Option Investor
New Plays

A Big Decision To Make

HAVING TROUBLE PRINTING?
Printer friendly version

Play Editor's Note:

Traders have a big decision to make. What is your market bias? Ever since the bounce began I've been saying that this is just a bear-market rally. Further discussion outlined that a bear-market rally could see gains in the +10% to +20% range. The S&P 500 came close to +19% and failed at round-number resistance near 800.

The decision you have to make is... do you initiate trades expecting the bear-market decline to resume? Or do you plan a strategy to buy a dip with the expectation that the rebound will continue? There have been cases where the bear-market rally produced +30% or +40% gains off its intermediate lows.

Currently my personal bias is that the bear-market will resume. At the very least I think stocks will retest their recent lows. This bottoming process is going to be long and drawn out. Odds are against a sharp V-shaped bottom. There are definitely a lot of cross currents at work. The FOMC's decision last week to buy treasuries is going to be short-term bullish while creating inflation down the road. Meanwhile the AIG bonus mess and unconstitutional moves by Congress could have a very negative impact on the markets.

The play section of this newsletter is about providing traders ideas and strategies with specific entry and exit points. I'm going to try and find both bullish and bearish bets because I know we have readers on both sides of the market.

FYI: two more ideas. I think ACL might be a strangle candidate. Consider buying the $95 call and $80 puts. WYNN might also be a strangle candidate right here near $20.00. I would use the April $25 call and $15 put.


NEW DIRECTIONAL CALL PLAYS

Bunge Ltd. - BG - close: 56.46 change: -0.91 stop: 49.40

Why We Like It:
BG has been screaming higher since it bottomed in early March. An above average amount of short interest may be the culprit the stock has rallied so sharply. Prior to the March bottom BG was already out performing the S&P 500. I think this trend will continue but we do not want to buy calls here.

BG is way too short-term overbought. I am suggesting that readers buy calls on a dip into the $52.00-50.00 zone. We'll use a stop loss at $49.40. If triggered our first target is $56.00. Our second target is $59.90. FYI: The Point & Figure chart is bullish with an $89 target. My time frame is less than four weeks.

Suggested Options:
We are suggesting the April calls. More conservative traders might want to consider the July calls.

BUY CALL APR 50.00 BGW-DW open interest=1838 current ask $8.20
BUY CALL APR 55.00 BGW-DK open interest=2720 current ask $4.70

Annotated Chart:
BG

Picked on    March xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           04/23/09 (unconfirmed)
Average Daily Volume =       1.9 million  
Listed on March 21, 2009         


CME Group - CME - close: 228.62 change: +0.69 stop: 192.50

Why We Like It:
CME was a huge out performer once the stock cleared significant resistance at $200.00 and its 100-dma. It looks like the stock has built a real bottom over the last few months and with the market bouncing volumes for the CME could be growing. We do not want to chase it here but we can be ready to buy the dip.

I am suggesting that readers buy calls on a dip in the $205-200 zone. We'll start with a stop loss at $192.50. Our first target is $229.00. My time frame is less than four weeks.

Suggested Options:
Our trigger is $205.00. We want to buy the April calls. More conservative traders might want to look to June calls for more time.

BUY CALL APR 200 CME-DA open interest= 544 current ask $36.00
BUY CALL APR 210 CME-DJ open interest=1078 current ask $28.70
BUY CALL APR 220 CME-DK open interest=1352 current ask $22.00

Annotated Chart:
CME

Picked on    March xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           04/23/09 (unconfirmed)
Average Daily Volume =       1.6 million  
Listed on March 21, 2009         


PowerShares DB Agriculture - DBA - cls: 25.01 chg: +0.03 stop: 23.25

Why We Like It:
It was the commodity-related names that really helped lead the market higher last week, especially following the move in the U.S. dollar. One way to play this strength is the DBA agriculture ETF.

I am suggesting that readers buy calls on a dip in the $24.25-23.50 zone. We'll use a tight stop loss at $23.25. If triggered our target is $26.90. My time frame is four to eight weeks.

Suggested Options:
Our trigger is $24.25. We want to use the April or July calls.

BUY CALL APR 22.00 DEU-DV open interest= 287 current ask $3.30
BUY CALL APR 24.00 DBA-DX open interest=1977 current ask $1.65
BUY CALL APR 26.00 DBA-DZ open interest=10146 current ask $0.60

BUY CALL JUL 24.00 DBA-GX open interest= 833 current ask $2.75
BUY CALL JUL 26.00 DBA-GZ open interest=1126 current ask $1.80

Annotated Chart:
DBA

Picked on    March xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           00/00/00
Average Daily Volume =       1.5 million  
Listed on March 21, 2009         


NEW DIRECTIONAL PUT PLAYS

Burlington Northern - BNI - cls: 55.06 change: -1.67 stop: 58.55

Why We Like It:
The oversold bounce in BNI was anemic. Shares didn't even tag the $60.00 level. The trend of lower highs is very much intact. I am suggesting readers buy puts now. Our target is $50.25.

Suggested Options:
I am suggesting the April puts.

BUY PUT APR 55.00 BNI-PK open interest=6217 current ask $3.20
BUY PUT APR 50.00 BNI-PJ open interest=8001 current ask $1.35

Annotated Chart:
BNI

Picked on    March 21 at $ 55.06
Change since picked:      + 0.00
Earnings Date           04/29/09 (unconfirmed)
Average Daily Volume =       3.8 million  
Listed on March 21, 2009         


Carbo Ceramics - CRR - close: 29.32 change: -2.15 stop: 32.55

Why We Like It:
Shares of CRR, an oil services company that makes ceramic parts, collapses on Friday. The stock had been building a bearish pattern of lower highs and what almost looks like a bearish head-and-shoulders pattern the last few months. Friday's drop under support in the $31-30 zone is pretty bearish. Volume was big on the decline.

While I would prefer to buy puts on bounce back toward $30 or $31 we may not have that chance. I'm suggesting readers buy puts now. Our first target is $25.25. Our secondary target is $22.50. The P&F chart currently points to $23.00. My time frame is less than two weeks for our first target.

Suggested Options:
I'm suggesting the April puts.

BUY PUT APR 30.00 CRR-PF open interest= 284 current ask $2.75
BUY PUT APR 25.00 CRR-PE open interest=  10 current ask $0.75

Annotated Chart:
CRR

Picked on    March 21 at $ 29.32
Change since picked:      + 0.00
Earnings Date           04/23/09 (unconfirmed)
Average Daily Volume =       608 thousand 
Listed on March 21, 2009         


First Solar - FSLR - close: 120.37 change: -4.43 stop: 128.55

Why We Like It:
The trend in FSLR is bearish. Traders continue to sell into strength. Every time the stock fills a gap down it rolls over. Technical indicators are also suggesting more weakness ahead. The P&F chart is very bearish with an $86 target. I am suggesting readers buy puts now with a tight stop loss over last week's highs. Of course trying to have a "tight" stop on FSLR is dangerous. The stock can be very volatile with big intraday swings. More aggressive traders might want to use a stop loss above the 50-dma around $132.00.

My first target is $101 near the March lows. Due to FSLR's volatility I would consider this an aggressive trade.

NOTE: Readers might want to consider an alternative strategy. Instead of a directional put play you could try a strangle play. FSLR has pulled back to the $120 mark and if the market reverses higher again FSLR might be able to break out over resistance. For the strangle play I would consider the $140 calls and $100 puts.

Suggested Options:
I am suggesting the April puts. My time frame is less than four weeks.

BUY PUT APR 120 QHB-PD open interest= 744 current ask $11.00
BUY PUT APR 110 QHB-PB open interest=2295 current ask $ 6.80
BUY PUT APR 100 QHB-PT open interest=1876 current ask $ 3.90

Annotated Chart:
FSLR

Picked on    March 21 at $120.37
Change since picked:      + 0.00
Earnings Date           04/30/09 (unconfirmed)
Average Daily Volume =       5.2 million  
Listed on March 21, 2009         


Lockheed Martin - LMT - close: 67.78 change: -0.44 stop: 70.15

Why We Like It:
Shares of LMT were extremely oversold in early March. When the market finally bounced the stock shot from $60 to $70 in less than two weeks. The $70.00 level acted as round-number resistance and the failure on Friday is a great entry point to consider put positions.

I am suggesting readers buy puts now with a stop loss at $70.15. Our target is the $62.50-60.00 zone.

Suggested Options:
I am suggesting the April puts. My time frame is less than four weeks.

BUY PUT APR 70.00 LMT-PN open interest= 398 current ask $4.70
BUY PUT APR 65.00 LMT-PM open interest= 915 current ask $2.30

Annotated Chart:
LMT

Picked on    March 21 at $ 67.78
Change since picked:      + 0.00
Earnings Date           04/21/09 (unconfirmed)
Average Daily Volume =       4.6 million  
Listed on March 21, 2009         


Precision CastParts - PCP - close: 57.42 change: -1.45 stop: 61.05

Why We Like It:
PCP delivered a huge oversold bounce from $48 to $60 but it's failing right at long-term resistance and round-number resistance at $60.00. This looks like a great spot to consider bearish put positions.

I'm suggesting new positions now with a stop loss at $61.05, just above last week's high. Our first target is $52.50. Our second target is $48.75. FYI: The P&F chart is very bearish with a $28.00 target. My time frame is less than two weeks for the first target.

Suggested Options:
I am suggesting the April puts.

BUY PUT APR 60.00 PCP-PL open interest= 299 current ask $4.60
BUY PUT APR 55.00 PCP-PX open interest= 480 current ask $2.20
BUY PUT APR 50.00 PCP-PZ open interest= 394 current ask $0.95

Annotated Chart:
PCP

Picked on    March 21 at $ 57.42
Change since picked:      + 0.00
Earnings Date           05/06/09 (unconfirmed)
Average Daily Volume =       1.8 million  
Listed on March 21, 2009         


New Play Archives