DNDN Moving Already

Plus: The Truth About Citi and BofA

By Bryan Bottarelli
Tuesday, April 28, 2009 11:34 AM EDT
Tue, 28 Apr 2009 15:34:00 GMT

Dear Bottarelli Research Member,

Question: Did you know that by law, the banks cannot publicize their stress test results without the government’s permission? Yes, as amazing as it sounds, it’s true. This allows the government to completely orchestrate how these results are disseminated to the public.

Today, for example, the Wall Street Journal reported that Bank of America and Citigroup (each of which have already received $45 billion in government bailout funds), have been told by regulators that they might need to raise additional capital.

Reading between the lines, I believe that both Citigroup and Bank of America failed their stress tests. And having regulators urge each bank to raise more capital was the most benign way to communicate this information.

After all, just imagine the market implications if today’s headline read “CITI and BofA FAIL STRESS TESTS.” The banks would probably get clobbered, as they should. But in the eyes of many officials, that’s far too dangerous. Instead, they’ll manage the release of the information the way that they see fit.

And just as a buffer, it’s no coincidence that the New York-based Conference Board followed up shortly thereafter with news that consumer confidence (which is the most bogus and worthless data reading in existence, in my opinion) soared in April.

Just like that, the story was changed from “banks fail stress tests” over to “hopeful economic signs show that the worst may be over for the economy.” This, my friends, is puppeteering at its finest. Those who are behind-the-scenes managing this news flow are truly masters at their craft. And thus far, their efforts are working. How long will it last? Who knows, but it certainly cannot go on forever. That’s why I’d like to maintain our ultra-short plays on SRS and FAZ. There will be a time when both of these plays shoot aggressively higher. I’m not talking about a 1-day move like we’ve seen recently. I’m talking about a multi-week move to the upside. Hopefully, we’re holding calls on both plays when we finally see this move come into play.

Looking at our DNDN strangle, we’re already seeing some explosive movement. As you know, we entered the DNDN May Strangle earlier this morning for a total of $1.78, and as I write, the entire position is now trading for $2.57. That’s a 44% return in just over one hour! If you’re a more conservative trader, feel free to lock in these profits now. After all, making 44% this quickly is certainly a fantastic winner. Or, you can also choose to lock in profits on half of your strangle play, and then hold the remaining half into this afternoon’s announcement. This way, you’re locking in profits while also holding for more explosive upside. To me, this makes a lot of sense. If you agree, then go ahead and lock in profits on half of your strangle play now.

As always, I’ll be out later in the session with more updates. But until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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