The Volatility Trader
105 W. Monument Street
Baltimore, MD 21201
Thursday, September 28, 2006
Email – #194
Dear Volatility Trader Member,
Yesterday, at around 2 P.M., I sent out the following alert:
Buy the October American Eagle Outfitters $45 put (AQU-VI) at no more than $1.65. The initial stop will be a close above $46.50.
Here’s why we’re making the trade:
The stock is trading 45% higher than its 200-day moving average, and looks set for a pullback. The option is trading at its theoretical value, and should gain ground significantly as the stock takes a breather.
Within the sector, Nike (NYSE: NKE) is leading the way after reporting strong earnings last week. However, the stock is now trading at the high end of its range, and is hitting resistance. That means technical traders are on the verge of exiting their long positions.
Durables Drifting Down… And A Chance To Profit From The GDP Numbers
The durable goods report yesterday revealed that new orders were down, with inventories beginning to rise. Though the report doesn’t paint a completely negative picture, it does allude to the fact that there is still some trepidation in the economy.
Finally, the U.S. second-quarter GDP figures did show a downward revision of annualized growth from 2.9% to 2.6%. On the whole, this means the economy is growing at a stable pace for now, and will also give the Federal Reserve continued reason to hold the Fed Funds rate steady at 5.25%.
But here’s where we will profit from the American Eagle trade…
I expect the final second-quarter report to show some weakness in consumer spending – and it’s this that will be one of the key reasons behind the slower annualized growth rate. This news should be enough to spook investors and prompt them to begin taking profits in retail stocks. Although we won’t see an all-out turnaround, we should see some anxious investors start taking money off the table.
Exit is everything,
Mark Whistler
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Current Portfolio:
Stock or Option: American Eagle Outfitters Oct 2006 $45 put (AQU-VI)
Current Price: $1.70
Comments: Buy puts. Sell puts if AEOS closes above $46.50
Stock or Option: TXU Corp (NYSE:TXU)
Current Price: $63.38
Comments: Sell SHORT. Buy stop is above $67.50
Stock or Option: TXU Corp Jan 2007 $55 puts (TXF-MK)
Current Price: $1.15
Comments: Buy puts. Sell puts if TXU closes above $67.50.
