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Play Editor's Note: Have you heard the term "blood in the streets"? It's part of an old Wall Street maxim to "buy when there is blood in the streets" and quite frankly I can't remember a time when there was so much "blood". Essentially it is a reminder that the market moves on emotion not rational, logical thought. Right now emotions are running high and everyone is afraid. Investors are so scared that short-term U.S. t-bills are trading with virtually zero yield (0%). Everyone is running for their lives into the presumed safety of government bonds. They have reason to be scared. Venerable Wall Street firms are falling like dominos. Fannie and Freddie have been seized by the government. Credit markets are freezing. Some countries are going so far as to close their stock markets altogether to halt the decline in stock prices.

The contrarian trade here is to buy this weakness. Unfortunately, as hard as I looked I couldn't find anything that we really wanted to buy. The best bet to me looks like buying puts on the Volatility Index (VIX) and we added that play yesterday. Speaking of the VIX, I think it will go higher tomorrow morning before reversing. If you have access during the day tomorrow may be a good entry point to buy those puts. I would use October or November strikes if you want more time. The safer bet is probably November puts.

Part of the challenge is conditioning. We're told over and over not to try and pick bottoms or to try and catch the "falling knife" and for good reason. Most of the time you're going to get hurt trying to jump in when we haven't hit bottom yet. The worst part is that when stocks do bounce from a huge sell-off they tend to bounce back fast and then you berate yourself for missing the move and not buying the "bottom". Well, we didn't know it was the bottom until after it happened. If you're a true, long-term investor then buying weakness like this is probably okay. You're going to hold that position for years. This newsletter isn't about long-term investing. We're trying to catch the quick trade and honestly this has been a tough game lately.

What I am suggesting right now is to sit back and wait for the smoke to clear. We don't have to enter bullish positions at the very bottom. We can still capture part of the move once the bounce has started. Most of the time significant bottoms get re-tested anyway so it's not like we won't get another chance. Be patient. Right now the best use of you time might be to look through the market and make notes on what stocks you would consider buying if they got low enough or near significant support.


New Calls

Ultra Dow 30 ProShares - DDM - cls: 52.79 chg: -4.50 stop: *

Company Description:
The Ultra (long) Dow 30 ProShares (DDM) is an exchange traded fund (ETF) that delivers twice the daily performance of the Dow Jones Industrial Average.

Why We Like It:
We are going to try and take advantage of the "blood in the streets" with a very speculative and highly aggressive call play on the DDM. Why the DDM? Because it will deliver twice the performance of the DJIA. Of course that is a two-edged sword. Here's the plan. Readers could look for a dip near $50.00 to buy calls on the DDM or wait and watch for when the selling begins to stall intraday tomorrow. We, the newsletter, don't have the luxury of waiting and watching so we're going to take a stab at an intraday entry point. Stocks closed at their lows today and the VIX closed at its high. Odds are good there will be some follow through lower for stocks tomorrow morning. I am suggesting readers open bullish call positions between 10:30 a.m. and noon tomorrow. We'll use 11:00 a.m. as our entry point. Our stop loss will be 5% under our entry price. Our first target is a 10% gain. We'll set a second target tomorrow once we find out what our entry price is. This should be considered a very aggressive, high-risk play. Volatility is surging and that makes the options we buy a lot more expensive. The DDM could bounce sharply but if the VIX collapses too fast our options values could actually go down short-term. Plus, we're trying to catch the proverbial knife and too often traders get cut in this sort of exercise. Sometimes the best play is to do nothing. If you're not feeling nimble then just sit out on this one (but see tonight's play editor's note).

Suggested Options:
We're suggesting readers buy calls on the DDM at 11:00 a.m. (Eastern time zone) on Thursday. Volatility is very high right now and that temporarily inflates all the option premiums. We'd pick a strike that is 3 to 5 strikes out of the money. Example if we open the play at $51.00 on the DDM then buy the $54 or $55 strike price.

***ALERT*** - I just looked at the bid/ask spread on these DDM options. These spreads are so wide they look like errors. If you can't buy these with a spread of $1.00 or less, and quite honestly a $1.00 spread is horrendous, then don't buy them! Instead consider this same play on the S&P 500 double-long (symbol SSO). I'll check tomorrow... if we have to we'll switch to the SSO.

BUY CALL OCT 54.00 DMB-JB open interest= 21 current ask $6.10
BUY CALL OCT 55.00 DMB-JC open interest= 88 current ask $5.70
BUY CALL OCT 58.00 DMB-JF open interest= 38 current ask $2.95

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume = 3.1 million
 

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