Trading is not a game of exacts. Perfectionists need not apply. Markets are made up of many irration...
Bulls and Bears
12/15/2006 12:00 am EST
Veteran options trader Jon Najarian tackles both a bullish and bearish play in the technology and energy sectors--two industries well-loved by investors. Backed by his comprehensive research, here he gives the rationale behind his trades.
"Here's a two-fer trade--one bullish play and one bearish!
"First, here is the bullish play. Cree (CREE NASDAQ GS) cut second quarter revenue and earnings targets due to lower-than-expected orders for light-emitting diodes (LEDs) used in mobile phones. Right away, brokerage firms Raymond James and Think Equity piled on the pressure when their analysts cut their outlooks for CREE as the company's shares traded down to $17.57.
"Cree's shares topped out at $35.30 back on April 7 of this year, so at less than half that price, I think we've got some real upside! To take advantage of this opportunity, I recommend telling your broker to buy the CREE March 20 Calls (CQRCD) up to 85 cents with CREE trading at $17.50 or higher. Set your sell stop at 50% down; in this case, 40 cents.
"And now for the bearish play: Valero Energy (VLO NYSE) discovered a leak in the blowdown line of a delayed coker unit at its Port Arthur, Texas, refinery. The plant has a total delayed coker-unit capacity of 103,000 barrels a day, and crude oil throughput capacity of 250,000 barrels a day. The news didn't make it out until the day after this happened, and this may be the catalyst for the 12,000 puts that our Depth Charge program (our bearish indicator) showed changing hands on that day.
"The Depth Charge ferrets out unusual selling on the bid price for stocks and options, as well as the buying of puts on the offer price. And in this case, the program uncovered the fact that someone bought 12,000 of the VLO Jan 52.50 Puts (VLOMX) for 85 cents, either as a hedge, or as a bet that the shutdown could significantly impact Valero.
"Whatever the case may be, I recommend jumping in and playing this one to the downside. Thus, I recommend telling your broker to buy the VLO Jan 52.50 Puts (VLOMX) up to $1.10 with VLO trading $55.10 or lower. Set your sell stop at 50% down, or in this case, 55 cents."
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