Add SII Calls

Take a Small Position in March 60 Calls

By Bryan Bottarelli
Monday, February 04, 2008 3:05 PM EST
Mon, 4 Feb 2008 20:05:00 GMT

PLAY: Buy the SII March 60 calls (SIK CL) at or under $3.30, good for the day. Place a protective stop limit at $1.70

Dear Bottarelli Research Member,

Despite today’s low-volume downside, we’re seeing a nice upside move on the Oil Service HOLDRS (OIH – AMEX). As you know, the OIH is a collection of 18 stocks in the oil service industry that are all traded using one exchange-listed instrument. As you can see, the OIH is in the process of hammering out a higher-low underneath the 200-day moving average, which could be the very early indication that a level of support has been established.

OIH

If this holds true, than we should see the OIH snap back above its 200-day MA. Therefore, I studied the components of the OIH (looking for a cheap way to play upside calls) and I think I’ve uncovered a great trading opportunity in shares of Smith International (SII – NYSE).

SII

While RIG and DO often times get all the credit in the oil service arena, Smith International is a global provider of engineering, drilling, and waste-management services to the oil and gas exploration industry. As you can see, the stock has just set a firm bottom below the $55.00 level, and it now looks poised to extend upwards and re-test the 200-day moving average at $62.50. This could be a nice upside move, and since the options premiums on SII look very reasonable, it’s worth owning another small call position in the March contracts.

I specifically like the SII March 60 calls (SIK CL). Trading under $3.20 per contract going into March, these calls put the risk/reward scenario squarely in your favor. Now remember, I still think the markets will move lower, so continue holding your DIA puts. And if you speculated alongside our NYX earnings play for tomorrow, hold those calls as well. But let’s also use the January weakness — and apparent February recovery — in the oil service sector to make another upside call play while the premiums remain attractively priced. Here’s the trade:

PLAY: Buy the SII March 60 calls (SIK CL) at or under $3.30, good for the day. Place a protective stop limit at $1.70.

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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