Introducing The CYA Play
Protecting Against the Worst-Case Scenario
“Banking Establishments Are More Dangerous Then Standing Armies”
- Thomas Jefferson
PLAY: Buy the DIA April 70 Puts (DIJ PR) at market, good for the day. Place a protective stop limit at $1.20 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).
PLAY: Buy the VIX May 60 Calls (VIX EN) at market, good for the day. Place a protective stop limit at $1.20 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).
PLAY: Buy the GERN January 2010 7.5 Calls (WNM AU) at market, good for the day. Place a protective stop limit at $0.50 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).
Dear Bottarelli Research Member,
Never before has the above quote from Thomas Jefferson held so much relevance. Because of ill-advised banking and financial decisions, the global economy is on the brink of disaster. According to Bloomberg.com, “global stock markets lost about half of their value in 2008, or $30.1 trillion dollars.” This is a mind-boggling sum. But that’s not the whole story.
If you combine these market losses with losses in commodities, bonds, and real estate, you can realistically argue that the “true” 2008 losses amounted to around $60 trillion. Once again, this is an utterly incomprehensible sum of money. And going forward,the losses could get even worse. Therefore, today’s newest LEAPS issue will take on a decidedly negative tone. Trust me, I don’t want to be pessimistic. But when I study the reality of today’s global economic position, I really have no choice. Therefore, in today’s alert, we’ll do what no clear-thinking hedge fund, mutual fund, or wealth manager did for their clients in 2008: Protect them for the “worst-case scenario.” To accomplish this goal, we’ll enter two plays that I call “CYA” positions (pronounced See-Ya).
You see, when I was trading on the floor of the CBOE, the art of properly hedging your positions was ingrained into our heads from day #1. Whenever you entered a trade, you immediately turned around and entered a hedge play that protected you in case your trade moved against you. While these hedge plays sometimes lost money, over the longer term, their importance was imperative to long-standing trading success. By protecting any “at risk” money, they severely limited the losses on any single play. As a result, these hedge plays were know as CYA plays, which stood for “Cover Your A**.” Today, with the Dow threatening to break below the late-November low of 7,500, it’s time to enter two CYA plays of our own. If we witness a devastating market fall (one in which the Dow drops to 6,000 or even 5,000), both of today’s CYA plays are designed to hand you phenomenal profits.
A good example of a properly executed CYA play occurred on July 7th 2008, when I recommended the CBOE Volatility Index October 25 Calls (VIX JE) in these very pages. As you probably know, the VIX is a “fear-gauge” that moves up as the markets move down. Since I was forecasting market weakness, I recommended the VIX calls for $2.80. And as you probably know, we ended up selling these calls for $21.25, good for a 658.93% gain. Needless to say, when I tell you that these CYA plays can make you phenomenal profits, I’m not kidding. And right now, I think it’s once again time to add two of these powerful protective positions to our LEAPS ledger. So let’s get started.
Your first CYA play comes in the form of the Diamonds Trust (DIA – AMEX), which seeks investment results that generally correspond to the price and yield performance of the Dow Jones Industrial Average. If the Dow breaks below the November lows, we’ll most likely see further deterioration in the Blue Chip averages. Levels of Dow 6,000 or even Dow 5,000 are not out of the question. If these devastating losses continue to pile up, you’ll be very, very glad you own DIA puts. Therefore, as today’s first CYA play, let’s enter DIA April 70 Puts now.
PLAY: Buy the DIA April 70 Puts (DIJ PR) at market, good for the day. Place a protective stop limit at $1.20 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).
Your second CYA play comes in the form of the CBOE Volatility Index (VIX). Like I mentioned above, the VIX moves up as the markets move down. If we experience another violent sell-off (like what we experienced in October and November), we could see the VIX move from current levels around 50 back up to their recent highs at 80. In fact, if the major market averages break down to fresh 52-week lows, we could see the VIX hit the 100 level for the very first time in history. I don’t know about you, but in my opinion, never before has the global marketplace been so fragile. Therefore, to reflect this high level of global fear, you could realistically see the VIX break out to levels that you’ve never seen before. To profit off this move, let’s go ahead and enter your second CYA play now.
PLAY: Buy the VIX May 60 Calls (VIX EN) at market, good for the day. Place a protective stop limit at $1.20 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).
Once we’re armed with these two protective plays, I’d like to add an aggressive upside position to our ledger, which comes in the form of Geron (GERN – NASDAQ). As I’ve mentioned in these pages before, I’m bullish on biotech companies here in 2009, and the news that hit the wires on Friday supported this viewpoint.
You see, just four days into a new presidential administration, Geron received clearance to begin (what could be) the biggest step forward in history in the field of stem cell research. Yesterday, the U.S. Food and Drug Administration gave GERN clearance to begin the first-ever test of an embryonic stem cell treatment in people. As you probably know, George W. Bush prohibited federal funding of embryonic stem cell research, but President Obama supports it. As a result, GERN will administer an injection to a small number of patients with a specific type of spinal cord injury, and the results could open up an entirely new stage of treatment and discovery.
In fact, Geron’s CEO Dr. Thomas Okarma said, “This marks the beginning of what is potentially a new chapter in medical therapeutics, one that reaches beyond pills to a new level of healing: the restoration of organ and tissue function achieved by the injection of healthy replacement cells.”
In response to this news, shares of GERN popped 54% higher. But to be honest with you, this could only be the tip of the iceberg. Therefore, I’d like to get positioned in a January 2010 call now — and profit off more explosive upside moves on GERN’s new breakthrough. Here’s the play…
PLAY: Buy the GERN January 2010 7.5 Calls (WNM AU) at market, good for the day. Place a protective stop limit at $0.50 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).
UPDATES
Yellow Roadway January 2011 2.5 Calls (VYX AZ): Our powerful recovery play was positively featured by options guru “Dr. J” on CNBC this week, which means I’m not the only one who has identified the explosive potential of this pick. Expect continued upside. Hold.
Genentech March 80 Calls (DWN CP), Teva Pharmaceuticals January 2010 45 Calls (WTX AI), & Cubist May 20 Calls (UTU ED): Friday’s news from GERN, mentioned above, could trigger an upside catalyst for the entire biotech sector. It’s clear that President Obama supports new biotech initiatives, and this bodes well for the entire sector. Hold.
ETH February 15 Puts (ETH NC): Shares continue to drift lower, getting even closer to my $6.00 per share price target. Hold.
Salesforce.com May 25 Puts (CRM QE) & Verizon April 30 Puts (VZ PF): Both VZ and CRM are struggling to move above their 50-day moving average, which supports more bearishness ahead. Hold.
MCD June 55 Calls (MCD FK), ADM January 2010 20 Calls (WRA AD), & YUM January 2010 30 Calls (WRJ AF): The market weakness this week took a bite out of MCD, YUM, and ADM, but the extended expiration dates should allow all three positions to recover. Hold.
Excel Maritime March 15 Calls (EKN CC) & Tesoro January 2011 5 Calls (ZGC AA): TSO continues to push higher, so be sure to lock in gains at the 100% level. In terms of EXM, if shares can find support at their 50-day moving average, we may add to this position (or roll it forward). More on this next week. Until then, hold.
Barrick Gold January 2010 40 Calls (WRX AH), AK Steel January 2010 15 Calls (YDF AC), & Southern Peru Copper January 2010 25 Calls (YPV AE): Metals made a very strong recovery this week, lead by gold. This allowed us to lock in a powerful 90% gainer on our ABX calls. As investors continue to be fearful about the economic environment, you should see even more money flowing into these metals plays. Therefore, I’ll look to re-enter a gold play on any forthcoming dips. Until then, maintain AKS and PCU. Hold.
Sincerely,
© 2012 CSR Group, LLC. All rights reserved. Published in USA.
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