Add STP Calls

Plus: Political Market Talk

“Politicians are like diapers. They need to be changed often, and for the same reason.”

- Comedian Robin Williams

PLAY: Buy the STP November 20 Calls (STP KD) at or under $2.35, good for the day. Place a protective stop limit at $1.10 and a pre-determined sniper sell at $4.20.

Dear Bottarelli Research Member,

Good Monday morning. It’s safe to say that we’re all glad to see October of 2008 in the rearview mirror. As I mentioned yesterday, last month was one of the worst market months in history — which was further complicated by ending with one of the single best weeks in market history. In other words, we had one of the best weeks nestled within one of the worst months. And now, we’re on the eve of a presidential election.

POLITICAL NOTE: I would think that the markets will remain semi-muted going into the election. A quick look at the Electoral College count, offered at Real Clear Politics, shows you that barring any miracle upsets, Barack Obama will soundly defeat John McCain. If this comes true, then the big question will be the following:

What will be the immediate market effect of a political system dominated by the Democrats?

In my view, we’ll first see the markets move lower. In fact, as I mentioned last week, I think that the Dow must engage in some sort of re-test of the October lows. This re-test will show us if last week’s rally was for real. If it WAS for real, we’ll set a higher low, which is a bullish indicator going forward. If it WAS NOT for real, we’ll most likely re-test the 7,800 level. Either way, from a technical perspective, I think it’s absolutely critical that we witness this re-test to see how it plays out. Armed with this information, we’ll then know how to structure our trading strategies going forward.

Aside from a down-market, another political effect could be weakness in the defense and coal sectors. Any hint of cuts in defense-spending could really harm stocks like L-3 Communications Holdings (LLL – NYSE) and Alliant Techsystems (ATK – NYSE). As you know, we entered LLL November 75 Puts (LLL WO) last week, which have moved against us. In fact, these puts have triggered our stop loss, so this position is closed. But as you can see from the charts below, both stocks have participated in the recent market rally — but that upside move could now be coming to an end. If I sense any weakness, I will add more puts on either one of these stocks.

Another important political effect could be seen in the alternative energy and coal sectors. As you know, a democratic president would be perceived as great news for alternative energy sectors (like solar and wind power). Since many of these stocks have gotten clobbered lately, we could have a nice opportunity to play upside calls.

On the flipside, we could see panic-selling within the coal sector. Back in January, Barack Obama did an interview with the San Francisco Chronicle where he said, “If somebody wants to build a coal power plant they can, it’s just that it will bankrupt them because they are going to be charged a huge sum for all that greenhouse gas that’s being emitted.”

The point of the quote was to emphasize the transition from coal burning power plants to plants with more advanced technologies. But recently, fear is creeping in that coal-stocks could be in for a world of hurt. Often times, perception is reality, so we could have an opportunity to play puts on some top coal stocks. Foundation Coal Holdings (FCL – NYSE) could be one good example.

But for today, I’d like to add November calls on Suntech Power Holdings (STP – NYSE). Once a solar-power darling, shares of STP have moved from $45.00 down to $10.00 in recent trading. But as you can see below, a bounce at the $15.00 level could be setting up for some nice upside momentum. With the presidential trigger at our backs, let’s add STP calls now!

PLAY: Buy the STP November 20 Calls (STP KD) at or under $2.35, good for the day. Place a protective stop limit at $1.10 and a pre-determined sniper sell at $4.20.

At the same time, I’d like to maintain our BNI November 90 Calls (BNI KR) and our DIA November 80 Puts (DIJ WB), both of which position us to profit off my thoughts from above. I’m sure I’ll be out later in the day with more updates, but until then:

Lock and load!

Sincerely,