Option Investor
New Plays

Railroads, Miners, and biotechs.

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New Option Plays
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Strangle Options Plays
BNI BNI None
FCX CHTT  
     
     
     

Play Editor's Note: So who do you believe? Do you believe the crowd who is calling this a bottom? Are they the same crowd who has been calling a bottom for the last 2,000 points on the DJIA? Or do you believe those calling for another 20% decline? You've heard it before but this is one of the toughest markets in history if you're trying to trade it.

I was listening to some on the street interviews recently and most people responded with some sort of "I'm just trying not to think of the market or what it's doing to my portfolio" or another version of sticking their head in the sand. Long-term they are right to stick with it if they have a 30, 40 or 50-year time horizon. If you continue with that train of thought then this massive sell-off is probably a great long-term entry point to buy stocks. Of course one has to wonder if next month will be a better long-term entry point to buy stocks another 10%, 15% or 20% lower.

If you're reading this then you're obviously a more independent-minded investor who believes that actively trading the market can out perform just a "buy-and-hold" philosophy. It's certainly been done. People have made fortunes trading the market. They've also lost fortunes. If the market happens to be going your direction then things look pretty good as the huge intraday swings can produce big returns on your computer screen. If the market isn't going your way then just wait. Tomorrow it probably will.

Traditionally if we look at the size of the sell-off, the pessimism in the market, and the extreme readings on the volatility index then there is a good amount of evidence that we're near "a bottom" but maybe not "the bottom". Stocks have been unable to build on any sort of rebound attempt. Rallies are sold hard as another chance to unload. Plus, you have plenty of pundits suggesting we're far from a bottom because everyone is too quick to try and call a bottom.

This week will probably see more volatility as fund redemptions and forced selling fight with end of year window dressing for those funds with an October 31st year-end. Now throw in an FOMC rate cut that may or may not be already priced in and add to it some serious bearish breakdowns in the last couple of days and it is almost impossible to pick a direction.

At this point I'm adding both bullish and bearish plays but generally we're going to stick with the trend, which is down. Traditionally the newsletter publishes directional put and call plays where we are buying calls or puts. Yet right now, with the volatility so high, options are incredibly expensive.

A smarter trade would be to use a strategy that sells option premium. Covered calls, selling puts on stocks you want to own, or some sort of credit spread seems like the better strategies in this environment. As I wrap up keep in mind that this month has taught us that volatility can always get higher and stocks can go lower than you or I expect. There is nothing to suggest that trend of surprises will change.

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NEW DIRECTIONAL CALL PLAYS

Burlington Northern - BNI - cls: 80.00 chg: -1.58 stop: 73.85

Why We Like It:
Railroad giant BNI has been consistently bouncing from support in the $75-74 zone for months even during this volatile time in the market. We want to buy calls on another dip near support. Our suggested entry zone is the $75.50-74.00 region with a stop loss at $73.85. If triggered our first target is the $79.95 mark. We unload most of our position there. We are listing a secondary, more aggressive target at $84.00. Note: BNI is also a short-term put play as we try to catch the drop to $75.

Suggested Options:
Our suggested entry point is $75.50. We're suggesting the November calls. These calls will be cheaper when we're triggered.

BUY CALL NOV 75.00 BNI-KO open interest= 549 current ask $8.10
BUY CALL NOV 80.00 BNI-KP open interest=1593 current ask $4.80

Annotated Chart:
Burlington Northern Picked on October xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/23/08 (confirmed)
Average Daily Volume = 5.1 million

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Freeport McMoran - FCX - close: 24.86 change: -1.42 stop: 18.45

Why We Like It:
Shares of copper and gold producer FCX have just been crushed as investors liquidate stocks or sell them on fears of the global slowdown. Eventually this stock is going to get so cheap that people will pile in. Currently the stock's P/E is nearing 3 so I'm not sure how much cheaper it can get. Here's the plan. FCX seems to have some heavy support in the $20 region. We're suggesting readers buy calls on a dip into the $21.00-20.00 zone. We'll use a stop loss at $18.45. Our first target is $29.00. Our secondary target is $37.50.

Suggested Options:
We are suggesting the December options. They're a little more expensive but we get more time. Remember, they'll be cheaper when FCX hits our entry point at $21.00.

BUY CALL DEC 25.00 FCX-LE open interest= 485 current ask $4.90
BUY CALL DEC 30.00 FCX-LF open interest=1817 current ask $3.00
BUY CALL DEC 35.00 FCX-LG open interest=1743 current ask $1.76

Annotated Chart:
Freeport-McMoran

Picked on October xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/21/08 (confirmed)
Average Daily Volume = 20 million

NEW DIRECTIONAL PUT PLAYS

Burlington Northern - BNI - cls: 80.00 chg: -1.58 stop: 82.35

Why We Like It:
While BNI has continued to bounce from support near $75-74 the stock seems destined to retest that level again. We want to try and catch the drop with a quick put play. We'll use a stop above Friday's high. Our target to exit will be $75.50. This is where we would switch directions and buy calls.

Suggested Options:
We're suggesting the November puts.

BUY PUT NOV 80.00 BNI-WP open interest=9621 current ask $4.70
BUY PUT NOV 75.00 BNI-WO open interest=10018 current ask $2.85

Annotated Chart:
Burlington Northern

Picked on October 26 at $ 80.00
Change since picked: + 0.00
Earnings Date 10/23/08 (confirmed)
Average Daily Volume = 5.1 million

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Chattem Inc. - CHTT - close: 67.73 chg: +0.32 stop: 70.75

Why We Like It:
CHTT has been pretty consistent with reaffirming its earnings guidance but in this environment investors really don't care. The stock's recent rally attempts have failed. Shares are breaking down from a very common two-week consolidation phase. We're suggesting readers buy puts with a stop loss above Friday's high. We're setting two targets. Our first target is $61.50 near the October 2008 lows. Our secondary, more aggressive target is the 58.00 level near its summer 2008 lows. FYI: I would consider this a more aggressive play because CHTT doesn't have a lot of volume and the option spreads are a little wide!

Suggested Options:
We are suggesting the November puts. More conservative traders may want more time so consider the December puts.

BUY PUT NOV 70.00 HQT-WN open interest= 56 current ask $6.80
BUY PUT NOV 65.00 HQT-WM open interest= 35 current ask $4.10
BUY PUT NOV 60.00 HQT-WL open interest=302 current ask $2.35

Annotated Chart:
Chattem

Picked on October 26 at $ 67.73
Change since picked: + 0.00
Earnings Date 09/25/08 (confirmed)
Average Daily Volume = 400 thousand

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