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


Sphere: Related Content