Add DXD Calls

Playing a Dip

By Bryan Bottarelli
Tuesday, November 04, 2008 3:08 PM EST
Tue, 4 Nov 2008 20:08:00 GMT

PLAY: Buy the DXD November 65 Calls (DXD KM) at or under $7.00, good for the day. Place a protective stop limit at $3.10 and a pre-determined sniper sell at $10.50.

Dear Bottarelli Research Member,

A few things to note here in the last hour of trading…

First off, I continue to be amazed at the market’s ability to maintain its upside moves. For the last six months (perhaps even more!), every substantial rally was quickly met with intense selling pressure. But ever since the pre-market futures were trading “limit down” two weeks ago (and somehow trimmed those losses for all of the trading session), I get the feeling that the bears have been waiting and watching quietly from the sidelines. In other words, the recent market rally is not due to intense buying interest, but rather it’s due to a lack of selling pressure. At least that’s my read on the situation. As a result, I continue to feel that this market is riding on hot air. Perhaps even manipulated and artificial upside. I can’t be sure, of course. But I do know this: Once the bears decide to step back in, we could see another troubling downside day.

As a result, I’d like to maintain our VZ November 32.5 Puts (VZ WZ). Today’s move above the 50-day moving average is bogus, if you ask me. From a technical perspective, the stock is in no-man’s land — just waiting to get smacked down by selling pressure. Therefore, let’s maintain our puts. And if you have yet to enter into this position, now is a perfect time to do so.

VZ

At the same time, I’d also like to take an aggressive stance and add calls on the Ultra Short Dow 30 Pro Shares (DXD – AMEX), which moves at the rate of twice the inverse of the Dow. As you can see below, the DXD has moved from $110 down to $67 over the last month. Should the Dow move lower, you can expect to see the DXD blast higher — very quickly. Therefore, let’s go ahead and add calls on the DXD now.

DXD

PLAY: Buy the DXD November 65 Calls (DXD KM) at or under $7.00, good for the day. Place a protective stop limit at $3.10 and a pre-determined sniper sell at $10.50.

NOTE: The DXD option series also includes a DXW series, but let’s not get involved with those. Due to a recent cash disbursement, this special DXW series comes with $364 of additional cash, which accounts for the more-expensive pricing. Let’s keep our accounting easy and play the straight DXD series instead.

Going into the close, I may add another upside call — just to balance out the ledger. If something presents itself, you’ll be the first to know. But until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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