Fading the Rally

Add MS & AIG Puts

By Bryan Bottarelli
Tuesday, July 14, 2009 10:18 AM EDT
Tue, 14 Jul 2009 14:18:00 GMT

PLAY: Buy the MS August 28 Puts (MS TS) at or under $2.50, good for the day. Place a protective stop limit at $1.20 and a pre-determined sniper sell at $4.00.

PLAY: Buy the AIG August 15 Puts (AIG TO) at or under $3.60, good for the day. Place a pre-determined stop limit at $1.90 and a sniper sell at $5.00.

*PRE-EMPTIVE SELL: Sell your NTES August 35 Calls (NGH HG) if they trade at or above $2.90, good for the day. Current bid/ask spread is $2.60 to $2.75.

Dear Bottarelli Research Member,

Yesterday, the market vaulted higher based on an upgrade (and huge earnings expectations) from Goldman Sachs Group (GS – NYSE). This morning, Goldman said that their second-quarter profit jumped more than 60%, which included record results from their equity underwriting business. Q2 net income came in at $3.44 billion ($4.93 per share) versus $2.05 billion ($4.58 per share) one year ago. But this morning, you’re seeing the classic “sell on news” trade. Since GS rallied $7.00 yesterday based on the expectation of a blowout number, today’s confirmation of said blowout number is turning into a selling catalyst.

GS

As a result, I think we have an opportunity to “fade” the Goldman-induced market rally. But instead of playing Goldman directly, we’ll piggy-back this move by using Morgan Stanley (MS – NYSE).

MS

In terms of earnings, MS does not report until July 22nd. But as you can see below, the shares put in a major upside rally alongside Goldman’s powerful move.

Now, in my humble opinion, Goldman is one of a kind. Their combination of trading talent, political influence, and underwriting profits cannot be matched anywhere on Wall Street. In fact, if you ask Matt Taibbi from Rolling Stone magazine, he’ll argue that GS engineered every major market manipulation since the Great Depression. The point is, just because GS blew out their numbers doesn’t mean that Morgan Stanley will do the same. As a result, I’d like to fade yesterday’s rally by adding puts on MS now.

PLAY: Buy the MS August 28 Puts (MS TS) at or under $2.50, good for the day. Place a protective stop limit at $1.20 and a pre-determined sniper sell at $4.00.

In terms of oil, yesterday’s market rally failed to pair oil’s down-move with oil stock performance, which has forced us to close out our July trade on the DUG July 21 Calls (DZG GU). If you haven’t already done so, close this position now.

On the other hand, our NTES August 35 Calls (NGH HG), which we entered on July 7th 2009 for $2.30 per contract, are one upside move away from handing us a nice profit. They’ve hit a high of $2.80 today, good for a 21% gainer. If they trade anywhere above $2.90, don’t wait for my signal. Go ahead and lock in the gains!

NTES

PRE-EMPTIVE SELL: Sell your NTES August 35 Calls (NGH HG) if they trade at or above $2.90, good for the day. Current bid/ask spread is $2.60 to $2.75.

And finally, I have a speculative play on insurance loser American International Group (AIG – NYSE). As I reported last week, the company just did a 20-to-1 reverse stock split, which has once again made the company tradable using options. As you can see below, the stock has been very volatile, moving in $1.00 to $2.00 increments on a daily basis. Last week, I missed out on the big fall by failing to recommend puts. But ever since dipping under $10.00, the stock has recovered. After this morning’s upside gap, it now trades over $15.00. So, as a quick play, I’d like to short this rally by adding AIG August puts.

AIG

PLAY: Buy the AIG August 15 Puts (AIG TO) at or under $3.60, good for the day. Place a protective stop limit at $1.90 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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