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

To get a better understanding of the option ideas expressed in this blog, buy my ebook today!

Tuesday, November 10, 2009

Bullish Breakouts on BIG Volume: November 9, 2009 & ASIA Detailed Option Trade

Here is a list of stocks which traded higher Monday November 9, 2009 on unusually higher volume. I will keep an eye on these stocks Tuesday 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
East West Bancorp Inc EWBC 55.03% 891.72%
Revlon Inc REV 37.20% 851.43%
Encore Capital Group Inc ECPG 6.61% 361.15%
Enzon Pharmaceuticals ENZN 9.47% 331.60%
Priceline.Com Inc PCLN 1.01% 219.70%
N B T Y Inc NTY 2.15% 134.52%
Greenlight Capital Re GLRE 3.00% 118.17%
M S C I Inc Cl A MXB 4.25% 105.02%
W M S Industries Inc WMS 5.41% 97.84%
H D F C Bank Ltd Adr HDB 8.35% 95.97%
Goldcorp Inc GG 6.67% 93.22%
T I M Participacoes Ads TSU 3.83% 90.59%
Asiainfo Holdings Inc ASIA 6.49% 87.81%
Blackboard Inc BBBB 1.23% 84.92%
Unisys Corp UIS 9.36% 79.29%
Microstrategy Inc Cl A MSTR 5.56% 74.14%
Home Inns & Htls Mgt Ads HMIN 2.94% 61.39%
Fuel Systems Solutns Inc FSYS 6.68% 60.89%
Nu Skin Enterprise Cl A NUS 3.04% 60.09%
Comp De Bebidas Adr ABV 3.58% 60.07%
Copa Holdings Sa CPA 4.92% 57.88%
Bucyrus International BUCY 6.85% 57.13%
Mastercard Inc Cl A MA 2.23% 44.03%

Out of the stocks listed above, I really like Asiainfo Holdings (ASIA) so I believe it will be worth describing a detailed option play I am interested in below. I am very bullish on Priceline.com (PCLN) but I already outlined an option play for that on Friday (read it here). 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.

Asiainfo Holdings Option Play: As we can see from the 20 day (30 minute) chart above there are two bullish patterns emerging; a clear uptrend since the beginning of November, but more importantly an Ascending Triangle which broke above the resistance Monday morning. Earnings for this stock are out of the way, as indicated by the dollar sign and phone on the chart. We can see earnings sent shares higher on a huge surge in volume. This stock is certainly one I can get behind looking at this chart, at least until a bearish pattern emerges and a downtrend is confirmed in this stock.

This stock set a new 52-week high Monday at 25.07. I could wait for the stock to pull back and buy it, but if that doesn't happen anytime soon I could miss out on this stock. I have decided to structure a 3 leg option trade using the December 22.50 and 25 put options and December 30 Call options. I am looking to sell vertical put spreads by selling the December 25 put options and purchasing December 22.50 put options against them. This would give me $105 cash per option spread and limit my risk to $145 per option spread. I would then look to finance December 30 call options (currently 27.50 calls are not available) with the cash received from selling the put spread (maybe even double or triple the amount of call contracts as put contracts sold if the December 27.50 calls are not available soon). Assuming the ratio of calls to puts is 1-1: this trade will be profitable as long as Asiainfo closes above $24.35 at December options expiration and gains will be more (technically unlimited) if Asiainfo can trade above $30 a share. Assuming the same ratio, if Asiainfo closes below 22.50 at December options expiration the losses are capped at $190 per spread.

This strategy will put money in my pocket to start and give me large upside with limited downside. If this stock moves sideways, I'll make money. If it sky rockets, I'll make more money. And if it happens to crash, my losses are limited to $190 per 3-leg position. However I see this stock trading higher by the December option 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 you've missed the stock and think it could move sideways or up 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, PCLN November 155 Put Options, Short PCLN November 175 Put Options

Bookmark and Share

Sphere: Related Content

1 comments:

Anonymous said...

What software/program do you use for the charts in your blogs? Thanks.

Hottest Blog Posts of All Time