Add Cheap Insurance
Add SDS Calls for Less than $1.00
PLAY: Buy the SDS February 34 Calls (SSH BH) at or under $0.95, good for the day. Do not place a protective stop limit or sniper sell, as this play is a hedge designed to protect our upside calls.
Dear Bottarelli Research Member,
Like a leaky faucet, the major market averages have spent most of the week trickling their way to new highs. But going into tomorrow, this slow trickle could gather some serious momentum.
After all, Intel (INTL – NASDAQ) is getting ready to offer the first glimpse at how technology earnings will shape up today after the close. And then, before tomorrow’s bell, JP Morgan (JPM – NYSE) will offer investors the first look at how financial earnings will shape up.
All told, that’s two powerful market sectors that are ready to offer a glimpse at what’s ahead for 2010. As I noted this morning, the large purchase on the S&P pit indicates that the big money traders are expecting the rally to continue. It’s certainly clear that the path of least resistance is higher, which is why we’re still holding upside positions on FDX February 90 Calls (FDX BR) and WHR February 85 Calls (OFW BQ).
But in this market, it’s never a smart tactical idea to be exposed entirely to one side going into a rash of influential earnings reports. For example, if Intel and JP Morgan both disappoint, we could witness some strong selling pressure.
Now I admit, the market has continued to shrug off weak news (like it’s doing today with the weak retail numbers) to rally higher. But nevertheless, we must respect the downside without abandoning the upside trend that’s currently in place. Therefore, faced with this situation, it makes sense to add an ultra-short hedge position using the UltraShort S&P500 ProShares (SDS – NYSE).
As I’m sure you know, the SDS moves at a rate of twice the inverse of the S&P 500 index. Therefore, if the S&P moves down 2% tomorrow, the SDS is designed to move up 4%. Since we currently have calls on FDX and WHR, adding a cheap SDS call play could properly balance out our directional risk, and not leave us exposed to a potential market drop. So, let’s commit a small amount of capital to this hedge position, and protect ourselves from an Intel- and JP Morgan-related sell-off. Here’s the play…
PLAY: Buy the SDS February 34 Calls (SSH BH) at or under $0.95, good for the day. Do not place a protective stop limit or sniper sell, as this play is a hedge designed to protect our upside calls.
Also, as a table-setter alert, I want to keep an eye on Ctrip (CTRP – NASDAQ).
Today, the stock is popping based on the news that China’s third largest airline had a 19% increase in passenger traffic last quarter. This is offering investors the idea that online travel bookings might be up for CTRP, and thus sparking today’s pop. If this momentum continues, we could have a nice upside call play. Or, if today’s news proves to be a one-time pop, we could have a nice put play to short. Either way, I’m watching closely. More to come.
Until then…
Lock and load!
Sincerely,
© 2012 CSR Group, LLC. All rights reserved. Published in USA.
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