Two New Puts

Balance Your Ledger With These Underperformers

By Bryan Bottarelli
Tuesday, August 15, 2006 1:59 PM EST
Tue, 15 Aug 2006 18:59:00 GMT

Dear Bottarelli Research Member,

Yesterday’s dramatic turnaround on the Dow highlights the importance of owning a position in both calls and puts. Despite an intra-day gain of 100 points, the Dow closed yesterday with only a 9-point gain. That’s a 91-point reversal! Today, the Dow has once again hit a 100-point gain, and although these gains have helped out our CAT and TXU positions, I fear we could once again witness an end-of-day sell-off. That’s why we’ll add two new puts to our ledger on stocks exhibiting extremely weak chart formations. Luckily for us, it’s easy to isolate weak candidates on a strong up-day (which is a clear signal of the bearish sentiment), so let’s get right into it!

Put Candidate #1 is Ceradyne (CRDN – NASDAQ), the maker of lightweight ceramic armor for soldiers, industrial, and automotive/diesel in the United States.

CRDN

As you can see by the chart, CRDN has really gotten hit hard lately — and how faces the threat of breaking underneath its support level at $42.00. I spent some time on the CRDN message boards today, and literally every CRDN stockholder message I read exhibited extreme frustrating with the stock, with comments like “only CRDN could be down on a huge up-day like today.”

This bearish sentiment, along with a weak chart on a strong up-day, signal to me that the bulls are losing confidence in CRDN, which could help the stock break through the $42.00 support level. With that downside action, let’s play CRDN puts now!

PLAY: Buy the CRDN September 45 Puts (AUE UI) at or under $3.70, good for the day. Current bid/ask spread is $3.50 to $3.60. Place a protective stop loss at $2.00.

Put Candidate #2 is Devon Energy Corp. (DVN – NYSE), the oil and gas exploration company with locations primarily in the United States and Canada. Although it’s tricky playing puts on any oil and gas company right now, today’s bearish tick on DVN signals that the stock could move down under $60.00 before finding the next support level. In fact, the last time DVN broke under the 200-day moving average in early July, the stock lost another $2.50. I’m going to be nimble on this one, but let’s play DVN for a quick move under $60.00.

DVN

PLAY: Buy the DVN September 60 Puts (DVN UL) at or under $1.90, good for the day. Current bid/ask spread is $1.70 to $1.85. Place a protective stop loss at $0.90.

As far as our calls, continue to hold both your TXU September 65 Calls (TXF IM) and your CAT November 75 Calls (CAT KO).I was disappointed that CAT was unable to hold onto its gains yesterday, but I’d have to say that was due to of a broad-based market sell-off more-so than a breakdown at a critical price level. Either way, each position is up nicely today, and I’m hoping this upside action is enough to re-energize the upside trend in both CAT and TXU going into September and October.

Lock and load

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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