One New Call, One new Put

Let’s Keep Locking and Loading!

Dear Bottarelli Research Member,

What a day of trading!

First the Dow opens the day 90 points higher to set a historic high at 12,049.51. Then all of those gains quickly reverse and the Dow nearly turns negative around 2:00 ET.

60 minutes later, as I write this very alert, the Dow is clinging to a 30 point gain as the index trades 18 points below the 12,000 mark.

To my eye, the failure of the Dow to maintain the 12,000 level signals that we’re witnessing a “now what?” market mentality. In other words, the exhausted bulls will ask themselves “Ok, we’ve just hit 12,000. Now what happens?”

I’ll tell you what happens — the bears can swoop in and punish anyone buying at these high levels. Now I admit, the sell-off may prove to be brief — similar to what we witnessed yesterday. But from what I’ve seen in today’s action, I think it’s once again time to add some protective DIA puts to our ledger. In fact, let’s go ahead and buy the same ones we profited from earlier this week!

PLAY: Buy the DIA November 120 Puts (DAW WP) at or under $1.50, good for the day. Do not place a protective stop loss at this time.

Now that we’re once again protected, we can get aggressing by making an earnings speculation on oilfield services provider Schlumberger (SLB – NYSE). Hidden in the mania of Dow 12,000 is the fact that oil prices have dipped down to $57.61 a barrel — a move that has put a hurt on all the oil names in today’s trading. As you know, the last time oil priced dipped down to $57.50, the oil patch sector had a nice little upside turnaround. If history looks to repeat itself, we could have another upside pop in the cards, and that’s where SLB comes into play.

SLB reports earnings for the fiscal third quarter on Friday. Despite strong projected results, oil service providers have suffered recently as U.S. oil prices are down about 25% since August, which brings about fears of future drilling slowdowns. Almost matching the oil price decline is the Philadelphia Oil Service Sector Index, which is down 22% from its May peak.

We have two things happening here: One, oil prices are approaching their previous support levels. And two, SLB could come out and report strong earnings (Wall Street is expecting a quarterly profit of $0.77 on revenue of $4.94 billion). Either one of these could be a boost for any longer-dated calls we own in SLB.

As a precautionary measure, I’d like to play SLB using November calls. That way, we can always add to the position on any earnings-related sell-off and still profit as oil prices adjust back above $60 a barrel leading into winter. If you’d care to speculate on alongside SLB, then here’s the trade:

PLAY: Buy the SLB November 60 Calls (SLB KL) at or under $2.70, good for the day. Current bid/ask spread is $2.55 to $2.65. Place a protective stop loss at $1.80.

*ONE FINAL TACTICAL NOTE: If you’re still holding your PPH November 75 Calls (PPH KO), the index continues to rock and roll, aggressively jumping to a new high of $79.82 in today’s trading. This has pushed your calls up to $5.20, good for a 48.57% gain from your average $3.50 entry price. Of course, we already took profits on the play earlier this week, but if you held for more gains you’re getting rewarded today. Take the gains now! And as always…

Lock and load!

Sincerely,