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, December 1, 2009

Volume Talks: Monday's Hot Stocks on Heavy Volume & Detailed Vertical Call Spread Option Play

With the markets trading slightly higher Monday, there were 19 stocks that hit my radar trading higher on much more action. 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. In this post I will name 19 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
GSI Technology, Inc. (GSIT) 37.35% 7031.54%
Somaxon Pharmaceuticals, Inc. (SOMX) 26.67% 3765.02%
Kimber Resources, Inc. (KBX) 18.41% 693.69%
China Automotive Systems, Inc. (CAAS) 14.29% 611.82%
CSG Systems International, Inc. (CSGS) 18.41% 471.65%
China Yuchai International Limited (CYD) 12.27% 421.43%
WuXi PharmaTech (Cayman) Inc. (WX) 8.94% 378.93%
Cytori Therapeutics Inc. (CYTX) 13.59% 316.56%
MercadoLibre, Inc. (MELI) 1.56% 182.28%
Encore Capital Group, Inc. (ECPG) 12.33% 109.22%
Tri-Tech Holding, Inc. (TRIT) 10.00% 74.20%
Greenlight Capital Re, Ltd. (GLRE) 4.21% 52.94%
Dollar Financial Corp. (DLLR) 2.48% 52.06%
Gafisa SA (GFA) 3.37% 46.52%
RINO International Corporation (RINO) 5.87% 37.24%
Computer Sciences Corporation (CSC) 1.94% 29.77%
Bottomline Technologies (EPAY) 5.16% 29.56%
Jinpan International Limited (JST) 3.94% 28.14%
Big 5 Sporting Goods Corporation (BGFV) 3.35% 16.52%

First I will take a minute to write an update about two stocks outlined in previous blog posts that appeared in the list above Monday. I took more profits in RINO International (RINO) Monday and took some of my MercadoLibre (MELI) position off the table. RINO has been on an absolute tear the past 3 days and I decided to take more profits as it neared 34 a share. I plan on keeping the remainder of my December 30/35 vertical call spread position until expiration as I believe this strategy could achieve maximum profitability.

One stock from the list above which has appeared a number of times recently is China Yuchai International Limited (CYD). This stock had a huge move higher following earnings and traded more of less sideways until Monday. Before getting into the chart details, I will give a company profile from Google (GOOG) Finance below.
China Yuchai International Limited (CYI) owns a controlling interest in Guangxi Yuchai Machinery Company Limited (Yuchai). Through its 76.4% interest in Yuchai, the Company primarily conducts its manufacturing and sale of diesel engines, which are mainly distributed in the People’s Republic of China (PRC) market. As of June 1, 2009, the Company had a 45.4% equity interest in HL Global Enterprises Limited (HLGE). The HLGE group is engaged in hospitality and property development activities conducted mainly in the PRC and Malaysia. As of June 1, 2009, the Company had a 34.4% equity interest in Thakral Corporation Ltd (TCL). The TCL group primarily conducts distribution of consumer electronic products with operations mainly in the PRC (including Hong Kong). TCL also has other business activities relating to contract manufacturing, property development and investment in the PRC. Yuchai manufactures engine blocks, cylinder heads, crankshaft, camshaft and certain other parts.
The stock had a huge move higher to a fresh 52 week high Monday and I believe if it can hold above 16.50 a share this stock is heading even higher. Therefore, I will be writing a detailed option strategy about CYD 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.

China Yuchai International Limited Option Trade: I would like to see this stock test the new support level near 16.25 on light volume and if it holds I would look at opening Vertical Call Spreads. This is an extremely simple trade to open and only requires the use of two separate option contracts. Depending on when the stock tests support will determine the option contracts used for my trade, but I'll use December options and current market data to give a detailed example. I would simply purchase December 17.50 strike call contracts and sell the December 20 strike call options against them. The theoretical price for this spread as of close Monday is roughly $45 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.

I don't expect the stock to trade above 20 a share by December options expiration, however 20 a share may not be out of the question, at least judging by Monday's option activity; the 20 strike December calls traded 165% of their open interest.

Profit & Loss: The maximum loss per spread is the price paid or $45, even if the stock trades to zero. If the stock continues higher and come December options expiration shares of CYD are at or above 20, this strategy will return maximum profitability of $205 per spread or 456%. The break even point for this strategy would be shares of CYD at 17.95 at December options 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 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: Long December MELI 50 Calls, December RINO 30 Calls, Short December MELI 55 Calls, December RINO 35 Calls

Bookmark and Share
Sphere: Related Content


Hottest Blog Posts of All Time