Daily Stock Market Equity and Options Trading Commentary

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Friday, December 4, 2009

Volume Talks: Thursday's Hot Stocks on Heavy Volume & Detailed Vertical Put Spread Option Trade

With the major indices trading lower Thursday, there were 15 stocks which hit my screener fighting the trend on heavy volume. 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 15 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 heres..

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
Almaden Minerals Ltd. (AAU) 18.75% 1414.74%
Energy Recovery, Inc. (ERII) 11.40% 613.56%
Rambus Inc. (RMBS) 8.88% 346.07%
A-Power Energy Generation (APWR) 4.16% 264.85%
GSI Commerce, Inc. (GSIC) 2.69% 240.94%
Comcast Corporation (CMCSA) 6.49% 222.56%
G-III Apparel Group, Ltd. (GIII) 7.29% 205.89%
athenahealth, Inc (ATHN) 4.03% 191.79%
VisionChina Media Inc (VISN) 11.74% 179.10%
Micron Technology, Inc. (MU) 2.57% 159.90%
Frontier Communications Corp (FTR) 1.95% 149.38%
Gafisa SA (GFA) 3.67% 95.65%
Lumber Liquidators, Inc. (LL) 2.10% 68.19%
Telvent Git, S.A (TLVT) 2.97% 49.85%
Progress Energy, Inc. (PGN) 1.17% 42.79%
E-House Holdings Limited (EJ) 4.66% 28.73%

First I will take a minute to write a quick update on a trade idea blogged about on November 19, 2009. A-Power (APWR) had a nice move higher after they reported earnings. As indicated the levels of volatility would collapse after earnings were reported (Thursday). This position was opened on Wednesday for a net credit of $120 and closed Thursday for a net debit of $35. I took profits in my vertical put spread position on strength in the underlying and IV collapse. I will continue to take profits closer to the expiration.

One stock from the list above which was also included in Tuesday's list is Gafisa SA (GFA). Before getting into the chart details, I will give a company profile from Google (GOOG) Finance below.
Gafisa SA (Gafisa) is a Brazil-based company engaged in homebuilding and real estate operations. Its core business is the development of residential buildings. It is also engaged in the development of land subdivisions, also known as residential communities, and entry-level housing. In addition, it provides construction services to third parties. Gafisa is present in 18 states and 40 cities and works on all residential segments together with its extensions: Alphaville Urbanismo SA, Fit Residencial Empreendimentos Imobiliarios Ltda and Bairro Novo Empreendimentos Imobiliarios SA. Gafisa also owns such subsidiaries as Cipesa Holding, Gafisa SPE 22 Ltda and Res. das Palmeiras SPE Ltda, among others. During the year ended December 31, 2008, the Company acquired Tenda.
By glancing at the chart, we can see the stock closed on a minor resistance level Thursday. We can also notice that there is an emerging bullish rising wedge. Depending on how the market reacts to the unemployment situation will most likely set the tone for this stock during trade Friday. If this stock trades lower in the near future it is key that it holds the 33 per share level. If this stock can trade higher and close from Thursday's 35 a share mark, I will look to open the option trade discussed 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 trading.

Click to enlarge
Gafisa SA Option Trade: On any weakness in the underlying I would be monitoring the chart to see if the stock bounces off the 50 or 100 day moving average and ultimately holds the $33 level. If it can hold these levels I would be selling Vertical Put Spreads. This is a rather simple trade to open and only requires the use of two separate option contracts. I would be a seller of the December 35 put options and a buyer of the December 30 put options (1 for 1). If the stock trades lower the put spread will give me a larger net credit (put more money in my portfolio) but will have a lower probability of achieving maximum profitability. If the stock can hold the $35 level and move higher, I would also be a seller of this same spread, however the spread will give me a smaller net credit (put less money in my portfolio), but will also have a greater probability of achieving maximum profitability. Using December options and current market data the spread could be opened for a net credit of $120 or 24% return taking into account maintenance requirements. I believe this stock has the chance of clearing the 52 week high which was set in mid October. Depending on how this stock trades over the next few days, I may choose to finance December or January 40 strike call options with the cash received. This will lower my maximum profit a bit but give me unlimited gains if GFA trades much higher.

Profit & Loss: The maximum loss per spread using current data is $380, even if the stock trades to zero. If the stock continues higher or even sideways and come December options expiration shares of GFA are at or above current levels of 35, this strategy will return maximum profitability or the credit received of $120 per spread. The break even point for this strategy would be shares of GFA at 33.80 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 APWR 12.50 Puts, Short December APWR 15 Puts

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Anonymous said...

What charting program is used for the Gafisa chart?

Anonymous said...

hello... hapi blogging... have a nice day! just visiting here....

Anonymous said...

Where's Marco? Did he get wiped out? In school? Or taking his money to the bank? -- KK

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