Volume Talks Monday: A Potential Option Straddle Play

Today's breakout report is for Monday March 15, 2010. If this is your first time reading one of my breakout reports you'll want to read the section below, however if you are familiar with my daily breakout report you should skip ahead to the list of stocks.

To reiterate previous blog posts like this, the first thing I do is scan the list for familiar names, such as stocks I am quite familiar with or ones 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). This indicates there may be some real momentum behind the stock, and that it could trade higher/lower in following sessions as well. Then (if and when any of the stocks I find are familiar to me), I make sure the stock has options available to trade, and then take a look at the chart(s) to see if I can structure a potential option trade. The list in this post includes 7 stocks which traded higher on heavier volume, and 15 stocks which traded lower on heavier volume Monday March 15, 2010. Many times I find an option strategy I plan on opening if I am convinced some money can be made.

The tables below show the company, ticker, per share % increase, and volume increase (% increased compared to 50 day average). The first table is a list of potential bullish stocks, the second table is a list of potential bearish stocks. For your convenience I have ranked both tables in order from greatest to least volume % change.

Breakout Bulls on Heavier Volume
Company	Ticker	Price Change	Volume Change
CNX Gas Corporation	(CXG)	16.13%	1234.78%
Phillips-Van Heusen Corporation	(PVH)	9.76%	589.99%
St. Jude Medical, Inc.	(STJ)	8.16%	370.10%
Pegasystems Inc.	(PEGA)	6.71%	241.31%
Baidu, Inc.	(BIDU)	4.83%	163.08%
Medicis Pharmaceutical Corporation	(MRX)	4.85%	117.51%
EMCOR Group, Inc.	(EME)	2.50%	100.15%
Breakout Bears on Heavier Volume
Company	Ticker	Price Change	Volume Change
Sterling Construction Company, Inc.	(STRL)	-16.60%	975.96%
Resources Connection, Inc.	(RECN)	-3.60%	613.37%
Watson Pharmaceuticals, Inc.	(WPI)	-2.63%	302.53%
EZCORP, Inc.	(EZPW)	-7.15%	282.74%
Ulta Salon, Cosmetics & Fragrance, Inc.	(ULTA)	-5.23%	203.46%
Varian Semiconductor	(VSEA)	-5.30%	201.71%
CONSOL Energy Inc.	(CNX)	-10.09%	183.59%
ExlService Holdings, Inc.	(EXLS)	-3.93%	155.54%
athenahealth, Inc	(ATHN)	-2.20%	153.09%
Thor Industries, Inc.	(THO)	-6.42%	149.09%
Hi-Tech Pharmacal Co.	(HITK)	-7.69%	143.85%
Lam Research Corporation	(LRCX)	-4.61%	141.50%
CGG Veritas	(CGV)	-3.45%	131.85%
Almost Family, Inc.	(AFAM)	-2.23%	131.48%
Jinpan International Limited	(JST)	-9.42%	122.14%

Out of the bearish list in today's report, I have two ideas. First, because options do not trade on Ulta Salon, Cosmetics & Fragrance, Inc. (ULTA), I will note that I would look at getting long this stock if it pulls back to the 21.50 range and can hold that level for two consecutive closes. Ulta had a great earnings report on March 11 and rocketed higher on massive volume, however it was downgraded Monday morning giving back much of Friday's gains. I think if Ulta holds the 21.50 range, it is due for a move beyond its 52 week high. I would get long near 21.50 with a tight trailing stop loss. The other stock which caught my eye is Almost Family, Inc. (AFAM), but before I get into the option strategy I am looking at using I will first give a company summary from Google (GOOG) Finance below.

Almost Family, Inc. (Almost Family), along with its subsidiaries, is a provider of home health services. The Company has service locations in Florida, Kentucky, Connecticut, New Jersey, Ohio, Massachusetts, Alabama, Missouri, Illinois, Pennsylvania and Indiana (in order of revenue significance).The Company has two operating segments: Visiting Nurse [VN] and Personal Care [PC]. The Company is compensated for its services by Medicare (Visiting Nurse only), Medicaid, other third party payors (insurance companies and other sources) and private pay (paid by personal funds). Its VN segment provides a range of Medicare-certified home health nursing services to patients in need of recuperative care, following a period of hospitalization or care in another type of inpatient facility. The Company’s PC segment provides services in patients' homes on an as-needed, hourly, or live-in basis. On June 1, 2009, the Company acquired the assets of the Medicare-certified home health agencies.

When checking the chart on Almost Family, I noticed a rather ugly bearish engulfing pattern formed Monday. The stock hit an intraday low of 35.30 which is support, however it bounced off of that level and closed a bit higher.

Click to enlarge chart
The chart tells me we will see short term weakness in this name, so I would put a short position on this stock if it breaks below 35.25 with a stop loss at Monday's open of 36.47. Key levels of support below 35.30 to watch are 34, and 32.50. However I noticed a big bet in the options market Monday and will outline the strategy below.

Almost Family Option Straddle: It seems that at the same time (Monday - 12:27 PM) someone dumped 100,000, 500 May 35 Straddle positions were traded for a net debit of $422 per straddle. A total of 510 May 35 call options traded on open interest of 1064, and a total of 500 May 35 put options traded on open interest of 806. The open interest suggests that these straddles could have been closed, however if these straddles were opened I may follow the money and copy this trade. Be careful, the April 35 straddle position may seem like a better idea because it is about two-thirds of the price, however the May 35 straddle gets more than double the amount of time until expiration, but more importantly AFAM is likely to report earnings by May options expiration. If these straddles were opened someone is betting quite heavily that AFAM will be above/below 35 per share by at least 12.06% by May options expiration, however they will likely be closed before expiration as the straddle will gain value with any directional move as long as the move is sooner rather than later. The current theoretical price of opening one May 35 straddle is roughly $450.

Profit & Loss: Assuming I could open this option position for the price of $450, my maximum risk is limited to $450 per straddle, this will occur if both legs of the straddle are held and AFAM closes at exactly 35 per share on May options expiration. The break even points for this straddle are shares of AFAM at either 39.50 or 30.50 on options expiration. The profit for this strategy is unlimited with it being greater for each penny shares of AFAM trade above the higher break even point, or each penny shares of AFAM trade below the lower break even point. I rarely wait until expiration to close or allow my position to get exercised.

This is a neutral strategy and should not be considered if you think the stock will trade in a tight range in the near future. However if you feel the stock could have a large move in either direction by May options expiration and have the money to speculate with, 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