Take AEM Profits

Plus, Add SHLD Calls for a Short Squeeze

PLAY: Sell your AEM March 55 Puts (O:AEM 10O55.00) at market, good for the day.

PLAY: Buy the SHLD March 95 Calls (O:SHLD 10C95.00) at or under $4.05, good for the day. Place a protective stop limit at $2.20 and a pre-determined sniper sell at $6.50.

Dear Bottarelli Research Member,

Whenever CNBC commentator Bob “Cool Breeze” Pisani gets all happy and giggly about the market’s upside, I tend to get nervous. After all, it’s a pretty consistent indicator of a near-term top. This was the case this morning when John Deere (DE – NYSE) reported so-so numbers, and yet the stock shot higher. Going forward, it might be time for a quick pullback.

In terms of our current positions, the AEM March 55 Puts (O:AEM 10O55.00) that we entered yesterday for $1.50 have just ticked up to $1.80. As you know, this was a bearish play based on AEM’s earnings report. But with 20% profits in hand, let’s take the safe road and lock in our gains now!

PLAY: Sell your AEM March 55 Puts (O:AEM 10O55.00) at market, good for the day.

NOTE: For you true speculators out there, you may consider selling half of your puts for a 20% gain and then hold the remainder going into earnings. If AEM falls, you could clean up.

Right now, our portfolio is slightly biased to the downside. With puts on ANF and RIMM, mixed in with earnings plays on ABX and CECO, it’s time to balance out the ledger with one new call play.

Now, after running a quick chart scan, my research team and I came across a very strong chart. And as it turned out, it was on the company that I’ve often times called the “worst retailer in America,” Sears Holdings Corporation (SHLD – NASDAQ). As you can see from the SHLD chart below, the stock is making a strong bounce off the 50-day moving average, indicating that a move up to $100.00 could be in the cards. Now I admit, I’ve always wanted to play puts on SHLD. After all, I have no idea how the stock can maintain such a high valuation (like a Forward P/E ratio of 39.22) while competing against the likes of Wal-Mart, Target, etc.

But each time the stock was ready to break down, it snapped back stronger than ever. Hence, I could never pull the trigger on puts. As I further investigated this odd situation, I came across something that explains this trading.

Here’s the secret…

As I write, SHLD has 11.01 million shares sold short. As a percentage of float, that’s a whopping 29.20%. In other words, for every 10 shares of SHLD on the market, three shares are sold short. Of the remaining seven long shares, Eddie Lampert controls a massive chunk of shares, which indirectly creates a market shortage. Therefore, every time SHLD moves down, the shorts try to cover their position. But since SHLD is difficult to obtain, the shorts must pay up to cover their position. As a result, this short-covering triggers a “short squeeze” effect, which pushes the shares higher!

Based on this situation, it doesn’t matter what type of organization SHLD runs, the stock is pre-programmed to move higher. Therefore, lets’ ride this trend using March calls. Here’s the play…

PLAY: Buy the SHLD March 95 Calls (O:SHLD 10C95.00) at or under $4.05, good for the day. Place a protective stop limit at $2.20 and a pre-determined sniper sell at $6.50.

NOTE: SHLD is due to report earnings on February 23^rd, which could trigger a pre-earnings run-up. If this occurs, I plan to sell our calls into this strength.

And as always…

Lock and load!

Sincerely,