Speculative: Add SDS Puts

Playing a End of Day “Mystery” Rally

By Bryan Bottarelli
Friday, September 05, 2008 2:07 PM EDT
Fri, 5 Sep 2008 18:07:00 GMT

PLAY: Buy the SDS September 70 Puts (SDS UR) at or under $2.50, good for the day. Place a protective stop limit at $1.80 and a pre-determined sniper sell at $3.30.

Dear Bottarelli Research Member,

Over the last hour, the markets have fought hard to wipe out their opening day losses. As I write, the Dow is attempting to bounce off the 11,000 level, as you can see below:

INDU

Now, here’s the important aspect of this recovery move: I have a sneaky suspicion that we could see an orchestrated rally into the close of today’s trading.

In other words, I think market technicians over at the Fed, who watched the Dow break down below its critical support levels in yesterdays’ trading, want to instill some investor confidence going into the weekend. And with all the bad news out there right now, the only possible way they can do that is by sparking a late-session rally into the close of trading.

Now don’t get me wrong: No sane investor will make a late-session buy going into the weekend. But that’s why this strategy works so well for the Fed (or as some call them, the Plunge Protection Team) PPT for short.

When you have light trading volume going into a Friday close, a substantial futures buy can easily sway market sentiment in your direction. I’ve seen this happen many times before, and it tends to occur a day or two after a substantial down-move (just like we had yesterday). Therefore, I’d like to make one speculative play to close the week — which will position us to profit in advance of this upside move. The way I’d like to do this is using puts on the Ultra Short S&P 500 ProShares (SDS – AMEX).

SDS

Now this can get a little confusing, so stay with me. As you know, the SDS is a vehicle that moves at a rate of twice the inverse of the major market averages. If the S&P 500 is down 2%, for example, the SDS is up 4%. As you know, we used calls on the SDS yesterday to profit as the S&P 500 got clobbered. But today, we’re going to ride it in the opposite direction. You see, if a “mystery buyer” steps in and ignites a market rally, the SDS will fall at twice the rate of the end-of-day rally. And that means our puts will shoot higher in price. So, as one last “speculative” play to close out the week, lets’ add SDS puts now.

PLAY: Buy the SDS September 70 Puts (SDS UR) at or under $2.50, good for the day. Place a protective stop limit at $1.80 and a pre-determined sniper sell at $3.30.

Also, TSO has done a good job of fighting its way back, so maintain your TSO October 20 Calls (TSO JD) for more upside. And as always…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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