Option Investor
New Plays

Speculative Bet on a Bounce

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Play Editor's Note:
The S&P 500's bounce from support near 820 was almost perfect. Stocks are very short-term oversold and due for a rebound. I think the rebound might last a couple of days, maybe more. In an effort to try and capture some of the bounce I'm listing a few aggressive, bullish candidates below. My larger market outlook is still bearish but we have to wait for the next entry point before considering new put positions.

FYI: I really wanted to add KALU as a new bullish candidate tonight. The stock looks poised to breakout over resistance and surge toward $30.00. Unfortunately after the closing bell tonight the company issued an earnings warning for its fourth quarter. You may want to keep an eye on it since I did not see any after hours reaction in the stock price.


NEW DIRECTIONAL CALL PLAYS

Mettler Toledo - MTD - close: 70.35 change: +1.94 stop: 66.95

Why We Like It:
MTD, a maker or precision instruments, has been out performing the market the last few days. The stock has been consolidating under resistance at the $70.00 level. Today's late afternoon rally was able to push MTD above that resistance and leaves the stock poised for further gains. I do have to point out that this might be considered an aggressive, higher-risk entry point because MTD has potential resistance at the simple 50-dma directly overhead at $71.45. More conservative traders will want to consider waiting for MTD to trade $71.50 or higher before initiating positions. I am suggesting call positions now with a stop loss under today's low.

We have two targets. Our first target is $73.95. Our second target is $77.45. FYI: The P&F chart is bullish with an $84 target. We do not want to hold over the early February earnings report.

Editor's note: Upon further review I definitely want to label this a more aggressive, higher-risk play because the option spreads are so wide and put us, as option buyers, at a disadvantage. An alternative might be selling some sort of put spread but keep in mind this should be a very short-term play.

Suggested Options:
We are suggesting the February calls.

BUY CALL FEB 65.00 MTD-BM open interest= 20 current ask $8.20
BUY CALL FEB 70.00 MTD-BN open interest= 22 current ask $5.00
BUY CALL FEB 75.00 MTD-BP open interest= 12 current ask $2.75

Annotated Chart:
MTD

Picked on January 15 at $ 70.35
Change since picked:     + 0.00
Earnings Date          02/05/09 (unconfirmed)
Average Daily Volume =      624 thousand  


Potash Corp. - POT - close: 69.86 change: -0.66 stop: 64.90

Why We Like It:
This play is for the adventuresome crowd. You need to be handle a lot of volatility. Most of the technicals on POT are negative. Yet the stock has provided a perfect bounce from its late December low and produced what looks like a "hammer" candlestick, which can be a one-day bullish reversal signal. Now I am not expecting POT to rally to new highs but it can see a big bounce. The stock moves a lot so the options aren't cheap. Readers should consider this a very aggressive play.

I'm suggesting call positions now with a stop under today's low. An alternative to a stop under today's low would be a stop just under $67.00. If the market is going to rebound then we're not expecting POT to see much weakness tomorrow. Our first target is $74.90. Our second target is $79.00. Please note that POT's earnings are in a few days and we plan to exit before they announce.

Suggested Options:
We are suggesting the February options but plan to exit in just a few days.

BUY CALL FEB 65.00 PVZ-BM open interest= 334 current ask $10.50
BUY CALL FEB 70.00 PVZ-BN open interest=1333 current ask $ 7.80
BUY CALL FEB 75.00 PVZ-BO open interest=1556 current ask $ 5.60

Annotated Chart:
POT

Picked on January 15 at $ 69.86
Change since picked:     + 0.00
Earnings Date          01/22/09 (unconfirmed)
Average Daily Volume =      9.9 million  


Praxair - PX - close: 60.95 change: +0.84 stop: 58.99

Why We Like It:
PX broke out over significant resistance a few weeks ago and rallied to the $67.00 level. Since then, during the market's correction lower, the stock has pulled back toward support near $59-60 and its 50-dma. PX has bounced at this level for two, almost three days in a row now. This afternoon's bounce looks like a lower-risk entry point to speculate on a rebound higher.

I'm suggesting call positions now with a stop loss at $58.99. More conservative traders may want to exit at $64.00. I am aiming for the $65.75 mark or the 100-dma, whichever one PX hits first. FYI: The Point & Figure chart is bullish with a $78 target.

Suggested Options:
We are suggesting the February calls but plan to exit before the January 28th earnings report.

BUY CALL FEB 55.00 PX-BK open interest=  80 current ask $8.30
BUY CALL FEB 60.00 PX-BL open interest=1166 current ask $5.00
BUY CALL FEB 65.00 PX-BM open interest=1034 current ask $2.55

Annotated Chart:
PX

Picked on January 15 at $ 60.95
Change since picked:     + 0.00
Earnings Date          01/28/09 (unconfirmed)
Average Daily Volume =      2.1 million  


Financial Sector - XLF - close: 9.98 change: -0.48 stop: 9.55

Why We Like It:
It looks like most of tonight's plays are for the more aggressive trader. The financials are in a tailspin lower. The XLF financial ETF has lost 25% in the last several days. The intraday rebound today is suggesting at possible short-term bottom. Our attempt at a bullish play here is to try and catch a bounce.

I am suggesting a stop loss under today's low. An alternative stop would be under the afternoon low or about 9.69. We have two targets. Our first target is $10.75. Our second target is $11.15. More aggressive traders may want to aim for $11.50. Near 11.50 is where I would expect the bounce to fail and we can probably start looking at bearish strategies again. FYI: Volume was about 150% more than normal today.

Suggested Options:
We are suggesting the February calls.

BUY CALL FEB 10.00 XJZ-BJ open interest= 2795 current ask $1.07
BUY CALL FEB 11.00 XJZ-BK open interest=14092 current ask $0.64

Annotated Chart:
XLF

Picked on January 15 at $  9.98
Change since picked:     + 0.00
Earnings Date          00/00/00
Average Daily Volume =      102 million  


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