A Pair Of Options Plays Betting On The Bounce

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

Those of you who trade our option recommendations know that we have exited most of our option positions over the past few weeks — most notably scoring a triplet of 100% gains on July 13 and a second triplet of 50%+ gains on July 31.

Prior to the recent market wobbles, years of low volatility and steady gains had lulled investors into a false sense of security. Yet for all of the hand wringing, the current market turmoil does not even qualify as a "correction" — technically defined as a drop of 10% in the U.S. markets. Things feel so bad simply because things have been so good for so long. Want proof? I bet it doesn’t feel like both the S&P 500 and NASDAQ finished up about 1% last week.

Here’s why I think this week’s recommended options plays could be among the quickest double- and even triple-digit percentage profits we clock in Global Bull Market Alert this year.

First, the sudden jump in volatility is one of the most powerful contrary indicators and most powerful "buy" signals around for speculators. In addition, a number of widely followed technical indicators — stochastics, MACD, Fibonacci levels — all indicate that the market is oversold and has hit or is nearing a technical support level.

Second, volatility is terrific for options. The more volatile the market, the quicker and faster you can earn profits. As a general rule, (bullish) call options also tend to be relatively underpriced compared to (bearish) put options in times of market uncertainty.

Finally, it’s no secret that global stocks tend to be more volatile than their domestic counterparts. While the ride down is steeper, so is the ride up. That means that when the market does recover, double-digit percentage gains in stocks can quickly translate to triple-digit percentage gains in options.

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With that in mind, here are this week’s Global Bull Market Alert options recommendations:

Buy Brazilian commodity giant Companhia Vale do Rio Doce’s (CVRD’s) December $45 call options (RIOLI.X).

Buy Korean steel giant Posco’s November $135 call options (PKXKG.X)

These two also have the benefit of trading in two of the top-performing markets so far this year.

Again, both of these are highly speculative plays. I don’t expect to hold on to these investments for long, since they are relatively short-dated options. But if the market heads in the direction that I anticipate, we should be able to lock in some nice gains.

PORTFOLIO UPDATE

Mr. Market’s Moodswings meant that we were stopped out of Terex Corp. (TEX) stock at a loss. But let’s remember that we have already booked gains of 102% and 56% on the options. As an aside, Terex’s COO purchased $900K of Terex stock on August 3 — a sure sign of his confidence in the company’s long-term prospects.

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Mr. Market continues to grapple with his mood swings on the back of nervousness about subprime woes. As bad as current sentiment seems, the sell off in the S&P 500 just about matches the selloff in May of 2006. And emerging markets -- which sold off 26% during that correction -- actually have held up much better this time around to drop only 10.5%. This bodes well for a strong recovery.

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