Three New Plays

One Call, Two Puts

By Bryan Bottarelli
Wednesday, August 09, 2006 10:55 AM EST
Wed, 9 Aug 2006 15:55:00 GMT

Dear Bottarelli Research Member,

It’s time to get back into the markets — and today we have three very nice set-ups to profit off right away. One is an upside play and the other two are downside plays. Entering all three plays gives you a market neutral position that’s slightly biased to the downside. This allows you to profit no matter if the markets move up or down. So enough small talk, let’s get right into it!

The upside play comes in the form of TXU Corp (TXU – NYSE).

TXU is a Texas energy company that engages in generation, residential and business sales, wholesale power and natural gas market activities. As of December 2005, TXU provided electricity service to 2.3 million customers in Texas — which offers you a nice and steady upside play over the next few weeks. Just look at the chart — and you’ll quickly see how much Wall Street loves TXU.

TXU

With the utilities hitting historic highs and looking to be the main upside catalyst powering the Dow — I think it’s a relatively safe and conservative play to get positioned to the upside in TXU. Here’s the play:

PLAY: Buy the TXU September 65 Calls (TXF IM) at or under $3.00, good for the day. Current bid/ask spread is $2.80 to $2.95. Place a protective stop loss at $1.90.

On the flipside, the first downside play comes in the form of Whirlpool (WHR – NYSE).

The major appliance company is experiencing weakness due to materials costs that have risen for the third straight year — which has forced them to announce worldwide price increases of 6% to 12%. These price increases are coming at a bad time — because right now industry growth is slowing due to the US housing market.

WHR

According to the recent figures, shipments of WHR’s core appliances (ranges, refrigerators and dishwashers) fell 3.7% in June. Last year, shipments rose 3.4% in June — so you can clearly see the year-over-year shortfall.

On the yearly basis, Whirlpool’s sales increased only 5%, the lowest rise in at least three years. Looking at the chart, I think this weakness will push WHR below the $75.00 level, which could open up a new wave of selling pressure. Based on that, let’s play WHR to the downside.

PLAY: Buy the WHR September 75 Puts (WHR UO) at or under $2.80, good for the day. Current bid/ask spread is $2.55 to $2.75. Place a protective stop loss at $1.60.

Finally, the third downside play comes in the form of Beazer Homes (BZH – NYSE).

BZH

Beazer Homes builds and sells single-family homes in the United States. Today, the stock is experiencing weakness thanks to new numbers out from luxury home builder Toll Brothers (TOL – NYSE), who just announced that their new orders and their revenue fell once again. This shortfall prompted the company to slash the number of homes it expects to build this year — for the forth time!

If you look at the BZH chart, you’ll clearly see a test and failure at the 50-day moving average, which signals more downside to come. Here’s the play:

PLAY: Buy the BZH September 40 Puts (BZH UH) at or under $2.00, good for the day. Current bid/ask spread is $1.75 to $1.90. Place a protective stop loss at $1.00.

Lock and load

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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