Add to PSA

Use March Expiration to Your Advantage

By Bryan Bottarelli
Monday, December 11, 2006 12:39 PM EST
Mon, 11 Dec 2006 17:39:00 GMT

Dear Bottarelli Research Member,

One of the benefits of holding longer-dated options is that you can use the extended time horizon to add to positions that still meet the qualifications of your original directional thesis. That’s what I’d like to do today with our PSA March 100 Calls (PSA CT).

PSA

As you can see by the chart, Public Storage (PSA – NYSE) has been engaged in a very strong upside trend since August. Looking back at that up-trend, anyone who bought PSA after a week of weakness was rewarded as the stock rallied to set new 52-week highs in the weeks that followed. Now that the stock appears to be forming a base around the $95 level, I’d like to add to our PSA March 100 Calls (PSA CT). Currently trading between $2.40 and $2.80 per contract, adding to your original position would lower your cost basis down to $2.95. From that point, all it would take is a $5.00 up-move to PSA $100 to hand you a gain of around 59%. To me, the risk is certainly worth the reward, so let’s add to our PSA position now.

PLAY: Buy more PSA March 100 Calls (PSA CT) at or under $2.60, good for the day. Re-adjust your protective stop loss to $1.65.

I also think it’s time that we re-up our protective insurance policy on the Dow Diamonds (DIA). As you know, we’ve been holding a protective put position in the Dow for two months — which would act as protection against a major market sell-off. The theory is that holding this position allows us to participate in the market’s upside strength without worrying about any looming crashes. Although these puts decrease in value as the market rises, the gains that we’ve been able to take on playing call options more than off-sets the insurance premiums. So let’s use this week to sell our DIA December 120 Puts (DAW XP) and subsequently buy a new protective position in the DIA February 120 Puts (DAW NP).Current bid/ask spread is $1.25 to $1.35 per contract.

DIA

Also continue to hold this morning’s play on the GS January 220 Calls (GPY AD). Although the stock is down nearly $3.00 today, this could be nothing more than pre-emptive profit-taking in advance of tomorrow’s pre-market earnings announcement.

GS

For all your risk-takers out there, this position could explode to the upside if Wall Street likes the numbers that Goldman reports. For $3.00 per contract, I feel it’s a speculation worth making.

Lock and load

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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