Dow Drops 130 Points

Add More DIA December 120 Puts

Dear Bottarelli Research Member,

I hope everyone had a relaxing holiday weekend because it looks like we could be in for an exciting and volatile month of trading. Right off the bat, let’s look at today’s action on the CBOE Volatility Index (VIX) to get a handle on how far this sell-off could go. As you can see the VIX is making a big-time jump today, which supports the fact that fear and suspicion is now creeping its way back into the markets, leading to a heavy dose of downside selling pressure.

If the VIX continues to rally, then the Dow Diamonds (DIA) could easily test their 50-day moving average at the 120 level. That’s a drop of another 162 points, which is why I’m insisting that you hold your protective DIA December 120 Puts (DAW XP). In fact, it may be a good idea to increase our protection and add to this position at current levels.

PROTECTIVE PLAY: Add more DIA December 120 Puts (DAW XP) at or under $0.65 per contract, good for the day.

After adding more protection, I’d like to share with everyone a note I received over the weekend from Charter Member M.H. He writes, “Dear Bryan, Does this market seem crazy to you? Why are stocks soaring when a slowdown is expected? I have begun to compose a list of possible puts which to date are composed of nvda, rimm, nke, along with various retail stocks. The actual timetable is my only question at this time. What do you think of this list? Am I missing some obvious stocks? Thanks for your help”

My reply to MH’s email was simple. “I’d take a cautiously opportunistic approach here, which means playing calls while being nimble enough to switch over to puts in a heartbeat.”

In other words, the smart thing to do is profit off the upside as long as we possibly can — while at the same time being nimble enough to switch over to puts the moment we see any signs of broad-based market weakness. And guess what? Today could be the beginning of this bearish mood swing.

As I look at our two upside call positions, both your PEIX January 17.5 Calls (PFQ AW) and your Charles Schwab January 17.5 Calls (SHQ AW) are amazingly resilient today despite the triple-digit downside action, so let’s maintain each position. But at the same time, let’s balance out our ledger by initiating two new put positions in Monsanto (MON – NYSE) and Alliant Techsystems (ATK – NYSE).

Starting with MON, a move back down to the mid-point of the 50-day and 200-day moving average looks like a sure fire bet. If you follow MON as closely as I do, you’ll notice a very established series of up and down swings that last about 15 to 30 days. As you can see from the chart, MON’s latest upside swing pattern is now coming to an end, so let’s play the coming downside using January 50 Puts.

PLAY: Buy the MON January 50 Puts (MON MJ) at or under $3.70, good for the day. Current bid/ask spread is $3.50 to $3.60. Place a protective stop loss at $2.70.

Next up is ATK, the leading supplier of ammunition to our efforts in Iraq. As you can see from the chart below, ATK just broke down below its recent low of $76.50 set in early November, which means that ATK could test its previous low of $74.78 set back in June, possibly moving even lower. Let’s play this downside with January puts as well.

PLAY: Buy the ATK January 75 Puts (ATK MO) at or under $1.60, good for the day. Current bid/ask spread is $1.30 to $1.55. Place a protective stop loss at $0.65.

With the addition of our two new puts, we’ll effectively balance out our ledger and profit no matter what the major market averages do for the rest of the week.

Lock and load

Sincerely,