Add DXD Calls

Plus: Sell DUG Puts, Hold DUG Calls

By Bryan Bottarelli
Monday, November 10, 2008 10:37 AM EST
Mon, 10 Nov 2008 15:37:00 GMT

PLAY: Buy more DXD November 76 Calls (DZS KX) at or under $4.30, good for the day. Place a protective stop limit at $2.10 and maintain your pre-determined sniper sell at $9.60.

PLAY: Sell your DUG November 41 Puts (DUG WO) at market price. Continue hold your DUG November 41 Calls (DUG KO).

Dear Bottarelli Research Member,

Good morning.We’ve kicked off another trading week with a spark of bullishness, as news of a Chinese stimulus package combined with yet another AIG bailout arrangement have attracted some early buyers. As you can see from the Dow chart below, this has once again helped push the Blue Chips over the 9,000 level. But when you compare the last two upside days (today and last Friday) with the previous two down-days (Wednesday and Thursday), it’s clear that the overpowering trend remains to the downside. Therefore, I must advise that we remain short.

INDU

One look at the DXD chart further supports this viewpoint. As you can see, this ultra-short vehicle is in the process of finding support at the 50-day moving average. To my eye, this is an ideal point to add to our call position. Let’s short this morning’s rally by adding more DXD calls now.

DXD

PLAY: Buy more DXD November 76 Calls (DZS KX) at or under $4.30, good for the day. Place a protective stop limit at $2.10 and maintain your pre-determined sniper sell at $9.60.

At the same time, we’re also seeing some movement on our DUG November 41 Straddle. As you know, this position is designed to profit off volatility. The more the oil market jumps around, the more the premiums on both the DUG calls and DUG puts will increase in value. Therefore, owning a two-sided position on the same strike price allows us to profit no matter if DUG moves higher or lower.

When we entered this position on November 6th, we paid a total of $9.60 for both positions. As I write you today, the puts have traded as high as $7.80 and the calls are currently trading down at $1.65. That’s a total basket value of $9.45. But as I look at the DUG chart below, it’s clear that DUG is getting ready for a powerful bounce. In fact, it’s touching its 200-day moving average right now, which has been a strong level of support of the past three months.

DUG

Based on this situation, I’d like to lock in the high value of our puts — and then continue holding the calls for a pending upside move. I admit, this maneuver is a little more risky than owning both sides, but given the chart formation, I think playing DUG higher right now is worth the risk. Therefore, let’s try maximizing our profits on each side of the straddle by selling the puts now and holding the calls. Here’s the play:

PLAY: Sell your DUG November 41 Puts (DUG WO) at market price. Continue hold your DUG November 41 Calls (DUG KO).

Going forward, I may decide to balance our ledger by adding an upside call. If and when it’s time to move on a play like this, you’ll be the first to know. Until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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