Position Update

Plus, A Cheap New Put

Dear Bottarelli Research Member,

As I write, the Dow is up 66 points. That comes on the heels of yesterday’s 132-point rally, which is an absolute shock here in the month of August (historically the weakest market month of the year). This makes me slightly nervous about the likelihood of an end-of-week sell-off, which could at least trim off some of this week’s tremendous gains. That’s why I’d like to cautiously add one new put to our ledger. But first, let’s quickly address our open positions before getting into today’s new cheap put play on Wells Fargo (WFC – NYSE).

The good news is that Caterpillar (CAT – NYSE) has indeed put in a nice recovery after giving us a scare when they sold off at their 200-day moving average. As you can see by the chart, today’s move has placed the stock solidly above this critical line (in red) which should lead to more upside gains. The CAT November 75 Calls (CAT KO) that you entered for $1.73 have traded as high as $1.90 today, so hold for more gains. In fact, if these calls break above the $2.00 level, let’s go ahead and take our profits.

PLAY: Sell the CAT November 75 Calls (CAT KO) at or above $2.00, good for the week.

The not-so-good news is that TXU (TXU – NYSE) has not participated in the upside rally over the last two days. In fact, despite the fact that the utility sector is once again on the verge of breaking a historic new high, TXU is actually down today alongside the entire utility group. Perhaps these over-performers just need to take a breather, but I’m not willing to bet against a chart that still looks this strong.

The only news item I can find that could warrant a TXU sell-off is the fact that Standard & Poor’s said on Monday that TXU could be one of 42 potential companies know as “fallen angels” (which means they’re a company that has been recently downgraded to junk status). This is nothing but pure speculation, mind you, so I’m not sure how much weight this holds. Therefore, I’m going to stick with the upside trend and maintain our calls.

After adding onto our position in the TXU September 65 Calls (TXF IM), our break-even now stands at $2.50 per contract. These calls did trade as high as $2.55 in today’s session, so we’re certainly not out of this position. Maintain your TXU calls.

In terms of our two put plays, both CRDN and DVN have traded higher in today’s action, which is to be expected on another strong upside day. But like I mentioned above, I’m skeptical about this rally, which means it’s a good idea to have a position in put options for when the market decides to get worried and sell off.

Both CRDN and DVN have not mounted any strong upside. In fact, as I write this very message, DVN has turned red and is now down on the day! This has pushed the DVN September 60 Puts (DVN UL) that you entered for $1.65 up to a high of $1.90 today. If these puts hit $2.00, that’s a 21% gain in two days. So let’s take that gain today if $2.00 hits.

PLAY: Sell your DVN September 60 Puts (DVN UL) at or above $2.00, good for the week. Hold your CRDN September 45 Puts (AUE UI)

Ok, now let’s get into today’s new recommendation on Wells Fargo (WFC – NYSE).

We all know that the US Housing market is in the toilet, as noted by yesterday’s report from the National Association of Home Builders that said sales of new, single-family homes fell in August to 32, its lowest point since February 1991.

In a weak environment like this, I was shocked to learn that Wells Fargo, one of the nation’s largest originators of high risk mortgages, said on Monday that they remain confident enough about credit quality to boost their offerings of riskier loans to seek new business. To me, this is a colossal mistake that could hurt WFC shareholders greatly. Heck, if I was a WFC shareholder and I heard this news, I’d be selling all my shares at market! When I looked at the chart, we could be seeing this happening already.

First off, I think its’ a lock that WFC re-tests its 50-day moving average at $34.25. Secondly, I think its’ a bearish sign that WFC’s recent attempt to re-test the $36 level was completely rejected, which is why I’m calling for a move under $34 over the next few weeks.

I feel the very best way to play this down-move is with the WFC October 35 Puts (WFC VG).Trading for only $0.90 to $1.00, these are a super-cheap way to own a downside bias in WFC going into mid-October. If WFC stock drops just $1.00, you could have a 50% gainer. So let’s add some of these puts to our ledger today.

PLAY: Buy the WFC October 35 Puts (WFC VG) at or under $1.10, good for the day. Place a protective stop loss at $0.55.

Lock and load

Sincerely,