The 100 Meter Dash

 | Aug 29, 2011 | 2:30 PM EDT  | Comments
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Stock quotes in this article:

dsw

,

mon

,

pcln

Trades

Equities have made a strong run over the last five days from the bottom of the current and very-wide trading range all the way to the top.

The way we are repeating these trips up and down, it's as if Priceline (PCLN) has great deals each week alternating between the bulls and the bears.  There would be a better chance at a breakout or breakdown if we could get away from challenging support and resistance after bouncing off the opposite direction.  In other words, moving directly from support all the way to resistance, or vice versa, without much consolidation is like trying to race the 100 meter dash after racing a mile. Your times likely won't be as good vs. that same 100 meter dash after only running 100 or 200 meters prior to it. 

DSW (DSW) is the only earnings play before the bell tomorrow I am interesting in playing. This one is a bit tough because option volume is a bit thin and the strikes are spread fairly wide, but the shoe trade has been a good one from the long side, so I will continue to ride it. I am buying the September $45-$50-$55 unbalanced call butterfly in a long 2 by short 3 by long 1 ratio with the Sept $45 call costing around $3.70, the short September $50 calls being sold for $1.30, and the September $55 call being bought for $0.40. The total is $3.90 on this trade.

DSW has resistance at $48, and that, along with $50.50 are my upside targets.  If DSW were to disappoint, then I think $43 is the downside target. The company has a reasonable P/E with no debt and a huge 23% short interest, so better than expected numbers could move this stock. This is also one I think will start seeing buyout interest if Collective Brands (PSS) finds a bidder.

Monsanto (MON) is getting support from Goldman Sachs and Morgan Stanley on today's selloff.  I am going to use this weakness to add some MON here, but I am using a modified collar to initiate a position.  I have purchased the stock at $69.73. Simultaneously, I am buying the October $67.50- $62.50 for a cost of $1.40 with the $67.50 being bought $3.20 and the $62.50 being sold for $1.80. Also, I sold the October $72.50 call for $2.50. The total cost for the trade is $68.63. My loss protection is limited here, but I am only at risk $1.13 all the way down to $62.50 while I have a $3.87 upside potential.

Also, I will most likely catch a $0.28 dividend in October on the shares. If the stock is called away before the dividend because it runs over $72.50, I really won't complain much since that means I'll have a fairly good return on my hands in a short timeframe. I have no problem owning shares of MON under $62.50 and there is big support in that area, so it makes a logically strike to use on the short side of the spread. In the current trading environment, this is a preferred approach until volatility subsides a bit more.

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