Add GS Puts
A Dark Cloud is Forming
PLAY: Buy the GS March 80 Puts (GS OP) at or under $5.90, good for the day. Place a protective stop limit at $2.50 and a pre-determined sniper sell at $9.00.
Dear Bottarelli Research Member,
A dark cloud is forming on Wall Street this morning. As the markets opened, the pre-market futures pushed the S&P 500 underneath the critical 802 level, which means that we’re more than likely to re-test the November 2007 low — a forecast that I’ve been saying all along. The Dow is showing a similar pattern, as seen below:
The downside push is a result of continued uncertainty and fear about the effectiveness of the latest Obama stimulus package — combined with earnings that continue to disappoint. In fact, I could offer you a long list of reasons why things look bleak right now, but I’ll avoid putting you through this disheartening and depressing exercise. Rather, we’ll simply get positioned in the best way possible to profit off this move, which I feel is playing puts on Goldman Sachs Group (GS – NYSE).
As you can see below, GS had a nice rally lately, but now that the major market averages are about to re-test their November lows, all bets are off. Let’s profit off an extended downside move using March 80 puts. Here’s the play…
PLAY: Buy the GS March 80 Puts (GS OP) at or under $5.90, good for the day. Place a protective stop limit at $2.50 and a pre-determined sniper sell at $9.00.
At the same time, let’s officially close out our UCO April 7.5 Calls (UCO DU). As I mentioned when we entered this play, the UCO replicates the performance of twice the daily performance of the Dow Jones AIG Crude Oil Sub-Index.
Now, in order to maintain a position in oil futures, the Dow Jones AIG Crude Oil Sub-Index “rolls over” its holdings every month. In other words, the index swaps near term oil options (April futures, for example) for further-out options. As a result, the price of the UCO is always based on oil futures, not the current spot price.
As I’m sure you know, oil prices jumped over $3.00 last Friday, which is exactly the move that I expected when I recommended this position. But nevertheless, the UCO continued to move down. This was both frustrating and confusing. But as I researched this position, I learned that the reason for this is called “contango,” which is a phenomenon where further-out oil futures are priced higher than nearer oil futures.
This price divergence harms UCO, simply because the index has to roll less expensive contracts from the front month over to more expensive contracts in the back months. As a result, the share price of UCO suffers (as we saw firsthand last week).
So as it stands, we have spot oil prices that rallied aggressively late last week, and today we have spot oil prices that are getting clobbered. In both situations, the UCO has moved lower. Therefore, this position is currently a no-win situation. The same goes for the USO as well. For the time being, it might behoove us to play puts on any near-term rise. But for today, let’s officially close out our UCO April 7.5 Calls (UCO DU). Sell.
In terms of our other positions, gold is rallying, but it appears like it could be at a near-term top. As I’ve mentioned before, I absolutely love the idea of holding gold plays, but I’d like to pick them up at a more-attractive level. In terms of AGU, maintain the play for a possible recovery. And as always…
Lock and load!
Sincerely,
© 2012 CSR Group, LLC. All rights reserved. Published in USA.
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