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Wednesday, November 11, 2009

Breakout Stocks on BIG Volume November 10, 2009 & HMIN Detailed Option Trade

Here is a list of stocks which traded higher Tuesday November 10, 2009 on unusually higher volume. I will keep an eye on these stocks Wednesday 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. 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
Priceline.Com Inc PCLN 17.55% 785.10%
Home Inns & Hotels Mgt HMIN 10.46% 553.23%
Fossil Inc FOSL 9.03% 295.15%
M & F Worldwide Corp MFW 4.07% 194.46%
Fuqi International Inc FUQI 3.23% 147.37%
Tanzanian Royalty Explrn TRE 14.01% 140.10%
Wellcare Health Plans WCG 4.17% 103.26%
Steven Madden Limited SHOO 1.80% 83.43%
Green Mtn Coffee Roastrs GMCR 3.50% 64.94%
Comp De Bebidas Adr ABV 0.94% 63.33%
Incyte Corporation INCY 3.54% 57.19%
Deer Consumer Products DEER 3.89% 55.93%
Netflix Inc NFLX 2.10% 39.25%
Mead Johnsn Nutritn Cl A MJN 3.46% 33.07%
Stepan Co SCL 1.43% 24.30%
W M S Industries Inc WMS 1.39% 20.35%
C N A Financial Corp CNA 2.34% 18.12%

This list is packed full of stocks I have been keeping an eye on and would like to own as I think they will trade higher. Out of the stocks listed above, I will write about Home Inns & Hotels Management Inc (HMIN). This stock exploded to the upside Tuesday after a blockbuster earnings release reported after the bell Monday. This stock closed 7 cents below its high for the day (also 52-week high) which is a good sign. With the help of the market I believe this stock will continue much higher. I believe it will be worth describing a detailed option play I am interested in 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.

(click chart to enlarge)
Home Inns & Hotels Option Play: As we can see from the 20 day (30 minute) chart above, this stock gapped higher and broke through resistance on huge volume Tuesday, therefore I don't mind getting behind the stock, at least until a bearish pattern emerges and a downtrend is confirmed in this stock. Earnings for this stock are out of the way, as indicated by the dollar sign and phone on the chart. Earnings being out of the way not only takes out the risk of having the stock report poorly and sell off, but also prices the options quite a bit cheaper in terms of implied volatility.

I believe this stock has a shot at 40 a share near term so I will write about a trade that will give me unlimited upside potential with limited downside risk. This option trade will involve 3 December option contracts. First I would look to sell vertical put spreads by selling in-the-money December 40 put option contracts and buying an equal number of December 35 strike put option contracts against them. Opening this spread would put $290 cash in my portfolio and limit my downside risk to $210 per option spread. This would be a good place to stop if one thought this stock would trade higher but wouldn't go too much beyond $40 a share by December options expiration. However I believe this stock has the potential of trading at least to $40 a share in the near term, so I would also purchase the December 40 strike call option with the money received. As of close Tuesday, this would cost me roughly $120 per option contract so the cash in my portfolio from opening this spread would be down to $170.

Profit and Loss: For simplicity let's assume I opened just one contract of each. If the worst possible scenario happened for this stock, this strategy would lose a maximum of $330. Now let's assume the stock trades sideways from Tuesday's close, this strategy could be closed for a loss of $197 at December options expiration. However let's assume this stock does trade higher and by 20% a share by December options expiration, this strategy would yield an additional $360 at expiration on top of the $170 cash received a return of 106%. I wouldn't recommend waiting for the expiration to close this position. The December option contracts have over 35 days left until they expire, so if and when HMIN experiences a pop or trades near 40 with some time value left in the options, I would look to take profits on my position or at least close the December 40 put contracts.

This is a very bullish strategy and should not be considered if you think the stock will sell off in the near future. However if you feel you've missed the stock and think it 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 PCLN December 220 Call Options

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