Add QID Straddle

A One-Week Play

By Bryan Bottarelli
Tuesday, October 14, 2008 10:49 AM EDT
Tue, 14 Oct 2008 14:49:00 GMT

PLAY: Buy the QID October 65 Puts (DYM VM) and the QID October 65 Calls (DYM JM) for a total cost at or under $9.00, good for the day. Do not place a sniper sell or a pre-determined stop limit at this time. I’ll manage this play within our daily trading alerts.

Dear Bottarelli Research Member,

Good morning. The tremendous upside move from yesterday has introduced some new variables into the tactical equation.

First off, we now have tremendous upside and downside volatility to contend with. Secondly, we have floor traders who are hesitant to fully price their options contracts (see UYG note below). And third, we have October expiration coming at the end of this week.

Therefore, we have a situation where October contracts are priced cheap while November contracts are sky high. But most importantly, we have the global markets injecting liquidity at an unprecedented and historic rate. And this has sparked talk of a market “bottom.”

Call me crazy, but I’m not convinced that we’ve bottomed out. Sure, one magical 970-point up-day is certainly nice, but that’s yesterday’s news. You often times hear the “talking heads” on TV say that nobody rings a bell at the bottom, but yesterday’s move was as close to ringing this mystical bell as you can possibly get. As traders, we’re smarter than the masses. Therefore, I think the downside volatility is far from over. In fact, we’re probably in for even more wild price swings — both to the upside and to the downside — over the next three days. And as a result, the only smart way to get positioned to profit off these swings is by using a straddle position. And once again, I’ve targeted the UltraShort QQQ ProShares (QID – AMEX).

QID

As you can see, the QID has moved quite aggressively over the last 1-2 weeks, and I expect to see further moves going into October expiration (which occurs on October 18th). As I write, the QID October 65 Puts (DYM VM) trade between $4.00 and $4.30 and the QID October 65 Calls (DYM JM) trade between $4.20 and $4.60. I would like to enter this straddle position for a total cost of $9.00. Now remember, we will only hold this position for a maximum of three days. It’s nothing more than a way to make a quick profit off more volatile price movements. The coming October expiration offers us the ability to play this straddle for cheap premiums in a super-volatile market. So let’s enter the position now — with the intention of being quick and nimble in our management. Armed with this game plan, here’s the play:

PLAY: Buy the QID October 65 Puts (DYM VM) and the QID October 65 Calls (DYM JM) for a total cost at or under $9.00, good for the day. Do not place a sniper sell or a pre-determined stop limit at this time. I’ll manage this play within our daily trading alerts.

Now, onto the movements of our UYG November 13 Calls (UUF KO). To be honest, we couldn’t have timed this play any better. Last week, we positioned ourselves in a financial bounce, and over the last two days, we’ve seen this move come in exactly as we predicted. Unfortunately, the market makers are severely limiting the upside movements of the UYG calls. In my view, these calls should have moved over $3.00 per contract. Easy. But for whatever reason, they’re simply not moving up in the manner that they should. If we remain patient, I think we’ll see this position move into the black. After all, our November expiration will be a tremendous help. Let’s not let these price movements scare us out of an otherwise strong position. Hold.

UYG

And as always…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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