Dow Tops 12K, Then Falls

Adding GOOG Protection

By Bryan Bottarelli
Wednesday, October 18, 2006 10:59 AM EST
Wed, 18 Oct 2006 15:59:00 GMT

Dear Bottarelli Research Member,

Let’s hand it to the blue chips — they broke through the magical 12,000 mark for the first time in history. In retrospect, it was a good decision taking profits on our DIA November 120 Puts (DAW WP) yesterday, banking a quick 24% gainer as the Dow sold off. But as you know, the blue chips trimmed a 90 point loss into only a 30 point loss at the close, setting the table for today’s record-breaking open.

This unrelenting strength is why I recently added three new call positions to the ledger: SWN December 30 Calls (SWN LF), PCU December 50 Calls (LCU LJ), and our speculative play on the GOOG October 460 Calls (GOP JL). All three are above our entry price, so let’s maintain each position for more gains.

What I’d like to offer you this morning is the opportunity to take a more cautions approach to the Google (GOOG – NASDAQ) trade I offered up yesterday. As you know, GOOG reports earnings tomorrow — which could be the catalyst that shoots the stock aggressively higher. Based on this potential upside move, I recommended a very fast play using the GOOG October 460 Calls (GOP JL).

After issuing this trade, I received numerous emails from Charter Members who asked about adding a protective put hedge to the GOOG play. A protective put hedge would allow the more conservative traders to participate in the action without taking on so much risk. You see, adding a cheap GOOG put to alongside the GOOG October 460 Calls (GOP JL) allows you to profit no matter if GOOG moves up or down. Granted, your profits are reduced as the wining side of the trade absorbs the losing side of the trade, but if GOOG moves up (or down) enough to offset these losses, then you’ll come out ahead. Having said that, here’s the GOOG hedge and I’d like to offer anyone who feels like they would need the additional downside protection:

GOOG HEDGE PLAY: Buy the GOOG October 370 Puts (GGD VN) at market, good for the day. Current bid/ask spread is $0.50 to $0.65.

*CLOSING NOTE: As I watch all the media hoopla surrounding Dow 12,000, I can’t ignore this one thought: Now that the Dow has officially broke the 12,000 mark, will this be the catalyst that induces the next round of profit-taking? If I see any signs of pending weakness (as evidenced by my study of the VIX) I’ll be out with more protective Dow puts. The VIX is currently trading at 11.49. A move back down to 11 will be my trigger. Until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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