Pare Down

Trim Upside Exposure: Sell HES

By Bryan Bottarelli
Monday, October 22, 2007 10:15 AM EDT
Mon, 22 Oct 2007 14:15:00 GMT

Dear Bottarelli Research Member,

Make No Mistake: I have us carefully positioned in a diversified mix of three upside calls going into November.

First, we’re exposed in metals using the FCX November 115 Calls (FCX KC).

Second, we’re exposed to international engineering using the FWLT November 155 Calls (UFG KK).

And third, we’re exposed to oil via the HES November 70 Calls (IGG KN).

All three of these business segments are extremely strong. But the problem we’re facing lies in the overall mood of the market. For example, the crushing blow we witnessed on Friday has sparked a new round of tension. And when the bears take control, everything moves lower. Nothing is spared. That’s what saw on Friday — and this has also continued into this morning. Here’s a look at the Dow chart:

INDU

In times like this, it’s smart to pare-down on your open call positions. If you haven’t already done so, let’s adhere to our stop loss on the HES November 70 Calls (IGG KN) and close the position. Also, if you’re not willing to withstand the additional market risk, the same goes for FWLT November 155 Calls (UFG KK).The safe play would be to adhere to our $4.20 stop and close the position out.

FWLT

Having said that, I know that a lot of traders have been adding aggressively to their FWLT position, so I’ll continue to monitor this play for the benefit of these specific traders. In fact, I’m still very bullish on this stock, and if you have the intestinal fortitude to use your November expiration to your advantage and maintain the position, it wouldn’t be a bad idea to add to your call position at these levels.

SPECULATIVE TRADERS: Buy more FWLT November 155 Calls (UFG KK) at or under $4.00, good for the day.

I also feel the same way about our FCX November 115 Calls (FCX KC), but for now let’s simply maintain this position. If we need to, we’ll add to it when the timing is most appropriate. And of course, maintain your downside exposure using the X November 105 Puts (X WA). These puts have traded as high as $7.30 today, so continue to hold for more gains.

FCX

Looking at the big picture, it’s imperative to understand that on a global scale, business remains very strong. For example, companies like 3M and Caterpillar sparked Friday’s sell-off when they reported weaker numbers from U.S. operations, but every one of their International business segments reported stronger returns. Nevertheless, the U.S. numbers took precedence, and these stocks moved aggressively lower.

When you witness a strong sell-off within the parameters of a longer-term upside run, it’s typically the market’s way of shaking out all of the weaker hands. Think of it as the markets’ adaptation of Darwin’s “survival of the fittest” thesis.

If the selling pressure continues, we’ll add an additional downside put (or two) to the ledger to profit off the continued market fall. But for now let’s see how the opening hour plays out before making the next move. Until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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