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

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Friday, January 15, 2010

25 High Yielding Option Write Ideas for January's Option Expiration Friday

In this post I will outline 25 stocks which will return high one day returns using the buy write option strategy. This post assumes the underlying security will be at or above the indicated strike price at market close. First and foremost It is very important to write the shares out as early as possible as volatility rushes into the market in the morning, and not wait for it to start decreasing rapidly in the afternoon. It's not too late to get premium out of many of these stocks, and writing them for just a day decreases risk greatly. I will look to be purchasing some of the stocks mentioned below during pre-market or near market open to write out within an hour of the opening bell. I don't mind holding any of these stocks long which is why I'll be using this strategy today. If I get called out I won't mind because I'll still make money. Below is the list of stocks, the potential return if exercised, and downside protection if they do not get exercised. To learn more about the buy/write option strategy, risks, pricing, calculations, other strategies, and options in general, click here.

Note that higher beta securities return higher percentages due to their levels of implied volatility, and because they are more risky.

To understand the table, I will give a detailed example of Option Maestro favorite Suntech Power (STP) below.

Sell the at-the-money STP January 16 strike call option. The premium received from the call option would give a downside protection of 2.18%. If the stock closes above 16 at the end of trade including post-market trade (it will get assigned) today the total return from this position would be 1.62% in just 6.5 trading hours.

I have ranked the stocks in the table below in order from greatest to least protection (note that most of these stocks with greater protection have less return, as they are deeper in the money or have less volatility than others listed). I have also calculated the group average return and protection which is the very bottom row of the table in green. The data listed in red bold represents greater than the group average.

Company Ticker Strike Potential Return % Protection %
A123 Systems AONE 20 1.47 3.43
Textron TXT 22.5 1.14 2.41
Suntech Power STP 16 1.62 2.18
Rambus RMBS 21 1.28 2.08
Dow Chemical DOW 30 0.33 2.06
First Solar FSLR 125 2.17 2.04
Baidu BIDU 460 0.79 1.70
Direxion Daily Financial Bull 3X ETF FAS 86 2.38 1.70
JP Morgan JPM 45 1.95 1.25
Potash POT 115 0.86 1.13
American Express AXP 43 1.76 1.01
Wells Fargo & Company WFC 29 1.03 1.00
MasterCard MA 260 0.55 0.73
Research in Motion RIMM 66.62 0.77 0.66
Las Vegas Sands LVS 19 2.52 0.64
Illumina, Inc. ILMN 40 3.13 0.64
Cisco CSCO 25 0.84 0.60
Goldcorp GG 41 1.48 0.49
Google GOOG 590 0.50 0.47
Alcoa AA 16 1.64 0.44
Apple AAPL 210 0.69 0.42
Dendreon DNDN 30 1.83 0.41
Goldman Sachs GS 170 1.26 0.39
Caterpillar CAT 62.5 1.05 0.21
Amazon AMZN 130 2.27 0.19



1.41 1.13

From the table above I will be looking to pick up shares of Suntech Power (STP), A123 Systems (AONE), and First Solar (FSLR) (for a one day option write). If these shares close below the strike I may end up with them and I don't mind as I'll take them into my portfiolio. Individual stocks may not return as much as some of the double and triple leveraged ETF's. For example If I was bullish on the financial sector, I may not mind holding the Direxion Daily 3X Bull (FAS) (short-term of course as these shares don't make good investment vehicles), I would choose to purchase the stock pre-market and write out call options at open. If I was more bearish on the financials I may look at purchasing the Direxion Daily 3X Bear (FAZ) and write at-the-money calls out on it. Be sure to check out other leveraged ETF's for similar strategies such as: SSO, SDS, UCO, UYM, UYG, SKF, TNA, TZA, BGU, BGZ, ERX, ERY, and many others.

To better understand options in general, including this strategy, these percentage calculations, and other option strategies please check out my Simplified Stock Option Trading E-Books. As a shareholder of many of the stocks listed above in the past, I've written them out for a variety of strikes for the January options expiration, as the volatility of the underlying stock gives a very nice premium, even on out of the money options.

The list above are stocks which I wouldn't mind holding in my portfolio if they did not get exercised at expiration. 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.

This is an ideal strategy to open long positions when the market has rallied as much as it has. This strategy will give protection if the market sells off, as well as provide a return if the market continues to rally. If the stock is not assigned, this strategy is a great way to create additional income for your portfolio. 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). Keep in mind when using this strategy it is essential that broker commissions are low enough to profit from the position.

Disclosure:Long AXP, GOOG January 2011 300 Calls, GS January 2011 100 Calls, TXT February 23 Calls, Short AA January 15 Puts, AXP January 44 Calls, AXP January 37.5 Puts, RIMM January 66.62 Puts, STP January 15 Puts, Sphere: Related Content

Thursday, January 14, 2010

Wednesday's Hot Stocks: Finding A Rose Among Many Thorns

With the major indices ticking slightly higher Wednesday, there were many stocks which broke out to the upside on BIG volume. 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 and option strategy below it.

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 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 is quite large and includes 27 stocks, all of which traded higher on heavy volume Wednesday January 13, 2010. However I will only be writing 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
Amtech Systems, Inc. (ASYS) 22.13% 1548.45%
Xyratex Ltd. (XRTX) 11.74% 928.47%
Baidu, Inc. (BIDU) 13.71% 726.42%
Nektar Therapeutics (NKTR) 13.51% 558.04%
RXi Pharmaceuticals Corporation (RXII) 9.23% 429.87%
interCLICK Inc (ICLK) 9.83% 358.92%
Triumph Group, Inc. (TGI) 8.32% 352.40%
Covance Inc. (CVD) 4.67% 293.23%
Charles River Laboratories (CRL) 6.14% 242.71%
Vital Images, Inc. (VTAL) 7.85% 231.57%
Super Micro Computer, Inc. (SMCI) 12.38% 218.35%
Websense Inc. (WBSN) 6.19% 202.68%
Cytori Therapeutics Inc. (CYTX) 13.57% 198.91%
Sony Corporation (SNE) 5.04% 195.74%
Sotheby's (BID) 8.65% 146.74%
Community Health Systems (CYH) 7.31% 137.01%
IESI BFC Ltd (BIN) 2.06% 117.87%
China Agritech Inc. (CAGC) 6.42% 117.68%
Schiff Nutrition International Inc. (WNI) 4.42% 104.95%
NewMarket Corporation (NEU) 1.31% 101.35%
EnerNOC, Inc. (ENOC) 7.72% 85.52%
Apogee Enterprises, Inc. (APOG) 4.32% 82.65%
iShares Dow Jones US Pharm Index (IHE) 1.65% 77.53%
Vitacost.com, Inc. (VITC) 3.86% 59.97%
Rosetta Resources Inc. (ROSE) 4.39% 33.17%
Green Mountain Coffee Roasters Inc. (GMCR) 6.29% 26.55%
Apple Inc. (AAPL) 1.41% 23.89%

One stock from the list above which really caught my attention during trade Wednesday is Rosetta Resources Inc. (ROSE). All of the listed February call contracts seemed to be getting some heavy action Wednesday with the February 22.50 strike (highest contract available) trading almost 1000% of the open interest (179 contracts traded on open interest of 18). However before we get into the chart details, I will give a company profile from Google (GOOG) Finance below.
Rosetta Resources Inc. together with its subsidiaries (Rosetta) is an independent oil and gas company engaged in the acquisition, exploration, development and production of oil and gas properties in North America. The Company’s operations are concentrated in the areas of the Sacramento Basin of California, the Rockies, and South Texas. In addition, Rosetta has non-core positions in the State Waters of Texas and the Gulf of Mexico. During the year ended December 31, 2008, the Company drilled 184 gross and 152 net wells, with a success rate of 89%. In 2008, the Company had 398.2 billion of cubic feet equivalents (Bcfe) of proved oil and natural gas reserves, including 376.5 billion cubic feet (Bcf) of natural gas and 3,603 million barrels (MBbls) of oil and condensate.
By glancing at the chart I believe this stock is a bit overextended to the upside so I would like to get into this on weakness. Shares of ROSE made a new 52 week high Wednesday and closed just 11 cents below it, a rather bullish sign. I am considering opening the following option trade on ROSE below, but I'd like to see it test minor support levels near 20 on lighter volume first.

Click chart to enlarge
ROSE Option Trade: As stated earlier I will be monitoring the chart to see if the stock can pull back on lighter volume and hold the 20 level. If it can, I would look to open Diagonal Call Spreads. Two major reasons I chose to structure this trade with this stock are: 1) I expect oil and gas to tick significantly higher by spring 2010, and 2) with volatility near 20 month lows I believe it is a great time to be buying some longer dated call contracts.

To begin this trade I would first purchase April 20 strike call options. This would give me the rights to this stock at 20 per share for just over three months, and being a small cap stock I believe it will outperform larger cap oil and gas stocks, if commodities really start to heat up by early spring. Using current data these calls are roughly $270 per option contract. I would then look to write out shorter dated higher strike calls against them to lower my cost basis. Looking ahead to February options, I could fetch $100 per contract for the 22.50 strike. This would lower my cost basis by 37%, however it would limit my return to 47% if assigned at February expiration. This would be great, but if ROSE moves lower or sideways until February options expiration and closes below 22.50 per share on expiration, I would have the underlying contracts to write again for the March expiration lowering my cost basis even more. I will continue to write shorter dated and higher strike call options against the April 20 calls until April options expiration, I get assigned, or I cannot receive premiums (in the case that the stock sells off significantly). The data used is for example purpose and will not be accurate if shares of ROSE reach my ideal entry point. If shares fall to my entry point near 20 per share, premiums for all call contracts will reflect it and become cheaper.

Profit & Loss: The maximum loss per spread using current data is $170, even if the stock trades to zero. If the stock continues higher and come February options expiration shares of ROSE are at or above 22.50 per share, this strategy will return $80 per option spread (47%). It is also important to note that the break even point for this strategy would be shares of ROSE at 21.70 on February options expiration, anything less would result in an unrealized loss for the April contracts and anything more would result in an unrealized gain for the April contracts.

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

Wednesday, January 13, 2010

Tuesday's Breakout Stocks: Pumping up Your Portfolio with NBTY

With the market taking a hit today on the back of a weak Alcoa (AA) earnings report, there were several stocks which fought the trend and finished higher on heavier volume. 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 and option strategy below it.

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 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 is quite large and includes 17 stocks, all of which traded higher on heavy volume Tuesday January 12, 2010. However I will only be writing 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
Sorl Auto Parts, Inc (SORL) 17.31% 511.37%
Illumina, Inc. (ILMN) 15.82% 441.68%
The Cheesecake Factory (CAKE) 5.79% 220.00%
Amylin Pharmaceuticals (AMLN) 1.40% 211.27%
Charles River Laboratories (CRL) 3.63% 186.19%
MicroStrategy (MSTR) 9.69% 149.00%
NBTY, Inc. (NTY) 1.21% 49.00%
Big Lots, Inc. (BIG) 1.75% 43.00%

One stock from the list above which was also included in a similar list from January 5, 2010 is NBTY, Inc. (NTY) Before getting into the chart details, I will give a company profile from Google (GOOG) Finance below.
NBTY, Inc. (NBTY) is a vertically integrated manufacturer, marketer and retailer of a line of nutritional supplements in the United States and throughout the world. The Company markets approximately 25,000 products under numerous brands, including Nature’s Bounty, Ester-C, Solgar, MET-Rx, American Health, Osteo Bi-Flex, Flex-A-Min, SISU, Knox, Sundown, Rexall, Pure Protein, Body Fortress, WORLDWIDE Sport Nutrition, Natural Wealth, Puritan's Pride, Holland & Barrett, GNC (UK), Physiologics, Le Naturiste, De Tuinen, Julian Graves and Vitamin World. The Company’s vertical integration includes the purchase of raw materials, formulating and manufacturing products, which it markets through the four channels of distribution: Wholesale/United States Nutrition, North American Retail, European Retail and Direct Response/E-Commerce. During the fiscal year ended September 30, 2009 (fiscal 2009), the Company manufactured approximately 90% of the nutritional supplements it sold.
By glancing at the chart we can see NTY closed at a new 52 week high on above average volume, a rather bullish sign. This stock broke and closed above levels of resistance around 44, so it looks as if shares of NTY could be poised for a move higher, or GET PUMPED UP (pun intended). I am considering opening the following option trade on NBTY below, but I'll first need to see it make a new closing high Wednesday.

Click to enlarge

NBTY Option Trade:
As stated previously I will be monitoring the chart to see if the stock can continue and close higher. If it can hold these levels I would be a buyer of February Vertical Call Spreads. This is a rather simple trade to open and only requires the use of two separate option contracts. I would be a buyer of the February 45 call options and a seller of the February 50 call options (1 for 1). If the stock trades higher the call spread will become a bit more expensive to open but will have a higher probability of achieving maximum profitability. Using February options and current market data the spread could be opened for a net debit of $170 per option spread. I believe this stock has serious momentum and could set new 52 week highs in the coming month.

Profit & Loss: The maximum loss per spread using current data is $170, even if the stock trades to zero. If the stock continues higher and come February options expiration shares of NTY are at or above 50 per share, this strategy will return maximum profitability or $330 per option spread (194%). It is important to note that I will not be waiting for expiration to take profits if NTY moves higher, I will look to be taking profits at any point depending on share price and the number of days left until expiration. It is also very important to know that the break even point for this strategy would be shares of NTY at 46.70 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: No Positions Sphere: Related Content

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