Toeing the Water with VLO & CAT Calls

Plus, Add SJM Puts for Insurance

By Bryan Bottarelli
Monday, July 09, 2007 1:00 PM EDT
Mon, 9 Jul 2007 17:00:00 GMT

Dear Bottarelli Research Member,

My daily stock screener has a multitude of stocks that I follow, and many of them are organized into groupings based on their historical trading similarities. Transocean (RIG – NYSE) and Diamond Offshore Drilling (DO – NYSE) is one such duo that we’ve successfully played in the past. Las Vegas Sands (LVS – NYSE) and Wynn Resorts (WYNN – NASDAQ) is another.

I use these pairings to isolate trading patterns — with the intention of identifying movements in one stock that can be exploited in the trading patterns of the other. Today’s alert highlights two such opportunities.

First up is Hess Corporation (HES – NYSE) and Valero Energy (VLO — NYSE). As you can see by the Hess chart below, the stock has been on absolute terror lately, capped off by today’s new 52-week high at $62.36.

HES

Now transition over to the VLO chart, and you’ll see that the stock is still trading below its latest high-water mark at $77.50. This indicates to me that VLO will soon follow the example set forth by HES and break out to a new high, so let’s use this mini-arbitrage situation as an opportunity to play VLO calls.

VLO

PLAY: Buy the VLO August 80 Calls (ZPY HP) at or under $1.65, good for the day. Place a protective stop limit at $0.80.

Also offering up a similar signal is the trading patterns of Deere (DE – NYSE) and Caterpillar (CAT – NYSE). As you can see below, DE has broken out to a new 52-week high today.

DE

Then, a look at the CAT chart shows a strong bounce off the 50-day moving average, which supports CAT following DE’s lead up towards a new 52-week high (especially leading up to CAT’s July 20th earnings announcement). Let’s go ahead and add the CAT August 80 calls to play this move.

CAT

PLAY: Buy the CAT August 80 Calls (CAT HP) at or under $3.10, good for the day. Current bid/ask spread is $2.95 to $3.05 per contract. Place a protective stop limit at $1.60.

Let’s also add some downside exposure using J. M. Smucker Company (SJM – NYSE). Last week, 11 SJM insiders initiated sales, and this sets off a warning bell to me. Although the total volume of these 11 transactions was not too high, I do have to wonder what’s happening behind the scenes when 11 insiders all sell within the same week. The chart looks like it could fall here, so let’s add puts on SJM to our ledger as well.

SJM

PLAY: Buy the SJM August 65 Puts (SJM TM) at or under $3.60, good for the day. Currnent bid/ask spread is $3.30 to $3.50. Place a protective stop limit at $2.00.

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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