Our downside Dow forecast stands, and so does your current play
Continue to buy the Dow 88 June 2003 Puts (DJX RJ) between US$8.50 and US$11.50

by Bryan Bottarelli

A typical day for me starts out just like any other trader’s. I get out of bed and flip on the financial channels to check the NASDAQ, Dow, and S&P futures. I do this before putting on a pot of coffee, before showering, and even before hitting the bathroom. I simply can’t get the day started without knowing how the markets will open.

Flipping on the TV on the morning of September 11, I noticed something very eerie. And although I was feeling exactly how everyone else in the country was feeling that morning, it had nothing to do with any stories of heroism, grief, or mourning.

You may not have noticed, but on the morning of September 11, the S&P Futures were trading at exactly 911. It sure was a strange sight. Later that evening, the numbers drawn in the New York Lottery were 9-1-1. Blows your mind, doesn’t it?

Moving on to the position at hand

I am writing to you on September 12, 2002. Right now, the Dow is trading at around 8,500. With Adam’s downside target still standing at 7,399, that gives you a little over 1,000 more points for the Dow to fall. Therefore, I’m reiterating the advice I gave to you in last month’s article: buy the Dow 88 June 2003 Puts (DJX RJ) anywhere between US$8.50 and US$11.50 per contract.

As I write, this option trades between US$10.00 and US$10.50. Those of you who got in last month around US$8.50 are seeing the beginnings of a nice 15% gain. As the Dow continues struggling to find its legs, I feel your gains will move even higher.

If nothing else, this put option acts as a great way to protect your long positions in case of a further selloff. As a general rule, financial markets do not react well to uncertainty. With all the talk about Iraq lately, the level of uncertainty and jitters is higher than ever. Even throwing our Dow forecast completely out the window, if something happens with the U.S. and Iraq you’d want to have this position in your portfolio as protection against a violent market selloff.

How you profit

In case you didn’t catch my explanation of how this option moves up as the Dow moves down, here’s a quick recap. This option gives you the right to sell the Dow for 8,800 up until the third week of June, 2003. The exit point I’m targeting for you 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—netting you a gain anywhere between 34% and 50% if you enter the position today. Assuming typical volatility and time decay, this option goes up in value US$0.80 to US$1.00 for every 100 points the Dow goes down.

Action Alert: the Dow 88 June 2003 Put (DJX RJ) remains a buy at levels up to US$11.50 per contract.