Speculators: Add FAZ Calls

Playing a Financial Pull-Back

By Bryan Bottarelli
Monday, April 13, 2009 11:26 AM EDT
Mon, 13 Apr 2009 15:26:00 GMT

PLAY: Buy the FAZ May 10 Calls (FAY EB) at or under $2.90, good for the day. Place a protective stop limit at $1.30 and a pre-determined sniper sell at $5.00.

Dear Bottarelli Research Member,

For most of the trading day, I’ve been going back and forth on playing calls on Direxion Financial Bear 3X Shares (FAZ – NYSE). In short, nobody has a clue how Wells Fargo reported their blowout earnings. And as I write, WFC has refused to provide any details. Considering that the financial sector has lead the powerful market rally over the last five weeks, this could be setting up for a major let-down.

Of course, there are some threats that could derail this thinking. First, more and more financial companies can use their special accounting tricks to turn billions of losses into billions of gains. I would hope that investors can see through this garbage, but last Thursday’s rally proves otherwise. Second, the U.S. government can come out and report that every bank has “passed” the stress test — even though their standards for passing or failing are nowhere near realistic. And third, the slew of upcoming earnings could push the sector aggressively higher one day and aggressively lower the next day.

All told, it makes for a very volatile situation. That’s exactly why I’d like to take advantage of it right now.

In my view, no accounting trick — or rule change — can fix our financial system. The only thing that’ll fix the system is a true flush-out, and that’ll take some time. In other words, if you set aside all the near-term euphoria, we’re still in very serious trouble. The short-squeeze that pushed WFC aggressively higher is now over. Same with the “mark-to-market” upside trigger. Therefore, any slight sign of bearishness in the financial sector, and we could see an aggressive push lower. So, as a more speculative position, I’d like to buy this bottom by playing calls on the FAZ.

FAZ

Specifically, I’d like to buy the FAZ May 10 Calls (FAY EB) at or under $2.90, and profit off any forthcoming sell-off in the financial sector. I’ve selected this position because it’s cheap and it gives you powerful 3-to-1 leverage. So, all we need is one or two days of pulling back, and we could have a powerful winner on our hands. Having outlined the risk/reward scenario, here’s the play…

PLAY: Buy the FAZ May 10 Calls (FAY EB) at or under $2.90, good for the day. Place a protective stop limit at $1.30 and a pre-determined sniper sell at $5.00.

And as always…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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