Dear Bottarelli Research Member,
Earlier this month, we identified a double top formation in the Dow Transports and successfully used that downside forecast to profit off Norfolk Southern (NSC – NYSE) put options. Now we could have a similar situation forming up in the Dow Utilities.
A quick look at the chart shows two possible bearish formations happening at the same time. First off, we have a double-top formation that occurred in December – as the 465 level acted as an unattainable level on two different occasions.
Then, if you draw your eye back a little further, you’ll notice that a possible head and shoulders has formed – as the left shoulder was established in early November – followed by the head which was formed with the double-top formation outlined above – and capped off by the right shoulder which looks to have just been established with last Thursday’s red down-tick underneath the 50-day moving average.
Based on these two bearish chart formations, it would appear that the Dow Utilities are set for a downside run. And that’s why I’d like to establish a new put position in TXU Corporation (TXU – NYSE).
By far the weakest of the utility names, TXU looks poised to move lower on any Utility weakness. And to be honest, the real downside pressure could trigger this Wednesday – which is when two big Dow Utility names Public Service Enterprise (PEG – NYSE) and Dominion Resources (D – NYSE) report their earnings. If any of these reports come in weak, you could have the catalyst that pushes the entire sector lower. And since TXU doesn’t report their earnings until Tuesday, February 27th, you’re somewhat cushioned against the threat of positive results. But from the looks of the charts, the next move will be lower – so let’s play it accordingly.
PLAY: Buy the TXU February 55 Puts (TXF NK) at or under $2.10, good for the day. Current bid/ask spread is $1.80 to $2.00. Place a protective stop loss at $1.10.
On the flipside, I think I’ve discovered one of the cheapest call options you’ll ever come across. They’re found in the options string for Liberty Media Capital (LCAPA – NASDAQ), which is an outfit that holds a stake in News Corporation – which operates filmed entertainment, television, cable network programming, direct broadcast satellite television, magazines, newspapers, and book publishing.
As you can see by the chart, the stock has been engaged in a very nice up-trend – and today’s tick could be a signal that the upside move will push even higher. Now here’s what I find so interesting. For a $100 stock, the options string is as cheap as you’ll ever see. The LCAPA March 105 Calls (NLD CA), for example, currently trade between $1.40 and $1.65 per contract. Sure they’re out of the money – but the March 100 calls are trading for $4.30. So a quick $5 up-move could result in a 177% gainer. To my eye, we should add this position immediately!
PLAY: Buy the LCAPA March 105 Calls (NLD CA) at or under $1.70, good for the day. Place a protective stop loss at $0.80.
Lock and load!