“Nose-Bleed” Territory?

What Happens Next?

By Bryan Bottarelli
Thursday, April 26, 2007 10:01 AM EDT
Thu, 26 Apr 2007 14:01:00 GMT

Dear Bottarelli Research Member,

There are two schools of thought circulating the markets right now. The first is: Never get in the way of a bull market. The second is: We’re currently in “nose-bleed” territory and a sell-off is due any day.

In my view, the markets are currently sitting at something I call that “now what?” moment. In other words, now that the Dow has crossed the magical 13,000 level, now what happens? Do we rally higher? Or do we correct? (and more importantly, if we do correct, when will it happen?)

Truthfully, there is no way to tell. But lucky for us, we don’t have to answer such difficult questions. As traders, we can simply manage a ledger that makes us money in either situation. That’s why it is still important to own a protective position in the SPY June 150 Puts (SYH RT).Currently trading for $2.60 per contract, these puts will increase in value is the markets fall — and you’ll certainly want to own this downside exposure the day the markets decide to sell off.

SPY

At the same time, let’s also adhere to the first thought from above — which is not getting in the way of a bull market. Looking at our open call positions, I think we own a comprehensive ledger of upside calls in all the right sectors

Marathon Oil (MRO – NYSE) for example, is making all the right moves. Just yesterday, their board of directors approved a 2-for-1 stock split and raised the company’s quarterly dividend 20%. These moves will help MRO push to a new high — which will provide a boost for our MRO June 100 Calls (MRO FT).

MRO

Also bouncing off yesterday’s sell-off was our speculative play on Allegheny Technologies(ATI – NYSE).The ATI June 115 Calls (ATI FC) that we entered for $5.80 are currently trading for $6.00, so if you have yet to enter this position, try to enter around $5.80. Keep in mind that I’ll also be inclined to add to this position on any forthcoming price dips.

ATI

Also trading right at our entry prices is the PEG June 90 Calls (PEG FR), the CMC June 35 Calls (CMC FG), and the APC June 50 calls (APC FJ). Each of these positions has been in the profit zone in the last few days, but they have now fallen back down to our entry levels. Maintain each position, but I may decide to take a quick profit on any forthcoming price jumps.

Using the same thinking process, I would like to officially close out our EEM June 125 Calls (EEM FE).We entered these calls for $3.75 and they’re currently trading for $4.10, so let’s limit out upside exposure and take our slight profits off the table now.

PLAY: Sell your EEM June 125 Calls (EEM FE) at or above $4.00, good for the day.

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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