Add AEM Puts

Preparing for Gold Profit-Taking

By Bryan Bottarelli
Wednesday, September 16, 2009 3:37 PM EDT
Wed, 16 Sep 2009 19:37:00 GMT

PLAY: Buy the AEM October 70 Puts (AEM VN) at or under $3.80, good for the day. Place a protective stop limit at $2.10 and a sniper sell at $5.40.

Dear Bottarelli Research Member,

Going into tomorrow’s trading, we’re currently holding the DO October 95 Calls (DO JB), which we entered earlier today for $4.80.

We’re also holding our downside market hedge, in the form of the SDS September 45 Calls (SSH IS). In many respects, owning this ultra-short hedge play has given us the freedom to aggressively play upside calls over the last week without fear of a sizable market crash. As you know, this has allowed us to lock in call gains of 20.00%, 43.33%, 26.53%, 21.88%, and another 20%.

With September expiration coming at the end of this week, I’d like to extend this strategy of owning market downside exposure via an ultra-short hedge, while also playing the market’s upside using quick-moving and high-beta companies (such as GMCR, LVS, DO, etc.). Going into tomorrow, I’d like to roll our SDS September 45 Calls (SSH IS) into a cheap October SDS call position. To accomplish this, go ahead and sell your SDS September 45 Calls (SSH IS) and then simultaneously purchase the SDS October 40 Calls (SSH JT) at or under $2.00. Think of this as re-upping your car insurance premiums for the year.

At the same time, we’re also seeing gold plays tread water for the entirety of today’s trading session, which I find odd considering that the markets pushed higher throughout the afternoon while gold prices remained firm. To me, this could indicate that gold stocks are set for a breather, which will most likely come in the form of profit-taking. Faced with this situation, here’s what I’d like to do…

Let’s go ahead and hedge our upside call play on oil (currently represented by our DO calls) by adding downside exposure in the metals market. To accomplish this, I’d like to add AEM October 70 Puts (AEM VN).

AEM

First thing this morning, I indicated that we could see a powerful upside move in gold plays such as ABX and AEM. But as you can see from the AEM chart above, the stock has remained stuck in the mud all day long. Therefore, it could be time for shares to take a breather. Let’s profit off any quick downside push by adding puts now.

PLAY: Buy the AEM October 70 Puts (AEM VN) at or under $3.80, good for the day. Place a protective stop limit at $2.10 and a sniper sell at $5.40.

At the same time, continue watching the movements of LVS and WYNN, each of which have given back of all of this morning’s gains and now trade in the red. If this proves to be a nice call-buying opportunity, I’ll alert you immediately. But for now, sit tight.

Until tomorrow,

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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