DUG News & Set JCP Sell

Plus: Close AEM

By Bryan Bottarelli
Tuesday, December 23, 2008 10:01 AM EST
Tue, 23 Dec 2008 15:01:00 GMT

PLAY: Sell your JCP January 20 Puts (JCP MS) at or above $2.80, good for the week.

Dear Bottarelli Research Member,

If you’re noticing strange trading patterns across the ultra-short plays, then you’re not alone. This morning, the Pro Funds Group (the world’s largest manager of short and leveraged funds) announced capital gain distributions for 35 of their 76 ETFs. Four of these distributions are coming in names that we regularly play, as noted below:

  • UltraShort Oil & Gas (DUG): Short-term Cap Gain of $6.06101
  • UltraShort QQQ (QID): Short-term Cap Gain of $9.49928
  • UltraShort Dow30 (DXD): Short-term Cap Gain of $16.0274
  • UltraShort S&P500 (SDS): Short-term Cap Gain of $11.46188

This explains why all of these positions are down this morning. Looking specifically at our DUG January 31 Calls (DZG AE), this position finally broke into the profit zone yesterday, and then this capital gain distribution was allocated. I would imagine that the options string for all of these funds will be halted until the distributions are deducted from the strike price.

For example, we will not be penalized by a $6.00 distribution by holding DUG 31 calls. Rather, I expect the $6.00 distribution to be subtracted from our strike price, which would then turn our January 31 calls into January 25 calls. And depending on how the pricing all settles out, we could get assigned additional contracts. While this move does change the values of DUG, from an option perspective, we should still have our current contracts adjusted to reflect exactly the levels we were at yesterday. As you can imagine, this might take a day or two to sort out. I’ll continue to monitor the situation.

In the meantime, let’s set a sell price in our JCP January 20 Puts (JCP MS). The stock is moving down again today, which has pushed our contracts up to a bid/ask spread of $2.65 to $2.80. Let’s go ahead and set a pre-determined sell order at $2.80, and attempt to lock in a quick 22% gainer throughout the week.

JCP

PLAY: Sell your JCP January 20 Puts (JCP MS) at or above $2.80, good for the week.

At the same time, today’s reversal in gold signals that the yellow metal is a lot stronger than many expected. News is now surfacing of shortages, which means that the temporary down-move that we were playing via the AEM January 40 Puts (AEM MH) is not taking shape. Therefore, let’s go ahead and close out these puts now. If you haven’t already done, sell them now.

AEM

Should any further news or notes come up, 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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