 9-month term titled “End of Year Special.”

https://www.bottarelliresearch.com/renew/?service=opt&offer=E0R2663KRR

Above all, I’m really looking forward to an outstanding 2008 trading year, and I want to ensure that you’re with me every step of the way. Looking at our current track record, we’ve just hit 10 straight winners (dating back to November 28^th) and I have no intention of slowing down anytime soon. So, to ensure that you remain part of our elite group of “Lock and load” traders, be sure to take advantage of this special 9-month extension now and secure your membership well into 2008!

Then, sick back and watch how the markets react to the Fed.

And as always…

Lock and load!

Sincerely,