Timing the Volatility

Add New QCOM Put

By Bryan Bottarelli
Thursday, March 15, 2007 2:05 PM EDT
Thu, 15 Mar 2007 18:05:00 GMT

Dear Bottarelli Research Member,

After yesterday’s furious market volatility, today’s action seems like a Sunday afternoon walk in the park. But as I look back at the trades we’ve executed, I can’t help but conclude that we’re continuing to play the intra-day moves perfectly.

For example, we used the market’s intense selling pressure yesterday to unload our DIA April 121 Puts (DAW PQ) for 55%, our LEH April 70 Puts (LES PN) for 41.18%, and our MRO April 95 Puts (MRO PS) for 28.21%. Then, shortly after each of these sales had triggered, the broad-based markets turned aggressively higher — thus making the timing of all three put sales spot-on.

As I watch today’s markets struggle to extend the intra-day gains of yesterday, I can’t help but think that we could be in for another round of weakness in the following 5-7 trading days. Perhaps it’ll come tomorrow — or perhaps it’ll come in an intra-day basis sometime next week. But either way, I think it’s smart to add one new put position to our ledger. But instead of playing a Dow component, I’d like to focus this time on the NASDAQ 100 Trust (QQQQ – NASDAQ).

QQQQ

Compared to the other major market indices, I’m seeing the weakest forward-looking indications on the QQQQ, which warrants looking closely at the components of the QQQQ to see which stocks are most vulnerable to fall. And without question, it looks like the recent strength in Qualcomm (QCOM – NASDAQ) is now exhausted and the stock could quickly give back some of its recent upside gains. Here’s the chart:

QCOM

As you can see, QCOM could be in the beginning stages of forming a strong double-top formation right above the $43.00 level. If the $43 once again proves to be resistance, then you can expect a swift pullback down to $40 in short order — which would be all it takes to make a handsome return playing QCOM puts. As an added benefit, the QCOM April put string is amazingly cheap. For example the April 45 Puts, which are $1.50 in-the-money, are currently trading for $2.40. That means you’re paying less than $1.00 to carry this position until April, which is a good value on a fast-moving stock like QCOM. Based on these two factors, let’s go ahead and add this put to our ledger today.

PLAY: Buy the QCOM April 45 Puts (AAO PI) at or under $2.50, good for the day. Current bid/ask spread is $2.25 to $2.45. Place a protective stop loss at $1.20.

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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