Trimming Down

Low Volatility Alters Expectations

By Bryan Bottarelli
Thursday, August 24, 2006 10:53 AM EST
Thu, 24 Aug 2006 15:53:00 GMT

Dear Bottarelli Research Member,

If you look at this week’s trading action, I bet you’re beginning to understand why virtually half of the trading floor is gone at the end of August. With earnings season over, the markets find themselves in a holding pattern — prompted by low-volume trading days and a slow directional grind. With a majority of the big-players gone, the propensity for the markets to make any big time moves is severely reduced — leaving the smaller-fish to navigate between the week’s 30 point up-days and 30-point down-days. In short…”boring!”

Trading environments like this are certainly less than ideal for short-term options trading. After all, the inability of stocks to make any significant moves opens up the threat of time decay, which is always a concern of traders like you and me. Being fully aware of this situation, I’ve consciously tried to maintain a smaller than usual trading ledger. Believe me, I can’t wait until we can get back to making fast in-and-out trades, but every chart formation and indicator I’m receiving right now simply do not warrant any sizable trading action. As a result of this trading environment, there are two things I’m doing to keep us profitable.

The first thing I’m doing is making sure we’re as nimble as possible on all of our trading positions. After all, reduced volatility means we need to reduce our profit expectations. The sell alert on the AIRM September 25 Calls (UDU IE) went by really quick yesterday, so if you didn’t get out, consider $1.25 a longstanding sell signal.

PLAY: Sell the AIRM September 25 Calls (UDU IE) at or above $1.25, good until cancelled.

It’s also time to take profits on our CRDN September 45 Puts (AUE UI). Our entry price was $3.40 on August 15th, and although these puts dropped down to the mid-$2’s, they’ve now come roaring back. As I write, they trade between $3.60 and $3.80 per contract. Let’s take the money off the table.

PLAY: Sell the CRDN September 45 Puts (AUE UI) at or above $3.70, good for the week.

Executing the these two sales leaves us with just the WFC October 35 Puts (WFC VG), which I’m a little more comfortable holding due to the October expiration. Continue to hold.

Now, the second thing I’m doing to take advantage of the current market environment is to prepare your next special report called 5 Speculative (and Cheap) Doublers. After making 144% off the MRK January 45 Calls (MRK AI), I’ve decided to isolate five longer-dated (and cheap) options that could each result in a 100% gainer. With low trading volumes all knocking volatility down, options premiums are being reduced across the board. Therefore, now is the ideal time to pick up longer-dated and cheap options on those companies I feel will rally (or fall) leading into October, November, and December. I’m still completing my due diligence on this report, which I plan to have ready in late August or early September. I just wanted to give you a head’s up as to what will be coming your way soon! It’s just another added benefit to being a Charter Member.

As always…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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