Position Update

Maintain TSO and KMB

By Bryan Bottarelli
Tuesday, September 16, 2008 10:23 AM EDT
Tue, 16 Sep 2008 14:23:00 GMT

Dear Bottarelli Research Member,

Yesterday’s 500-point loss was the worst single-day loss since September 11th 2001. But more importantly, the tremendous downside weakness has now pushed nearly all of the major market averages (including the OEX, SPX, DIA, COMPQ, & INDU) to new 52-week lows.

INDU

As much as I hate to admit it, my floor-trader schooling has taught me that stocks hitting new lows continue to hit new lows. Therefore, I’ll continue to use a downside bias to short any rallies — while adding puts on stocks that I feel have more room to fall.

But I’ll implement this strategy carefully. After all, as I write you, the major market averages have bounced aggressively off their lows (probably initiated by a Fed cash dump), so I will remain cautious with new plays going forward. The market is just too volatile, so we need to be at the top of our game. I remain up to the challenge. Looking at our two open positions, I like what we currently have.

On one hand, oil’s two-day drop is the largest in over four years. Crude oil prices are now threatening to break under the $90.00-a-barrel level, a whopping 36% price correction off the highs. That’s good for a $52.92 haircut! And as much as the stock charts have moved against me, I cannot help but think that this severe price reduction is great news for a refiner like Tesoro Corporation (TSO — NYSE).

TSO

I’m convinced that the recent downside move in the stock price is a direct result of the weak market conditions — and nothing more. Therefore, I want to do everything in our power to maintain the TSO October 20 Calls (TSO JD), which we’re currently holding with an average entry price of $1.25. When the market stabilizes, the refiners like VLO and TSO will be among the first group to rally hard, so maintain your TSO calls to participate in this upside move.

At the same time, also maintain your KMB October 65 Calls (KMB JM). The diaper manufacturer has done a remarkable job of maintaining its value in the midst of a major market bloodbath, and that should bode well for us going forward. Heck, if this market volatility continues, KMB could begin selling adult diapers to CBOE floor traders — opening up an entirety new market for those who cannot leave their trading post due to violent price swings. I’m kidding, of course. As a protective position, maintain your KMB calls for more upside.

KMB

I’ll follow up with any new trading information, but until then:

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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