A Speculative Call Play
Add VMW Calls. Maintain AAPL and PCP
Dear Bottarelli Research Member,
I’d like to begin this holiday-shortened trading week by looking at the current technical formation of the CBOE Volatility Index (VIX). As you know, many traders describe volatility as the “fear gauge,” and as you can see from the chart, this heightened level of fear has spiked on two recent occasions: mid-August and early November.
Now here’s what I consider important: The VIX spiked above 35 in August but has failed to trade above 32.50 here in November. Even accounting for today’s 160-point loss on the Dow, the VIX has failed to set a new high, which signals that our recent downside market activity could be in the rearview mirror. And of course, that would warrant adding a new call position to our ledger.
As you know, we’re currently holding the Apple December 175 Calls (APV LO) for an average entry price of $7.45. We’re also holding the PCP December 135 Puts (PCP XG) with an entry price of $6.70. Both positions have traded in the black today, so let’s maintain each position for further upside. But in the meantime, let’s consider some other trading opportunities, starting with Deere (DE – NYSE).
Chart-wise, DE has recently dipped underneath its 50-day moving average and is struggling to bounce back above it. That could all change when they report earnings this Wednesday. Furthermore, Deere has also announced a 2 for 1 stock split for December 4th, so that could be an upside trigger as well. Let’s see how the stock reacts to earnings, and if we get a price dip leading into their December 4th stock split date, we could pick up some calls on the cheap.
Also looking strong is Sasol (SSL – NYSE). The South African integrated oil and gas company recently enjoyed a bullish article in Barron’s, which said that the stock could gain 40% if oil prices remain high. This price increase could be triggered by SSL’s chemical and synthetic fuel segment, which produces syngas from natural gas and low-grade coal and then converts this syngas into a range of synthetic fuel components. I’d love to add longer-dated SSL calls on a support test at the 50-day MA at $47.50. That’s still $2.00 lower than current levels, so let’s watch this one as well.
In terms of new plays, I’d like to make a speculative trade on VMware (VMW – NYSE). VMW is the most dominant player in the “virtualization” market, which means that they separate the operating system from the underlying hardware to achieve improvements in efficiency, availability, flexibility, and manageability. This play is more of a “share shortage” play than a technical chart play. You see, VMware was spun off by EMC (EMC – NYSE) who controls 86% of VMW’s shares. EMC has repeatedly said that they do not plan on selling any of their shares, which has lead to a big-time shortage of available VMW shares on the open market. This has sparked large intra-day price swings, as you can see from the stock’s $125 high in late October and sell-off down to $83 currently. If the markets can put together any sort of upside move, VMW shares could blast higher once again, so let’s get positioned to ride this move using December calls. Here’s the play:
PLAY: Buy the VMW December 90 Calls (VMW LR) at or under $4.60, good for the day. Current bid/ask spread is $4.20 to $4.40. Place a protective stop limit at $2.00.
*SCHEDULING NOTE: Due to Thanksgiving on Thursday, the offices here at Bottarelli Research will be officially closed from Wednesday November 21st through Friday November 23rd. We will trade today and tomorrow, but after that I plan to maintain any of our remaining open positions until Monday, November 26th. Please be sure to take this into account during (what should be) a light trading session on Wednesday and a half-day of trading on Friday. And as always…
Lock and load!
Sincerely,
© 2012 CSR Group, LLC. All rights reserved. Published in USA.
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