Strategy Talk

Roll DIA, Watch NWS, Add SUN and CROX

Dear Bottarelli Research Member,

Let’s talk strategy.

First and foremost, we hit some nice upside call gains yesterday on our positions in ADM January 35 Calls (ADM AG) and WFMI January 45 Calls (FMQ AI). Add those to our other upside call gainers in RIG December 70 Calls (RIG LN), HAS January 25 Calls (HAS AE), and FLML December 20 Calls (FLU LD), and I think we’ve been doing a good job of playing this upside market — despite the fact that I still don’t trust that it’ll last.

Now here’s the thing. The one position that’s allowed us to take on so many upside call positions has been our DIA November 120 Puts Hedges (DAW WP). Having this “insurance policy” allows us to take upside positions without the added risk of having zero downside exposure. Remember my analogy: The market right now is like driving a 2007 BMW 760i Sedan (MSRP $121,400) without a car insurance policy. Although you may enjoy a few months of accident-free luxury, it only takes one freak collision to set you back a pretty penny. That’s why the smart thing to do is keep on playing upside call positions, like we’ve been doing, while at the same time keeping our insurance policy in tact — even if that means paying another monthly premium. That’s why I’d like to “roll” our DIA November 120 Puts (DAW WP) into DIA December 120 Puts (DAW XP).

This play entails selling the November position and simultaneously buying the December position. This transaction will require a cash outlay of around $0.70, but I feel it’s well worth it to remain hedged to the downside. In fact, a look at the Volatility Index (VIX) shows that we’re once again approaching the low levels that sparked the last downside push. Extending our protective puts into December gives us the flexibility of extending our insurance policy for another expiration month, so let’s execute the “roll” now.

PROTECTIVE PUT ROLL: Sell your DIA November 120 Puts (DAW WP) at market, then simultaneously purchase the DIA December 120 Puts (DAW XP)

By extending our protection, we can once again look for upside call opportunities that look appealing. One that immediately comes up is Sunoco (SUN – NYSE).

When you compare the recent actions of refiners, you’ll notice that SUN has not been participating as much as some other names. This could spark a “catch-up” effect that pushes SUN back up to its 200-day moving average at the $72.50 level, and perhaps even further. For example, let’s compare the chart of SUN from above with that of Marathon Oil (MRO — NYSE).

As you can see, MRO has moved up well past its 50-day and 200-day moving average, while SUN continues to play around right at the 50-day. If SUN follows the same pattern as MRO, we could see the stock move higher in the next two months, so let’s enter into a longer-dated call position to capitalize on this up-move.

PLAY: Buy the SUN January 70 Calls (SUN AN) at or under $3.20, good for the day. Current bid/ask spread is $2.90 to $3.00. Place a protective stop loss at $1.30.

Two other interesting positions have presented themselves today, and although I’m not quite ready to pull the trigger on either one of them, it’s still a good idea to bring them to your attention.

The first is our old friend News Corp (NWS – NYSE). This morning, the company reported earnings that beat estimates by a full $0.07. In fact, Rupert Murdoch’s company earned $843 million in the three months ended in September, compared to a net loss of $433 million a year ago. This was quite a turnaround, yet the news is surprisingly being shrugged off by Wall Street. As I write, NWS is up only $0.04 on the day. I’ll be watching to see if NWS can break through the $22.00 level, and if it does, it could be time for more upside calls.

The second stock making my screen is CROCS (CROX — NASDAQ). If you’ve ready my Charter Member reports, then you’re familiar with the term “A Who Cares” stock. As a quick refresher, a “Who Cares” stock is one that has upside momentum despite a seemingly outrageous P/E multiple of high short interest. Names like Taser International (TASR – NASDAQ), Hansen Natural (HANS – NASDAQ), and Travelzoo (TZOO – NASDAQ) are all included on this list. In fact, take a look at the 5-year charts of these names and you’ll see what I’m talking about. Well, the newest addition to this group could be CROX.

As you can see from the chart above, the maker of plastic shoes (which I personally slip on to take out the trash or walk the dog) has been on an incredible upside roll, fueled entirely by momentum. With a trailing P/E ratio of 35.64, its’ easy to see why 11.05 million shares are currently sold short, representing a whopping 49.30% of the float. But with such an incredible short interest, you get these massive upside rallies fueled by short-covering, a situation that only pushes shares higher and higher. So why wait? As a pure speculative momentum play, let’s add some CROX December calls to our ledger.

PLAY: Buy the CROX December 45 Calls (CQJ LI) at or under $3.10, good for the day. Current bid/ask spread is $2.75 to $2.90. Place a protective stop loss at $1.50.

Finally, our position in PVX March 10 Calls (PVX CB) is looking great today, as the stock is up over 3% as I write. Continue to hold your calls. Also maintain your position in the CAT January 65 Calls (CAT AM) and the BBH December 195 Calls (BBH LS). In terms of CAT, I feel we’re buying just as the news can’t get any worse, which could be a nice longer-dated contrarian play. In terms of BBH, a Democratic House and Senate could be a bullish catalyst for the top biotech names, so let’s do our best to maintain this volatile position as long as possible. And as always…

Lock and load!

Sincerely,