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

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Thursday, October 8, 2009

15 Breakout Stocks on HUGE Volume

Here is a list of 15 stocks which traded higher Wednesday on unusually higher volume. I have added all 15 of these stocks to my watch list (and invite you to as well), but chose only a couple to write about in detail in this post. 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, Wednesday's per share % increase, and Wednesday's 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
Timberline Resources TLR 60.24% 1213.49%
Sykes Enterprises Inc SYKE 6.65% 706.94%
Talbots Inc TLB 16.53% 531.89%
Enzon Pharmaceuticals ENZN 1.03% 504.59%
Veeco Instruments Inc VECO 4.31% 332.42%
Claude Resources Inc CGR 9.21% 265.31%
Brocade Comm Sys Inc BRCD 1.69% 265.10%
Avanir Pharmaceuticals AVNR 13.62% 219.47%
Tessera Technologies Inc TSRA 4.94% 185.65%
Metabasis Therapeutics MBRX 1.91% 112.12%
G Iii Apparel Group Inc GIII 9.72% 111.18%
Orion Marine Group Inc ORN 6.55% 103.45%
Telvent Git S A TLVT 6.76% 102.17%
Mylan Inc MYL 3.86% 85.62%
Phoenix Companies Inc PNX 12.20% 50.32%

During Wednesday's trade I noticed one of these stocks which I had been keeping an eye on from the day before, Sykes Enterprise (SYKE). As of Tuesday morning Sykes announced it would be acquiring ICT Group (NASDAQ:ICTG), and rallied on the news. It isn't too often that the company doing the buying rallies on this type of news, unless they get a super deal. Sykes purchased ICTG for $15.38 a share ($263 million, half in stock and half in cash), and they expect to save $20 million a year from this purchase. So how much higher can this stock go? I believe we could see it above $25 by expiration so Wednesday I purchased several 25 strike call options for the October expiration.

As you may have heard, Brocade has been in the news for takeover talks. This causes the options to explode on this name making it a great candidate for the Buy/Write option strategy. I held shares of Brocade prior to this release, but unfortunately I took $50 a contract for the October 8 strike a couple weeks ago. However as this stock was rising sharply Monday morning I purchased shares and waited until it crossed $9 to write them out. I wrote the shares out for a price 11% higher than the stock price at the time ($10) and took $30 per option contract. This lowered my cost basis to $8.41 a share and if it can get above $10 by expiration I will realize over 18.5%.

With the implied volatility still being high on the option contracts, and just over a week left until the October contracts expire I wouldn't mind looking to do the buy/write option strategy on the Brocade October 9 strike. As of Wednesday's close this would lower the cost per share to $8.60 giving a 4.7% return if Brocade can hold these levels until then.

A more bullish strategy would be to look at the contracts for the month ahead. One could purchase an at the money November 9 strike call option, and sell the November 11 strike call option against it (creating a vertical call spread) for $60 per option spread. Break even would be $9.60 at November expiration, and if Brocade traded at or above 11 a share at November expiration this position would yield 233%. However if Brocade did not move and expired at or below $9 a share at November expiration, 100% of the price paid for the spread would be lost ($60).

The ideas outlined above involve the use of stock options. The reason option volumes have surged in the last 5 years is because they are a great way to hedge your portfolio as well as create income off of your shares (see option volume chart).

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.

Disclosure: Long BRCD, SYKE October 25 Call Options, Short: BRCD October 8 & 10 Call Options

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Wednesday, October 7, 2009

Most Active Stock Options October 7, 2009

As of today Wednesday October 7, 2009 the top ten most active stock option contracts were:
  1. Financial Select Sector SPDR (NYSE:XLF) October 15 Call Option
  2. Citigroup (NYSE:C) October 5 Call Option
  3. S&P 500 SPDR (NYSE:SPY) October 105 Put Option
  4. iShares MSCI Emerging Markets Index Fund (NYSE:EEM) March 36 Put Option
  5. iShares MSCI Emerging Markets Index Fund January 36 Put Option
  6. S&P 500 December Index (SPX) 1050 Put Option
  7. S&P 500 November Index 1050 Put Option
  8. S&P 500 October Index 1050 Put Option
  9. S&P 500 SPDR October 105 Call Option
  10. S&P 500 SPDR October 104 Put Option
It is not everyday where index options trade among the most actives. Judging by today's activity we can see that one strategist may be very bearish and perhaps because of earnings season approaching. However Alcoa (NYSE:AA) released numbers that trumped expectations and spiked sharply after hours, which is currently causing the DOW futures to be higher by almost 90 points. I assume we may see Alcoa come down to earth tomorrow, but perhaps it could keep on going. I opened up a large position for the October 12.50/14.00 vertical spread for roughly $96 per option contract. Assuming Alcoa expires next Friday above 14 a share (current bid is 14.99) this will return over 50% on my position. Considering I would take the shares of Alcoa at 12.50, this was not as risky of a bet as some may label it... I also purchased several 25 strike October call options on my new favorite breakout: Sykes Enterprises Inc (NASDAQ:SYKE). Sphere: Related Content

Tuesday, October 6, 2009

Most Active Stock Options October 6, 2009

As of today Tuesday October 6, 2009 the top ten most active stock option contracts were:
  1. AT&T (NYSE:T) October 26 Call Options
  2. AT&T October 25 Call Options
  3. AT&T January 20 Call Options
  4. AT&T October 24 Call Options
  5. Citigroup (NYSE:C) January 5 Call Options
  6. Verizon (NYSE:VZ) October 29 Call Options
  7. AT&T October 23 Call Options
  8. Citigroup October 5 Call Options
  9. S&P 500 SPDR ETF (NYSE:SPY) 105 Call Options
  10. AT&T October 22 Call Options
As you may have guessed AT&T will be spinning a dividend out of the shares tomorrow morning which is the reason for this level of options activity. Verizon will also be spinning out a dividend of 47.5 cents tomorrow. Today I sold some 11 strike October puts on the United States Natural Gas Fund (NYSE:UNG), added to my Direxion Daily Financial Bull 3X ETF (NYSE:FAS) 73 put position, and purchased some Volatility Index October 30 strike call options for $50 a contract (note these expire the Wednesday after equity expiration). Sphere: Related Content

Pre-Market Check October 6, 2009 and Economic Calendar

As of now the Dow Jones futures are down 5 points, the S&P 500 is lower by 0.10 points, and the NASDAQ 100 futures are higher by 2.75 points.

There isn't too much market moving data being released Tuesday, but will certainly be interested in earnings from Yum! Brands (NYSE:YUM). These earnings will give me some idea on how to trade one of my favorite small cap stocks Buffalo Wild Wings (NYSE:BWLD). Happy trading! Sphere: Related Content

Monday, October 5, 2009

Most Active Stock Options October 5, 2009

As of today October 5, 2009 the top ten stock option contracts traded were:
  1. Citigroup (NYSE:C) October 5 Call Options
  2. S&P 500 SPDR ETF (NYSE:SPY) October 103 Put Options
  3. PowerShares QQQ (NASDAQ:QQQQ) October 41 Put Options
  4. Financial Select Sector SPDR ETF (NYSE:XLF) October 14 Put Options
  5. PowerShares QQQ October 40 Put Options
  6. S&P 500 SPDR ETF October 103 Call Options
  7. S&P 500 SPDR ETF October 102 Put Options
  8. S&P 500 SPDR ETF October 104 Put Options
  9. Financial Select Sector SPDR ETF October 15 Call Options
  10. S&P 500 SPDR ETF October 104 Call Options
It looks as if the bearish bets still outweigh the bullish ones, but it would have been a great day to place some bets if you're bearish. Today I sold covered calls on half of my Bank of America position for the September 18 strike. I also jumped into the October 67 put options on the Direxion Financial Bull ETF (NYSE:FAS) at the days low. I will look to trade out of them on weakness in the financials if we get a pull back tomorrow. Sphere: Related Content

Bank some Profits from a Sell Off using Direxion's Financial Bull ETF (FAS)

As posted in Charting the banks on OptionMaestro.com, I was once extremely bullish on the financial stocks. Most of the targets which were unheard of back on May 10, have either been hit or passed. I am currently bearish short term; I believe we will see profits taken over the next month which would cause these financial stocks to move lower. In this article I will describe a way which I have been using (and will continue to use) to capture the downside on the financial sector. To understand the trade described in this article, you'll need a background of trading stock options. To learn more about the option strategy that will be outlined in this article, risks, pricing, calculations, other strategies, and options in general, click here.

Why the financial sector? I chose the financial stocks because they are up the greatest % since the market bottom, and if this sell off continues, we may see the financial stocks suffer the most. The table below shows the performance of 10 financial stocks since March 9, 2009 (closing low on the S&P 500). Stocks are ranked in order from greatest % gain to least. I used data from Google Finance, so I know everyone has access to it as well.

Company Ticker Current Close March 9 Close % Change
Bank of America Corporation BAC 16.34 3.75 335.73
Citigroup Inc. C 4.52 1.05 330.48
American Express Company AXP 32.49 10.64 205.36
Wells Fargo & Company WFC 26.28 9.97 163.59
JPMorgan Chase & Co. JPM 41.86 15.9 163.27
Goldman Sachs Group, Inc. GS 179.61 73.95 142.88
SunTrust Banks, Inc. STI 21.15 10.09 109.61
Morgan Stanley MS 29.46 16.48 78.76
The Bank of New York Mellon Corporation BK 27.6 18.02 53.16
KeyCorp KEY 6.17 6.06 1.82

To show a chart of these stocks over this period, I also generated a chart from Yahoo Finance which can be viewed below (click chart to enlarge).

All the stocks happen to be positive during this period, with KeyCorp gaining the least and Bank of America gaining the most.

In my opinion the safest way to trade the downside of these stocks is either going short the Direxion Daily Financial Bull 3X ETF (FAS) or buying at/near the money put options on the FAS. As described in Double and Triple Leveraged ETFs Revisited: The Real Decay, we can see that increased levels of volatility cause these instruments, such as the FAS, to decay. For this reason it is extremely difficult to find shares to short, which makes the put option trade a bit more attractive for liquidity reasons. If you are bearish on the financial sector or would like to hedge some of your holdings you may find the trade outlined below helpful.

The FAS Trade:
Using a vertical put spread will limit the amount gained on the downside, but is cheaper than purchasing just put protection (however I recommend just put protection for someone who is all out bearish on financials). With the FAS near 72 a share, it would be worth looking at the 72/67 put spread. This can be opened by purchasing the October 72 put options on the FAS, and selling the October 67 put options against them (same number bought and sold). Using Friday's close price, one could purchase the October 72/67 vertical put spread for $220. If the financial stocks continue lower, resulting in the FAS to close at or below 67 a share on October options expiration (October 17, 2009), this position could be closed for $500 or a gain of 127%.

A more bearish approach would be to look at opening a 72/64 vertical put spread. This spread could be opened for $320. If the FAS closed at or below 64 a share on October expiration this position would be closed for $800 or a gain of 150%. I choose this strategy over the Direxion Daily Financial Bear 3X ETF (FAZ) because it also suffers from volatility decay. Note the risks involved with this trade, because if the FAS moves higher or sideways over the next 10 trading days, 100% of the cost per spread can be lost.

To better understand options in general, including this strategy, these percentage calculations, and other option strategies click here. As a shareholder of American Express, and Bank of America, I have my portfolio hedged using this strategy. I believe we could see the S&P 500 trade down to the 975 area in the short term, before we rally higher. I will look to start closing positions if and when the S&P 500 nears the 1000 range, and use weakness to continue closing my spreads.

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 5 years is because they are a great way to hedge your portfolio as well as create income off of your shares (see chart here).

I dedicate this post to my father, who passed away 5 years ago today.

Disclosure: Long AXP, BAC, FAS October 73 Put Options, FAS October 67 Put Options, FAS November 65 Put Options, Short FAS October 65 Put Options, November 55 Put Options

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