HOT TRADING STRATEGIES FOR A COLD MARKET
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%

Update:
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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Thursday, December 3, 2009

Volume Talks: Wednesday's Hot Stocks on Heavy Volume & Detailed Option Trade

With the major indices trading mixed Wednesday, there were many stocks which traded higher on BIG volume. The list described below is a large one which is quite unusual for a rather flat trading day. 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 39 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
Lihua International, Inc. (LIWA) 33.54% 869.35%
BioFuel Energy Corp. (BIOF) 34.21% 786.94%
China Agritech Inc. (CAGC) 17.63% 778.49%
Alcon, Inc. (ACL) 5.57% 630.53%
Alexco Resource Corp. (AXU) 16.92% 551.51%
China Marine Food Group (CMFO) 7.36% 458.91%
Claude Resources Inc. (CGR) 20.91% 457.78%
Keryx Biopharmaceuticals (KERX) 13.96% 451.29%
Northern Dynasty Minerals Ltd. (NAK) 9.97% 416.82%
Curis, Inc. (CRIS) 12.78% 372.10%
Telestone Technologies Corporation (TSTC) 10.39% 354.05%
G-III Apparel Group, Ltd. (GIII) 5.89% 341.59%
DreamWorks Animation SKG, Inc. (DWA) 9.71% 328.31%
KMG Chemicals, Inc. (KMGB) 3.44% 274.66%
P.F. Chang's China Bistro (PFCB) 9.27% 256.17%
Sirona Dental Systems, Inc. (SIRO) 5.97% 248.89%
Duoyuan Global Water Inc (DGW) 4.10% 192.68%
BPZ Resources, Inc. (BPZ) 9.14% 158.69%
NovaGold Resources Inc. (NG) 8.88% 142.56%
Copart, Inc. (CPRT) 8.79% 119.30%
UAL Corporation (UAUA) 12.47% 98.14%
Encore Capital Group, Inc. (ECPG) 4.06% 94.38%
Pepco Holdings, Inc. (POM) 1.07% 82.74%
Ulta Salon, Cosmetics & Fragrance, Inc. (ULTA) 4.12% 65.64%
MercadoLibre, Inc. (MELI) 4.45% 65.37%
Jos. A. Bank Clothiers, Inc. (JOSB) 2.62% 64.42%
TNS, Inc. (TNS) 5.38% 57.85%
Iowa Telecom Services (IWA) 2.05% 52.41%
The Warnaco Group, Inc. (WRC) 2.38% 51.94%
Warner Chilcott Plc (WCRX) 1.96% 48.27%
AsiaInfo Holdings, Inc. (ASIA) 6.21% 44.80%
Coca-Cola FEMSA, S.A.B. de C.V. (KOF) 1.15% 43.30%
Interoil Corp (IOC) 3.34% 37.93%
NutriSystem Inc. (NTRI) 1.14% 37.58%
Blue Nile, Inc. (NILE) 1.94% 36.49%
Lihir Gold Limited (LIHR) 1.88% 30.04%
SanDisk Corporation (SNDK) 3.50% 23.79%
Catalyst Health Sltns (CHSI) 2.36% 21.62%
Amazon.com, Inc. (AMZN) 2.71% 21.44%

UPDATE: First I will take a minute to write an update about three stocks outlined in previous blog posts that appeared in the list above. Today I closed my earnings option trade on SIRO (Check out trade idea here) which was just opened Tuesday. I also closed many of my short vertical put spreads on ASIA (Check out trade idea here), but kept the 30 strike calls as I will be looking to sell some of them on continued strength in the underlying. I was also out taking more profits in my MELI vertical call spread position (Check out trade idea here). I took profits today to realize a profit even if MELI expires worthless, but I strongly believe we could see MELI above 55 by expiration. Therefore I plan on keeping the remainder of my December 50/55 vertical call spread position on the table as I believe this strategy could achieve maximum profitability.

One stock from the list above I recognized from a previous breakout list is Lihir Gold Limited (LIHR). This stock first appeared after hitting similar levels in my blog post from November 24. Before getting into the chart details, I will give a company profile from Google (GOOG) Finance below.
Lihir Gold Limited (LGL) is engaged in gold mining and processing operations on Lihir Island in Papua New Guinea, at Ballarat in Victoria, Australia, at Mount Rawdon in Queensland, Australia and Bonikro in Cote d’Ivoire, West Africa. It is also engaged in exploring in Côte d’Ivoire, where it has over 20,000 square kilometers of exploration licenses either granted or under application in the Birimian greenstone belts. The Ballarat operation comprises four granted mining licenses, aggregating to an area of 22.1 kilometer, and a single granted exploration license comprising a semi-contiguous area of 126 kilometer all granted in the state of Victoria, Australia. All tenements are held 100% by Ballarat Goldfields. The Mount Rawdon operation comprises 12 mining licenses covering 39.6 kilometer. It maintains six exploration permits for minerals (EPMs) surrounding the Mount Rawdon mine site. The Bonikro operation is located on an exploitation permit granted by the government of Cote d’Ivoire.
It is clear there has been some momentum behind this stock lately, but by glancing at the chart there seems to be some resistance near 35 a share. It traded near 35 a share on November 24 and 25, before selling off severely with the rest of the market on what I call Red Friday (Black Friday). I need to see this stock trade and close above 35 a share before I would become a buyer. I am very bullish on the entire precious metal sector right now as I believe gold will continue to trade higher until the fed at least hints at a rate hike. 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.

Lihir Gold Limited Option Trade: As stated I would like to see this stock break above 35 a share on above average volume. The stock traded to a new 52 week high of 35.06 Wednesday before settling slightly lower. If it breaks above and holds I would look at opening Vertical Call Spreads. This is a very easy trade to open and only requires the use of two separate option contracts. As the stock trades higher the call spread will become a bit more expensive but give a higher probability of becoming profitable. For an example I'll use December options and current market data. I would open this trade a bit differently than other vertical call spreads blogged about in the past. I would simply purchase December 35 strike call contracts and sell the December 40 strike call options against them (1 for 1); however I would purchase the 35 strike calls and wait for continued strength in the underlying before I write the 40 strike calls out (this way the 40 strike calls bring larger premiums). This is because currently the December 40 calls wouldn't make a big difference in the cost of the spread. However if the stock continues higher after the 35 strike calls are purchased, writing the 40 calls could lower the cost significantly, or depending on the time until expiration I may just close the 35 strike calls for a profit. I believe if and when this stock can close above 35 a share it is a bullish sign and there will be continued strength. The December 35 strike calls can currently be purchased for $130 per option contract, making a spread would lower the cost to $120.

Profit & Loss: The maximum loss per spread is the price paid or $120, even if the stock trades to zero. If the stock continues higher and come December options expiration shares of LIHR are at or above 40, this strategy will return maximum profitability of $380 per spread or 317%. The break even point for this strategy would be shares of LIHR at 36.20 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 ASIA 22.50 Puts, December ASIA 30 Calls, Short December ASIA 25 Puts, December MELI 55 Calls

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Wednesday, December 2, 2009

Most Active Stock Options December 2, 2009 & Trading Activity

The top ten most active stock option contracts traded today were:
  1. Pfizer (PFE) December 18 put Options
  2. PowerShares QQQ (QQQQ) January 43 Call Options
  3. PowerShares QQQ December 44 Put Options
  4. Nike (NKE) January 45 Call Options
  5. PowerShares QQQ December 45 Put Options
  6. Pfizer December 19 put Options
  7. S&P 500 SPDR (SPY) December 110 Put Options
  8. S&P 500 SPDR March 110 Put Options
  9. S&P 500 SPDR June 104 Put Options
  10. S&P 500 SPDR December 111 Call Options
Today I sold December 15/12.50 put spreads on A-Power (APWR) before they announce earnings tomorrow. I also opened Gold SPDR (GLD) call spreads as I think we'll continue to rally into year end. I took advantage of weakness in Google (GOOG) and Visa (V) and purchased back my covered call options as I will wait for strength to write them back out. I closed my December 16 put position for a nickel a share on Corning (GLW) this morning and the stock looks hot, so I may look at opening January call spreads if I see it continue the trend. Happy trading! Sphere: Related Content

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%

UPDATE:
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

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Monday, November 30, 2009

Most Active Stock Options November 30, 2009 & Trading Activity

The top ten most active option contracts today were:
  1. Home Depot (HD) January 20 Call Options
  2. PowerShares QQQ (QQQQ) December 44 Call Options
  3. PowerShares QQQ January 44 Call Options
  4. S&P 500 SPDR (SPY) December 105 Put Options
  5. Financial Select Sector SPDR (XLF) January 12 Put Options
  6. S&P 500 SPDR December 109 Put Options
  7. S&P 500 SPDR December 110 Call Options
  8. Financial Select Sector SPDR January 13 Put Options
  9. PowerShares QQQ December 41 Put Options
  10. Financial Select Sector SPDR January 14 Put Options
We can see there is some unusual bearish activity in the January XLF options. I have considered hedging with a 13/12 vertical put spread for January in the XLF, but have not opened it yet. Today I sold several December 19 strike put options on the Direxion Daily Financial 3X Bear (FAZ), traded Google December 590 & 600 strike calls back and forth multiple times, and I'm currently short the GOOG 600's. I also sold some call options on Suntech Power (STP), and tried getting some premium for the December 15 strike put options on A-Power (APWR), but did not get filled. I believe today would have been a great day to get short some puts on APWR but I will try again tomorrow. As stated in a previous blog post APWR reports Thursday so I want to be short some puts going into the number as I don't mind holding the shares if it sells off below 15. I purchased back my 85 strike call options on Visa (V) as I believe it could hit 85 before expiration with the help of the market. I missed out on buying back my American Express (AXP) 43 strike calls at $40 per contract, which could have been written for $70 at close, so I'll definitely be looking to buy those back on weakness in the underlying. I did sell some premium on the Dell (DELL) December 14 put options at the day high, which I left open but could have closed for a 20% gain at close. I continued to lighten up on my position in RINO, but may leave the rest to expire as I think my 30/35 vertical call spreads have a good chance of expiring at maximum profitability. Happy trading and hope December can be as profitable if not more profitable than November was! Sphere: Related Content

Sunday, November 29, 2009

Volume Talks: Friday's Breakout Stocks & Detailed Earnings Option Trade

With the markets trading in the red on Black Friday there were 9 stocks fighting the trend which will be posted in this article. 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 9 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
A-Power Energy Generation Systems (APWR) 7.98% 214.31%
Bioject Medical Technologies Inc. (BJCT) 115.38% 697.10%
EasyLink Services International Corp. (ESIC) 13.61% 100.25%
Kandi Technolgies Corp. (KNDI) 3.96% 40.10%
MGP Ingredients, Inc. (MGPI) 10.39% 130.84%
Reliv International, Inc (RELV) 5.44% 114.58%
RINO International Corporation (RINO) 3.89% 17.32%
Tri-Tech Holding, Inc. (TRIT) 5.36% 2.63%
Deer Consumer Products, Inc. (DEER) 7.43% 34.70%

UPDATE: First I will take a minute to note a quick update on RINO which appeared on my breakout list multiple times before writing a detailed option trade in a blog post on November 17. I have taken enough profits in the Vertical Call Spreads opened to have a realized gain even if the spreads currently open expire worthless (also known as playing with the houses money). I do believe RINO has a shot at trading even higher, but I needed to take profits as the stock has soared nearly 25% over the past few trading days.

One stock from the list above which has appeared a number of times in the past is A-Power Energy Generation Systems (APWR). This stock has been on a tear lately and it is worth it to note they haven't reported earnings yet, but according to AOL (AOL) money & finance they are scheduled to do so on December 3. First I will give a company profile from Google (GOOG) Finance below.
A-Power Energy Generation Systems, Ltd. (A-Power) is a renewable energy company in China, engaged in providing onsite distributed power generation systems and micro power grids for industrial companies. It is also engaged in the production of wind turbines. The Company is engaged in designing, constructing, installing and testing distributed power generation and micro power grids as stand-alone facilities and for various customers in the steel, chemical, ethanol, cement, and food industries. A-Power design projects, subcontract their construction and installation to approved third-party subcontractors under its project oversight, and conduct testing on completed projects prior to turning them over to its customers. The size of its projects range from 5 megawatt to 400 megawatt and allow its customers, which require heavy electrical input, to recapture previously wasted heat and gas from their manufacturing processes to generate electricity.
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 APWR 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.

As stated APWR is scheduled to report earnings December 3, therefore I will be looking to open the option strategy discussed below closer to the date to take advantage of increased levels of implied volatility.

A-Power Energy Generation Systems Earnings Option Trade: As you can see from the chart above support for APWR is near 15 a share, below that some minor resistance comes in at 14, however if the stock sells of below 14 it could trade down to 12.50 or even 11. I do not expect APWR to sell off below these levels, however with a bad earnings report it easily could with the amount the stock has risen in the past few weeks. Therefore I will structure an option trade around levels of support that takes advantage of the increased levels of implied volatility leading up to earnings. I have decided to be a seller of Vertical Put Spreads. This is a very easy strategy to open as it only has two different option contracts.

I would first look to sell December 15 strike put options, and purchase the December 12.50 strike put options with the cash received (1 for 1). Based on current pricing, this spread can be opened for a net credit of roughly $60 per option spread. **NOTE** Depending on where the stock is trading and how bullish I become by December 2, I may even look to sell the December 17.50 put options and purchase the December 15 strike put options and 20 strike call options with the cash received, however that is a bit more risky and complicated.

Profit & Loss: This trade will be profitable as long as APWR maintains a price of 14.40 a share (18.2% lower than current share price), and will return a maximum of $60 per option spread or 24% of margin requirement if APWR can hold above 15 a share by December 19. The maximum loss from this strategy is $190 per option spread and will result if the stock sells off significantly (by more than 29% by December 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 RINO 30 Calls, Short December RINO 35 Calls

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