A Crushing Blow (and a sign of things to come)

The Directional Bias has Shifted to Puts

By Bryan Bottarelli
Thursday, May 24, 2007 3:54 PM EDT
Thu, 24 May 2007 19:54:00 GMT

Dear Bottarelli Research Member,

As the markets get set to close the day close to a 100- point loss, a quick scan of our recent trading favorites shows that all of the companies that we enjoyed playing calls on are getting severely beaten-down today.

Everything is red across the board, and excessive losses in names like Allegheny Technologies (ATI – NYSE), Potash of Saskatchewan (POT – NYSE), InterContinental Exchange (ICE – NYSE), Transocean (RIG – NYSE), and Las Vegas Sands (LVS – NYSE) offer us a clear signal that there could a lot more downside on the horizon. If you haven’t already done so, adhere to the stops on all of our near-term call positions and close the DVN, LVS, and ICE positions now. If the market is indeed ready for a correction, a series of put plays will more than made up for these trades — handing you big gains as the market turns south.

In fact, a quick look at the SPY chart signals a down-move that could extend at least to the 50-day moving average — and possibly getting as low as a re-test of the 200-day moving average. By my calculation, that’s a drop between 4% and 11%, offering you a clear illustration that we must move our directional trading bias over to the downside. The time to play puts is now. In fact, the SPY June 150 Puts (SYH RT) that we added to our position this morning for $0.85 have now traded as high as $1.65. As you can see, this protective position can jump very, very quickly. Anyone who entered this morning for $0.85 is already up 95%, so hold for even more gains.

SPY

Looking to tomorrow’s trading day, we’ll probably see a low-volume session. After all, the markets are closed Monday for Memorial Day, so I suspect that floor traders will be starting the long weekend early. As a result, I’ll spend the day loading up a series of top downside candidates that we’ll be able to play puts on come early next week. If the market is ready to make a big fall, then we’ll clean up playing puts. So gear up for this and I’ll follow up with you tomorrow. Until then…

Lock and load

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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