New Play Candidates for 2010

Watching OSIS, APPL, GMCR, DV, NEM, MON

PLAY: Buy the MON January 85 Calls (MON AQ) and the MON January 80 Puts (MON MP) at market, good for the day.

Dear Bottarelli Research Member,

Happy New Year, and welcome to 2010!

I hope you had a warm and relaxing holiday season.

Looking back at the previous calendar year, I can’t help but wonder if we’ve ever experienced a year in which a 20% gain on the Dow has been so uncomfortable? On the same hand, the S&P 500’s 23% gain was the best since 2003, yet it certainly didn’t feel like a superb year. In fact, the S&P’s 65% recovery since March (without any correction more than 7%) certainly has investors on edge. So, as we begin 2010, it’s time for companies to prove to Wall Street that the recovery they’ve priced in for the last eight months is indeed happening. If the numbers do not support an extended recovery, then we must be ready to play defensively. The first big test will be Friday’s employment report.

In the meantime, I have a number of potential play candidates to follow. First off, the rash of security breaches and increased terrorist activity over the holiday travel season has sparked new interest in full body scanning technology, manufactured by OSI Systems (OSIS – NASDAQ). As you can see from the chart below, OSIS has been moving up sharply lately, which could lead to our next day-trading vehicle. More to come.

Also squeaking to a new 52-week high today is Apple (AAPL – NASDAQ). There is rampant speculation that Apple is on the verge of introducing their next major product launch. A few analysts are already saying that the unveiling will be so surprising, that it’ll “leave the industry scrambling.” This is another situation to watch closely.

Over on the put side, it’s interesting that shares of Green Mountain (GMCR – NASDAQ) and Devry (DV – NYSE) are both trading lower in the midst of today’s strong upside move. As you know, we’ve played GMCR calls with great frequency and success in 2009, and I’d love to continue that trend here in 2010. But after a strong upside run, it could be ready to take a breather. Let’s see how long this pullback lasts, which could determine our next move. If GMCR finds support, don’t be surprised if we play calls. The chart will dictate the next move.

DV is also looking weak today. To be honest, I’d rather play puts on DV over GMCR, simply due to their market sector. Any hiccup in the ability of students to receive loans could send DV sharply lower, so I’ll pay close attention to this setup as well.

I also like how gold prices have come roaring back to life, sparked by weakness in the U.S. dollar. As you know, for the entire 2009 year, the trend was to short any U.S. dollar rallies and buy into any metals dips. But then, in late November and all of December, this trend flip-flopped and the play was to buy the U.S. dollar and short gold. I’ve been saying that this flip was an anomaly. Let’s see if the dominant trend of 2009 can get back into form. If so, picking up gold calls (on NEM, for example) could be something to explore.

In terms of new plays, I’d like to examine the situation we have right now with Monsanto (MON – NYSE). As you probably know, I’m bullish on any companies that are positioned to feed our planet. This group includes companies like POT, MOS, AGU, and CF. But, the granddaddy of them all is MON. And on Wednesday, January 6^th, MON is expected to report earnings.

Now here’s what I find interesting…

Unlike other companies in their sector group, MON has been a big time under-performer over the 2009 calendar year. Over the last 52-weeks, for example, MON has gained only 10%, which comes in far behind the 40% gain of POT over the same time-frame. The reason for this weak performance, in my view, has been very cautious guidance from MON’s management team. In response to their June earnings report, for example, shares of MON dropped $10.00. And in response to their October earnings report, shares fell another $10.00. This $10.00 price reaction sets the table for a strangle position leading into this Wednesday’s announcement.

As you can see from the MON chart, the stock is just begging for a reason to rally. A strong earnings report could quite easily send shares above the previous high at $86.00. And from there, investors who realize that MON has been under-performing (and thus, a nice value play to kick off 2010) could extend the rally even higher. But on the flip-side, another earnings disappointment could just as easily send shares lower, mirroring the $10.00 dips in June and October. So, in this case, it makes sense to position ourselves to profit no matter if MON rallies or dips. The best way to do this is by using a combination of cheap, out-of-the-money calls and puts.

For example, the MON January 85 Calls (MON AQ) currently trade between $1.17 and $1.18 per contract. And the MON January 80 Puts (MON MP) currently trade between $0.86 and $0.89 per contract. Add them both together, and you’ll pay a total of $2.05 to own exposure to the upside and downside in MON. In my view, this is a very cheap price to pay for a stock that has shown the ability to make large price moves on earnings day.

Therefore, let’s get positioned on both sides of MON in preparation for whatever earnings reaction we witness. If we can get any move (up or down) of at least $3.50, we’ll be in good shape. Here’s the trade…

PLAY: Buy the MON January 85 Calls (MON AQ) and the MON January 80 Puts (MON MP) at market, good for the day. Buy each contract on a 1-for-1 basis. For example, if you buy 5 calls, be sure to buy 5 puts. Do not place any protective stop orders at this time. We’ll manage this position based on the directional movements of MON.

As always, I’ll keep you fully informed on all of the trading candidates listed above. But until then…

Lock and load!

Sincerely,