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

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Friday, January 8, 2010

Thursday's Hot Stocks: Selling Time on Valeant Pharmaceuticals

With the major indices trading mixed Thursday, there were several stocks which broke out to the upside on BIG volume. 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 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. The list in this post is quite large and includes 17 stocks, all of which traded higher on heavy volume Thursday. However I will only write about one stock in detail which I'll be adding to my watch list, 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
Ulta Salon, Cosmetics & Fragrance (ULTA) 8.53% 470.91%
Fastenal Company (FAST) 1.71% 152.57%
Sociedad Quimica y Minera (SQM) 5.42% 144.25%
Clean Energy Fuels Corp. (CLNE) 4.62% 114.78%
M.D.C. Holdings, Inc. (MDC) 4.60% 106.75%
Valeant Pharmaceuticals (VRX) 4.22% 92.55%
The Stanley Works (SWK) 3.52% 92.24%
MSCI Inc. (MXB) 6.88% 84.46%
The Dress Barn, Inc. (DBRN) 2.15% 67.55%
Community Health Systems (CYH) 1.72% 67.43%
Humana Inc. (HUM) 4.65% 65.44%
Liberty Global Inc. (LBTYA) 0.00% 59.03%
The Talbots, Inc. (TLB) 3.65% 46.14%
World Acceptance Corp. (WRLD) 2.29% 45.18%
Westport Innovations Inc. (USA) (WPRT) -0.66% 32.45%
Schweitzer-Mauduit International (SWM) 1.82% 27.48%
NII Holdings, Inc. (NIHD) 4.25% 25.98%
WellCare Health Plans, Inc. (WCG) 1.39% 24.45%

From the list above there are two stocks which I have noticed appearing on similar lists lately, one is Valeant Pharmaceuticals (VRX) and the other is Ulta Salon, Cosmetics & Fragrance (ULTA), and I am bullish on both. ULTA was red hot in Q4 of 2009 and looks like it could continue, but currently there aren't any options offered on this stock, so by default I will be writing about Valeant.

Click to enlarge

Valeant Option Trade: VRX broke out Wednesday and continued the trend Thursday. I believe VRX is a little overbought short term, so I would like to see some consolidation before jumping in. Friday's unemployment data will likely influence this stock as it will have a major impact on the overall market, so if this stock shows weakness on the back of that data, I believe it could be a good opportunity to get in. It is also important to note that Valeant will be hosting a conference call at 9 AM Friday to announce 2010 financial guidance, this may also affect the stock during trade Friday. If a sell off does occur, I would need to see this stock hold support near 31. My ideal entry point is below 32 a share, and I would look to structure a Vertical Call Spread position for the February expiration if it neared that price. Using current market data I could open a 32.50/35 February vertical call spread for roughly $140 per spread. This position would make time my friend, as this spread would put me into VRX for 33.90 a share (64 cents below Thursday's close). Of course if I waited until my entry point near 32 a share I would be paying a premium on the shares, but my potential return would increase, and my risk would also decrease. If I become more conservative on VRX, I would likely look to structure a 30/32.50 vertical call spread for February; this would give me a near 30% gain in 43 days as long as the stock holds above 32.50 (5.9% lower than Thursday's close).

Profit & Loss: The maximum loss per spread using current data is $140 per vertical call spread, even if the stock trades to zero. If the stock continues higher and closes on February options expiration above 35 a share, this strategy will return maximum profitability or $110 (a gain of 73.3%). The break even point for this strategy would be shares of VRX at 33.90 on February 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 SQM Sphere: Related Content

Thursday, January 7, 2010

Wednesday's Hot Stocks: Palm Option Trade Ahead of CES 2010

First and foremost, I hope everyone had a wonderful year end to 2009. I am finally back to writing after an extremely busy year end, and I must say it feels good! So on with my first post of 2010...

With the major indices trading flat Wednesday, there were a ton of stocks which hit my screener trading higher on heavy volume. As always, 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, especially with larger lists like this one). 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. The list in this post is huge and includes 50 stocks, all of which traded higher on heavy volume Wednesday. However I will only write about one stock in detail which I'll be adding to my watch list, 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
T A S E R International (TASR) 24.26% 1639.31%
Ticketmaster (TKTM) 4.53% 734.66%
Warren Resources (WRES) 4.42% 578.23%
China Education Alliance (CEU) 10.91% 481.63%
Worthington Industries (WOR) 20.53% 449.81%
Stillwater Mining (SWC) 16.57% 429.69%
Solarfun Pwr Hldgs (SOLF) 13.39% 373.16%
Vanceinfo Tech (VIT) 4.60% 358.01%
Fastenal (FAST) 6.60% 344.07%
China Transinfo Tech (CTFO) 12.08% 339.20%
Dexm (DXCM) 2.99% 337.21%
Ngas Resources (NGAS) 7.85% 322.78%
Live Nation (LYV) 6.42% 320.72%
Westport Innovations (WPRT) 5.77% 309.27%
Clean Energy Fuels (CLNE) 7.99% 308.79%
Metali (MEA) 10.44% 305.63%
Kraft Foods (KFT) 0.70% 302.19%
Atmel (ATML) 3.22% 262.59%
Istar Financial (SFI) 6.87% 259.54%
Renesola (SOL) 11.81% 252.83%
China Marine Food Group (CMFO) 9.47% 242.62%
Sono Products (SON) 1.94% 215.30%
Aixtron A G (AIXG) 4.71% 213.73%
Titanium Metals (TIE) 7.62% 208.14%
Provid Energy Trust (PVX) 6.12% 197.43%
Aine Glbl Premier Ppty (AWP) 2.19% 194.70%
Kulicke & Soffa Ind (KLIC) 10.95% 191.60%
Boise (BZ) 8.44% 177.08%
Diebold (DBD) 4.95% 174.68%
Valeant Pharmaceut (VRX) 5.17% 168.76%
Atlas Pipeline (APL) 6.48% 165.39%
U S Energy Wyoming (USEG) 9.56% 161.40%
Smartheat (HEAT) 7.08% 145.88%
Liberty Global (LBTYA) 5.82% 140.76%
Equinix (EQIX) 0.91% 130.37%
M D C Holdings (MDC) 3.31% 119.78%
Palm (PALM) 6.45% 106.63%
Dr Reddys Labs (RDY) 3.40% 106.54%
Cree (CREE) 4.14% 105.13%
Talbots (TLB) 9.45% 80.70%
Smart Modular Tech (SMOD) 8.51% 69.75%
Sandisk (SNDK) 2.75% 47.58%
Stanley Works (SWK) 2.51% 44.37%
Steven Madden Limited (SHOO) 2.31% 35.25%
Baidu (BIDU) 1.63% 32.91%
Lululemon Athletica (LULU) 2.10% 31.91%
Jinpan International (JST) 2.42% 29.10%
M & F Worldwide (MFW) 2.38% 28.81%
Schweitzer Mauduit (SWM) 4.12% 21.78%
nsol Energy (CNX) 3.32% 19.71%

There are quite a few familiar stocks from the list above which isn't unusual because there are so many listed, but the one which I will be writing a detailed option strategy about today is Palm (PALM). It was a year ago when Palm revealed the Palm Pre smartphone and WebOS at the Consumer Electronics Show and took the near $3 stock to well over $15 a share by the its release in June. It is very unlikely that Palm's stock will have the same reaction, but with shares of Palm breaking above some minor resistance levels the past couple days and some positive notes (such as Palm phones coming soon to the Verizon (VZ) network) from CES 21010, I believe Palm could continue rallying until resistance near the 12.50 level.

Click to enlarge
Palm Option Trade: I would like to see Palm fill the gap from mid December (roughly 11.50) before I jump in, but with CES 2010 starting today it may be a good time to take advantage of increased levels of volatility and sell some premium in the options market. I would do this by opening January 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 January 11 put options and a buyer of the January 10 put options (1 for 1). This spread would put me in the market for just 9 days, and time would certainly be my friend. Using current market data the spread could be opened for a net credit of $27 per spread or 27% return taking into account maintenance requirements.

Profit & Loss: The maximum loss per spread using current data is $63, even if the stock trades to zero. If the stock continues higher, sideways, or even as much as 2% lower, this strategy will return maximum profitability or the credit received of $27 per spread. The break even point for this strategy would be shares of PALM at 10.63 at January 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: No Positions Sphere: Related Content

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