One Call, One Hedge

Play AMGN Calls and DIA Puts

By Bryan Bottarelli
Monday, October 20, 2008 11:14 AM EDT
Mon, 20 Oct 2008 15:14:00 GMT

*PLAY: Buy the AMGN November 50 Calls (AMQ KJ) at or under $3.80, good for the day. Place a protective stop limit at $1.90 and a pre-determined sniper sell at $5.20.

PLAY: Buy the DIA November 90 Puts (DAV WL) at or under $6.20, good for the day. Place a protective stop limit at $3.50 and a pre-determined sniper sell at $9.00.

Dear Bottarelli Research Member,

In addition to our Weatherford November 15 Calls (WFT KC) and our HIG November 30 Puts (HIG WZ), I’d like to add two positions that’ll bracket us on both sides of the market. In this environment, I still think it’s a good idea for us to own an equal balance of calls and puts, and use the intra-day price swings to lock in profits when the timing is right. So in this spirit, I’d like to add a new call play on Amgen (AMGN – NASDAQ) and a new put play on the Dow Diamonds (DIA – AMEX).

Starting with Amgen, the top biotech names have quietly been making strong moves lately, and Amgen is the best biotech stock your money can buy. As you can see, the stock is bouncing off the 50-day moving average at $50.00, and they’re set to report earnings on October 22nd. Both of these events could spark an upside move. Therefore, let’s add November 50 calls now.

AMGN

PLAY: Buy the AMGN November 50 Calls (AMQ KJ) at or under $3.80, good for the day. Place a protective stop limit at $1.90 and a pre-determined sniper sell at $5.20.

At the same time, let’s short today’s Dow pop by using puts on the Dow Diamonds (DIA – AMEX).I would love to play an ultra-short vehicle like the DXD, but the option premiums are way too high to justify. Therefore, we’ll revert back to the more appropriately priced DIA puts. This is a pure directional hedge, using volatility to lock in a quick winner. Now that the Dow has trimmed a 230-point gain down to a 40-point gain, let’s add these puts to our ledger now.

DIA

PLAY: Buy the DIA November 90 Puts (DAV WL) at or under $6.20, good for the day. Place a protective stop limit at $3.50 and a pre-determined sniper sell at $9.00.

And as always…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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