Upside Positioning

Add Two Longer-Dated Calls

Dear Bottarelli Research Member,

As I write, the Dow has traded 100-points higher on two news items that could ease investor fears. The first news item is a truce between Israel/Lebanon, and the second news item is the fact that BP won’t have to entirely shut down its Alaskan pipeline. Both of these developments are creating a bullish overtone to begin our mid-August trading week.

As I’ve been saying, August is historically the weakest month to be a bull, so the plan right here is to pin-point solid stocks that have gotten overly beaten down this month and enter into longer-dated positions to capitalize on this un-necessary weakness. The two primary candidates that fit those criteria are Caterpillar Inc. (CAT — NYSE) and CSX Corp. (CSX – NYSE).

Without question, CAT has gotten pummeled ever since we sold our November 75 Calls (CAT KO) for $4.00 on August 4^th. In fact, CAT dropped over $6.00 just last week! To me, this sell-off was way overdone.

As you can see by the CAT chart, the stock dropped under its 200-day moving average late last week — but today has rebounded above Friday’s high and is currently trading above this critical 200-day MA level. In my view, this offers us an ideal time to enter into another round of CAT calls.

LONGER-TERM PLAY: Buy the CAT November 75 Calls (CAT KO) at or under $1.90, good for the day. Current bid/ask spread is $1.65 to $1.80. Place a protective stop loss at $0.90.

When it comes to CSX Corp. (CSX — NYSE), there are two reasons why I’d like to wait a day or two before entering new upside calls. The first reason is that the stock is splitting its shares 2 for 1 tomorrow at the close. Therefore, we could have the opportunity to buy into some cheap calls on Wednesday after the split as floor traders get accustomed to the new pricing models.

The second reason is due to the chart formation today in CSX. Although the stock is up today, I’d like to see a stronger upside reaction on a day the Dow is up triple-digits. In fact, I would have liked to see today’s upside candlestick engulf Friday’s bearish candlestick. This would’ve shown me that the bulls have regained control. But as it stands, today’s tick is not showing me an overly bullish reaction, which tells me that CSX will probably test the 200-day moving average just above $58.00 before mounting another strong upside rally. So for now, let’s hold off on adding a new round of CSX calls until we see a better showing from the bulls.

I would, however, like to add to our upside position in TXU Corp. (TXU – NYSE). When I look at today’s chart, it appears that the shorter-term bearishness has come to an end and the stock wants to regain its upside trend.

We originally entered the TXU September 65 Calls (TXF IM) on August 9^th for $2.80, and they currently trade between $2.15 and $2.30. Adding more calls to your position at these levels would effectively lower your cost basis to $2.55 going into September. Given the unwavering strength of the Dow Utilities, I think it’s a move worth making.

PLAY: Add more TXU September 65 Calls (TXF IM) at or under $2.30, good for the day. Implement a new protective stop loss at $1.25.

Once you’ve entered into this new round of upside positions, I’ll be looking for some downside puts to balance out your ledger. But for now, we’re basically using the recent weakness to establish some longer-term upside plays. Like other longer-term plays, they’ll work to compliment the day-to-day trading in our shorter-term stuff, which could come out later in the week. Until then…

Lock and load

Sincerely,