Two New Plays

Add One Metal Call & One Protective Put to the Led

PLAY: Buy the PCU May 90 Calls (PCU ER) at or under $7.20, good for the day.

PLAY: Buy the DJX May 111 Puts (DJV QG) at or under $1.60, good for the day.

Dear Bottarelli Research Member,

Right now, I’m seeing multiple signs that a heightened level of fear is seeping into the markets. First, the CBOE Volatility Index (VIX) touched the 13 level last week, something that hasn’t happened in over 26 trading days. I learned from being on the CBOE that when you see volatility quietly increasing, that tells you that fear is becoming more prevalent in the markets — which is a sign that floor traders are preparing for a market fall.

Secondly, we’ve just kicked off earnings season. This week, tech giants Yahoo, Google, and eBay are all set to report earnings. From what I’m hearing, Yahoo could be the one company that disappoints investors — which could send the entire tech sector down.

The combination of heightened fear and the possibility of un-met earnings expectations could very well be the recipe for a fall. But then again, it could very well be the exact opposite — as blowout earnings spur another upside market push. Truth be told, it’s really anyone’s guess what will happen — and that’s why options traders always have the advantage over stock traders. We can make money no matter if the market rallies or falls — and the secret is proper market positioning.

Right now, the established market trend is to the upside. Therefore, we’re currently overweight to the upside by holding one longer-term call on BDX, one near-term upside call on ATW, and one near-term downside put on OXM. This combination covers us for whatever the market throws our way, as you can see today with ATM up and OXM down.

But today, I’d like to add two new positions that allow us to make two safe 30% winners no matter what type of earnings news come out later this week. The first way to do that is through playing major metals company Southern Copper Corporation (PCU – NYSE) to the upside.

Based out of Phoenix, Arizona, PCU mines and produces a full line of metals, including copper, molybdenum, zinc, silver, gold, and lead. The company operates mines in Peru and Mexico that produced 1,521 million pounds of copper; 317 million pounds of Zinc, 33 million pounds of molybdenum, 18 million ounces of silver, and 32 thousands ounces of gold. If you’re bullish on the continued rise of any precious metal, then PCU is the play for you. If you look at the chart, you’ll see what the stock’s strong up-trend:

I think it’s a virtual lock that PCU will break the $100 mark sometime this month. The beauty of the play is that metals like gold and silver tend to attract investment dollars when the equity markets are suffering. So no matter if the markets rise of fall, I think PCU offers us a safe way to make a nice quick hit.

PLAY: Buy the PCU May 90 Calls (PCU ER) at or under $7.20, good for the day. Current bid/ask spread is $6.70 to $7.20. Place a protective stop loss at $4.30.

As a trading sidebar, I also looked closely at Freeport-McMoRan Copper & Gold (FCX – NYSE).In fact, they were my first choice — until I noticed the pricing structure of their options and realized that PCU was a much better play.

You see, FCX is a $65 stock and the May 60 Calls, which are around $5 in the money, are trading $7.10 to $7.40. In comparison, PCU is a $95 stock and the PCU May 90 Calls, which are also around $5 in the money, are trading between $6.80 to $7.00. This means the FCX floor traders are asking you to pay more money to leverage their $60 stock than the PCU floor traders are asking you to leverage their $90 stock. Seeing this, it quickly became apparent that PCU was the better of the two plays.

The second way to properly position ourselves is to own put options in the DJX. The DJX is exactly 1/100 the value of the Dow Jones Industrial Average — which allows you to enter into a downside position without a large capital outlay.

If the markets do indeed drop, owning put options on the DJX could make you a quick winner in the midst of a free-fall — while protecting any losses sustained from your upside calls on ATM and PCU.

PLAY: Buy the DJX May 111 Puts (DJV QG) at or under $1.60, good for the day. Current bid/ask spread is $1.45 to $1.55. Place a protective stop loss at $1.00.

Lock and load!

Sincerely,