Two New Plays

Add RATE Puts, GDX Calls

By Bryan Bottarelli
Monday, November 10, 2008 12:00 PM EST
Mon, 10 Nov 2008 17:00:00 GMT

PLAY: Buy the GDX January 23 Calls (GBJ AW) at or under $2.95, good for the day. Place a protective stop limit at $1.30 and a pre-determined sniper sell at $4.50.

PLAY: Buy the RATE December 30 Puts (QIB XF) at or under $3.20, good for the day. Place a protective stop limit at $1.10 and a pre-determined sniper sell at $6.00.

Dear Bottarelli Research Member,

Following up on our last alert, I’d like to add some upside exposure to our ledger using the Market Vectors Gold Miners ETF (GDX – AMEX). In terms of full disclosure, the GDX was my latest recommendation in our Bottarelli Research Small Caps service, so I’ve spent considerable time doing due-diligence on this position.

As a general description, GDX is an investment that seeks to replicate the price and yield performance of the AMEX Gold Miners index — which offers you exposure to a wide variety of precious metals companies, including Agnico-Eagle Mines (AEM – NYSE), AngloGold Ashanti (AU – NYSE), Barrick Gold (ABX – NYSE), Gold Fields (GFI – NYSE), Newmont Mining (NEM – NYSE), Randgold Resources (GOLD – NASDAQ), and Yamana Gold (YRI.TO).

GDX

Now when you look at this group, here’s what I find rather interesting. As you read this, the price of gold is down around 10% year to date. When compared to the S&P 500’s year-to-date loss of 33.9%, the price action of gold is over-performing the major market averages. But get this: In strange contrast, shares of gold mining stocks (taken collectively) are down over 60% during this same period. What is happening here?

The simple answer is that this over-sold condition has been sparked by liquidations among top institutions. You see, $967 billion in mutual fund redemptions have occurred since the start of the 2008 calendar year. And since gold has been an over-performer in 2008, most of the gold stocks contained in the GDX are the first sector group to be sold. That’s why gold miners have moved dramatically lower compared to the price of physical gold.

In fact, the current price of gold mining stocks compared to the price of gold is now at the cheapest level since 1984!

At the same time, continued bailout efforts will flood the global markets with U.S. dollars, and that makes the case for gold even stronger. Not only that, but gold miners currently carry an average a price to book ratio of 1.27 and an average price to sales ratio of 3.42. That’s dirt cheap! Therefore, let’s balance out our put ledger by adding longer-dated calls on GDX now. Here’s the play…

PLAY: Buy the GDX January 23 Calls (GBJ AW) at or under $2.95, good for the day. Place a protective stop limit at $1.30 and a pre-determined sniper sell at $4.50.

At the same time, I’d like to play puts on Bankrate.com (RATE – NASDAQ). The company’s entire business model is based on an Internet-based consumer banking network that lists information on mortgages, credit cards, automobile loans, money market accounts, certificates of deposit, checking and ATM fees, home equity loans, and online banking fees. With the credit markets all but frozen, RATE’s trailing P/E ratio of 29.61 looks awfully pricey. Furthermore, a look at the chart indicates that RATE will drop down to fill the gap set at the $27.50 mark, so let’s profit off this move using RATE puts now!

RATE

PLAY: Buy the RATE December 30 Puts (QIB XF) at or under $3.20, good for the day. Place a protective stop limit at $1.10 and a pre-determined sniper sell at $6.00.

At the same time, continue to hold your DXD November 76 Calls (DZS KX) and your DUG November 41 Calls, as it looks like we’ve timed both moves correctly. And as always…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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