Something We Haven’t Seen

“Fishing for a Fall”

By Bryan Bottarelli
Tuesday, June 05, 2007 1:58 PM EDT
Tue, 5 Jun 2007 17:58:00 GMT

Dear Bottarelli Research Member,

It’s now after lunchtime, and so far we’re seeing something that we haven’t seen lately: An intra-day move to the downside that is not getting bought up. Now I must admit, I’m half-tempted to use today’s weakness to buy calls — especially on the oil names that have recently split their stock and are hitting new 52-week highs. After all, we still have a situation where a category 5 cyclone with 195 mph winds is approaching the Strait of Hormuz (which is a region that produces 17 million barrels of crude per day), so any oil price shocks could quickly send these oil names higher. But let’s see how the remainder of today’s trading pans out before making a play like this.

SPY

In the meantime, let’s revisit our protective put strategy by sharing with you comment I received from Charter Member S.D. He writes:

Bryan: In situations like this what do you think about fishing for this fall which at some point really is imminent, after all, there’s no such thing as a perpetual bull run, there’s always some kind of recoil for the next leg up. By fishing, I mean, roll up with the SPY puts, say July then August, if necessary, because sooner or later we will catch the pullback and big too, if its played right.

I think S.D is right on the money. In fact, I’ve been waiting for just the right time to execute this strategy — and today offers us the ideal opportunity. After all, our SPY June 150 Puts (SYH RT) expire June 15th. That’s 10 calendar days from today! As a result, we’re now faced with the threat of added time decay — but today’s downside action offers the ideal opportunity to “roll” our June positions over into August.

Here’s the Strategy: Like S.D. mentioned, there will be a time when the markets start to correct themselves, and we certainly want to be holding puts the day (or week) this correction takes place. But in order to do that, we have no choice but to extend our time frame on our protective SPY positions. Therefore, I’d like you to sell your SPY June 150 Puts (SYH RT) and then simultaneously buy the SPY August 150 Puts (SYH TT).

Your June puts are currently trading between $0.50 and $0.55 per contract and the August puts are currently trading between $2.25 and $2.30 per contract, so this will entail an additional outlay of $1.80 per contract. But the benefit of extending your time horizon and getting two more months of additional downside exposure is well worth this cost, so here’s the play:

PLAY: Sell your SPY June 150 Puts (SYH RT) at market and then simultaneously buy the SPY August 150 Puts (SYH TT) at or under $2.35, good for the day.

I also think the time to move on the broker group is now. In prior alerts I mentioned a possible downside move on Bear Stearns (BSC — NYSE), and today the stock is once again trading down over $2.00. This signals that the crossing of the 50-day and the 200-day moving averages have acted as a near-term resistance point, so let’s add some BSC puts to our ledger now.

BSC

PLAY: Buy the BSC July 150 Puts (BSC SJ) at or under $5.60, good for the day. Current bid/ask spread is $5.40 to $5.50. Place a protective stop limit at $3.10.

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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