A Speculative Earnings Play

Add NYX Calls, Hold DIA Puts

By Bryan Bottarelli
Monday, February 04, 2008 10:40 AM EST
Mon, 4 Feb 2008 15:40:00 GMT

*SPECULATIVE PLAY: Buy the NYX February 90 Calls (NYX BR) at or under $0.85, good for the day. Place a protective stop limit at $0.35.

Dear Bottarelli Research Member,

January of 2008 is officially in the history books. Good riddance! In just the last month, the Dow lost 4.6%, the S&P 500 lost 6.1%, and the NASDAQ dropped 9.9% (making this the worst January in history on the NASDAQ). Looking back, the markets have experienced only five Januaries that were worse than 2008, and four of those five instances occurred near recessions.

Now even with these losses, the Dow increased 4.4% over the last week. This 4.4% weekly gain was the Dow’s best percentage week in almost five years — and you better believe that the bears are fully aware of this jump. This is why I added to our DIA February 122 Puts (DAW NR).

As you know, the bears have been selling into any market rally, and this situation sets up another down-leg that could re-test the January lows. As you can see from today’s DIA chart below, we’re just now getting a red candlestick formation at the top of the recent upside move, so this could be the early indication of more weakness on the horizon. Based on our two entry prices, we’re holding these DIA puts with the average cost basis of $1.13 per contract, and these calls just traded for $0.80. A day or two of weakness and we’ll be right back in the money, so let’s maintain these puts to protect against further market downside.

DIA

Also noteworthy this morning is the move in Archer-Daniels-Midland (ADM – NYSE). This morning, they reported that their fiscal second-quarter profits jumped 7% from a year ago. The agricultural products company $473 million ($0.73 cents a share) compared with $441 million ($0.67 cents a share) one year-ago. Although this was a strong report, the $0.73 number came in one cent under the analyst expectation, and therefore ADM is down over $1.80 in early trading. Since ADM was one of the original agriculture plays that are so hot in recent trading, I’ll continue to follow ADM for signs of a strong bottom.

Also on the earnings front, CME Group (CME – NYSE) and NYSE Euronext (NYX – NYSE) both report tomorrow. Typically you’ll see options premiums inflate leading into these reports, and unless you pick the right direction, you’ll see these high premiums quickly deflate as soon as the earnings are reported. This is certainly the case as I scan over the CME options string, as you have to pay $6.80 for a CME February call that’s a full $40.00 out of the money! But on the other hand, the NYX options look quite reasonable. For example, the NYX February 90 Calls (NYX BR) are trading between $0.75 and $0.80 per contract. To me, that’s not a bad price to pay for a call on an $82.00 stock that’s $8.00 out of the money leading into earnings. So as a speculative earnings play, let’s go ahead and stick a very small amount of these calls in our back pocket, just in case NYX reports strong numbers and the stock blasts off tomorrow.

NYX

SPECULATIVE EARNINGS PLAY: Buy the NYX February 90 Calls (NYX BR) at or under $0.85, good for the day. Place a protective stop limit at $0.35.

In that same spirit, Apache (APA – NYSE) reports their earnings on Thursday, and this has been a stock on my watch list for quite some time.


The early indication is that APA will report a blockbuster number (as high as 62% above a year ago), so if the conditions are right, we might make an upside call leading into Thursday’s announcement. I’ll give you more tactical follow-up on this possible trade in forthcoming alerts. But until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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