Add SDS Calls

Play an Afternoon Pullback

By Bryan Bottarelli
Wednesday, July 30, 2008 10:36 AM EDT
Wed, 30 Jul 2008 14:36:00 GMT

PLAY: Buy the SDS August 65 Calls (SDS HM) at or under $2.95, good for the day. Place a protective stop limit at $1.70 and a pre-determined sniper sell at $3.80.

Dear Bottarelli Research Member,

After locking in a really nice profit on our UNP August 80 calls (UNP HP), it’s time to get positioned ahead of the next market move. This is much easier said than done, especially when you consider that the Dow fell 230 points on Monday, rallied 250 points yesterday, and is now extending upon yesterday’s gains with another 150-advance in today’s session. As you can see from the Dow chart, this is a nice little 2-day rally. But I fear that the upside will not last too much longer.

INDU

After all, a large chunk of the upside has come from the financials, which have rallied on the news of MER’s CDO sale for $0.22 on the dollar. Exactly why the financials have used this news as an upside trigger is a slight enigma to me, but hey, I’ll certainly use the pop to make a quick profit. And on that note, I’d like to once again play calls on the UltraShort S&P500 ProShares (SDS – AMEX).

SDS

As you know, the SDS moves up at a rate of twice the inverse of the S&P 500’s decline. So, if the S&P 500 gives up its early-session gains and falls into the red later in the session, the SDS will move up rather aggressively. For that reason, I’d like to play this pullback by entering SDS August calls now. Here’s the play:

PLAY: Buy the SDS August 65 Calls (SDS HM) at or under $2.95, good for the day. Place a protective stop limit at $1.70 and a pre-determined sniper sell at $3.80.

At the same time, I’d like to keep a very close eye on shares of AK Steel Holding (AKS – NYSE).As you probably know, steel stocks have been white-hot lately, thanks to blockbuster earnings from majors like United States Steel (X – NYSE) and Arcelor Mittal (MT – NYSE).It’s my opinion that a smaller firm like AKS could enjoy similar upside. In fact, I’ve heard rumors that a company like US Steel has wanted to take over AKS for years, and now might be the perfect time for them to make a move. This would obviously provide a major boost for AKS, so I’ll keep a close eye on it and plan to enter August calls on any forthcoming dip. If and when it’s time to strike, you’ll be the first to know.

AKS

In the meantime, I’d like to maintain all of our current positions. Our ACI August 55 Calls (ACI HK) are down slightly from our $3.10 entry price, but based on steel’s strength, I’m sure coal will be right behind. This bodes well for ACI going forward, so maintain your August calls.

In terms of our BEN August 100 Puts (BEN TT), we can certainly see a sharp snap-back in the financials, so maintain this position as well. And despite a two-day rally (and earnings from Viacom), I’m still quite bearish on the overall state of the U.S. advertising, and this should lead to a pullback in shares of LAMR. Maintain your LAMR August 35 Puts (LJQ TG ) for said pullback. And finally, the biotech sector is still a sector I want to be long, so maintain your GENZ August 75 Calls (GAA HO) as well. And as always…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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