Add TLT Calls

Adding Protection

By Bryan Bottarelli
Wednesday, September 02, 2009 11:15 AM EDT
Wed, 2 Sep 2009 15:15:00 GMT

PLAY: Buy the TLT September 96 Calls (ILT IR) at or under $1.70, good for the day. Place a protective stop limit at $0.95 and a sniper sell at $2.50.

Dear Bottarelli Research Member,

First and foremost, congratulations on your FAZ winner from this morning. It’s becoming clear that the financial sector, which lead the market rally, is now beginning to unwind. If this continues, we could be in for some red market days ahead. As you can see from the S&P 500 chart below, the bears have re-introduced themselves to the bulls, sparking yesterday’s massive downside push. I can just hear the bears now saying, “Remember us? We’re back.”

SPX

But at the same time, the bulls have been very resilient, buying into every market dip. Therefore, we must continue to remain nimble and cautious. In many respects, that’s why we used yesterday’s sell-off to establish upside call positions on AAPL September 170 Calls (APV IN) and ESI September 105 Calls (ESI IA).If the markets do bounce, we’ll be in great shape to lock in some upside winners. But at the same time, we cannot ignore the sentiment shift that’s now creeping into play. Therefore, I’d like to add one new “quasi-protective” position to our ledger, while keeping an eye on a handful of others.

The first position comes in the form of the iShares Barclays 20+ Year Treasury Bond (TLT – NYSE), which corresponds to the movements of the United States Treasury market via the Barclays Capital 20+ Year U.S. Treasury index. In the most simplistic form, a market sell-off would cause investors to seek shelter, which would mean a shift out of stocks and into bonds. This could be the catalyst that pushes the TLT past the $100 level. Let’s get positioned for this move now!

TLT

PLAY: Buy the TLT September 96 Calls (ILT IR) at or under $1.65, good for the day. Place a protective stop limit at $0.95 and a sniper sell at $2.50.

At the same time, I’m keeping a very close eye on both gold and oil plays. Specifically, two of my favorite gold plays (ABX and AEM) are shooting higher today, which could indicate that gold is gearing up for a run to $1,000 per ounce. If this momentum continues, we’ll jump onto the bandwagon by playing calls.

ABX

AEM

Let’s also watch oil prices. The dip under $68.00 could lead to dip-buying, which makes a case for an oil-service play like Diamond Offshore Drilling (DO – NYSE), especially as the company is tapping the 50-day moving average on the daily chart.

DO

As always, I’ll monitor everything and alert you the moment it’s time to act.

Until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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