Three New Plays

SHLD and LAMR Puts, GENZ Calls

By Bryan Bottarelli
Monday, July 28, 2008 10:21 AM EDT
Mon, 28 Jul 2008 14:21:00 GMT

PLAY: Buy the SHLD August 80 Puts (KTQ KP) at or under $4.80, good for the day. Place a protective stop limit at $2.10 and a pre-determined sniper sell at $5.90.

PLAY: Buy the LAMR August 35 Puts (LJQ TG) at or under $1.60, good for the day. Place a protective stop limit at $0.80 and a pre-determined sniper sell at $2.20.

PLAY: Buy the GENZ August 75 Calls (GAA HO) at or under $3.00, good for the day. Place a protective stop limit at $1.50 and a pre-determined sniper sell at $4.00.

Dear Bottarelli Research Member,

“The market suddenly abounds with cheap stocks.”

That was the lead sentence in Andrew Bary’s editorial column in this week’s Barron’s, and it’s right on the money. Some of the best companies your investment dollars can buy are now trading at P/E ratios under 6, while other great companies are now trading below book value.

Historically speaking, buying at these valuation levels is typically a winning formula. Nevertheless, it’s interesting to me that many key floor traders that I monitor are actually hoping for a “washout” day of selling pressure. This downside, while temporarily painful, would mark the blow-off selling day that everyone is talking about. But once this occurs, traders and investors alike will have overcome that critical mental barrier about the blow-off selling day. And then, we can get back to actually buying stocks for the some of the cheapest and most desirable valuations in quite some time.

But in the meantime, I’ve located two stocks that I’d like to play near-term puts on. The first is Sears Holdings Corporation (SHLD), which actually falls into the category of a stock that is not cheap at all. Currently trading at a sky-high P/E ratio of 40, SHLD’s inability to push above its 50-day moving average means that the shares could easily drop $10.00 back to its recent low of $70.00. Let’s play this over-valued retailer using August puts now.

SHLD

PLAY: Buy the SHLD August 80 Puts (KTQ KP) at or under $4.80, good for the day. Place a protective stop limit at $2.10 and a pre-determined sniper sell at $5.90.

Another industry that could be on the verge of a major recession (that nobody is talking about!) is the advertising sector. For example, major advertisers like Coca-Cola and General Motors have trimmed their marketing budgets to cut costs, and this could have a big impact on a company like Lamar Advertising (LAMR – NASDAQ).

LAMR

LAMR owns and operates 251,000 billboard and logo advertising displays in 44 states, Canada, and Puerto Rico, and as you can see below, the stock is in a clear down-trend. Media companies have not endured a consumer-led recession since 1991, so the timing is certainly due for a slowdown. Similar to SHLD, the inability of LAMR to extend above its 50-day moving average means we could see a drop back down to the low $30.00 range. Therefore, let’s play the continued downside move using August puts as well.

PLAY: Buy the LAMR August 35 Puts (LJQ TG) at or under $1.60, good for the day. Place a protective stop limit at $0.80 and a pre-determined sniper sell at $2.20.

And finally, the biotech sector remains red-hot, thanks to news out of Amgen (AMGN – NASDAQ) that their osteoporosis drug candidate “denosumab” had positive trial results. One analyst called the drug “a future blockbuster,” and AMGN’s 14% of upside today will most likely continue to push the entire biotech sector higher. As a result, I’d like to make another upside play on Genzyme (GENZ – NASDAQ). After a nice pullback, shares of GENZ could use AMGN’s news today to bounce higher, so let’s play this biotech strength using August calls. Here’s the play:

GENZ

PLAY: Buy the GENZ August 75 Calls (GAA HO) at or under $3.00, good for the day. Place a protective stop limit at $1.50 and a pre-determined sniper sell at $4.00.

Also, if you’re still holding your USO August 100 Calls (IYS HV), I’ll continue to follow this position going forward. Until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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