Daily Stock Market Equity and Options Trading Commentary

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Thursday, March 11, 2010

Volume Talks Wednesday March 10: Two Option Ideas on One Hot Stock

Today I am going to introduce my new breakout report which will also include stocks which traded the session lower 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.

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 26 stocks which traded higher on heavier volume, and 19 stocks which traded lower on heavier volume Wednesday March 10, 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
Psychiatric Solutions, Inc. (PSYS) 21.29% 1435.10%
Kinetic Concepts, Inc. (KCI) 14.29% 1240.87%
Vanda Pharmaceuticals Inc. (VNDA) 11.30% 610.19%
Evercore Partners Inc. (EVR) 2.41% 586.03%
Harbin Electric, Inc. (HRBN) 10.00% 558.51%
Aixtron AG (AIXG) 7.27% 417.52%
Helix Energy Solutions Group Inc. (HLX) 8.93% 371.88%
RadioShack Corporation (RSH) 5.58% 290.62%
Rovi Corporation (ROVI) 3.29% 277.25%
Micrel, Incorporated (MCRL) 1.25% 163.32%
Universal Health Services, Inc. (UHS) 2.98% 151.05%
Denbury Resources Inc. (DNR) 4.02% 143.64%
Alaska Air Group, Inc. (ALK) 5.64% 132.41%
Helen of Troy Limited (HELE) 2.46% 123.50%
Newell Rubbermaid Inc. (NWL) 2.07% 115.43%
Assured Guaranty Ltd. (AGO) 8.01% 115.39%
Amylin Pharmaceuticals, Inc. (AMLN) 6.47% 104.22%
Companhia Siderurgica Nacional (SID) 2.11% 91.91%
The Boeing Company (BA) 3.27% 81.41%
Valeant Pharmaceuticals International (VRX) 1.78% 66.44%
OmniVision Technologies, Inc. (OVTI) 4.34% 65.04%
Jo-Ann Stores, Inc. (JAS) 1.83% 54.59%
Nordson Corporation (NDSN) 1.87% 51.42%
MetLife, Inc. (MET) 2.38% 50.80%
Power Integrations, Inc. (POWI) 1.45% 50.72%

Breakout Bears on Heavier Volume

Company Ticker Price Change Volume Change
Transatlantic Holdings, Inc. (TRH) -1.01% 938.92%
AboveNet, Inc. (ABVT) -12.19% 877.72%
The Boston Beer Company, Inc. (SAM) -3.17% 564.04%
J. Crew Group, Inc. (JCG) -4.32% 465.83%
AeroVironment, Inc. (AVAV) -3.11% 449.55%
Navistar International Corporation (NAV) -5.29% 420.91%
Collective Brands Inc. (PSS) -7.17% 364.99%
Smith & Nephew (SNN) -2.15% 336.74%
EQT Corporation (EQT) -5.68% 292.01%
DaVita Inc. (DVA) -2.54% 185.85%
VanceInfo Technologies Inc. (VIT) -4.40% 157.98%
RehabCare Group, Inc. (RHB) -2.26% 142.11%
Coca-Cola FEMSA, S.A.B. de C.V. (KOF) -1.00% 111.62%
International Speedway Corporation (ISCA) -3.06% 111.42%
Carrizo Oil & Gas, Inc. (CRZO) -2.34% 79.42%
Cummins Inc. (CMI) -1.47% 67.38%
Western Digital Corp. (WDC) -1.86% 56.64%
Landstar System, Inc. (LSTR) -1.32% 55.74%
Kohl's Corporation (KSS) -1.79% 53.49%

Out of the large list of stocks above one stock that caught my eye quickly from the bullish list was Nordson Corporation (NDSN). This stock has appeared several times in the past 2 weeks as it has been in a steady incline since it reported earnings on February 22, 2010. As always I will first give a company summary from Google (GOOG) Finance below.
Nordson Corporation is engaged in manufacturing of equipment used for precision material dispensing, testing and inspection, surface preparation and curing. The technology-based systems are found in the production facilities globally. It serves the markets, including the appliance, automotive, bookbinding, container, converting, electronics, food and beverage, furniture, life sciences, medical, metal finishing, nonwoven, packaging, semiconductor and solar energy industries. The equipment ranges from manual, stand-alone units for low-volume operations to microprocessor-based automated systems for high-speed, high-volume production lines. The Company operates in three business segments: Adhesive Dispensing Systems, Advanced Technology Systems and Industrial Coating Systems. In January 2010, the Company acquired German distributor GLT mbH based in Pforzheim, Germany.
This company is a real growth story, and one I certainly wouldn't mind betting on. The company is projected to grow FY 2010 earnings 49% over FY 2009, and another 26% in FY 2011.

Click chart to enlarge
As we can see from the chart above this stock is very strong, setting new 52 week highs everyday and judging by the top end of the bollinger band 73 doesn't seem impossible short-term. If I was only an equity trader, I definitely wouldn't short it here, but would actually consider getting long these shares and setting a tight trailing stop loss, however I am more of an options trader so I'll outline my plans below.

Nordson Corporation Vertical Call Spread Strategy: Sooner or later profits have to be taken, therefore I plan on waiting for a slight correction in this stock before structuring this trade. I would like to see the stock pull back to the 20 day moving average and support at around 65 per share on lighter volume and hold at least 2 days. If this occurs I would look at purchasing a 65 strike call option with at least 20 days until expiration and writing out a 70 strike call option against it. If the chart gives me a clear bullish sign and I am convinced Nordson will move higher in the days after the light volume test, I may choose to just purchase at-the-money call options and wait for a move higher to write out the higher strike call option for a greater premium.

Nordson Corporation Vertical Put Spread Strategy:
As stated this stock may reach levels of 73 before profits start to be taken, therefore here is an idea that will return a very nice yield considering the risk in a very short time period. With the hovering on a strike price it is always a great idea to see what premiums can be made if the stock holds the current level or even continues higher. With the trend being up on this stock, I would look at selling near-the-money March Vertical Put Spreads. I would sell the March 70 put options and purchase the March 65 put options against them to limit my downside risk. As of current data this spread can be opened for a net credit of $95 or a 19% return on maintenance (less any commissions) in 9 calendar days.

Profit & Loss: The first strategy outlined is a scenario which accurate profit and loss cannot be determined, however the maximum loss will be limited to the price paid per option spread, and the maximum gain will be limited to $500 less the price of the spread. The second scenario is based on current data, therefore we can get a much more accurate profit and loss. Assuming this vertical put spread was opened for a net credit of $95, the maximum loss is limited to $405 per spread, and that is if Nordson sells off and closes at or below 65 a share on March options expiration (March 19). If Nordson moves higher, sideways, or lower-but by less than 11 cents a share by March options expiration this strategy will return the maximum profit of $95 per spread. It is also important to note that the break even point for this strategy is shares of Nordson at exactly 69.05 on March options expiration. Commissions are not taken into account for any of the profit and loss calculations.

Updates to Previous Posts:
As stated on my blog post here I thought ROVI corporation was an ideal stock to structure a synthetic stock position on for the March options expiration with two closes above 34.50. I updated that post here (where I informed readers to keep a close eye on Nordson) and said an ugly pattern had emerged and I would not get into Rovi until that patern had been voided. It was completely voided on March 2 and closed at 34.75. On March 3 ROVI was setting up to close its second day above 34.50 (closed at 34.63) and I entered into this trade near close. It has since rallied as much as 10.9% intraday. Although the chart still looks good and signals ROVI could move higher, the stock finished well off the highs sending me signal to lighten up on this position, therefore I closed two-thirds of my vertical put spread position on ROVI, as well as one-third of my March 35 Call Position on ROVI.

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 ROVI March 35 Call Options, Short ROVI March 35/30 Vertical Put Spread Sphere: Related Content

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