Adding Long to the Short

A New Longer-Dated Play to Balance Things Out

Dear Bottarelli Research Member,

We have an interesting situation in the markets today — as both the bulls and the bears consider themselves to be “contrarians” at these levels.

For example, the bulls will tell you that everyone is expecting a stock market correction (as noted by all the pending downside statistics from yesterday’s alert) and therefore the markets will buck that trend and move even higher. The 3-day attempt to sell-off — which is getting blown out of the water today — is testament to this strength.

The bears, on the other hand, will tell you that since investors are still buying without any sense of fear, the current market will undoubtedly turn tail and move aggressively lower. Historically the more patient of the two sides, the bears are content simply waiting for the big sell-off to come. So here’s the thing: With both sides trying to get ahead of the next trend, we find ourselves at an interesting place in the markets. Do we ride the current upside or protect against the pending downside? Well, the answer is “we do both.”

A quick look at our trading ledger shows a nice balance of upside calls and downside puts. First off, our double-down trade from yesterday on Transocean (RIG – NYSE) looks to have been very well-timed, as both oil prices and the stock have recovered in today’s trading. As I write, the RIG March 80 Calls (RIG CP) that we’re holding with a $1.90 cost basis have traded as high as $2.20 today, good for a 15.7% gainer.

With RIG announcing earnings tomorrow, we may decide to take our profits on this position before the day’s over, so keep an eye out for a “take profits” alert. In fact, if you’d like to minimize your earnings-announcement risk, I’d recommend setting a sell order right now at $2.30 per contract. That would lock in a 21% gain in a matter of days. I’ll follow the trade into tomorrow, of course, but I feel the smartest and safest move would be to lock in your profits today.

At the same time, we also have put options on stocks that I think are due for a fall — regardless of market conditions. One downside candidate, as you know, is NYSE Group (NYX – NYSE). The fact that NYX is unable to participate in any significant upside strength on a day that the Dow is in rally mode makes be comfortable holding a downside put position. The NYX March 90 Puts (NYX OR) that we entered yesterday for $5.30 are currently trading between $5.30 and $5.50 today, so we’re ready for the stock to fall so we can take some nice profits.

Also looking to finally roll over is WebMD Health (WBMD – NASDAQ). The stock has been resilient, for sure, but it’s now had a series of attempts to penetrate through the $50 level without any success, which means the next moves looks to be lower. Maintain your WBMD March 50 Puts (QWB OJ).

The one aggressive play we made yesterday was the FMCN March 90 Calls (QOH CR), and although the stock hit a new 52-week high yesterday, it’s struggling in today’s action. Going into this play, it was clear that FMCN can make big time intra-day moves — which is why it’s such a tremendous trading position. The trick is to keep your stops tight and ride the volatile moves as best you can — but today’s down-move temporarily put us out of our trade. Not to worry, I’m sure we’ll have another opportunity in FMCN to make up for this trade in short order. For now, the position is closed.

Finally, I’d like to begin the process that I alluded to last week — which entails establishing longer-dated positions in that special collection of cheap stocks exhibiting tremendous upside characteristics. By slowly adding these longer-dated positions to our trading, you can profit both off our weekly trades and our longer-dated trades — offering you the perfect balance of short-term and long-term trading. In essence, it’s like getting two services all in one — which is just one of the many benefits you get as a Charter Member to our elite group of traders.

The first trade that I’d like to add comes in the form of Input/Output (IO – NYSE). Input/Output offers one the advanced and exciting seismic products to the oil and natural gas industry worldwide. It’s a simple concept, really. If you think that oil exploration will continue to be in high demand, then IO is perfectly positioned to offer the most advanced services in the marketplace. Just look at some of their product offerings and you’ll see what I mean:

SPECTRA is their navigation and survey control software system for towed streamer-based seismic survey operations, GATOR is their navigation and quality control software system for ocean bottom cable and transition zone operations, REFLEX is their software for navigation and seismic data analysis, and SWAT is their 4-D survey software for Web-based assessments of survey progress. One look at the IO chart, and you’ll see what all this specialized software has meant for IO shareholders:

Now here’s the best news of all. When you look at the IO options string, you’ll see some great bargains. For example, consider the IO August 12.5 Calls (IO HV). Currently in-the-money by $1.39, these calls are trading between $2.45 and $2.60. That means you’re paying only $1.15 to carry this position into August. What a deal! When it comes to profit projections, these calls could easily double if IO stock moves up just $1.50. By the looks of the chart, this $1.50 upside move is a very strong bet going out into August, so let’s get established in a longer-dated position in IO right away. Here’s the trade:

PLAY: Buy the IO August 12.5 Calls (IO HV) at or under $2.75, good for the day. Current bid/ask spread is $2.40 to $2.60. Place a protective stop loss at $$1.10.

As always, I’ll be watching for immediate trading opportunities. Until then…

Lock and load!

Sincerely,