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

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Wednesday, March 3, 2010

Tuesday's Hot Stocks: One Fahionable Option Trade

With the major indices trading slightly higher Tuesday, there were 28 stocks which broke higher 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.

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 includes 28 stocks, all of which traded higher on heavier volume Tuesday March 2, 2010. Many times I find an option strategy I plan on opening if I am convinced some money can be made.

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
RiskMetrics Group, Inc. (RISK) 4.22% 708.32%
Sotheby's (BID) 5.47% 398.03%
Sirius X M Radio, Inc. (SIRI) 1.24% 389.34%
Domino's Pizza, Inc. (DPZ) 5.10% 352.15%
The Dress Barn, Inc. (DBRN) 4.35% 345.73%
Acxiom Corporation (ACXM) 6.07% 343.50%
A. O. Smith Corporation (AOS) 2.70% 248.57%
Rovi Corporation (ROVI) 3.95% 234.36%
Power Integrations, Inc. (POWI) 1.99% 210.19%
Green Mountain Coffee Roasters Inc. (GMCR) 5.12% 207.96%
VeriFone Holdings, Inc. (PAY) 4.77% 195.50%
VMware, Inc. (VMW) 1.39% 182.60%
Medivation, Inc. (MDVN) 5.17% 179.23%
Atheros Communications, Inc. (ATHR) 3.11% 165.37%
J.C. Penney Company, Inc. (JCP) 3.44% 153.81%
NBTY, Inc. (NTY) 3.46% 143.64%
Albemarle Corporation (ALB) 2.26% 141.47%
F5 Networks, Inc. (FFIV) 2.47% 140.16%
Sirona Dental Systems, Inc. (SIRO) 2.30% 124.33%
Hartford Financial Services (HIG) 3.67% 109.34%
WebMD Health Corp. (WBMD) 1.09% 107.75%
priceline.com Incorporated (PCLN) 1.17% 103.15%
RINO International Corporation (RINO) 7.29% 94.85%
Concho Resources Inc. (CXO) 2.12% 84.46%
Steven Madden, Ltd. (SHOO) 1.90% 78.74%
Jo-Ann Stores, Inc. (JAS) 1.58% 66.80%
Smith International, Inc. (SII) 2.40% 53.17%
Vale (ADR) (VALE) 2.49% 51.69%

Out of the 28 stocks above, there are quite a few which I have already outlined potential option trades on in previous posts, therefore if you follow my posts you'll definitely want to see the update section below. Out of Tuesday's breakout stocks on big volume, one which I have been debating opening an option strategy on for some time is Steven Madden, Ltd. (SHOO), however at this point I believe the stock is overbought and I would like to wait for a pull back to get long. First I will give a company summary from Google (GOOG) Finance below.
Steven Madden, Ltd. designs, sources, markets and retails fashion-forward footwear for women, men and children. The Company also designs, sources, markets and retails name brand and private label fashion handbags and accessories through its Daniel M. Friedman Division. The Company distributes products through its retail stores, its e-commerce Website, department and specialty stores throughout the United States and through special distribution arrangements in Canada, Europe, Central and South America, Australia and Asia. Its business comprises three segments: Wholesale, Retail and First Cost. Steven Madden Retail, Inc., its wholly owned retail subsidiary, operates Steve Madden and Steven retail stores, as well as its e-commerce Website. Its wholly owned subsidiary, Adesso-Madden, Inc. acts as a buying agent for footwear products under private labels and licensed brands for many mass merchandisers and mid-tier department stores. In February 2010, the Company acquired Buddha, Inc.
Steven Madden (SHOO) reported earnings the morning of February 25, 2010, gapped higher and closed much lower (opened at 43.58, closed at 41.99; a rather bearish chart pattern and a potential reversal signal), the following day the stock traded in a big range (high of 42.94, and low of 41.23) but bulls managed to dominate and SHOO closed nearly unchanged, just 2 cents higher, SHOO seems to have regained its footing and on March 1 & 2 the stock has exploded to the upside on larger volume. As stated before, the day of earnings signaled a very ugly chart pattern to me, and I believe SHOO would have sold off if it was not helped by Deckers (DECK) reporting earnings the evening of February 25. As stated I believe SHOO is a bit overbought, but based on the current chart I certainly wouldn't short it here, so I will outline a potential option trade that will get me into the stock lower if SHOO sells off, but will allow me to participate in gains if the stock continues higher, sideways, or even lower by as much as 10% over the next 17 days.

Steven Madden Vertical Put Spread: As stated I wouldn't mind picking up shares of this stock if it traded lower, and based on the chart and bollinger bands I don't believe seeing the stock down near the 40-38 range is impossible. Instead of setting a limit order to purchase these shares, I have decided to sell March 40/35 vertical put spreads, that way if the stock continues higher I will also return slight gains, instead of just having a good until canceled limit order. Using current market data, this strategy could be opened for a net credit of $25 per spread or 5% return on maintenance (less any commissions) in 17 calendar days, but I plan on placing my order on weakness in the underlying to try and get a bit more premium than current levels.

Profit & Loss: Assuming I could open this option position for the prices outlined above, my maximum risk is limited to $475 per position, this will occur if SHOO sells off and closes on March options expiration at or below 35 per share. This position will achieve maximum profitability if SHOO closes above 40 per share on March options expiration (10.17% lower than Tuesday's close price), returning $25 profit per option spread (less any commissions). The break even point for this strategy is SHOO at 39.75 per share at March options expiration (less any commissions), anything below 39.75 per share at expiration will result in an unrealized loss on shares of SHOO (assuming the position is not closed and is exercised).

This should not be considered if you think the stock will sell off by more than 10% in the near future. However if you feel the stock could move higher or sideways 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.

Updates to Previous Posts:
First it is important to note that I traded entirely out of my China Agritech (CAGC) March Vertical Call Spread position Tuesday as I noticed immediate weakness following a huge gap higher at the open. It looks as if the daily chart is marked with a very ugly bearish engulfing candle pattern, and I would not want to be long this stock here.

Second I lightened up on my Sirona Dental (SIRO) position after witnessing the stock reverse off the higher end of the bollinger band near 38 per share. The chart still looks okay on Sirona, however this was my signal to lighten up.

Third, going way back to my Sirius (SIRI) buy-write option strategy outlined on February 2, 2010, I believe that identical strategy could be considered at these levels. Going into the close Tuesday, I purchased additional shares of Sirius as it looked like it had a reversal day and the short term bottom may be in (gapping lower at the open, trading as low as 82 cents, and finishing the day in positive territory; having its second highest volume day in the past 52 weeks, only to the day Sirius got booted from the Russel Index on June 26, 2009). I hope to write the shares out for the March options expiration on strength in Sirius, however I may have to write them out for April.

Last but not least another update to Rovi Corporation (ROVI). After outlining a bullish option strategy on February 24, I made an important update to the post on February 25 stating a very bearish pattern had emerged and it was likely to show some short term weakness. ROVI showed weakness the following three days, but finally broke out again Tuesday voiding that bearish chart pattern and actually setting a new 52 week high. I might reconsider opening the option strategy outlined in my post on ROVI, however I think I would rather purchase shares of the stock and set a tighter trailing stop loss, as ROVI has just been far too volatile lately.

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 NTY March 45 Call Options, SIRI, SIRO March 40 Call Options, SIRO April 25 Put Options, Short RINO March 20 Put Options, SIRI March 1 Call Options, SIRO April 30 Put Options Sphere: Related Content

Tuesday, March 2, 2010

Detailed Option Trade for a Potential Apple Reversal

Apple has been on a tear lately, up over 6% from the closing price Monday February 23. Judging by Tuesday's price action, I believe it may head a bit lower in the following sessions, and I have outlined an option strategy to capture a move lower below. First I must mention that I do not mind owning shares of Apple after options expiration, because the strategy outlined below does involve being naked one contract of Apple (AAPL), this means for each contract I am "naked" I could get 100 shares of Apple "put" to me.

Click chart to enlarge
As we can see from the chart above, Apple gapped higher to 209.93 per share at open Tuesday and closed below that price at 208.85, finishing the day down 0.14 points (14 cents). The volume was not huge, but greater than the previous two trading sessions. I believe Apple is heading lower short term based on this bearish looking pattern, but for confirmation I need to see Apple close lower on at least average volume Wednesday.

Apple Ratio Put Spread Option Strategy: With this pattern emerging, I decided to structure a ratio put spread on Apple. This is a fairly simple trade and only involves two different option legs for the same expiration. I first must state that I only anticipate short term weakness on Apple down to the 20 or 50 day moving averages before it consolidates and moves higher. With my short term price target being near 200 per share and the stock trading near 209 per share, that gives me all the info I'll need to structure this trade. First I purchased in-the-money March 210 strike put option contracts on Apple, then for each one (1) I purchased, I sold two (2) March 200 strike put options against them. I was able to open this spread for a net debit of $170 per ratio put spread. Using current market data as of close Tuesday the theoretical price for opening one of these spreads is roughly $195 per spread, which gives an extrinsic option premium to this spread of $80. Once opened it is very important to be monitoring this position, as I rarely wait until expiration day to close or let the position exercise, so a key support level to watch is 205. If Apple tests support near 205 per share and holds, I will look to be exiting this position, if it cannot hold the 205 level I will continue to hold it.

Profit & Loss: Although I rarely wait until expiration to get out of my positions, I will outline the maximum profit and losses associated with this trade if I waited until March options expiration to close or get exercised on this position. Assuming I could open this option position for the prices outlined above, my maximum risk is limited to $195 per spread, this will occur if Apple trades higher and closes on March options expiration at or above 210 per share. This position will achieve maximum profitability if Apple closes exactly at 200 per share on March options expiration, returning 513% or $805 profit per option spread. This strategy has two break even points, one being Apple at 208.05 per share, and the other at 195.98 per share at expiration (less any commissions). Anything below 195.98 per share at expiration will result in an unrealized loss on shares of Apple (assuming the position is not closed and is exercised). It is important to note the net delta, gamma, and theta for this strategy as well, considering it may be a good idea to trade out of this spread before expiration. Based on current market data some important Greeks to note for this spread are Delta = -0.082, Gamma = 0.014, and Theta = -0.077.

This should not be considered if you think the stock will rally in the near future. However if you feel the stock could move lower but no lower than 4.23% 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 AAPL March 210 Put Options, Short AAPL March 200 Put Options
Sphere: Related Content

Monday's Hot Stocks: Charge Up Your Portfolio With Volterra

With the major indices starting off March with a bang Monday, there were plenty of stocks which traded higher on above average 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.

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 includes 28 stocks, all of which traded higher on heavier volume Monday March 1, 2010. Many times I find an option strategy I plan on opening if I am convinced some money can be made.

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
OSI Pharmaceuticals, Inc. (OSIP) 51.94% 3438.90%
Halozyme Therapeutics, Inc. (HALO) 21.21% 565.39%
Dillard's, Inc. (DDS) 18.73% 420.81%
USEC Inc. (USU) 20.64% 402.38%
Insituform Technologies, Inc. (INSU) 3.26% 308.66%
Volterra Semiconductor Corporation (VLTR) 6.96% 285.11%
Crosstex Energy, L.P. (XTEX) 11.39% 248.45%
Power Integrations, Inc. (POWI) 6.23% 247.08%
Pall Corporation (PLL) 3.90% 242.46%
Radware Ltd. (RDWR) 4.53% 202.75%
Pacer International, Inc. (PACR) 13.07% 190.37%
Cantel Medical Corp. (CMN) 5.22% 178.79%
Tuesday Morning Corporation (TUES) 11.21% 167.25%
NBTY, Inc. (NTY) 4.41% 165.91%
A. O. Smith Corporation (AOS) 1.32% 144.08%
AboveNet, Inc. (ABVT) 3.89% 127.93%
The Dress Barn, Inc. (DBRN) 3.50% 115.04%
Rockwell Collins, Inc. (COL) 3.75% 113.94%
Riverbed Technology, Inc. (RVBD) 5.14% 111.79%
Albemarle Corporation (ALB) 5.20% 99.11%
NetLogic Microsystems, Inc. (NETL) 3.03% 98.63%
SanDisk Corporation (SNDK) 11.94% 92.14%
F5 Networks, Inc. (FFIV) 4.39% 87.90%
M & F Worldwide Corp. (MFW) 8.55% 81.15%
The Boston Beer Company, Inc. (SAM) 3.42% 80.31%
Steven Madden, Ltd. (SHOO) 4.02% 80.14%
Nu Skin Enterprises, Inc. (NUS) 5.69% 72.16%
priceline.com Incorporated (PCLN) 5.22% 71.65%

Out of the 28 stocks listed above the one which I will be keeping an extra close eye on in the following sessions is Volterra Semiconductor Corporation (VLTR). This stock looks like it has some real momentum, and had its highest 52 week close Monday. As always, I will give a company profile from Google (GOOG) Finance below.
Volterra Semiconductor Corporation (Volterra) designs, develops and markets, high-performance analog and mixed-signal power management semiconductors for the computing, storage, networking and consumer markets. The Company's core products are integrated voltage regulator semiconductors and scalable voltage regulator semiconductor chipsets that transform, regulate, deliver, and monitor the power consumed by digital semiconductors. Through its power system architecture and mixed-signal design techniques, Volterra has integrated power, analog, and digital circuits onto a single complementary metal oxide silicon [CMOS] semiconductor, eliminating the need for a large number of discrete components required by conventional power management solutions.
As stated Volterra had its highest close on Monday, and I think it has potential to go even higher. Before I go too much further into detail, it is important to note that it may be slightly overbought short term (judging by how the stock pulled back off the higher end of the bollinger band Monday), therefore before I jump into the trade outlined below, I would like to see the stock hold the 23 price level over the next few trading sessions. If the stock can hold the 23 level, I would look at opening March 22.50/25 Vertical Call Spreads. It looks like these call spreads had some action Monday, as 72 of the March 22.50 strike call contracts traded on open interest of 350, and 70 of the March 25 strike Call contracts traded on an open interest of 55. It is also very important to note that these contracts are not as liquid as I'd like them to be, but with increased interest moving into them they should become more liquid.

Click chart to enlarge
Volterra Option Strategy: As stated I will be looking at opening a March 22.50/25 Vertical Call Spread position on Volterra. This is a very simple option strategy and can be opened with just two legs. I would be a buyer of the March 22.50 call options and a seller of the March 25 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 March options and current market data the spread could be opened for a net debit of $110 per option spread. This spread is already in the money by 0.85 points (85 cents), so at this theoretical price I would be paying an extrinsic option premium of 25 cents a share or $25 per option spread.

Profit & Loss: Although I rarely wait until expiration to get out of my positions, I will outline the maximum profit and losses associated with this trade if I waited until March options expiration to close or get exercised on this position. Assuming I could open this option position for the prices outlined above, my maximum risk is limited to $110 per position, this will occur if VLTR sells off and closes on March options expiration at or below 22.50 per share. This position will achieve maximum profitability if VLTR closes above 25 per share on March options expiration, returning 127% or $140 profit per option spread. The break even point for this strategy is VLTR at 23.60 per share at March options expiration (less any commissions). It is important to note the net delta and gamma for this strategy as well, considering it may be a good idea to trade out of this spread before expiration on continued strength in the underlying. Based on current market data this spread is long delta 0.418, and long gamma 0.022.

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 NTY March 45 Call Options Sphere: Related Content

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