Unexpected Rally

Use OXM Profits to Offset DJX Puts

By Bryan Bottarelli
Tuesday, April 18, 2006 11:51 AM EST
Tue, 18 Apr 2006 16:51:00 GMT

PLAY: DJX May 111 Puts (DJV QG) stopped at $1.00.

PLAY: Sell OXM May 50 Puts (OXM QJ) at or above $5.90, good for the day.

Dear Bottarelli Research Member,

I must admit, today’s rally is a little surprising.

As I noted yesterday, a high level of fear was seeping into the markets — and from the looks of the futures activity, the S&P floor traders were preparing for a rather sizable drop.

To position us for that move, I recommended using the DJX May 111 Puts (DJV QG) as a measure of protection. This position allowed us to simultaneously take an upside position in the PCU May 90 Calls (PCU ER) without exposing ourselves to excessive downside risk. It also gave us the comfort of holding our two other upside positions: ATW May 52.5 Calls (ATW EX) and BDX June 60 Calls (BDX FL).

Plus, I was confident that our final put position, the OXM May 50 Puts (OXM QJ), evened out the trading ledger.

This morning, as the markets rallied, we took profits on the PCU May 90 Calls (PCU ER) while watching both ATW and BDX move higher on today’s upside strength. Of course, this upside move meant that our DJX May 111 Puts (DJV QG) have traded down to our $1.00 stop price. But not to worry — I’d like to use our gains from the OXM May 50 Puts (OXM QJ) to negate this loss. As I write, these puts have traded as high as $6.10 today. That’s $0.60 above our $5.50 entry price. Selling these puts today would effectively wipe out the loss on your DJX puts, thus making this morning’s PCU gains pure profit. So here’s what I’d like to do…

PLAY: DJX May 111 Puts (DJV QG) stopped at $1.00.

PLAY: Sell OXM May 50 Puts (OXM QJ) at or above $5.90, good for the day.

Lock and load,

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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