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Daily Stock Market Equity and Options Trading Commentary

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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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