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Monday, September 28, 2009

Bullish Stocks to Watch: Week of September 28, 2009

Here is a list of 7 stocks which broke out during Friday's trade on big volume. I will be keeping my eye on all of these stocks this week, but chose only one to write a detailed option trade about this week. All of these stocks demonstrated tremendous strength during Friday's trade breaking out to the upside on huge volume. The table below shows the company, ticker, Friday's per share % increase, and Friday's 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
Luna Innovations Inc LUNA 94.64% 10617.62%
Dataram Corp DRAM 54.47% 9241.51%
Durect Corporation DRRX 15.35% 1193.01%
Terrestar Corp TSTR 10.78% 338.34%
Brunswick Corp BC 15.84% 197.29%
Diedrich Coffee DDRX 3.80% 45.77%
Jefferies Group Inc JEF 3.96% 33.08%

The stock that is most attractive to me from the list above is: Brunswick Corp (BC). This stock was upgraded Friday which caused this sharp increase, so purchasing this stock on weakness is key. If the overall market can hold and continue to move higher, I think this stock easily has a shot at a fresh 52 week high (above 14.10 a share). Below is an option idea based on this type of speculation. To learn more about the option strategies outlined in this post, risks, pricing, calculations, other strategies, and options in general, click here.

Brunswick Diagonal Call Option Spread Trade: I am bullish on BC shorter term, so I will look to be opening diagonal call spreads using the in the money December 10 strike call options as my base, and using higher strike nearer term call options to write out against them. With less than 20 days left until the October expiration, the 12.50 strike call option is bringing a decent premium. Depending on when I decide to write it and the purchase price of the December 10 call option will play a major factor, but using data as of Friday's close, I could open this spread for roughly $170 per spread. If BC traded at or above 12.50 at October expiration this position would yield a 47.1% gain (both contracts being closed as the near dated option delta exceeds the longer dated option delta). If BC is not trading above these levels, I would bank 100% of the premium received for the October option contracts and look to write out the base contracts for a similar strike for the November option expiration. This is a bullish income generating strategy, if BC sells off significantly 100% of the premium paid for the December 10 call options could be lost.

The ideas outlined above involve the use of stock options. 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 option volume chart).

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.

Disclosure: No Positions

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4 comments:

Anonymous said...

Marco, If BC hadn't been upgraded, would you still be looking to place a position on it?

Are you selective in who makes an upgrade?

Thanks much!

Marco H said...

Sometimes I use upgrades to ride the momentum. If you look at this stock, it was downgraded on September 15 (which I did not go into detail in the post), but it did not move down by nearly as much as it moved up. Moving up by this much was a good sign. The last short interest I found recorded on this stock was near 12%. With nearly one-eighth of the shares shorted, I feel this stock can still move higher on a squeeze.

Anonymous said...

Marco,

Why is a december10 in the money call most attractive? Is it merely a potentially higher return for the given situation?

Thank you for your insight!

Marco H said...

I could buy the stock here at over $11 or buy the rights to the shares at $10 for just over $2 (at the time of writing the blog post). If the stock sold off I can only lose the premium paid. This also allows leverage. Investing $1000 in stock may not buy 100 shares, but gives me the right to almost 500 shares at the $10 strike. I find it easier to use this method when stocks have had tremendous runs, as we know they can give back gains extremely fast!

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