Add X Calls

Playing a Steel Bottom

By Bryan Bottarelli
Wednesday, October 29, 2008 11:15 AM EDT
Wed, 29 Oct 2008 15:15:00 GMT

PLAY: Buy the U.S. Steel January 35 Calls (X AD) at or under $6.10, good for the day. Place a protective stop limit at $3.10 and a pre-determined sniper sell at $9.00.

Dear Bottarelli Research Member,

After locking in profits on our Apple (AAPL – NASDAQ) calls yesterday and Barrick Gold (ABX – NYSE) calls this morning, we’re left holding two downside put positions: LLL November 75 Puts (LLL WO) and DIA November 80 Puts (DIJ WB).

Going into this afternoon’s Fed announcement, I’d like to maintain both positions. After all, we all know that the market has been ripe with volatility lately, and both of these puts gives us the flexibility to profit off any sharp selling pressure.

But at the same time, I’d like to balance out the ledger by adding another call to the mix, and today’s candidate comes in the form of U.S Steel (X – NYSE).

In one of the most under-reported earnings stories over the last month, U.S. Steel announced yesterday that their Q3 profits more than tripled.CEO John P. Surma said it was most profitable quarter in history, as net income reached $919 million ($7.79 per share) versus $269 million ($2.27 per share) one year earlier. In this market environment, these results are phenomenal.

X

But just to take a safe approach, Mr. Surma also warned that fourth-quarter results will most likely decline due to “the volatile global economic climate.” Because of this cautios statement, shares of U.S. Steel failed to make an aggressive upside advance. But as I look at the chart (above), it’s clear that steel could be hitting a near-term bottom. Anywhere between $30.00 and $33.00 per share could be the floor. Therefore, I’d like to add longer-dated call.s

Specifically, I think the January 35 calls offer a nice risk versus reward balance. Therefore, let’s use this extended time frame to get positioned for a bottom in U.S. Steel. Here’s the play…

PLAY: Buy the U.S. Steel January 35 Calls (X AD) at or under $6.10, good for the day. Place a protective stop limit at $3.10 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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