Play BG Calls, CMI Puts

Plus, Maintain PBR

By Bryan Bottarelli
Monday, December 17, 2007 11:31 AM EST
Mon, 17 Dec 2007 16:31:00 GMT

Dear Bottarelli Research Member,

Here is a prime example of how excessive market volatility will improperly sway your trading decisions. As you may recall, I recommended January call options on Carolina Group (CG – NYSE) on December 4th as a way to combat any looming U.S. recession fears. Now, on a personal note, I think that any recession talk is totally over blown. But when it comes to the market, one man’s opinion is irrelevant. What matters most on Wall Street is perception – and the perception of a coming U.S. recession made a strong case for playing the CG January 90 Calls (CG AR). In the days that followed, large intra-day price swings in the market caused CG to move lower, and this ultimately stopped us out of our calls well before the January expiration date. This is unfortunate, because today CG is back on the move. Check it out:

CG

I bring this up for two reasons. First, in times like this, it often behooves us to loosen our stop losses, especially on positions that have over a month of expiration time left. It may sound like backwards tactical thinking, but that’s actually not the case. You see, there is no sense letting wild intra-day price swings stop you out of a winning position, so I’ll be issuing looser stops in the coming days.

The second reason that I bring up the CG trade because it shows you just how quickly a position can snap back in your favor — and this leads directly into our play on Petroleo Brasileiro (PBR – NYSE). As you know, our PBR January 115 Calls (PMJ AZ) have been trending lower in recent trading, but I’d like to continue holding this position. All it takes is one strong day and we’ll be back in business — so utilize your January expiration and continue to hold.

PBR

In terms of this week, we have some major earnings announcements on tap. First, we have Goldman Sachs on December 18th. Then we have Morgan Stanley on December 19th followed by Research in Motion on December 20th. I’m sure all three of these will have strong market implications — which will just add more fuel to any intra-day price swings.

Looking specifically at today’s action, the only group of stocks that remains strong are agriculture plays like Potash of Saskatchewan (POT – NYSE), Mosaic (MOS – NYSE), and Bunge (BG – NYSE). If we witness a market bounce over the next day or two, I suspect that this group could really shoot higher, and it looks like the top candidate for calls is BG.

BG

As you can see from the chart, BG is making a strong bounce today, which establishes a higher-low above its 50-day moving average. This looks like a bullish trigger, so I’d like to carefully add BG January calls now.

PLAY: Buy the BG January 120 Calls (BG AD) at or under $6.20, good for the day. Current bid/ask spread is $5.40 to $5.80. Place a protective stop limit at $2.30.

At the same time, I’d also like to add another put contract to our ledger, and the company exhibiting a strong downside signal today is Cummins (CMI — NYSE). As you can see from the chart, CMI has just ruptured its 50-day moving average, and this could be the early indication that a move back down to $105.00 could be in the cards. Therefore, let’s play this downside move using January puts. Here’s the play:

CMI

PLAY: Buy the CMI January 120 Puts (CDM MD) at or under $7.50, good for the day. Current bid/ask spread is $6.90 to $7.20. Place a protective stop limit at $3.30.

Also, don’t forget that you only have 5 trading days left to lock in 9 more months of Bottarelli Research service for the discounted price of $1,400. This special membership discount is only available until December 24th, and after that our membership fees will increase across the board. So give yourself an early Christmas present and extend your Bottarelli Research membership now! To take this special offer, simply follow the discounted membership link below and select the 9-month term titled “Year End Special.”

https://www.bottarelliresearch.com/renew/?service=opt&offer=E0R2663KRR

And as always…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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