Editor's Note:

Stocks are up three days in a row. The recent strength is encouraging but we could see another sell-off as we near the weekend. Trade carefully. If you have gains, consider taking some money off the table.

A close over 1206 on the S&P500 would bolster my confidence in the market but the larger pattern (like the bear-flag pattern) could still be in play.

You may want to consider a market-neutral strategy. Research In Motion (RIMM) is due to report earnings after the closing bell on Thursday. The stock has not participated in the market's rebound. Investors could be expecting another disappointing quarter. That sets up an opportunity for an upside surprise. Whatever the results are from RIMM the stock will most likely see a big move one way or the other.

There are multiple ways to play this event. Two of them are an option straddle or an option strangle. With RIMM near $30 you could buy an option straddle at the $30.00 strike price (this involves buying both a call and a put at the same strike). Or you could buy an option strangle, which involves buying an out of the money call and an out of the money put (I wouldn't make them too far out of the money).

Personally, I'd probably look at October options but you could actually trade Septembers. Buying options near the close on Thursday would give you one day for this trade to work before Septembers expire after the close on Friday. If this trade works, it could be a big win. If it doesn't you'll probably lose the entire trade with September strikes.

- James


NEW DIRECTIONAL PUT PLAYS

iShares Russell 2000 ETF - close: 70.42 change: +1.24

Stop Loss: n/a
Target(s): see below
Current Option Gain/Loss: + 0.0%
Time Frame: 1 or 2 days
New Positions: Yes, see below

Company Description

Why We Like It:
The stock market is up three days in a row. The rally stalled right at last week's high. What are the chances that the market will see another decline as we head toward the weekend? The last couple of Friday investors have been afraid of the weekend and stocks dropped sharply. With the major indices at short-term resistance this looks like a good spot to bet on a very short-term pull back.

I would consider this a lottery ticket type of play. We're going to pick September puts. The plan is to buy our September puts at the open tomorrow (Thursday) and sell them at the close on Friday. They will expire after the closing bell on Friday. You may want to adjust your exit to Thursday's close or Friday morning instead. I would keep our position size small. We're not using a stop loss.

FYI: You might be able to enhance this play by using the double-long Russell 2000 ETF (symbol: UWM).

- Suggested Positions -

buy the SEP $69 PUT (IWM1117U69) current ask $0.60

Annotated Chart:

Entry on September 15 at $ xx.xx
Earnings Date --/--/--
Average Daily Volume = 80 million
Listed on September 14, 2011