This game never gets old: buy another Dow put today
Our first five netted massive profits. With 1,000 more points to shed, why stop now?

by Bryan Bottarelli

Over the last month of trading, the Dow has experienced sporadic record-setting buying sprees lasting only two or three days before evaporating in a cloud of blood-red selling pressure. Who’s buying in this market, you ask? To me, these buying binges seem to be fueled (in part) by traders fearing that they’ll miss out on “the bottom” if they don’t buy into the rally. “After all, how low can it possibly go?” they rationalize, right before clicking the “buy” button on their Schwab trading screen. But, of course, this grocery-store impulse buying style has gotten them punished each time. The money is being made—like clockwork—by those shorting the rallies.

Does it sound too easy? Maybe so. How long will profits from shorting the rallies last? Who knows? And who cares? Adam and I started buying Dow puts in the 2002 Taipan Forecast issue that hit the mail in December 2001. To date, we’ve issued five Dow put recommendations and haven’t had a loser yet. The percentage gains on the five puts were 75%, 91%, 93%, 120%, and 271%. As for timing, we’ve averaged 64 days of holding time on each position. If you ask me, the writing is on the wall. Continue shorting the rallies and ask questions once you hit your first loser. Admittedly, that’s not nearly as technical an explanation as Adam’s. (But it is a great way to avoid nasty confrontations with the wife, which, according to Adam’s rant, he’s had too many times.) That’s the difference between a technical analyst and a trader. Adam crunches the numbers, and I say “milk that cow for all she’s worth.” In other words, keep buying those Dow puts until the market tells you otherwise. If you agree, then here’s the drill…

As I write this, the Dow stands at 8,500. That’s a full 1,000 points above the 7,489 it was trading at a month ago. Should the Dow fulfill even half of Adam’s predicted downside scenario, retesting 7,500 will be a lock. To profit off this fall, here’s the option I recommend:

Buy the Dow 88 June 2003 Puts (DJX RJ) anywhere between US$8.50 and US$11.50 per contract.

This option gives you the right to sell the Dow for 8,800 up until June of 2003. Our exit point will be once the Dow retests the 7,500 level, which could happen in the next three months. At the 7,500 level, I estimate this option will be worth around US$15 per contract.

Even more enticing is that the next Fibonacci support level of 161.80% shows the Dow at a bone-chilling 4,612. At this level, your June 88 puts would trade at around US$42.00 per contract. Now that’s something dreams are made of!