The Volatility Trader
105 W. Monument Street
Baltimore, MD 21201
Tuesday, August 22, 2006
Email – #170
Dear Member,
Thank you for your patience while we waited out this market. Right now, it appears to be a saner place. And we have some new positions to initiate…
But first, I’d like to introduce you to Mark Whistler, a lead analyst for Mt. Vernon Research and author of Trading Pairs: Capturing Profits and Hedging Risk with Statistical Arbitrage Strategies. Mark is one of the country’s top researchers, and his work has been featured in OptionInvestor.com, Active Trader Magazine and BullMarket.com. And I am delighted to tell you he’s agreed to come on board.
His analysis is top-shelf and I’m sure you’ll find his advice extremely profitable.
Today, he and I have uncovered two opportunities…
Action To Take:
Research in Motion (Nasdaq: RIMM)
First, we will pick off a quick gain from Research In Motion (Nasdaq: RIMM), as the stock pulls back from the recent rocket-like upward moves. The stock had a tough time earlier this spring, but recent analyst upgrades and changes to earnings estimates caused a torrid rebound. But, in the last 14 sessions, only two have been down days. Now, with the stock falling back from piercing the upper Bollinger Band, smart investors are looking for a pullback into the 50-day moving average and the $70 region.
But we’re not even going to wait that long. Buying the September 2006 $70 puts will create a quick 30% or more, and we will close the options trade as the underlying stock nears $75.
TRADE INSTRUCTIONS: Buy the September 2006 $70 puts (RUP-UN). Do not pay more than $0.50. Immediately close the trade if the underlying stock moves above $81.71, otherwise, stay tuned for trade guidance.
Chart of Research In Motion
KB Homes (NYSE: KBH)
Tomorrow should begin to move this trade in the right direction, should the MBA Mortgage Applications Survey show any stabilization in purchasing applications, which are 23% lower than this time one year ago. In addition, existing homes sales are out tomorrow as well; we’re looking for a number greater than 6.62 million.
Overall, the housing markets are expected to continue to slide south throughout the remainder of the year; thus, we are not trying to call an all-out reversal. Instead, this trade is meant specifically to capitalize on brief buying momentum as nervous shorts close positions after eight months of bearish trading.
On a technical level, the stock is sitting just below the 50-day moving average, and appears to be forming a “cup and handle.” From here, a quick shot to the $46 region should bring bulls in off the fence, and push the September 2006 $45 option in the money, setting up a quick 30%-40% gain.
TRADE INSTRUCTIONS: Buy the September 2006 $45 calls (KBH-II) for no more than $1.25. Immediately close the trade if the underlying stock falls below $40; otherwise, stay tuned for more guidance.
Chart of KBH Homes
Good trading,
Mark Whistler
