Add WHR and MEE Calls

Two More Upside Trades

By Bryan Bottarelli
Monday, August 24, 2009 11:08 AM EDT
Mon, 24 Aug 2009 15:08:00 GMT
“We’re in one of those stock markets, in short, where good news is magnified and bad news is ignored, and that’s swell as long as it lasts. There’s an incredible amount of liquidity sloshing about global markets, thanks to the exertions of Mr. Bernanke and his foreign counterparts. For the ‘nonce, it’s the dominant investment current carrying equities and commodities far beyond the levels warranted by fundamentals. Which to our jaunted eye, shapes up as the perfect center-banker trap. At some point, those worthies will have no choice but to turn the spigot off. Hard to pinpoint when that’ll happen. But when it does, the enthralling movie we’ve been watching since early March will be run backwards. Guaranteed.”
– Alan Abelson, Barron’s August 24th 2009

PLAY: Buy the WHR September 65 Calls (WHR IM) at or under $2.65, good for the day. Place a protective stop limit at $1.40 and a sniper sell at $4.00.

PLAY: Buy the MEE Septmber 30 Calls (MEE IF) at or under $2.65, good for the day. Place a protective stop limit at $1.40 and a sniper sell at $4.00.

Dear Bottarelli Research Member,

Good morning. In my view, the above quote from Barron’s perma-bear, Alan Abelson, perfectly describes this market. Shrugging off bad news – and celebrating good news – is what has driven this rally for the last five months. As long as this short-sighted strategy is working, everything is fine. But the moment the wind shifts, and the sentiment shifts towards selling into rallies, then all bets are off. As you can see below, the Dow keeps roaring higher and higher. As inexplicable as it is, this is the market we’re faced with today.

INDU

Now as you know, we did our best to bob and weave through last week’s market action by taking small but consistent winners of 12.07%, 17.47%, 13.21%, and 33.33%. Going into the close of last week’s trading, we had locked in profits on all of our call positions, which left us holding three downside plays: SDS September 45 Calls (SSH IS), OIH September 100 Puts (OIH UT), and WYNN September 55 Puts (UWY UK).

As I write you today, the market is still behaving like a runaway freight train, steamrolling higher without any concern about the coming hangover. Therefore, we have no choice but to cautiously play alongside the madness. So on that note, let’s first trim our downside exposure by closing off our OIH September 100 Puts (OIH UT). I certainly mistimed an oil pullback, so let’s officially cut this one loose. Just like the markets, oil is moving in only one direction right now, so let’s not fight against the current. Sell.

When it comes to SDS and WYNN, let’s maintain both positions. Everyone knows that the markets can shoot lower at any given moment, so I want to use the extended September expiration dates to maintain exposure to this pending move. In fact, if the time comes to add to either position, you’ll be the first to know.

On the flipside, let’s reload the call side of our ledger by playing calls on the unique combination of Massey Energy (MEE – NYSE) and Whirlpool (WHR – NYSE).

Now I admit, I originally targeted WHR for a put play. But to be honest, the upside momentum is simply too strong to peg a reversal point. Therefore, we’re now dip-buyers. You see, the more I thought it through, the more I felt like WHR speculators are injecting steroids into the stock based on the idea that the government-sponsored “Cash for Clunkers” program might get extended into laundry appliances, refrigerators, dishwashers, and other household appliances – all of which are WHR’s core business. With names like Whirlpool, Maytag, KitchenAid, Jenn-Air, Admiral, Magic Chef, and Polar (just to name a few), let’s ride this momentum for all it’s worth.

WHR

PLAY: Buy the WHR September 65 Calls (WHR IM) at or under $2.65, good for the day. Place a protective stop limit at $1.40 and a sniper sell at $4.00.

Next up is Massey Energy (MEE – NYSE), a company that produces and sells bituminous coal to electric utilities, steel manufacturers, industrial customers, and energy traders. As of this January, MEE operated 160 wells around the Appalachian Basin. If you listen to the news, you know that China is once again becoming a primary coal buyer. In fact, coal was China’s top import in Q2, and this is a trend that looks to continue into the fall. From a chart perspective, MME is getting set to continue their upside push, so let’s play this move using MEE September calls.

MEE

PLAY: Buy the MEE September 30 Calls (MEE IF) at or under $2.65, good for the day. Place a protective stop limit at $1.40 and a sniper sell at $4.00.

And as always…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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