Editor's Note:

Stocks plunged again in reaction to the S&P downgrade of the U.S. credit rating. Of course we were expecting the market to sell-off on Monday morning. I will admit I was not expecting a -6.6% drop in the S&P 500 index today. The breakdown below 1150 and 1125 is pretty ugly. There seems to be no support in this market.

When there is blood in the streets that is the time when you want to buy the market. That's an old market maxim that contradicts the "don't try and catch the falling knife" axiom. Over the weekend we added some new bullish plays and I labeled them as "lottery ticket" plays. We could win big or lose big. With that outlook in mind, I am not adding any stop losses to our current bullish plays. The market looks like it will plunge again tomorrow but I suspect we could see a bounce into the FOMC meeting. Depending on what the Federal Reserve has to say we could see an oversold, short-covering rally soon.

When the bounce does show up it's going to be big. We're talking a plus 500 point day type of short-covering rally. If we see the market gap open lower again on Tuesday readers may want to double down on their call positions to take advantage of these oversold conditions.

-James

Current Portfolio:


CALL Play Updates

Core Labs - CLB - close: 99.01 change: -4.24

Stop Loss: n/a
Target(s): 104.90, 109.75
Current Option Gain/Loss: -12.0% & +47.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
08/08 update: Wow! I am impressed with CLB today. The Dow Industrials are off -635 points, the oil OIX index is down -8.1% and the OSX oil services index is down -10% on Monday's session. Yet CLB only fell -4.1%. Today would have been a perfect excuse to sell CLB hard. Yet so far the stock has managed to maintain its long-term up trend and technical support at the 200-dma. Shares did not even come close to hitting Friday's lows. Now this doesn't mean CLB will not break down but so far support is holding.

Now the stock market and the energy sector is extremely short-term oversold and due for a big bounce. The newsletter is not adding new positions but readers, who are much more nimble than an end of day newsletter, may want to buy more calls if we see another gap down on Tuesday morning. I would probably buy the $100 strike calls.

Please note that we are removing our stop loss for this trade. You will have to make your own decision on where or if you use a stop.

Earlier Comments:
It's an aggressive trade so keep your position size small. FYI: August options expire in less than two weeks.

- Suggested (SMALL) Positions -

Long AUG $105 call (CLB1120H105) Entry $1.25*

- or -

Long SEP $105 call (CLB1117I105) Entry $2.00
08/08 we are REMOVING the stop loss for this trade
08/05 stop loss @ 95.45, under the 200-dma
08/05 play opened.
08/05 *entry price is an estimate. option did not trade today
08/04 Adjusted our strategy for the decline. New stop loss @ 95.80. New targets are $104.90 and $109.75. Buy calls if both CLB and S&P 500 are positive at the open tomorrow.

Entry on August 5 at $100.23
Earnings Date 10/20/11 (unconfirmed)
Average Daily Volume = 526 thousand
Listed on August 2, 2011


Cabot Oil & Gas - COG - close: 59.30 change: -7.57

Stop Loss: n/a
Target(s): 69.75, 72.00
Current Option Gain/Loss: - 23.0% & -24.4%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
08/08 update: Oil stocks were murdered again. The OIX index is down -8.1%. The OSX services index is down -10%. Crude oil prices plunged -6%. Shares of COG actually gapped open lower under $65.00, under the 50-dma and under our buy-the-dip entry point at $64.75. Our entry is now at $64.23. The sell-off today took COG down past $60.00 and shares are testing their 100-dma. Down -11.3% in one day is pretty tough to try and use a stop loss. We are not going to use a stop for this lottery-ticket trade.

If we see a dip to $55.00 I would use it as a new entry point to buy calls again (maybe the $55 or $60 strikes).

Earlier comments:
This is an aggressive trade. The plan was to keep our position size small to limit our risk. FYI: August options expire in less than two weeks.

- Suggested (SMALL) Positions -

Long AUG $70 call (COG1120H70) Entry @ $0.65

- or -

Long SEP $70 call (COG1117I70) Entry $ $2.25*

08/08 * entry price on the Sept. $70 call is an estimate since the option did not trade on Monday.
08/08 COG gapped open lower at $64.23. No Stop Loss.

Entry on August 8 at $64.23
Earnings Date 10/25/11 (unconfirmed)
Average Daily Volume = 1.9 million
Listed on August 6, 2011


Green Mountain Coffee Roasters - GMCR - close: 89.40 change: -6.59

Stop Loss: n/a
Target(s): 99.50, 104.00
Current Option Gain/Loss: - 7.2% & + 16.4%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
08/08 update: Our high-risk trade on GMCR is open and at a much better entry price than planned. We set a buy-the-dip trigger at $92.25 but GMCR gapped open lower at $91.26. Shares saw a brief bounce above $93.00 but faded toward $90 as the market's sell-off accelerated lower. Shares of GMCR should still have some support at the 50-dma (near $88.50) and its July lows in the $87.30-88.00 area.

We are not going to use a stop loss on this lottery-ticket trade. Readers may want to consider buying more calls if we see GMCR trade down into the $88-87 area (although you may want to use lower strikes).

Earlier Comments:
As a high-risk, speculative play we wanted to keep our position size very small. FYI: August options expire in less than two weeks. We're expecting the bounce to be fast and sharp but you may want to trade September calls for the extra time.

- Suggested (SMALL) Positions -

Long AUG $95 call (GMCR1120H95) Entry @ $2.74

- or -

Long SEP $100 call (GMCR1117I100) Entry $3.65

Entry on August 8 at $91.26
Earnings Date 12/08/11 (unconfirmed)
Average Daily Volume = 2.9 million
Listed on August 6, 2011


O'Reilly Automotive - ORLY - close: 57.51 change: -0.84

Stop Loss: n/a
Target(s): 61.75,
Current Option Gain/Loss: Unopened
Time Frame: 2 to 3 weeks
New Positions: Yes, see below

Comments:
08/08 update: You have to be impressed with ORLY's relative strength. While it did not close positive shares did try and rally this morning and only gave up -1.4% at the close. Shares did not test last week's lows, which is a show of strength. On the other hand the rebound today did fail at resistance near its 10-dma and 200-dma, which is bearish but the lack of selling probably trumps the failed rally at resistance on a day like today.

The markets closed on their low for the day, which normally does not bode well for tomorrow's open. There is still a good chance that ORLY will test its lows from last week. Aggressive traders could go ahead and buy calls now. I am keeping our buy-the-dip entry point at $56.50. More conservative traders could use a trigger closer to $55.00 instead. Use a small position size to limit your risk.

FYI: August options expire in two weeks. We're expecting the bounce to be fast and sharp but you may want to trade September calls for the extra time.

Buy-the-Dip Trigger @ 56.50

- Suggested Positions -

buy the AUG $60 call (ORLY1120H60)

- or -

buy the SEP $60 call (ORLY1117I60)

Entry on August xx at $ xx.xx
Earnings Date 10/26/11 (unconfirmed)
Average Daily Volume = 1.7 million
Listed on August 6, 2011


SPDR S&P500 ETF - SPY - close: 112.26 change: -7.82

Stop Loss: n/a
Target(s): 119.75, 122.50
Current Option Gain/Loss: -33.9% & -30.1%
Time Frame: 2 to 4 weeks
New Positions: see below

Comments:
08/08 update: Monday proved to be a disastrous day in the market. The S&P 500 index fell more than -6.6%. Volume was massive once again. This was an aggressive trade to try and catch the falling knife at what should have been support near 1150 on the S&P 500 (and $115.00 on the SPY).

Our buy-the-dip entry point was hit at $115.00 this afternoon and shares kept on falling. The market's close on their low for the day is bearish for tomorrow's open. I would expect a dip toward the $110 level. The newsletter is not adding new positions but personally if we see the SPY dip to $110 I would be tempted to buy more calls.

Please note that we are NOT going to use a stop loss on this lottery ticket trade.

Earlier Comments:
FYI: August options expire in two weeks. We're expecting the bounce to be fast and sharp but you may want to trade September calls for the extra time.

- Suggested (SMALL) Positions -

Long AUG $118 call (SPY1120H118) Entry $2.15

- or -

Long SEP $120 call (SPY1117I120) Entry $2.55

08/08 trade opened at $115.00. We are not using a stop loss.

Entry on August 8 at $115.00
Earnings Date --/--/--
Average Daily Volume = 235 million
Listed on August 6, 2011


PUT Play Updates

CBOE Volatility Index - VIX - close: 48.00 change: +16.00

Stop Loss: n/a
Target(s): 26.00, 22.50
Current Option Gain/Loss: -84.0% & -50.0%
Second Position Gain/Loss: -55.5% & - 20.0% Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
08/08 update: We were a little too early with our VIX puts last week. Of course there was no way to know that the S&P would downgrade the U.S. credit rating on Friday after the closing bell. Once that event happened we knew stocks would sell-off on Monday morning. Once again we did not know how badly stocks would deteriorate. I certainly was not expecting a +50% rise in the VIX in one day.

Over the weekend I suggested we launch another put position at the open this morning but the plan was to keep our position size very small to limit our risk.

I am suggesting we buy puts again! The VIX almost never trades at these elevated levels for very long. I'm adding another position to buy September $30 puts at the open tomorrow.

Earlier Comments:
I am not listing a stop loss on this trade. We should consider this a higher-risk, speculative trade. I'm setting our targets at 26.00 and 22.50. NOTE: August VIX options expire after the 17th of the month. You may want to buy Septembers instead.

- Suggested Positions -

Long AUG $25.00 PUT (VIX1117T25) Entry $2.50

- or -

Long SEP $25.00 PUT (VIX1121U25) Entry $4.00

- Second Position, entered at the open on Monday, Aug. 8th -
(very small positions)

Long AUG $25.00 PUT (VIX1117T25) Entry $0.90

- or -

Long SEP $25.00 PUT (VIX1121U25) Entry $2.50

- 3rd Position, listed Aug. 8th, Open Aug. 9th @ open. -

Buy the SEP $30.00 PUT (VXI1121U30) current ask $5.20

08/08 3rd position listed to buy at the open on Aug. 9th
08/08 2nd position was filled the open.

chart:

Entry on August 5 at $28.48
Earnings Date --/--/--
Average Daily Volume = xxx
Listed on August 4, 2011