Fed Cuts 25, Dow Drops 200

Lock in 16% Basket Gains!

By Bryan Bottarelli
Tuesday, December 11, 2007 2:46 PM EST
Tue, 11 Dec 2007 19:46:00 GMT

Dear Bottarelli Research Member,

Ok, the Fed has issued their 25-basis point cut, and as expected the markets are selling off on the news. Leading up to this announcement, our basket of LEH December 65 Puts (LES XM) and GS December 40 Calls (GPY LH) was trading for a combined value of $6.40. That was good for an 18% gainer off our $5.40 combined entry price. In the moments prior to the Fed announcement, the primary mover was the GS calls, which were trading for $4.00. But after the Fed decision was announced, the roles reversed. Now that the markets are pushing lower, our LEH puts have turned into the primary moving contracts, and they’ve traded as high as $4.60 in today’s action. Add that to the cost of the GS calls, which are now trading for $1.70, and you have a total basket value of $6.30. That’s still 16.6% above our entry price. So based on this situation, let’s go ahead and lock in these profits now!

LEH

After all, we successfully played both sides of the Fed and we’re currently showing a 16% gain. Perhaps it’s a conservative route, but let’s lock in these profits now!

PLAY: Sell your LEH December 65 Puts (LES XM) and your GS December 240 Calls (GPY LH) at market, good for the day.

Also keep in mind that we have upcoming earnings from both LEH and GS still in play, combined with support levels on each company within reach. Therefore, we could very easily re-visit each of these plays sometime soon. But for now, take your money and run!

GS

Before getting the urge to load up on more puts, I’d like to see if the markets can mount any sort of recover by the close of trading. If they can, then we know that the bulls are buying this dip. If not, when we’ll most likely be adding more puts come tomorrow morning. So let’s continue to watch the intense intra-day action and formulate a tactical strategy based on who will ends up taking directional control by 3:02. Until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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