A Bloated Tech Breaking Down

A Quick Play on WBMD Puts

By Bryan Bottarelli
Tuesday, August 01, 2006 3:00 PM EST
Tue, 1 Aug 2006 20:00:00 GMT

Dear Bottarelli Research Member,

As I said this morning, I’m getting increasingly nervous about this market. After a sizable run-up last week, we could see weakness creep back in to the markets all week long as we lead up to next Tuesday’s Fed meeting.

That backdrop sets the table for a new shorter-term put play on WebMD (WBMD – NASDAQ) With a forward P/E of 129.80 and a trailing P/E of 452.79, WBMD was one of the so-called “bloated techs” I profiled a month ago. Today, the stock is selling off in front of their August 3rd earnings announcement (which is scheduled for after the bell) which means we could have a quick speculative downside play in the works. Here’s the chart:

WBMD

As you can see, the stock has tried very hard to stay above the 50-day moving average. In fact, yesterday’s big jump past the $42 level gave the bulls reason to celebrate. But today, all of those gains have been erased, which signals more weakness for WBMD. You can barely see it on the chart, but it looks like the stock will be testing the 200-day moving average (in red) around the $36.00 level. So let’s play it to the downside now:

PLAY: Buy the WBMD August 40 Puts (QWB TH) at or under $2.85, good for the day. Current bid/ask spread is a wide $2.35 to $2.85, so try to get filled somewhere in the midpoint of that larger-than-normal price spread. Place a protective stop loss at $1.50.

*TACTICAL NOTE: I expect to implore a quick trigger finger on this one, so only make this play if you’ll be in a position to withstand big price jumps and (hopefully) a quick gainer.

Lock and load

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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