HOT TRADING STRATEGIES FOR A COLD MARKET
Daily Stock Market Equity and Options Trading Commentary

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Friday, December 25, 2009

Happy Holidays to All

Happy holidays to all! I hope everything is going well for all of you. I will return to normal blogging the week of January 3, 2010. Hope trading has been very profitable, only 4 days left to trade so good luck! I expect a slow week in the markets, so it may be a good time to check out my option trading guides if you are new to options! Sphere: Related Content

Tuesday, December 15, 2009

Will Return to Blogging Soon!

Hey guys sorry I haven't been updating my blog lately. I have been extremely busy with my retail cheese website for the holiday season. I will return shortly. Happy trading! Sphere: Related Content

Friday, December 4, 2009

Volume Talks: Thursday's Hot Stocks on Heavy Volume & Detailed Vertical Put Spread Option Trade

With the major indices trading lower Thursday, there were 15 stocks which hit my screener fighting the trend on heavy volume. As always, the first thing I do is scan the list for familiar names, such as stocks which have appeared on similar scans multiple times in the past week or two (most of these names are unfamiliar so it saves a lot of time, especially with larger lists). This indicates there may be some real momentum behind the stock, and that it could trade higher in following sessions as well. Then (if and when any of the stocks I find are familiar to me), I take a look at the chart(s) to see if I can structure a potential option trade. In this post I will name 15 stocks, but only write about one in detail and outline an option trade I may look at opening in the near future.

This method is just one of the ways I use to find stocks for potential option trades. The first part of this post will show the list of stocks which traded higher on above average volume. The second part of this post requires the knowledge of stock options. To learn more about the option strategies outlined in this post, risks, pricing, calculations, other strategies, and options in general, click heres..

The table below shows the company, ticker, per share % increase, and volume increase (% increased compared to 50 day average). For your convenience I have ranked the stocks in order from greatest to least volume % change.

Company Ticker Price Change Volume Change
Almaden Minerals Ltd. (AAU) 18.75% 1414.74%
Energy Recovery, Inc. (ERII) 11.40% 613.56%
Rambus Inc. (RMBS) 8.88% 346.07%
A-Power Energy Generation (APWR) 4.16% 264.85%
GSI Commerce, Inc. (GSIC) 2.69% 240.94%
Comcast Corporation (CMCSA) 6.49% 222.56%
G-III Apparel Group, Ltd. (GIII) 7.29% 205.89%
athenahealth, Inc (ATHN) 4.03% 191.79%
VisionChina Media Inc (VISN) 11.74% 179.10%
Micron Technology, Inc. (MU) 2.57% 159.90%
Frontier Communications Corp (FTR) 1.95% 149.38%
Gafisa SA (GFA) 3.67% 95.65%
Lumber Liquidators, Inc. (LL) 2.10% 68.19%
Telvent Git, S.A (TLVT) 2.97% 49.85%
Progress Energy, Inc. (PGN) 1.17% 42.79%
E-House Holdings Limited (EJ) 4.66% 28.73%

Update:
First I will take a minute to write a quick update on a trade idea blogged about on November 19, 2009. A-Power (APWR) had a nice move higher after they reported earnings. As indicated the levels of volatility would collapse after earnings were reported (Thursday). This position was opened on Wednesday for a net credit of $120 and closed Thursday for a net debit of $35. I took profits in my vertical put spread position on strength in the underlying and IV collapse. I will continue to take profits closer to the expiration.

One stock from the list above which was also included in Tuesday's list is Gafisa SA (GFA). Before getting into the chart details, I will give a company profile from Google (GOOG) Finance below.
Gafisa SA (Gafisa) is a Brazil-based company engaged in homebuilding and real estate operations. Its core business is the development of residential buildings. It is also engaged in the development of land subdivisions, also known as residential communities, and entry-level housing. In addition, it provides construction services to third parties. Gafisa is present in 18 states and 40 cities and works on all residential segments together with its extensions: Alphaville Urbanismo SA, Fit Residencial Empreendimentos Imobiliarios Ltda and Bairro Novo Empreendimentos Imobiliarios SA. Gafisa also owns such subsidiaries as Cipesa Holding, Gafisa SPE 22 Ltda and Res. das Palmeiras SPE Ltda, among others. During the year ended December 31, 2008, the Company acquired Tenda.
By glancing at the chart, we can see the stock closed on a minor resistance level Thursday. We can also notice that there is an emerging bullish rising wedge. Depending on how the market reacts to the unemployment situation will most likely set the tone for this stock during trade Friday. If this stock trades lower in the near future it is key that it holds the 33 per share level. If this stock can trade higher and close from Thursday's 35 a share mark, I will look to open the option trade discussed below. Note that many of the stocks listed above will be good plays and many will be bad plays, I list them all to show possible breakout stocks and write about a few of the ones I am interested in trading.

Click to enlarge
Gafisa SA Option Trade: On any weakness in the underlying I would be monitoring the chart to see if the stock bounces off the 50 or 100 day moving average and ultimately holds the $33 level. If it can hold these levels I would be selling Vertical Put Spreads. This is a rather simple trade to open and only requires the use of two separate option contracts. I would be a seller of the December 35 put options and a buyer of the December 30 put options (1 for 1). If the stock trades lower the put spread will give me a larger net credit (put more money in my portfolio) but will have a lower probability of achieving maximum profitability. If the stock can hold the $35 level and move higher, I would also be a seller of this same spread, however the spread will give me a smaller net credit (put less money in my portfolio), but will also have a greater probability of achieving maximum profitability. Using December options and current market data the spread could be opened for a net credit of $120 or 24% return taking into account maintenance requirements. I believe this stock has the chance of clearing the 52 week high which was set in mid October. Depending on how this stock trades over the next few days, I may choose to finance December or January 40 strike call options with the cash received. This will lower my maximum profit a bit but give me unlimited gains if GFA trades much higher.

Profit & Loss: The maximum loss per spread using current data is $380, even if the stock trades to zero. If the stock continues higher or even sideways and come December options expiration shares of GFA are at or above current levels of 35, this strategy will return maximum profitability or the credit received of $120 per spread. The break even point for this strategy would be shares of GFA at 33.80 at December options expiration.

This is a bullish strategy and should not be considered if you think the stock will sell off in the near future. However if you feel the stock could move higher in the near future, this strategy could yield a nice gain. To get a better understanding of stock options and different option strategies please check out my Simplified Stock Option Trading E-Books.

These are just examples and are not recommendations to buy or sell any security; if you're more bullish/bearish, you’ll want to adjust the strike price and expiration accordingly.

The reason option volumes have surged in the last five years is because they are a great way to hedge your portfolio as well as create income off of your shares (see chart here). Keep in mind when using this strategy it is essential that broker commissions are low enough to profit from the position.

Disclosure: Long December APWR 12.50 Puts, Short December APWR 15 Puts

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Thursday, December 3, 2009

Volume Talks: Wednesday's Hot Stocks on Heavy Volume & Detailed Option Trade

With the major indices trading mixed Wednesday, there were many stocks which traded higher on BIG volume. The list described below is a large one which is quite unusual for a rather flat trading day. As always, the first thing I do is scan the list for familiar names, such as stocks which have appeared on similar scans multiple times in the past week or two (most of these names are unfamiliar so it saves a lot of time, especially with larger lists). This indicates there may be some real momentum behind the stock, and that it could trade higher in following sessions as well. Then (if and when any of the stocks I find are familiar to me), I take a look at the chart(s) to see if I can structure a potential option trade. In this post I will name 39 stocks, but only write about one in detail and outline an option trade I may look at opening in the near future.

This method is just one of the ways I use to find stocks for potential option trades. The first part of this post will show the list of stocks which traded higher on above average volume. The second part of this post requires the knowledge of stock options. To learn more about the option strategies outlined in this post, risks, pricing, calculations, other strategies, and options in general, click here.

The table below shows the company, ticker, per share % increase, and volume increase (% increased compared to 50 day average). For your convenience I have ranked the stocks in order from greatest to least volume % change.

Company Ticker Price Change Volume Change
Lihua International, Inc. (LIWA) 33.54% 869.35%
BioFuel Energy Corp. (BIOF) 34.21% 786.94%
China Agritech Inc. (CAGC) 17.63% 778.49%
Alcon, Inc. (ACL) 5.57% 630.53%
Alexco Resource Corp. (AXU) 16.92% 551.51%
China Marine Food Group (CMFO) 7.36% 458.91%
Claude Resources Inc. (CGR) 20.91% 457.78%
Keryx Biopharmaceuticals (KERX) 13.96% 451.29%
Northern Dynasty Minerals Ltd. (NAK) 9.97% 416.82%
Curis, Inc. (CRIS) 12.78% 372.10%
Telestone Technologies Corporation (TSTC) 10.39% 354.05%
G-III Apparel Group, Ltd. (GIII) 5.89% 341.59%
DreamWorks Animation SKG, Inc. (DWA) 9.71% 328.31%
KMG Chemicals, Inc. (KMGB) 3.44% 274.66%
P.F. Chang's China Bistro (PFCB) 9.27% 256.17%
Sirona Dental Systems, Inc. (SIRO) 5.97% 248.89%
Duoyuan Global Water Inc (DGW) 4.10% 192.68%
BPZ Resources, Inc. (BPZ) 9.14% 158.69%
NovaGold Resources Inc. (NG) 8.88% 142.56%
Copart, Inc. (CPRT) 8.79% 119.30%
UAL Corporation (UAUA) 12.47% 98.14%
Encore Capital Group, Inc. (ECPG) 4.06% 94.38%
Pepco Holdings, Inc. (POM) 1.07% 82.74%
Ulta Salon, Cosmetics & Fragrance, Inc. (ULTA) 4.12% 65.64%
MercadoLibre, Inc. (MELI) 4.45% 65.37%
Jos. A. Bank Clothiers, Inc. (JOSB) 2.62% 64.42%
TNS, Inc. (TNS) 5.38% 57.85%
Iowa Telecom Services (IWA) 2.05% 52.41%
The Warnaco Group, Inc. (WRC) 2.38% 51.94%
Warner Chilcott Plc (WCRX) 1.96% 48.27%
AsiaInfo Holdings, Inc. (ASIA) 6.21% 44.80%
Coca-Cola FEMSA, S.A.B. de C.V. (KOF) 1.15% 43.30%
Interoil Corp (IOC) 3.34% 37.93%
NutriSystem Inc. (NTRI) 1.14% 37.58%
Blue Nile, Inc. (NILE) 1.94% 36.49%
Lihir Gold Limited (LIHR) 1.88% 30.04%
SanDisk Corporation (SNDK) 3.50% 23.79%
Catalyst Health Sltns (CHSI) 2.36% 21.62%
Amazon.com, Inc. (AMZN) 2.71% 21.44%

UPDATE: First I will take a minute to write an update about three stocks outlined in previous blog posts that appeared in the list above. Today I closed my earnings option trade on SIRO (Check out trade idea here) which was just opened Tuesday. I also closed many of my short vertical put spreads on ASIA (Check out trade idea here), but kept the 30 strike calls as I will be looking to sell some of them on continued strength in the underlying. I was also out taking more profits in my MELI vertical call spread position (Check out trade idea here). I took profits today to realize a profit even if MELI expires worthless, but I strongly believe we could see MELI above 55 by expiration. Therefore I plan on keeping the remainder of my December 50/55 vertical call spread position on the table as I believe this strategy could achieve maximum profitability.

One stock from the list above I recognized from a previous breakout list is Lihir Gold Limited (LIHR). This stock first appeared after hitting similar levels in my blog post from November 24. Before getting into the chart details, I will give a company profile from Google (GOOG) Finance below.
Lihir Gold Limited (LGL) is engaged in gold mining and processing operations on Lihir Island in Papua New Guinea, at Ballarat in Victoria, Australia, at Mount Rawdon in Queensland, Australia and Bonikro in Cote d’Ivoire, West Africa. It is also engaged in exploring in Côte d’Ivoire, where it has over 20,000 square kilometers of exploration licenses either granted or under application in the Birimian greenstone belts. The Ballarat operation comprises four granted mining licenses, aggregating to an area of 22.1 kilometer, and a single granted exploration license comprising a semi-contiguous area of 126 kilometer all granted in the state of Victoria, Australia. All tenements are held 100% by Ballarat Goldfields. The Mount Rawdon operation comprises 12 mining licenses covering 39.6 kilometer. It maintains six exploration permits for minerals (EPMs) surrounding the Mount Rawdon mine site. The Bonikro operation is located on an exploitation permit granted by the government of Cote d’Ivoire.
It is clear there has been some momentum behind this stock lately, but by glancing at the chart there seems to be some resistance near 35 a share. It traded near 35 a share on November 24 and 25, before selling off severely with the rest of the market on what I call Red Friday (Black Friday). I need to see this stock trade and close above 35 a share before I would become a buyer. I am very bullish on the entire precious metal sector right now as I believe gold will continue to trade higher until the fed at least hints at a rate hike. Note that many of the stocks listed above will be good plays and many will be bad plays, I list them all to show possible breakout stocks and write about a few of the ones I am interested in trading.

Lihir Gold Limited Option Trade: As stated I would like to see this stock break above 35 a share on above average volume. The stock traded to a new 52 week high of 35.06 Wednesday before settling slightly lower. If it breaks above and holds I would look at opening Vertical Call Spreads. This is a very easy trade to open and only requires the use of two separate option contracts. As the stock trades higher the call spread will become a bit more expensive but give a higher probability of becoming profitable. For an example I'll use December options and current market data. I would open this trade a bit differently than other vertical call spreads blogged about in the past. I would simply purchase December 35 strike call contracts and sell the December 40 strike call options against them (1 for 1); however I would purchase the 35 strike calls and wait for continued strength in the underlying before I write the 40 strike calls out (this way the 40 strike calls bring larger premiums). This is because currently the December 40 calls wouldn't make a big difference in the cost of the spread. However if the stock continues higher after the 35 strike calls are purchased, writing the 40 calls could lower the cost significantly, or depending on the time until expiration I may just close the 35 strike calls for a profit. I believe if and when this stock can close above 35 a share it is a bullish sign and there will be continued strength. The December 35 strike calls can currently be purchased for $130 per option contract, making a spread would lower the cost to $120.

Profit & Loss: The maximum loss per spread is the price paid or $120, even if the stock trades to zero. If the stock continues higher and come December options expiration shares of LIHR are at or above 40, this strategy will return maximum profitability of $380 per spread or 317%. The break even point for this strategy would be shares of LIHR at 36.20 at December options expiration.

This is a bullish strategy and should not be considered if you think the stock will sell off in the near future. However if you feel the stock could move higher in the near future, this strategy could yield a nice gain. To get a better understanding of stock options and different option strategies please check out my Simplified Stock Option Trading E-Books.

These are just examples and are not recommendations to buy or sell any security; if you're more bullish/bearish, you’ll want to adjust the strike price and expiration accordingly.

The reason option volumes have surged in the last five years is because they are a great way to hedge your portfolio as well as create income off of your shares (see chart here). Keep in mind when using this strategy it is essential that broker commissions are low enough to profit from the position.

Disclosure: Long December ASIA 22.50 Puts, December ASIA 30 Calls, Short December ASIA 25 Puts, December MELI 55 Calls

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Wednesday, December 2, 2009

Most Active Stock Options December 2, 2009 & Trading Activity

The top ten most active stock option contracts traded today were:
  1. Pfizer (PFE) December 18 put Options
  2. PowerShares QQQ (QQQQ) January 43 Call Options
  3. PowerShares QQQ December 44 Put Options
  4. Nike (NKE) January 45 Call Options
  5. PowerShares QQQ December 45 Put Options
  6. Pfizer December 19 put Options
  7. S&P 500 SPDR (SPY) December 110 Put Options
  8. S&P 500 SPDR March 110 Put Options
  9. S&P 500 SPDR June 104 Put Options
  10. S&P 500 SPDR December 111 Call Options
Today I sold December 15/12.50 put spreads on A-Power (APWR) before they announce earnings tomorrow. I also opened Gold SPDR (GLD) call spreads as I think we'll continue to rally into year end. I took advantage of weakness in Google (GOOG) and Visa (V) and purchased back my covered call options as I will wait for strength to write them back out. I closed my December 16 put position for a nickel a share on Corning (GLW) this morning and the stock looks hot, so I may look at opening January call spreads if I see it continue the trend. Happy trading! Sphere: Related Content

Tuesday, December 1, 2009

Volume Talks: Monday's Hot Stocks on Heavy Volume & Detailed Vertical Call Spread Option Play

With the markets trading slightly higher Monday, there were 19 stocks that hit my radar trading higher on much more action. As always, the first thing I do is scan the list for familiar names, such as stocks which have appeared on similar scans multiple times in the past week or two (most of these names are unfamiliar so it saves a lot of time, especially with larger lists). This indicates there may be some real momentum behind the stock, and that it could trade higher in following sessions as well. Then (if and when any of the stocks I find are familiar to me), I take a look at the chart(s) to see if I can structure a potential option trade. In this post I will name 19 stocks, but only write about one in detail and outline an option trade I may look at opening in the near future.

This method is just one of the ways I use to find stocks for potential option trades. The first part of this post will show the list of stocks which traded higher on above average volume. The second part of this post requires the knowledge of stock options. To learn more about the option strategies outlined in this post, risks, pricing, calculations, other strategies, and options in general, click here.

The table below shows the company, ticker, per share % increase, and volume increase (% increased compared to 50 day average). For your convenience I have ranked the stocks in order from greatest to least volume % change.

Company Ticker Price Change Volume Change
GSI Technology, Inc. (GSIT) 37.35% 7031.54%
Somaxon Pharmaceuticals, Inc. (SOMX) 26.67% 3765.02%
Kimber Resources, Inc. (KBX) 18.41% 693.69%
China Automotive Systems, Inc. (CAAS) 14.29% 611.82%
CSG Systems International, Inc. (CSGS) 18.41% 471.65%
China Yuchai International Limited (CYD) 12.27% 421.43%
WuXi PharmaTech (Cayman) Inc. (WX) 8.94% 378.93%
Cytori Therapeutics Inc. (CYTX) 13.59% 316.56%
MercadoLibre, Inc. (MELI) 1.56% 182.28%
Encore Capital Group, Inc. (ECPG) 12.33% 109.22%
Tri-Tech Holding, Inc. (TRIT) 10.00% 74.20%
Greenlight Capital Re, Ltd. (GLRE) 4.21% 52.94%
Dollar Financial Corp. (DLLR) 2.48% 52.06%
Gafisa SA (GFA) 3.37% 46.52%
RINO International Corporation (RINO) 5.87% 37.24%
Computer Sciences Corporation (CSC) 1.94% 29.77%
Bottomline Technologies (EPAY) 5.16% 29.56%
Jinpan International Limited (JST) 3.94% 28.14%
Big 5 Sporting Goods Corporation (BGFV) 3.35% 16.52%

UPDATE:
First I will take a minute to write an update about two stocks outlined in previous blog posts that appeared in the list above Monday. I took more profits in RINO International (RINO) Monday and took some of my MercadoLibre (MELI) position off the table. RINO has been on an absolute tear the past 3 days and I decided to take more profits as it neared 34 a share. I plan on keeping the remainder of my December 30/35 vertical call spread position until expiration as I believe this strategy could achieve maximum profitability.

One stock from the list above which has appeared a number of times recently is China Yuchai International Limited (CYD). This stock had a huge move higher following earnings and traded more of less sideways until Monday. Before getting into the chart details, I will give a company profile from Google (GOOG) Finance below.
China Yuchai International Limited (CYI) owns a controlling interest in Guangxi Yuchai Machinery Company Limited (Yuchai). Through its 76.4% interest in Yuchai, the Company primarily conducts its manufacturing and sale of diesel engines, which are mainly distributed in the People’s Republic of China (PRC) market. As of June 1, 2009, the Company had a 45.4% equity interest in HL Global Enterprises Limited (HLGE). The HLGE group is engaged in hospitality and property development activities conducted mainly in the PRC and Malaysia. As of June 1, 2009, the Company had a 34.4% equity interest in Thakral Corporation Ltd (TCL). The TCL group primarily conducts distribution of consumer electronic products with operations mainly in the PRC (including Hong Kong). TCL also has other business activities relating to contract manufacturing, property development and investment in the PRC. Yuchai manufactures engine blocks, cylinder heads, crankshaft, camshaft and certain other parts.
The stock had a huge move higher to a fresh 52 week high Monday and I believe if it can hold above 16.50 a share this stock is heading even higher. Therefore, I will be writing a detailed option strategy about CYD in this post today. Note that many of the stocks listed above will be good plays and many will be bad plays, I list them all to show possible breakout stocks and write about a few of the ones I am interested in trading.

China Yuchai International Limited Option Trade: I would like to see this stock test the new support level near 16.25 on light volume and if it holds I would look at opening Vertical Call Spreads. This is an extremely simple trade to open and only requires the use of two separate option contracts. Depending on when the stock tests support will determine the option contracts used for my trade, but I'll use December options and current market data to give a detailed example. I would simply purchase December 17.50 strike call contracts and sell the December 20 strike call options against them. The theoretical price for this spread as of close Monday is roughly $45 per option spread. This will give me both limited risk and limited gains, but considering the stock has added value this fast, I am more than willing to pay some premium.

I don't expect the stock to trade above 20 a share by December options expiration, however 20 a share may not be out of the question, at least judging by Monday's option activity; the 20 strike December calls traded 165% of their open interest.

Profit & Loss: The maximum loss per spread is the price paid or $45, even if the stock trades to zero. If the stock continues higher and come December options expiration shares of CYD are at or above 20, this strategy will return maximum profitability of $205 per spread or 456%. The break even point for this strategy would be shares of CYD at 17.95 at December options expiration.

This is a bullish strategy and should not be considered if you think the stock will sell off in the near future. However if you feel the stock could move higher in the near future, this strategy could yield a nice gain. To get a better understanding of stock options and different option strategies please check out my Simplified Stock Option Trading E-Books.

These are just examples and are not recommendations to buy or sell any security; if you're more bullish/bearish, you’ll want to adjust the strike price and expiration accordingly.

The reason option volumes have surged in the last five years is because they are a great way to hedge your portfolio as well as create income off of your shares (see chart here). Keep in mind when using this strategy it is essential that broker commissions are low enough to profit from the position.

Disclosure: Long December MELI 50 Calls, December RINO 30 Calls, Short December MELI 55 Calls, December RINO 35 Calls

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Monday, November 30, 2009

Most Active Stock Options November 30, 2009 & Trading Activity

The top ten most active option contracts today were:
  1. Home Depot (HD) January 20 Call Options
  2. PowerShares QQQ (QQQQ) December 44 Call Options
  3. PowerShares QQQ January 44 Call Options
  4. S&P 500 SPDR (SPY) December 105 Put Options
  5. Financial Select Sector SPDR (XLF) January 12 Put Options
  6. S&P 500 SPDR December 109 Put Options
  7. S&P 500 SPDR December 110 Call Options
  8. Financial Select Sector SPDR January 13 Put Options
  9. PowerShares QQQ December 41 Put Options
  10. Financial Select Sector SPDR January 14 Put Options
We can see there is some unusual bearish activity in the January XLF options. I have considered hedging with a 13/12 vertical put spread for January in the XLF, but have not opened it yet. Today I sold several December 19 strike put options on the Direxion Daily Financial 3X Bear (FAZ), traded Google December 590 & 600 strike calls back and forth multiple times, and I'm currently short the GOOG 600's. I also sold some call options on Suntech Power (STP), and tried getting some premium for the December 15 strike put options on A-Power (APWR), but did not get filled. I believe today would have been a great day to get short some puts on APWR but I will try again tomorrow. As stated in a previous blog post APWR reports Thursday so I want to be short some puts going into the number as I don't mind holding the shares if it sells off below 15. I purchased back my 85 strike call options on Visa (V) as I believe it could hit 85 before expiration with the help of the market. I missed out on buying back my American Express (AXP) 43 strike calls at $40 per contract, which could have been written for $70 at close, so I'll definitely be looking to buy those back on weakness in the underlying. I did sell some premium on the Dell (DELL) December 14 put options at the day high, which I left open but could have closed for a 20% gain at close. I continued to lighten up on my position in RINO, but may leave the rest to expire as I think my 30/35 vertical call spreads have a good chance of expiring at maximum profitability. Happy trading and hope December can be as profitable if not more profitable than November was! Sphere: Related Content

Sunday, November 29, 2009

Volume Talks: Friday's Breakout Stocks & Detailed Earnings Option Trade

With the markets trading in the red on Black Friday there were 9 stocks fighting the trend which will be posted in this article. As always, the first thing I do is scan the list for familiar names, such as stocks which have appeared on similar scans multiple times in the past week or two (most of these names are unfamiliar so it saves a lot of time, especially with larger lists). This indicates there may be some real momentum behind the stock, and that it could trade higher in following sessions as well. Then (if and when any of the stocks I find are familiar to me), I take a look at the chart(s) to see if I can structure a potential option trade. As stated, in this post I will name 9 stocks, but only write about one in detail and outline an option trade I may look at opening in the near future.

This method is just one of the ways I use to find stocks for potential option trades. The first part of this post will show the list of stocks which traded higher on above average volume. The second part of this post requires the knowledge of stock options. To learn more about the option strategies outlined in this post, risks, pricing, calculations, other strategies, and options in general, click here.

The table below shows the company, ticker, per share % increase, and volume increase (% increased compared to 50 day average). For your convenience I have ranked the stocks in order from greatest to least volume % change.

Company Ticker Price Change Volume Change
A-Power Energy Generation Systems (APWR) 7.98% 214.31%
Bioject Medical Technologies Inc. (BJCT) 115.38% 697.10%
EasyLink Services International Corp. (ESIC) 13.61% 100.25%
Kandi Technolgies Corp. (KNDI) 3.96% 40.10%
MGP Ingredients, Inc. (MGPI) 10.39% 130.84%
Reliv International, Inc (RELV) 5.44% 114.58%
RINO International Corporation (RINO) 3.89% 17.32%
Tri-Tech Holding, Inc. (TRIT) 5.36% 2.63%
Deer Consumer Products, Inc. (DEER) 7.43% 34.70%

UPDATE: First I will take a minute to note a quick update on RINO which appeared on my breakout list multiple times before writing a detailed option trade in a blog post on November 17. I have taken enough profits in the Vertical Call Spreads opened to have a realized gain even if the spreads currently open expire worthless (also known as playing with the houses money). I do believe RINO has a shot at trading even higher, but I needed to take profits as the stock has soared nearly 25% over the past few trading days.

One stock from the list above which has appeared a number of times in the past is A-Power Energy Generation Systems (APWR). This stock has been on a tear lately and it is worth it to note they haven't reported earnings yet, but according to AOL (AOL) money & finance they are scheduled to do so on December 3. First I will give a company profile from Google (GOOG) Finance below.
A-Power Energy Generation Systems, Ltd. (A-Power) is a renewable energy company in China, engaged in providing onsite distributed power generation systems and micro power grids for industrial companies. It is also engaged in the production of wind turbines. The Company is engaged in designing, constructing, installing and testing distributed power generation and micro power grids as stand-alone facilities and for various customers in the steel, chemical, ethanol, cement, and food industries. A-Power design projects, subcontract their construction and installation to approved third-party subcontractors under its project oversight, and conduct testing on completed projects prior to turning them over to its customers. The size of its projects range from 5 megawatt to 400 megawatt and allow its customers, which require heavy electrical input, to recapture previously wasted heat and gas from their manufacturing processes to generate electricity.
It is clear this stock has momentum behind it, so I certainly wouldn't mind getting long. Therefore, I will be writing a detailed option strategy about APWR in this post today. Note that many of the stocks listed above will be good plays and many will be bad plays, I list them all to show possible breakout stocks and write about a few of the ones I am interested in trading.

As stated APWR is scheduled to report earnings December 3, therefore I will be looking to open the option strategy discussed below closer to the date to take advantage of increased levels of implied volatility.

A-Power Energy Generation Systems Earnings Option Trade: As you can see from the chart above support for APWR is near 15 a share, below that some minor resistance comes in at 14, however if the stock sells of below 14 it could trade down to 12.50 or even 11. I do not expect APWR to sell off below these levels, however with a bad earnings report it easily could with the amount the stock has risen in the past few weeks. Therefore I will structure an option trade around levels of support that takes advantage of the increased levels of implied volatility leading up to earnings. I have decided to be a seller of Vertical Put Spreads. This is a very easy strategy to open as it only has two different option contracts.

I would first look to sell December 15 strike put options, and purchase the December 12.50 strike put options with the cash received (1 for 1). Based on current pricing, this spread can be opened for a net credit of roughly $60 per option spread. **NOTE** Depending on where the stock is trading and how bullish I become by December 2, I may even look to sell the December 17.50 put options and purchase the December 15 strike put options and 20 strike call options with the cash received, however that is a bit more risky and complicated.

Profit & Loss: This trade will be profitable as long as APWR maintains a price of 14.40 a share (18.2% lower than current share price), and will return a maximum of $60 per option spread or 24% of margin requirement if APWR can hold above 15 a share by December 19. The maximum loss from this strategy is $190 per option spread and will result if the stock sells off significantly (by more than 29% by December expiration).

This is a bullish strategy and should not be considered if you think the stock will sell off in the near future. However if you feel the stock could move higher in the near future, this strategy could yield a nice gain. To get a better understanding of stock options and different option strategies please check out my Simplified Stock Option Trading E-Books.

These are just examples and are not recommendations to buy or sell any security; if you're more bullish/bearish, you’ll want to adjust the strike price and expiration accordingly.

The reason option volumes have surged in the last five years is because they are a great way to hedge your portfolio as well as create income off of your shares (see chart here). Keep in mind when using this strategy it is essential that broker commissions are low enough to profit from the position.

Disclosure: Long December RINO 30 Calls, Short December RINO 35 Calls

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Friday, November 27, 2009

Most Active Stock Options November 27, 2009 & Trading Activity

As of today the top ten most active stock option contracts traded were:
  1. Gold SPDR (GLD) December 118 Call Options
  2. Gold SPDR December 121 Call Options
  3. Volatility Index (VIX) January 22.50 Put Options
  4. S&P 500 SPDR (SPY) January 100 Put Options
  5. S&P 500 SPDR December 100 Put Options
  6. S&P 500 SPDR December 110 Call Options
  7. Volatility Index January 37.50 Call Options
  8. Kellogg (K) January 45 Call Options
  9. S&P 500 SPDR December 109 Put Options
  10. S&P 500 SPDR December 110 Put Options
As you already know it was an extremely ugly day due to the Dubai mess and it could have been much worse. This is most likely the reason the GLD call options exploded today. My plan this morning as I looked at the futures, was to be closing as many short call positions on stocks like: Google (GOOG), Apple (AAPL), Bank of America (BAC) and Las Vegas Sands (LVS) and opening as many short put positions on the following stocks: Corning (GLW), Visa (V), Bank of America (BAC) and American Express (AXP), as I believed we would see the market gain strength going into close. After seeing many of the call contracts I closed early this morning almost double in value from the price I purchased them for, I decided it was time to sell premium before the weekend again. I reopened my short call positions on Google, Apple, and Las Vegas Sands, but never got my ask filled on Bank of America (BAC).

As volatility came 2 points off the morning highs near 11:30 AM I decided it may be time to start closing my short put positions as well. I ended up closing all of my short put positions except for Corning (GLW) for an average gain of 45%. It will be interesting to see what Monday brings as I assume the volume will be much greater than the past few days. Happy birthday mom, and happy trading! Sphere: Related Content

Wednesday, November 25, 2009

Most Active Stock Options November 25, 2009 & Trading Activity

As of today the top ten most active stock option contracts traded were:
  1. Coca Cola (KO) January 50 Call Options
  2. Coca Cola January 45 Call Options
  3. McDonald's (MCD) January 55 Call Options
  4. McDonald's December 60 Call Options
  5. Coca Cola January 47.50 Call Options
  6. McDonald's December 57.50 Call Options
  7. S&P 500 SPDR (SPY) December 120 Call Options
  8. S&P 500 SPDR December 120 Put Options
  9. Coca Cola January 52.50 Call Options
  10. Coca Cola January 50 Call Options
As you can see there were mainly dividend plays being traded in the options market today. I did as I said and sold many covered call contracts before the bell. I also traded out of some of my RINO position opened last week for a very large gain. I kept a few 30/35 vertical call spreads open on RINO as I think it could trade much higher. Happy trading and have a great Thanksgiving! Sphere: Related Content

Update to RINO Call Spreads

I had the chance to double down my 30 strike call options yesterday for $80 a contract as RINO neared 26.50 a share. I am watching the chart very closely and think RINO could trade higher into close today. I am looking to lightening up on the 30 strike calls purchased yesterday, and keeping my vertical calls spreads open as I am still bullish on RINO. It is breaking up again today on BIG volume, so this is a good sign! As of now the spreads I wrote about on November 17 are profitable by 33% from the theoretical price indicated. However I opened my position the following day for roughly $110 per option contract, $20 less than the indicated price in that post. I will be taking profits, but keeping some RINO spreads on the table. Happy trading! Sphere: Related Content

Selling Theta: 5 Option Write Ideas for a Closed Market

Today is Wednesday November 25, 2009 and I am in a selling mood, not because I am extremely bearish but because I see a potential profit play. I am looking to sell covered calls on some of my holdings. If you're thinking about selling covered calls like me, today may be the day to do it! This won't make anyone rich but it's simple, safe, and may give a couple extra dollars to spend over the holiday's.

In this article I will outline five covered call ideas for Wednesday's trade. The reason I plan on selling covered calls today, is because I am taking advantage of time decay. The amount an option contract decays each day (holding everything else constant) is known as Theta, and is your friend when you're the seller. With the market being open three and a half hours (market closes at 1 PM Friday) over the next four days, option contracts should decay. Premiums should be higher going into the close Wednesday than they will be Friday morning, likewise premiums should be less Monday morning than they were at close Friday. I don't expect too much action Friday, so I am choosing to write my shares out Wednesday.

Since I plan on writing covered calls on my positions anyway, I believe it may be beneficial to get short theta Wednesday versus next week. With some of my positions such as Apple and Google, I may look to purchase back the call if profitable when trade resumes Monday, and wait to write it out again on strength in the underlying. It is very important to take into account brokerage commissions as the margins may be very thin. It is also important to note the strike prices I have chosen are prices I am willing to sell my stock at in case a significant move higher occurs in the market.

The five ideas are listed below using data as of market close Tuesday. The table below shows the company, ticker, call option strike price, current theta (or decrease in the call option contract holding everything else constant), and potential return if stock is assigned at expiration.

Company Ticker Strike Theta Return % Protection %
Apple AAPL 210 -0.115 4.4 1.7
Bank of America BAC 16 -0.013 3.4 4.0
Goldman Sachs GS 175 -0.092 4.0 1.2
Google GOOG 590 -0.245 2.8 1.6
MasterCard MA 240 -0.142 3.4 2.4

To better understand options in general, including this strategy, these percentage calculations, and other option strategies please check out my Simplified Stock Option Trading E-Books. As a shareholder of Bank of America, I use this strategy to sell calls on strength and buy them back on weakness. This allows me to generate income off my shares and lower my cost basis, as the volatility of the underlying stock gives a very nice premium, even on out of the money options.

The list above are stocks which I wouldn't mind holding in my portfolio if they do not get exercised at expiration. These are just examples and are not recommendations to buy or sell any security; if you're more bullish/bearish, you’ll want to adjust the strike price and expiration accordingly.

This strategy allows for some profits to be taken off the table. This is ideal especially when the market has rallied as much as it has. This strategy will give some protection if the market sells off, as well as provide a return if the market continues to rally. If the stock is not assigned, this strategy is a great way to create additional income for your portfolio. The reason option volumes have surged in the last 5 years is because they are a great way to hedge your portfolio as well as create income off of your shares (see chart here). Keep in mind when using this strategy it is essential that broker commissions are low enough to profit from the position.

Disclosure: Long AAPL December 200 Calls, BAC, GOOG January LEAP 300 Calls

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Tuesday, November 24, 2009

Most Active Stock Options November 24, 2009 & Trading Activity

As of today the top ten most active stock option contracts traded were:
  1. Blackstone Group (BX) January 10 Call Options
  2. Mattel (MAT) January 17.50 Call Options
  3. General Electric (GE) January 2011 22.50 Call Options
  4. Bank of America (BAC) January 2011 30 Call Options
  5. Mattel January 15 Call Options
  6. Bank of America (BAC) January 2011 25 Call Options
  7. PowerShares QQQ (QQQQ) December 44 Call Options
  8. Health Care SPDR (XLV) March 32 Call Options
  9. S&P 500 SPDR (SPY) December 111 Call Options
  10. S&P 500 SPDR (SPY) December 105 Put Options
Today's activity is very unusual but before I start detailing my thoughts on today's activity it is worth it to note that both active option contracts traded on Blackstone (BX) and Mattel (MAT) are due to the dividends they will be spinning out tomorrow morning. If we take a look at all of the LEAP options traded on both General Electric and Bank of America (both DOW components) it is certainly a bearish bet as most of the contracts traded near the bid price, so in other words if I had a massive block I wanted to get through, I wouldn't waste time trying to receive a split between the bid/ask, I would simply sell them at the bid to execute the trade. This could imply one trader does not believe these stocks will be at these prices by January 2011, but more likely implies the trader is betting on a near term sell off just to close the positions for a gain... Happy trading and have a wonderful holiday! Sphere: Related Content

Volume Talks: Monday's Breakout Stocks on Big Volume & Potential Call Spread Option Trade

With the NYSE trading almost 1.5% higher Monday, it's no surprise that there were 21 breakout stocks on big volume that made my post. As always, the first thing I do is scan the list for familiar names, such as stocks which have appeared on similar scans multiple times in the past week or two (most of these names are unfamiliar so it saves a lot of time, especially with larger lists). This indicates there may be some real momentum behind the stock, and that it could trade higher in following sessions as well. Then (if and when any of the stocks I find are familiar to me), I take a look at the chart(s) to see if I can structure a potential option trade. As stated, in this post I will name 21 stocks, but only write about one in detail and outline an option trade I may look at opening in the near future.

This method is just one of the ways I use to find stocks for potential option trades. The first part of this post will show the list of stocks which traded higher on above average volume. The second part of this post requires the knowledge of stock options. To learn more about the option strategies outlined in this post, risks, pricing, calculations, other strategies, and options in general, click here.

The table below shows the company, ticker, per share % increase, and volume increase (% increased compared to 50 day average). For your convenience I have ranked the stocks in order from greatest to least volume % change.

Company Ticker Price Change Volume Change
Origin Agritech Ltd. (SEED) 100.58% 23598.99%
ARCA biopharma, Inc. (ABIO) 92.00% 11377.85%
Network Engines, Inc. (NENG) 29.69% 3621.94%
Casella Waste Systems Inc. (CWST) 23.85% 1832.04%
Agria Corporation ADR (GRO) 24.48% 843.72%
Dillard's, Inc. (DDS) 4.85% 143.41%
Jinpan International Limited (JST) 3.21% 127.30%
Kirkland's, Inc. (KIRK) 3.18% 104.44%
Tech Data Corporation (TECD) 1.66% 92.76%
MercadoLibre, Inc. (MELI) 7.09% 86.18%
Gafisa SA ADR (GFA) 4.97% 67.70%
Par Pharmaceutical Companies, Inc. (PRX) 2.30% 61.67%
M & F Worldwide Corp. (MFW) 4.10% 59.12%
RehabCare Group, Inc. (RHB) 3.40% 54.86%
priceline.com Incorporated (PCLN) 1.50% 42.04%
Nu Skin Enterprises, Inc. (NUS) 4.85% 35.59%
CIGNA Corporation (CI) 7.56% 24.39%
Alliance Data Systems Corporation (ADS) 4.97% 21.46%
Health Net, Inc. (HNT) 2.93% 18.55%
Lihir Gold Limited ADR) (LIHR) 3.66% 17.64%
World Acceptance Corp. (WRLD) 6.87% 17.48%

One stock from the list above which has appeared a number of times lately is MercadoLibre, Inc. (MELI). This stock has been on a tear since they reported earnings on November 4, 2009. First I will give a company profile from Google (GOOG) Finance below.
MercadoLibre, Inc. hosts an online platform in Latin America, called MercadoLibre and located at www.mercadolibre.com. The Company has e-commerce operations in Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Peru, Uruguay and Venezuela. In addition, it also operates online trading platforms in Costa Rica, the Dominican Republic and Panama. MercadoLibre has two principal services: The MercadoLibre marketplace and The MercadoPago online payments solution. The MercadoLibre marketplace is a fully automated, topically arranged online trading service. The MercadoPago online payments solution is an integrated online payments solution. During the year ended December 31, 2008, visitors to its Website were able to browse an average of over 2.5 million total listings on any given day in over 2,000 different product categories. At December 31, 2008, the Company had over 33.7 million confirmed registered MercadoLibre users.
MercadoLibre is a lot like Ebay (EBAY), but they are much smaller which means they can grow much bigger. It is clear this stock has momentum behind it, so I certainly wouldn't mind getting long. Therefore, I will be writing a detailed option strategy about MercadoLibre, Inc. in this post today. Note that many of the stocks listed above will be good plays and many will be bad plays, I list them all to show possible breakout stocks and write about a few of the ones I am interested in trading.

I believe this stock is a bit overbought short-term, so before I jump in, I would like to see it pull back a bit on lighter volume. The 20, 50, and 100 day moving averages come in near 47.50, 46.75, and 46 respectively, but I believe this stock could trade down to levels of support near 45 a share; note it is critical that it holds support otherwise it may head even lower. If I see this stock bounce off any of the moving averages, I may also use that as my entry point. I would look to open Vertical Call Spreads on MELI when I am ready to get long.

MercadoLibre, Inc. Vertical Call Spread Option Trade: This is a fairly simple trade to open and only requires the use of two separate option contracts, the December 50 & 55 Call options. I would simply purchase December 50 strike call contracts and sell the December 55 strike call options against them. The theoretical price for this spread as of close Monday is roughly $130 per option spread. This will give me both limited risk and limited gains, but considering the stock has added value this fast, I am more than willing to pay some premium. It is also important to highlight that both contracts look as if they have gaining interest, on Monday the December 50 calls traded over 2 times the number of contracts open, and volume for the December 55 calls traded about 80% of open interest.

Profit and Loss: Let's say I opened just one spread. If MELI sells off significantly, this strategy would lose a maximum of $130 per option spread. Now let's assume the stock continues to rally and closes at December option expiration at or above $55, this position would return maximum profitability, $370 per option spread or 285%. It is worth noting the break even point for this strategy, it is $51.30 a share of MELI, therefore anything below this level in the underlying will result in a loss, and anything above at December options expiration would result in a profitable option trade.

This is a bullish strategy and should not be considered if you think the stock will sell off in the near future. However if you feel the stock could move higher in the near future, this strategy could yield a nice gain. To get a better understanding of stock options and different option strategies please check out my Simplified Stock Option Trading E-Books.

These are just examples and are not recommendations to buy or sell any security; if you're more bullish/bearish, you’ll want to adjust the strike price and expiration accordingly.

The reason option volumes have surged in the last five years is because they are a great way to hedge your portfolio as well as create income off of your shares (see chart here). Keep in mind when using this strategy it is essential that broker commissions are low enough to profit from the position.

Disclosure: No Positions

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Monday, November 23, 2009

Most Active Stock Options November 23, 2009 & Trading Activity

As of today the top ten most traded option contracts were:
  1. Bank of America (BAC) January 17.50 Call Options
  2. PowerShares QQQ (QQQQ) December 45 Call Options
  3. S&P 500 SPDR (SPY) December 111 Call Options
  4. S&P 500 SPDR December 115 Call Options
  5. Volatility Index (VIX) Decmber 60 Call Options
  6. S&P 500 SPDR December 111 Put Options
  7. PowerShares QQQ December 44 Call Options
  8. S&P 500 SPDR December 120 Call Options
  9. S&P 500 Index Options (SPX) December 1180 Call Options
  10. Origin Agritech Ltd. (SEED) December 10 Call Options
The sentiment from today's most active options seems very bearish, excluding the December 60 strike call options on the Volatility Index. I believe this position is the outcome of one trader hedging his/her portfolio. If you look at the OptionsXpress December VIX option chain below, you can see that nearly double the amount of VIX 60 strike calls traded than the December VIX 45 calls, the 45 calls were pretty much financed by the 60 calls. This trader expects volatility to rise near term, but not by more than 75. The break even for this trade would be roughly 75 on the VIX.

click to enlarge


Common shares of Origin Agritech Ltd. (SEED) traded like options today, doubling in value. The 10 calls exploded with volume today, it will certainly be interesting to see what both the shares and options do tomorrow. Today I traded Google 590 and 600 calls several times, with being short the 600 calls overnight. Happy trading! Sphere: Related Content

Longtop Financial: Using Vertical Option Spreads to Capture the Next Move

With the market trading relatively flat on November options expiration Friday, there were several stocks that hit my radar which traded higher on BIG volume. In this post, I will name 11 stocks which traded higher Friday November 20, 2009. I will be checking these stocks frequently to see if there is continued buying pushing the stocks higher. This method is just one of the ways I use to pick stocks to structure particular option trades. The second part of this post requires the knowledge of stock options. To learn more about the option strategies outlined in this post, risks, pricing, calculations, other strategies, and options in general, click here.

The table below shows the company, ticker, per share % increase, and volume increase (% increased compared to 50 day average). For your convenience I have ranked the stocks in order from greatest to least volume % change.

Company Ticker Price Change Volume Change
TTI Team Telecom International Ltd. (TTIL) 22.73% 6333.63%
Dataram Corporation (DRAM) 40.12% 1504.37%
GeoGlobal Resources Inc. (GGR) 51.11% 1026.89%
Kirkland's, Inc. (KIRK) 18.37% 648.69%
CytRx Corporation (CYTR) 25.27% 622.86%
The J.M. Smucker Company (SJM) 5.37% 320.19%
SkillSoft Public Limited Company (SKIL) 8.58% 273.53%
America's Car-Mart, Inc. (CRMT) 3.72% 216.18%
Jinpan International Limited (JST) 7.14% 100.90%
Longtop Financial Technologies Limited (LFT) 4.44% 78.10%
Tech Data Corporation (TECD) 3.16% 49.56%

One stock from the list above which has appeared quite a few times on my daily breakout stocks on big volume screen is the software company Longtop Financial Technologies (LFT). This stock has been on an absolute tear lately. Therefore, I will be writing a detailed option strategy about Longtop Financial Technologies (LFT) in this post today. Note that many of the stocks listed above will be good plays and many will be bad plays, I list them all to show possible breakout stocks and write about a few of the ones I am interested in trading.

Click chart to enlarge

Looking at the chart above, we can see this stock moved sideways until recent. We can see there is some serious support around the 30 per share range, and resistance around 35. This stock set a new 52 week high at 35.40 on Wednesday November 18, and on Friday it came within six cents of making a new 52 week high, before it traded off its highs to close the day at 35.07. This stock has some serious momentum behind it and could make for a nice trade, however I need to see it make a new 52 week high on above average volume to really give it my blessing. If this stock fails to make a new 52 week high I believe it could trade lower to support and would look at purchasing Vertical Put Spreads, however if this stock trades higher to a new 52 week high on above average volume I would look to purchase Vertical Call Spreads.

BEARISH SCENARIO

Longtop Financial Technologies Vertical Put Spread Option Trade: As stated I am expecting a slight sell off if this stock fails to make a new 52 week high on above average volume. I would become a buyer of Vertical Put Spreads if the stock traded below 34 a share (minor support level) on above average volume. First I would look to purchase December 35 strike put options on LFT, and then I would choose to lower my cost by selling the December 30 strike put options (support level) against them (1 for 1). Using market data as of close Friday, each vertical put spread would result in a net debit of $145 (paying $145 cash).

Profit & Loss: If Longtop Financial trades down near support levels (assuming this position is opened), and closes on December options expiration at or below 30 a share this strategy will return $355 or 245%. If Longtop Financial trades higher after this position is opened and closes at or above 35 a share at December options expiration, this strategy will lose 100% of the premium paid or $145. The break even point for this option strategy is Longtop financial at 33.55 a share at December options expiration.

BULLISH SCENARIO

Longtop Financial Technologies Vertical Call Spread Option Trade: If however LFT makes a new 52 week high on above average volume, I may be convinced to open vertical call spreads on this stock. Using this strategy, first I would look to purchase December 35 strike call options on LFT, and then I would choose to lower my cost by selling the December 40 strike call options against them (1 for 1). Using market data as of close Friday, each vertical call spread would result in a net debit of $150 (paying $150 cash).

Profit & Loss: If Longtop Financial trades higher (assuming this position is opened), and closes on December options expiration at or above 40 a share this strategy will return $350 or 233%. However if Longtop Financial trades lower after this position is opened and closes at or below 35 a share at December options expiration, this strategy will lose 100% of the premium paid or $150. The break even point for this option strategy is Longtop financial at 36.50 a share at December options expiration.

Both of the strategies outlined above require the underlying stock to move in the indicated direction and should not be considered if you think the stock will move sideways in the near future. However if you feel the stock could move to the higher call strike price or to the lower put strike price in the near future, either strategy could yield a nice gain. To get a better understanding of stock options and different option strategies please check out my Simplified Stock Option Trading E-Books. These are just examples and are not recommendations to buy or sell any security; if you're more bullish/bearish, you’ll want to adjust the strike price and expiration accordingly.

The reason option volumes have surged in the last five years is because they are a great way to hedge your portfolio as well as create income off of your shares (see chart here). Keep in mind when using this strategy it is essential that broker commissions are low enough to profit from the position.

Disclosure: No Positions

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Friday, November 20, 2009

Volume Talks: Hot Stocks on Heavy Volume & Detailed Ratio Put Spread Option Trade

With the market selling off Thursday, there were several stocks that hit my radar which traded higher on abnormal volume. In this post, I will name 12 stocks which fought the trend Thursday November 19, 2009. I will be checking these stocks frequently to see if there is continued buying pushing the stocks higher. This method is just one of the ways I use to pick stocks to structure particular option trades. The second part of this post requires the knowledge of stock options. To learn more about the option strategies outlined in this post, risks, pricing, calculations, other strategies, and options in general, click here.

The table below shows the company, ticker, per share % increase, and volume increase (% increased compared to 50 day average). For your convenience I have ranked the stocks in order from greatest to least volume % change.

CompanyTickerPrice ChangeVolume Change
TTI Team Telecom International Ltd. (TTIL)49.15%14947.18%
Solarfun Power Holdings Co., Ltd. ADR (SOLF)5.09%582.96%
The Bon-Ton Stores, Inc. (BONT)18.13%574.24%
The DIRECTV Group, Inc. (DTV)1.48%449.64%
Donaldson Company, Inc. (DCI)7.89%348.78%
Trina Solar Limited ADR(TSL)6.04%295.09%
Suntech Power Holdings Co., Ltd. ADR(STP)5.96%253.52%
CNA Financial Corporation (CNA)3.43%139.40%
Canadian Solar Inc. (CSIQ)3.88%131.10%
NetApp Inc. (NTAP)4.09%114.49%
American Superconductor Corporation (AMSC)1.63%57.05%
Longtop Financial Technologies Limited (LFT)2.97%47.76%

There certainly seemed to be a trend among the solar stocks Thursday. As much as I like Suntech Power (STP), I will not be writing a detailed option strategy in this post, as I've already covered one in a previous post. The stock which I find most attractive from the list above is Canadian Solar (CSIQ), so I will outline an option play I would like to use on this stock. Note that many of the stocks listed above will be good plays and many will be bad plays, I list them all to show possible breakout stocks and write about a few of the ones I am interested in.

Click chart to enlarge


Looking at the chart above, we can see a bullish ascending triangle pattern has emerged, however my gut is telling me solar is just a bit overheated (pun intended) and that a healthy consolidation may occur in the near term. I am expecting up to a 15% correction on shares of CSIQ near term, but I believe once this stock consolidates, it will trade much higher. I would become a buyer of this stock if it trades down to and holds above support levels of 19.50 - 20, near term. Therefore I would look to be selling Ratio Put Spreads on this stock for a net credit. I would structure this option trade using the December 21 and 19 strike put options. At current levels of option Delta a 2:1 ratio put spread would be optimal.

Canadian Solar Ratio Put Spread Option Trade:
As stated I am expecting a slight sell off and I would become a buyer of this stock roughly 10% below current share value, so the following trade is what I would look at doing. First I would look to purchase December 21 strike put options on CSIQ, and then I would choose to finance them by selling two December 19 strike put option contracts for every one December 21 strike put purchased. Using market data as of close Thursday, each ratio put spread would result in a net credit of $10 (receiving $10 cash).

Profit & Loss: If and when Canadian Solar trades down near support levels (assuming this position is opened), I will be monitoring the chart very closely to spot a potential reversal. If I am convinced of the reversal, I will likely choose to take profits in the long side of the trade (December 21 strike puts), and hold the remaining short put options, as they will be out of the money and if CSIQ indeed reversed, they should lose time value relatively quickly. The previous case is the optimal trade for this strategy, but even if CSIQ continues higher and all contracts expire worthless, this strategy would still be profitable by the amount of the credit received when opened. It is almost like a free trade, especially if I am willing to take shares of CSIQ into my portfolio. Now let's assume CSIQ sells off with no convincing reversal in the chart, I would choose to keep the entire position open. With all three contracts left open until expiration, this trade would be profitable as long as CSIQ is at or above 16.90 a share.
In the optimal case, the first part of this trade is bearish and the second part is bullish. This is a great way to create cash flow especially when wanting to own shares of a stock. If timed right and the opportunity approaches, this strategy could yield even more. The negative with this strategy is that it limits the upside. To get a better understanding of stock options and different option strategies please check out my Simplified Stock Option Trading E-Books.

These are just examples and are not recommendations to buy or sell any security; if you're more bullish/bearish, you’ll want to adjust the strike price and expiration accordingly.

The reason option volumes have surged in the last five years is because they are a great way to hedge your portfolio as well as create income off of your shares (see chart here). Keep in mind when using this strategy it is essential that broker commissions are low enough to profit from the position.

Disclosure: Long STP

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