Add DO Puts
Also, Maintain POT and LEH
Dear Bottarelli Research Member,
The beat goes on. Looking specifically at the Dow, the Blue Chips seem to be down 200 points one day, and then up 200 points the next day. If this model holds, then we’ll most likely see another down market day tomorrow. So to get a jump on this action, I’d like to highlight two stocks (that I actually like) that are exhibiting troubling candlestick formations in today’s trading. As you see, despite today’s strong upside, both stocks are trading squarely in the red, which does not paint a bullish picture going forward.
The first company is Foster Wheeler (FWLT – NASDAQ). As you probably know, I’m rather bullish on the global oil and gas engineering firm, but today’s breakdown below the 50-day moving average does not make me feel warm and fuzzy inside. If the markets follow the recent trend and sell off tomorrow, FWLT could get hit hard.
Along the same lines is Diamond Offshore Drilling (DO – NYSE). Now that Transocean (RIG – NYSE) has closed its purchase of GlobalSantaFe, it appears like RIG is receiving all of the recent investment dollars. After all, since RIG is now the world’s largest offshore drilling contractor (recently locking in $600,000 a day for one of its drilling operations), they now operate a total of 140 drill ships and rigs. That’s 2 out of every 5 offshore oil rigs worldwide, hence this powerful chart:
While RIG is hitting fresh 52-week highs, DO is being kicked to the curb. As you can see from the chart below, DO has just ruptured its 50-day moving average – something the stock hasn’t done since early November. And now that DO has dipped below this level for the second time this month, it would appear that the stock is headed for a move similar to what happened during the last market sell-off in late August. As you can see, upon rupturing the 50-day MA in August, DO dropped all the way down the 200-day moving average before finding a support point. This could be the next move that we see in DO.
Given an alternative like this, where both FWLT and DO look like good put play candidates, I often times compare the values of the in-the-money puts to determine which contract offers this best bang for our buck. And in this case, and answer comes in the form of DO. For example, the FWLT December 130 Puts (which are $2.00 in the money) currently trade for $8.20. On the other hand, the DO December $110 puts (which are also $2.00 in the money) currently trade for $5.20. That’s a $3.00 price premium on the DO puts for a similar downside move, so let’s add this play to our ledger now!
PLAY: Buy the DO December 110 Puts (DO XB) at or under $5.50, good for the day. Current bid/ask spread is $5.10 to $5.40. Place a protective stop limit at $2.80.
Also, continue to hold your LEH December 60 Puts (LES XL) and your POT December 110 Calls (PYP LB), as these two positions give you the flexibility to use any intra-day market volatility to lock in gains no matter which direction things are moving. And in this market, you better believe that this trading tactic is criticality important! As always…
Lock and load!
Sincerely,
© 2012 CSR Group, LLC. All rights reserved. Published in USA.
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CSR Group, LLC expressly forbids its writers from having a financial interest in any security recommended to readers. Furthermore, all employees and agents of CSR Group, LLC and its affiliate companies must wait 24 hours before following a published recommendation.
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