Another Comeback?

Market Recovers 170: Carefully Play X & TSO

By Bryan Bottarelli
Wednesday, January 23, 2008 10:26 AM EST
Wed, 23 Jan 2008 15:26:00 GMT

PLAY: Buy the X February 95 Puts (X NS) at or under $6.80, good for the day. Place a protective stop limit at $3.30.

PLAY: Buy the TSO February 40 Calls (TSO BH) at or under $1.60, good for the day. Place a protective stop limit at $0.70

Dear Bottarelli Research Member,

Senior floor trader Art Cashin was asked on CNBC if he’s ever seen this type of volatility. “Sure,” he replied. “On January 23rd, 1987.”

Let’s put that into perspective…

The volatility we’re seeing right now hasn’t been this intense in over 20 years. When I realized that, it’s now clear that January of 2008 will go down as a historical market event, one in which the NASDAQ lost over 15% in one month with volatility that was off the charts. The VIX, for example, has jumped all the way up to 37.5, which was the same level that represented a market bottom back in August. So, this tells you that we should be getting close to a bottom.

VIX

But nevertheless, if the markets decide to re-test yesterday’s lows — and break these levels — than all bets are off. Therefore, let’s revisit my option on U.S. Steel (X – NYSE).

X

As I noted on January 18th, shares of X could quickly fall $15.00, moving to their recent low of $85.00 per share. They’ve been somehow clinging to the $100.00 level, but if this level breaks, it’ll be a quick move down. As a result, we could have the opportunity to make a “sniper” play using the X February 95 Puts (X NS). As a reminder of our sniper mentality, you should immediately sell these puts once they hit a gain of 15% to 20% above your entry price. Don’t wait for my instruction because the markets are moving too fast. The moment your see your gain, take it without looking back. Here’s the play:

PLAY: Buy the X February 95 Puts (X NS) at or under $6.80, good for the day. Place a protective stop limit at $3.30.

At the same time, let’s apply this “sniper” approach to Tesoro Corporation (TSO – NYSE) as well. If you recall, TSO is a major U.S. oil refiner with a P/E ratio of 6.70 that’s currently trading below 10x forward earnings. This is ridiculously cheap, so let’s make a quick upside call play using the TSO February 40 Calls (TSO BH). Once again, apply the “sniper” tactic and immediately lock in gains the moment you see them.

TSO

PLAY: Buy the TSO February 40 Calls (TSO BH) at or under $1.60, good for the day. Place a protective stop limit at $0.70.

Also, if you’re still holding your GILD February 50 Calls (GDQ BJ), the company reports earnings after the bell today, and the early indications show that the numbers will be strong. Therefore, let’s hold our calls into this earnings announcement and hope it’s the catalyst that pushes this position back into profitability!

*TRADING NOTE: I must once again reiterate the fact that all trades that you take right now are using a very small percentage of your trading funds. If you typically trade 10 contacts, for example, only trade two or three. Preserving capital in times like this is critical to longstanding success, so please adhere to this reduced contract sizing metric.

And as always…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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