Maintain DIA Puts

Plus, Watch Apple

By Bryan Bottarelli
Monday, October 03, 2011 9:32 AM EDT
Mon, 3 Oct 2011 13:32:00 GMT
“It might be a while before the market decides on the following issues, each of which continues to whipsaw investors moment by moment: Eurozone sovereign debt problems, a U.S. recession, a Chinese recession, weak banks inflation, deflation, and weak job numbers. If you can’t trade nimbly, then you better have a stomach for volatility.”
– Vito Racanelli, quoted in Barron’s on October 3, 2011

Dear Bottarelli Research Member,

Good morning. You may not realize this, but we just closed the books on the weakest third quarter on the S&P 500 since 1928. I don’t know about you, but this amplifies what sort of market we’re dealing with right now. On any given day (as the quote from this week’s Barron’s masterfully describes above), the markets can move up or down according to any piece of news. And right now, this list of news catalysts is growing larger by the day. Therefore, we must continue to take a nimble approach to our trading.

Judging by the action overseas (which saw both the European and Asian markets drop deeply into the red, led by a 4.38% fall for the Hang Seng Composite), Q4 isn’t going to get off to a strong start. This is why we went into the weekend holding only our protective DIA October 107 Puts (O:DIA 11V107.00).Based on Friday’s late sell-off, these puts have now moved into the profit zone. This morning’s weakness is adding to your gains. Judging from the overseas weakness, let’s hold these puts a little longer, just until we get a sense of how today’s trading goes. Then, we’ll make a tactical decision going forward.

In other trading news, we could have a developing situation on Apple (AAPL – NASDAQ). Here’s the story…

Apple has scheduled an iPhone-related event this Tuesday. The speculation is that they’ll unveil their iPhone 5, which seems like perfect timing leading into the holidays. Now, if you look at the Apple chart, you’ll see that the shares have pulled back nicely, which could offer us a nicely timed opportunity to play a possible run-up going into this news. The trouble is, the premiums on Apple’s options string are quite expensive. For example, the October 380 Calls (O:AAPL 11J380.00) trade for $19.00. That’s way more than a typical Bottarelli Research trade, but that’s what we have in front of us right now. Based on the cost, this is certainly a more speculative position. But if a trade opportunity triggers, I think we’ll make a move.

As always, I’ll keep you fully informed. But until then…

Lock and load!

Sincerely,

Bryan Bottarelli
Editor, Bottarelli Research
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