Adding a Safety Net

Add AMZN Calls

By Bryan Bottarelli
Friday, August 28, 2009 2:49 PM EDT
Fri, 28 Aug 2009 18:49:00 GMT

PLAY: Buy more SDS September 45 Calls (SSH IS) at market, good for the day.

PLAY: Buy the AMZN September 85 Calls (QZN IQ) at or under $1.80, good for the day. Place a protective stop limit at $0.90 and a sniper sell at $3.00.

Dear Bottarelli Research Member,

To follow up on this morning’s comments, I think the best tactical strategy right now is to establish a position that gives us long exposure on technology and short exposure on financials. Going into today’s close, we’ll leg into one side of this position now, and continue to watch the markets for the ideal time to jump into the second part of the trade.

At the same time, gold prices have also been moving up, which supports the idea of adding an upside safety element into our trading ledger via gold calls. So using this positioning backdrop as a blueprint, let’s dive into today’s new plays.

First and foremost, I’d like to once again add cheap downside insurance to our ledger by carefully adding another small amount of SDS September 45 Calls (SSH IS). In many respects, this ultra-short position is a pseudo-financial play, since the S&P 500 has a much larger collection of financial companies than the Dow or the NASDAQ. With the major market averages giving up their earlier gains and now dipping back into the red, let’s lower our cost basis by adding to our SDS calls. As you can see from the chart below, if the markets move south, the SDS has the ability to blast higher.

SDS

PLAY: Buy more SDS September 45 Calls (SSH IS) at market, good for the day.

At the same time, let’s get positioned in a “safety-net” play by adding upside exposure in the technology sector. Throughout the day, I’ve scanned for the most promising tech plays, with emphasis on stock formations that offer the most upside potential combined with options prices that offer the most bang for your buck. As a result of this search, two companies stand out: Amazon.com (AMZN – NASDAQ) and KLA-Tencor (KLAC – NASDAQ).

From a daily perspective, AMZN has been weak today, but I think the stock could bounce at the 50-day moving average. Therefore, buying today’s dip could be a nice play, especially with a “back to school” catalyst on the horizon. Best of all, their September options are very cheap. The AMZN September 85 Calls, for example, are only $1.75 out of the money, yet they’re trading for under $2.00. For a high-beta stock like AMZN, these calls can pop back into the money in a moment’s notice. Therefore, let’s go ahead and add these calls to our trading ledger now.

AMZN

PLAY: Buy the AMZN September 85 Calls (QZN IQ) at or under $1.80, good for the day. Place a protective stop limit at $0.90 and a sniper sell at $3.00.

In terms of KLA-Tencor (KLAC – NASDAQ), they’re a semiconductor and microelectronics manufacturer who also dabbles in LED, data storage, solar, and other semiconductor/wafer-related industries. As you can see from the chart, the stock wants to push towards a new 52-week high, but today’s weak market internals pushed it back down. On any strength leading into next week, I’d expect to see these new highs achieved. I’ll keep this one on my radar screen.

KLAC

I’m also keeping an eye on Barrick Gold (ABX – NYSE). As a quick refresher, ABX owns the industry’s largest gold production (7.7 million ounces in 2008). They also have the largest gold reserves of 138.5 million ounces. They generated $2.2 billion of operating cash flow in 2008 and are sitting on $1.4 billion in cash. In short, they’re the best gold company in the world. I personally think that gold prices have found a nice support level at $950, which could spark a rally to $1,000 by year’s end. Therefore, be on the lookout for ABX calls soon.

ABX

And finally, I still could love nothing more than to short the snot out of Prudential Financial (PRU – NYSE). As I mentioned yesterday, the financial and life insurance firm has aggressively rallied, but is now showing signs of fatigue. At one point yesterday, the stock was down over $2.00 (noted by the long candlestick formation) but luckily, it was able to use the intra-day market reversal to recoup all of their earlier losses. Going forward, I feel that PRU will revisit these downside levels. Therefore, on any sign of weakness, we’ll pounce on PRU puts. Stay tuned.

PRU

And as always…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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