Two New Plays

Add TBT Puts & UGL Calls

By Bryan Bottarelli
Wednesday, March 25, 2009 10:08 AM EDT
Wed, 25 Mar 2009 14:08:00 GMT

PLAY: Buy the TBT April 45 Puts (TBT PS) at or under $1.60, good for the day. Place a protective stop limit at $0.80 and a pre-determined sniper sell at $2.70.

PLAY: Buy the UGL April 33 Calls (UGL DG) at or under $3.60, good for the day. Place a protective stop limit at $2.20 and a pre-determined sniper sell at $5.70.

Dear Bottarelli Research Member,

Good morning. There’s an old saying that governs every one of my new trades — and learning to live by this saying over the years has sometimes been a very expensive lesson. That saying is “Never Fight the Fed,” and we can apply this old adage in today’s trading.

You see, I personally believe that the number of U.S. Treasury buyers on a global scale is drying up. The Chinese, for example, are no longer interested. In fact, they’re concerned about the values of their current holdings. Now, this is important. After all, the Fed uses the proceeds of these Treasury sales to fund our stimulus (or bailout) programs. This is what people refer to as “printing money.” But if global buyers are no longer interested, this makes a bearish case for Treasury values (which I’ve been trading using the iShares Barclays 20+ Year Treasury Bond). As you can see from the chart below, the TLT has indeed fallen from $120 down to $100 before getting caught in a tight, 3-month trading range between $105 and $100.

TLT

From a pure chart perspective, this would indicate further weakness. But last week, everything changed. As you know, the Fed recently committed to buying $300 billion in Treasuries, and they plan to begin their buying process today. In other words, they’re saying “if the global market for Treasuries has dried up, then we’ll step in and become the new global market for Treasuries.”

Yes, it’s a self-fulfilling prophecy. And while I don’t necessarily agree with completely monopolizing market segments like this, I must remember the old adage: “Never Fight the Fed.” So, rather than fighting against them, let’s jump on board and ride the Fed’s buying spree for all that we can. In other words, let’s play puts on the UltraShort 20+ Year Treasury ProShares (TBT – NYSE).

TBT

As you know, the TBT moves at a rate of twice the inverse of the 20-Year U.S. Treasury index. So, if the Fed’s buying sparks an up-tick in Treasuries, then the TBT is set to fall. In fact, a TBT move below its 50-day moving average could penetrate a key support level, which might lead to aggressive selling pressure. Let’s profit off this fall by adding TBT puts now!

PLAY: Buy the TBT April 45 Puts (TBT PS) at or under $1.60, good for the day. Place a protective stop limit at $0.80 and a pre-determined sniper sell at $2.70.

At the same time, I think it’s time to buy this near-term dip in gold via the Ultra Gold ProShares (UGL – NYSE).The UGL moves at a rate of twice the performance of gold bullion, and ifit can set a support level at the 50-day moving average, we could be in for a powerful upside move. I firmly believe that gold prices will break $1,000 soon, which supports adding UGL calls now!

UGL

PLAY: Buy the UGL April 33 Calls (UGL DG) at or under $3.60, good for the day. Place a protective stop limit at $2.20 and a pre-determined sniper sell at $5.70.

At the same time, let’s also maintain our MON April 85 Calls (MON DQ) and our QID April 48 Calls (QID DV).And as always…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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