Adding Downside Exposure

Add Dow Chemical Puts

By Bryan Bottarelli
Thursday, March 22, 2007 10:53 AM EDT
Thu, 22 Mar 2007 14:53:00 GMT

Dear Bottarelli Research Member,

Let’s start off today by looking at Weatherford International (WFT – NYSE).

Headquartered in Houston, Texas – Weatherford operates 48 rigs used for the drilling, completion, and production of oil and natural gas wells in the United States. I bring up WFT because one of their top competitors is Halliburton (HAL – NYSE) – who just lowered their Q1 2007 guidance from $0.59 per share to $0.40 to $0.54 per share, a move that dropped the stock more than 7% lower in one day.

HAL

Although this news caused WFT to suffer a brief sell-off as well, the stock quickly recovered as if they’re immune to the threat exposed by HAL. Now when I look at the WFT chart, two interesting indicators pop out.

WFT

First off, the stock has just bounced above its 200-day moving average. The last time this happened was December of 2006, which resulted in the stock moving from $46.50 down to $37.00 in less than a month’s time. Without question, this was a crushing below which established a very strong resistance point at the $46.50 level. And brings be directly to indictor number two, which is a possible double-top formation at this same critical $46.50 level. If WFT cannot extend its rally past this level, then I’m certainly going to recommend adding downside puts to our ledger.

Specifically, the WFT May 45 Puts (WFT QI) which currently trade between $1.65 and $1.75 per contract look particularly appealing. Let’s keep a close eye on WFT for a pending downside move.

In the meantime, we have an immediate put play available on Dow Chemical (DOW – NYSE).

DOW

The chemicals, plastics, and agricultural outfit was up big earlier this month on speculation that a potential joint venture with India’s Reliance Industries could be in the works – but no sources or announcements about any deals have yet to be confirmed. As a result, the upside move that the stock experienced in reaction to the J/V speculations is now unraveling, which could lead to a gap-filling downside move that pushes the stock back down to the $43 level.

Looking at the DOW options string, the DOW May 45 Puts (DOW QI) look like a good bargain. Currently trading between $1.75 and $1.85 per contract, a $2.00 down-move on DOW stock could push these puts up to $3.00, good for a nice and quick 62% gainer. Let’s get some downside exposure by adding this position to our ledger now.

PLAY: Buy the DOW May 45 Puts (DOW QI) at or under $1.85, good for the day. Place a protective stop loss at $0.90.

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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