Take SDS Profits!

Plus, Play a Refiner Bounce

By Bryan Bottarelli
Thursday, September 04, 2008 10:47 AM EDT
Thu, 4 Sep 2008 14:47:00 GMT

PLAY: Sell your SDS September 66 Calls (SDS IN) at or above $3.50, good for the day.

PLAY: Buy the TSO October 20 Calls (TSO JD) at or under $1.30, good for the day. Place a protective stop limit at $0.60 and a pre-determined sniper sell at $2.60.

Dear Bottarelli Research Member,

After getting filled at our $3.10 sell order on the BX September 20 Puts (BX UD), I’ve now isolated an interesting opportunity in shares of U.S. oil refiner Tesoro Corporation (TSO – NYSE). But first thing’s first:

Let’s lock in gains on our SDS September 66 Calls (SDS IN).

In the blink of an eye, the Dow has dropped over 200 points, penetrating the key support level at the 50-day moving average. See below:

INDU

An even worse chart pattern is taking shape on the S&P 500, and this breakdown (which we expected) has offered a really strong boost to our ultra-short call position. As you know, we entered the SDS September 66 Calls (SDS IN) yesterday for $2.80 and they’ve now traded as high as $3.60. That’s good for a super-quick 29% gainer, so let’s go ahead and lock in these profits now!

SPX

PLAY: Sell your SDS September 66 Calls (SDS IN) at or above $3.50, good for the day.

Now back the refiners. As you probably know, refiners like Valero (VLO – NYSE) and TSO have gotten clobbered as the “crack spread” (which is the difference between oil and gasoline prices) has shot well above its historical price range. But now that oil prices are moving aggressively lower, this spread is reverting back to levels that benefit refiners.

NOTE: Refiners do not drill for oil, so they must buy crude on the open market and refine it into gasoline. So as you can see, paying higher prices for oil while gasoline prices remain constant is not good for their business. But now that oil is coming back down, refiners like TSO can make up ground very quickly — and that’s the opportunity we have today.

As I write, shares of TSO are ridiculously low at $19.00 per share. But as you can see, the stock has just moved aggressively above its 6-month resistance level at the 50-day moving average — and subsequent moves have now turned this resistance level into support. To my eye, this is now the low for TSO, which could spark a rally lasting well into the 2009 trading year. Based on this view, I’d like to add October calls on TSO now.

TSO

PLAY: Buy the TSO October 20 Calls (TSO JD) at or under $1.30, good for the day. Place a protective stop limit at $0.60 and a pre-determined sniper sell at $2.60. If TSO moves the way I expect, we could have a 100% winner.

TACTICAL NOTE: I am also carrying a similar position in my LEAPS service on Valero (VLO – NYSE) with a longer-dated time frame. So as you can see, I’m very bullish on a coming refiner-recovery.

Congrats on your SDS and BX winners today. And as always…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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