Adding Protection

Plus, a Possible FDX Earnings Play

By Bryan Bottarelli
Monday, June 19, 2006 11:27 AM EST
Mon, 19 Jun 2006 16:27:00 GMT

PLAY: Buy the DJX July 110 Puts (DJV SF) at or under $1.70, good for the day. Current bid/ask spread is $1.55 to $1.70. Place a protective stop loss at $1.00.

Dear Bottarelli Research Member,

A choppy week of trading has begun!

This morning, the futures pointed to a strong opening, but those gains lasted less than an hour before all the major market indices turned from green to red. Despite the reversal, our two shorter-term trading positions have held onto early-session gains, as both Las Vegas Sands (LVS – NYSE) and Pepsico (PEP – NYSE) are in the green. In fact, LVS stock was up $1.30 at the open before coming back down with the rest of the markets.

With this choppy trading pattern setting the mood for this week, I think it’s a good idea to balance out our two upside positions with a protective downside put on the DJX. The DJX is an index that trades for 1/100 the value of the Dow Jones Industrial Average, so it’s a pure way to play the movements of the Dow without a lot of up-front capital.

DJX

As you can see by the chart, the DJX just had a very-strong two-day period which put the index smack-dab in the middle of its 50-day and 200-day moving averages. At these levels, it’s literally a tug-of-war between the bulls and the bears to see if the index rallies to the 50-day or falls back to the 200-day. Since we already have two upside positions established in PEP and LVS, it makes sense to enter into a protective put on the DJX to cover us from any market downside. With that, here’s the play:

PLAY : Buy the DJX July 110 Puts (DJV SF) at or under $1.70, good for the day. Current bid/ask spread is $1.55 to $1.70. Place a protective stop loss at $1.00.

Another interesting situation has just popped up in FedEx (FDX – NYSE). As you can see by the chart, the stock finds itself in a similar position as the DJX as it trades right in the middle of the 50-day and 200-day moving averages. But here’s the kicker:

FDX

This Wednesday, FedEx will announce their Q4 earnings starting at 8:30 am ET. The consensus estimate is $1.77 versus $1.46 a year ago. This means that we could have a play similar to our recent earnings play on Goldman Sachs (GS – NYSE), where we purchase both a cheap call and a cheap put and profit off any big rise or big fall in the stock based on the earnings report. I’m still doing my due diligence on the FDX options, so you may see more on this trade later today or tomorrow. Until then…

Lock and load

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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