Shopping for Puts

Add MON, Monitor DO

By Bryan Bottarelli
Tuesday, May 08, 2007 11:16 AM EDT
Tue, 8 May 2007 15:16:00 GMT

Dear Bottarelli Research Member,

We’re getting a rather interesting chart formation on the SPY today — and it appears like we could be at the precipice of the next market down-leg. Take a look:

SPY

As you can see, the price ticks from last Friday and Monday show a very tight trading range here at these high levels — and this represents an exhausted buyer. Then you have today’s red candlestick formation, which offers us a clue that the next down-move could be setting itself up. Add into the equation a Fed meeting tomorrow (that could offer the bears a trigger for a drop) and I would like to get positioned in puts to capitalize on any coming weakness. And my first put candidate is Monsanto (MON – NYSE).

MON

I’ve mentioned MON in a bearish sense before, but today’s chart finally offers us the signal that we’ve needed to initiate a play. If you look above, MON’s trading pattern indicates that their failure to hold at the $60 level now places higher odds of seeing the stock retrace back to the un-filled gap at $56. Based on this forecast, I’d like to enter MON puts. Here’s the play:

PLAY: Buy the MON June 60 Puts (MON RL) at or under $2.50, good for the day. Current bid/ask spread is $2.25 to $2.40. Place a protective stop loss at $$1.40.

Another put candidate comes in the form of Diamond Offshore Drilling (DO — NYSE). The oil server has had a nice run, but oil prices approaching $61 a barrel could spark some near-term weakness — which means that DO could re-test the 50-day moving average around the $82.50 level. At this time, I’m not quite ready to initiate a play — but keep DO on your radar for a potential play in the next few days.

DO

Another stock making a great move today is Commercial Metals (CMC — NYSE). If you recall, we entered the CMC June 35 Calls (CMC FG) on April 23rd and I pre-eminently closed off the play. It appears like I was a little over-cautions in my approach, as CMC is blasting higher today and setting a new 52-week high at $35.58. If you’re still holding the June 35 calls, they’re now trading for $2.10, so you may consider using today’s upside and locking in your gains.

CMC

Along the same lines, we entered the AMZN June 60 Puts (ZQN RL) on April 27th for $2.60, and after some very intense trading activity, they were stopped. But these puts are back up to a high of $2.65 in today’s action, so if you’re still holding these puts, it looks like your patience may pay off. If the markets turn south, you could have a nice winner on your hands. I still consider a downside move as eminent on the AMZN chart.

AMZN

If the selling pressure begins to cascade, the I’ll be out with more downside puts. Until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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