A Two-Sided Play

Add PTR and SDS Calls

By Bryan Bottarelli
Monday, August 03, 2009 1:00 PM EDT
Mon, 3 Aug 2009 17:00:00 GMT

PLAY: Buy the PTR August 125 Calls (PTR HE) at or under $3.70, good for the day. Place a protective stop limit at $1.90 and a sniper sell at $6.00.

PLAY: Buy the SDS August 45 Calls (SSH HS) at or under $2.70, good for the day. Place a protective stop limit at $1.50 and a sniper sell at $5.00.

Dear Bottarelli Research Member,

Two predominant trading themes are shaping up today. First and foremost, it’s clear that overnight news out of China is now acting as the catalyst within the entire commodity sector, which then spills over to the major market averages.

Today, for example, you’re seeing another day in which gold, oil, and the markets are all trading higher, as manufacturing data out of China is all it takes to extend the rally here in the U.S. It used to be the other way around. For as long as I have been trading, strength in the U.S. markets have sparked rallies overseas. Now, the roles have reversed. Is this a sign of the times?

The second theme is that the market averages are approaching their “round numbers.” The most notable is 1,000 on the SPX. But at the same time, the VIX (which acts as a market fear gauge) has also been rallying. Typically, when the major markets rally, the VIX moves lower, as the level of investor fear dissipates with an upside market. But as you can see below, the VIX is rallying as the SPX moves towards 1,000. This is an odd trading pattern. It shows you that some big-time players are adding index put options on the S&P right around 1,000, which is the reason that the VIX is rallying.

SPX

VIX

With both of these events occurring at the same time, I’ve found a way to structure a trading position around both triggers. First off, we’ll combine the two powerful investing themes of oil and China by playing calls on PetroChina (PTR – NYSE).

Headquartered in Beijing, PTR has proven reserves that include 10,576 million barrels of crude oil and 60,246.7 billion cubic feet of natural gas. As you can see below, the stock is just about to break out above its previous high as $123.50. If so, we could see PTR rally quickly and aggressively from here. Let’s play this move by adding August calls now.

PTR

PLAY: Buy the PTR August 125 Calls (PTR HE) at or under $3.70, good for the day. Place a protective stop limit at $1.90 and a sniper sell at $6.00.

At the same time, I’d also like to add calls on the Ultra Short S&P 500 Pro Shares (SDS – NYSE). As you know, the SDS moves at the rate of twice the inverse of the S&P 500 index. Therefore, if we see any pullback, the SDS calls will move up at twice the rate of the fall. I see this play as a way to hedge ourselves against a sudden market drop. If we do witness a coming dip, we can quickly lock in a gain before the dip-buyers push the markets higher once again. Let’s use today’s pop to get a small position, and we’ll look to lock in a profit if the buyers take a quick breath of air.

SDS

PLAY: Buy the SDS August 45 Calls (SSH HS) at or under $2.70, good for the day. Place a protective stop limit at $1.50 and a sniper sell at $5.00.

With the combined position of PTR calls and SDS calls, we now own exposure to the two strongest market catalysts (oil and China), while also owning a layer of protection against a market fall. At the same time, maintain your TBT August 50 Calls (TBT HX), ICE August 100 Calls (IHH HT), and AIG August 15 Puts (AIG TO). And as always…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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