“The Most Harrowing & Volatile Week in Modern History”

Add GLD Calls

By Bryan Bottarelli
Monday, September 22, 2008 10:00 AM EDT
Mon, 22 Sep 2008 14:00:00 GMT
“Wall Street was shaken to its foundations in the most harrowing and volatile week in modern history.”
– Barron’s, September 22nd 2008

PLAY: Buy the GLD October 87 Calls (GLD JI) at or under $5.00, good for the day. Place a protective stop limit at $3.10 and a pre-determined sniper sell at $7.00.

Dear Bottarelli Research Member,

Good morning. The idea of banning short-selling is catching on around the world, as Australia, Taiwan and the Netherlands have also announced short-selling restrictions. In addition to that, the U.S. has now added 30 new companies to the short-selling ban, and one of them is General Electric (GE – NYSE).

You would think that GE is one of the most stable companies in the world. But GE runs a capital division that engages in financial services such as commercial loans, financial programs, home loans, insurance, credit cards, and personal loans. Therefore, you could argue that the next phase of the credit crisis could extend onto GE.

Now, the big question is: Can the markets behave in a proper manner with the short-selling ban in effect?

Honestly, I have no idea. After all, I’ve never traded in a market with short-selling banned. But in my view, I can tell you that this situation could be setting up for some tremendous downside selling when the short-selling ban expires on October 3rd. Therefore, perhaps the strategy is to accumulate well-priced put options on a company that looks vulnerable, like GE, and play these put options into the end of the short-selling ban in early October.

GE

The GE October 27 Puts (GEW VA) look particularly attractive at $1.60 to $1.80 per contract, especially now that shares of GE have once again dipped below their resistance level at the 50-day moving average. It appears like a move back down to the low $20s could be in order, but once again, I’d like to see how today’s markets behave in the opening hour or so before making any new plays.

At the same time, we could also have an opportunity to play another round of calls on the Ultra Short Dow 30 ProShares (DXD). Looking at the Dow chart below, it’s clear to see a level of resistance right at the 50-day moving average. If the Dow cannot break through this resistance level, then you can expect more downside, which would support adding a fresh series of DXD calls.

INDU

But for right now, I’d like to once again add upside exposure in the Spider Gold Shares (GLD – NYSE).After a volatile week, gold prices are opening today with another upside pop, and this could extend GLD towards its 52-week high around $97.50. Let’s play this upside move now!

GLD

PLAY: Buy the GLD October 87 Calls (GLD JI) at or under $5.00, good for the day. Place a protective stop limit at $3.10 and a pre-determined sniper sell at $7.00.

And as always…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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