A Turn for the Worst

Dow Tumbles 200, Sell Remaining DIA Puts

By Bryan Bottarelli
Tuesday, March 13, 2007 2:21 PM EDT
Tue, 13 Mar 2007 18:21:00 GMT

Dear Bottarelli Research Member,

The markets are taking a big-time turn for the worst — which is something I’ve been suspicious about since we partly recovered from late February’s downside swoon. As I mentioned in past alerts, I think we need to re-test the recent lows before making a further up-swing — and as I write it looks like the markets agree with this assessment. Right now, the Dow is off by 200 points — and virtually everything on the ticker is deeply in the red.

It’s moves like this that have us continuing to hold both calls and protective puts. The second half of our DIA March 126 Puts (DAW OV), for example, have traded as high as $4.50 today. Since these puts expire this week, let’s go ahead and use today’s downside to lock in profits on the remaining half of this position.

DIA

PLAY: Sell the second half of your DIA March 126 Puts at or above $4.50, good for the day.

At the same time, let’s extend our protective measures by adding DIA puts that expire in April. This allows us to take profits on our March play and continue to maintain a level of protection against any further down-moves.

PLAY: Buy the DIA April 121 Puts (DAW PQ) at or under $2.05, good for the day. Sine this is a protective position, do not place a stop loss at this time.

Also looking to turn lower is Marathon Oil (MRO – NYSE). The MRO April 95 Puts (MRO PS) that we entered for $3.90 have traded as high as $4.50 today, good for a quick 15% gainer. Let’s continue to hold this position for more downside action. In fact, let’s set a pre-empting sell order at $5.00 and see if these prices trigger either today or tomorrow morning.

MRO

PLAY: Set a pre-emptive $5.00 sell order on your MRO April 95 Puts (MRO PS) — good for the week. Current bid/ask spread is $4.60 to $4.80, so a continued sell-off into the afternoon could see this order get filled. If prices to not fill, then maintain your order into the open of trading tomorrow.

On the flipside of the coin, our call positions are experiencing weakness today. Rest assured, I carefully chose call plays on stocks that I’m bullish on over an extended time horizon. Names like Lockheed Martin (LMT – NYSE), Allegheny Technologies (ATI – NYSE), NASDAQ Stock Market (NDAQ – NASDAQ) and even Allergan (AGN – NYSE) are all stocks that that I would be comfortable withstanding any “choppy” market conditions — which means we could be adding to our call plays if prices continue to drift lower.

But just to act as one further downside buffer, let’s add a new put position in Lehman Brothers Holdings (LEH – NYSE). Even after another stellar earnings report from Goldman, the broker group is getting clobbered today — which means that fundamentals could easily give way to selling pressure. Let’s quickly take advantage by playing the LEH April 70 Puts (LES PN). Here’s the play:

LEH

PLAY: Buy the LEH April 70 Puts (LES PN) at or under $2.60, good for the day. Place a protective stop loss at $1.30.

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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