Play AGU Calls & APA, APC, PTR Puts

Also: Maintain NILE Puts

By Bryan Bottarelli
Thursday, February 21, 2008 10:44 AM EST
Thu, 21 Feb 2008 15:44:00 GMT

PLAY: Buy the APA March 105 Puts (APA OA) at or under $2.20, good for the day.

PLAY: Buy the APC March 60 Puts (APC OL) at or under $2.00, good for the day.

PLAY: Buy the PTR March 140 Puts (PTR OH) at or under $6.00, good for the day.

PLAY: Buy the AGU March 75 Calls (AGU CO) at or under $2.70, good for the day.

Dear Bottarelli Research Member,

As you know from yesterday’s alerts, I’m still very leery of buying into this rally. As you can see below, the Dow keeps making attempt after attempt to move higher, but it feels like running in quicksand. If 12,500 acts as resistance (which is looks like it will), then we could possibly fall back down under 12,000.

INDU

Therefore, we’ll plan to profit off this downside using our NILE March 40 Puts (JWU OH). But I’d also like to increase our downside exposure by getting positioned to profit off a downside move in oil prices. As you know, oil prices recently broke the $100.00 level, which has typically been a psychological top. And today, the nation’s top oil speculator T. Boone Pickens announced that he now expects oil prices to fall, and has therefore shorted oil. Based on this situation, I’ve discovered three ways to play it. And since the option prices are in our wheel-house, I’d like to play them all now.

First up is Apache (APA – NYSE). As you can see below, the crude oil and natural gas company is finding weakness right at a double-top, and this signals a coming downside move. Therefore, let’s get positioned to profit off this move now!

APA

PLAY: Buy the APA March 105 Puts (APA OA) at or under $2.20, good for the day. Execute a sniper sell if these puts trade at or above $2.70. Place a protective stop limit at $1.20.

Next up is Anadarko Petroleum (APC – NYSE). In a chart formation that’s even weaker than APA, APC is experiencing weakness well below its previous high at $68.00 and looking to dip below its 50-day moving average. So once again, let’s profit off a forthcoming drop using March puts.

APC

PLAY: Buy the APC March 60 Puts (AP COL) at or under $2.00, good for the day. Execute a sniper sell if these puts trade at or above $2.50. Place a protective stop limit at $1.20.

And finally, a dip in oil prices will continue to result in weakness for PetroChina (PTR – NYSE).As you can see from the chart, the crossing of the 50-day and the 200-day moving averages has set up a very strong resistance level for PTR, and today’s weakness could set forth a move back down under the $140.00 level. So let’s play this down-move using March puts as well.

PTR

PLAY: Buy the PTR March 140 Puts (PTR OH) at or under $6.00, good for the day. Execute a sniper sell if these puts trade at or above $7.30. Place a protective stop limit at $3.70.

For one final tactical move, we must also respect the possibility of an upside move. So in times like this, when the market is moving higher despite clear warning signs, the smartest way to play the upside is by taking a small call position in only the strongest market sectors. That way, you’ve insulated yourself on the strength of a particular market sector that’s been out-performing the major market indices. And of course, the strongest sector group on the entire market remains the agricultural plays — especially the fertilizer names.

Favorites like Mosaic (MOS – NYSE) and Potash of Saskatchewan (POT – NYSE), for example, each hit new 52-week highs yesterday, indicating that their upside momentum will certainly continue. Unfortunately, the at-the-money calls for both POT and MOS trade well above $8.00 per contract. And in a market environment like this, that’s a little too pricey for my taste. But luckily, I’ve discovered a solution. You see, Agrium (AGU – NYSE) is also a company that produces and markets agricultural nutrients and specialty fertilizers worldwide — including potash, sulfur, and phosphate-based fertilizer products. Similar to MOS and POT, the stock has been quite strong. But unlike MOS and POT, the shares have yet to hit a new 52-week high. Therefore, I think AGU has a strong possibility to follow suit and trade above the $75.00 level sometime before May expiration. And unlike MOS and POT, the options string on AGU is reasonably priced. Therefore, let’s go ahead and add the AGU March 75 Calls (AGU CO) to our ledger now!

AGU

PLAY: Buy the AGU March 75 Calls (AGU CO) at or under $2.70, good for the day. Plan to execute a “sniper sell” if these calls trade at or above $3.30. Place a protective stop limit at $1.20.

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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