Tuesday's market sentiment was driven by extreme greed with Fear & Greed Index at 89, which was the same as the previous closing. As reported by CBOE, the total put/call ratio for Tuesday was 0.94. The index put/call ratio was 1.10, and the equity put/call ratio was 0.68. The CBOE volatility index (VIX) put/call ratio was 0.79. In the following, top stocks had been identified through our daily options scanning process, with the scanning criteria where the daily call volume ratio was above 2.00 (2x of the average call volume) with a call volume above 20,000.
Average Call Volume
Daily Volume Ratio
Vale SA (VALE)
Research In Motion Limited
Source: Schaeffer's Research
Unusual option activities can be an indicator or precursor of a major movement for the underlying stock. This article will try to identify the bullish factors for Vale SA and Research in Motion Limited.
Vale SA is a Brazil-based metals & mining company, producing and supplying iron ore, iron ore pellets, nickel, copper, coal, phosphate, potash, cobalt and others. The company also provides logistics services. Vale closed at $20.12 with 0.50% gain on Tuesday with a volume of 13.13M, which was 16.74% less than 15.77M. Vale had been trading in the range of $15.77-$26.87 in the past 52 weeks.
- Iron ore prices rally. Vale will benefit from increasing global demand. Vale expects the iron ore market to recover along with the economics of key Asian markets. China's imports are at a record level as harshest winter has hit iron ore output and driven up prices, sending the prices for the commodity soaring to a 15-month high.
- Cost cutting and divesting. For 2013, the company plans to spend $16.3B in capex, around a 7% decline from the $17.5B estimated in 2012. Vale has been trying to dispose in the non-core projects, including a stake sale to Statoil ASA (STO) in the concession BM-ES-22A in Brazil's Espirito Santo Basin.
- Goldman Sachs' analysts remain positive. The analysts from Goldman Sachs, Marcelo Aguiar and Diogo Miura, remain positive for 2013 and had raised their price target on VALE to $29.30 from $28.90.
- Fundamentally, Vale has a total cash of $8.81B and generates a strong cash flow of $20.46B. Vale offers a forward annual dividend yield of 3.10%. Vale has higher revenue growth (3 year average) of 16.4, comparing to the industry average of -8.2. Vale has higher operating margin of 34.2%, ttm, and net margin of 26.7%, ttm, as compared to the averages of 20.7% and 12.3%, ttm, respectively. Vale also generates higher ROE of 20.3, comparing to the average of 8.3. Vale has a low valuation with P/E of 4.9, which is well below the industry average of 13.2. Vale's forward P/E of 8.7 is also below S&P 500's average of 13.3.
Technically, the MACD (12, 26, 9) is showing a bearish trend; however, the MACD difference had been converging. The momentum indicator, RSI (14), is near neutral at 52.21. The major supports are 50-day MA of $19.09 and 200-day MA of $18.72.
Vale was downgraded by Canaccord Genuity to hold from buy.
The most active call was Mar. 15, 2013 call at the strike price of $21.00 with a volume of 9,927 and an open interest rate of 8,885. The implied volatility is 24.3, and the chance of breakeven is 23.86. The historical volatility for Vale is 19.44 for 1 month, 25.33 for 3 months, and 30.34 for 1 year.
For bullish investors, a credit put spread of Mar. 16, 2013 $17/$19 is reviewed which will allow investors to gain some upside potentials while acquiring the stock at a lower price below $19.00.
Research In Motion Limited
Research in Motion designs, manufactures, and markets wireless solutions for the mobile communications market worldwide. RIMM closed at $17.90 with 13.01% gain on Tuesday with a volume of 110.76M, which was 2.24x of 30 day average volume of 49.37M. RIMM had a new 52-week high at $17.90 on Tuesday. RIMM has a beta of 1.66.
- Launch of BlackBerry 10 on January 30, 2013. RIMM had been on a bullish run with positive expectation for BlackBerry 10. BlackBerry10 will be sold at Wal-Mart and Canadian Wal-Mart stores will be taking pre-orders. Telus, Rogers and Bells from Canada are also taking pre-orders. In a comparison with the iPhone 5, TelekomPress gave a favourable rating to the new BlackBerry in all areas except the availability of apps.
- Strategic alliances. The company will look into strategic alliances with other technology company once BlackBerry 10 models are launched. RIMM's strategic review could lead to the sale of RIMM's hardware production or the sale of licences to its software, among other options.
- Analysts' calls. Jefferies Group raised RIMM from hold to buy and increased the price estimate by $6.50 to $19.50 per share. Analyst Peter Misek stated, "investors can win in the many ways such as RIM creates an effective software business on top of Android/ iOS or prospects that are too low and a very high short interest, which could start congestion. The wild card is licensing contracts or other objects." Misek noted that RIM's new BlackBerry 10 operating system will enable corporate email on Apple (AAPL) iPhone and Google (GOOG) Android devices, which the market is unaware of or may have been overlooking it. Misek also stated the following supporting points for BB10: "1) Our checks indicate that the carriers have agreed to volume commitments for the first two quarters post-launch. 2) Our checks indicate that BB10 builds have been raised from 500K/month in early Dec to 1M-2M/month. 3) Developers are supporting BB10 more than we expected. RIM is targeting 70K BB10 apps available at launch." Although Paradigm Capital downgraded RIMM to "hold" from "speculative buy," the firm had increased RIMM's price target to $19.00 from $14.50. Scotia Capital upgraded RIMM to "sector outperform" from "sector perform."
- Fundamentally, RIMM has a total cash of $2.73B and zero total debt. RIMM has a book value of $18.15. RIMM has an enterprise price value of only $5.42B. The success of BB10 could improve RIMM's fundamental bottom-lines significantly and, most importantly, maintain RIMM's competitiveness in the smartphone industry.
- Technically, RIMM is strongly bullish with the MACD (12, 26, 9) showing a bullish trend and the RSI (14) indicating a strong bullish momentum at 78.61. RIMM is currently trading above its 50-day MA of $11.92 and 200-day MA of $9.81.
Spiking short interest. The shorted interest increased around 21% during the last two reporting period. The shorted shares now account for more than 28% of the equity's float. This could lead to volatile stock movement.
Over-bought in the short-term. The momentum indicator, RSI (14), is in the over-bought territory (above 70). However, this does not mean the price will correct immediately, and the stock may stay in the over-bought territory for a period of time.
Sell on the News. Delay of BB10 launch or sell off upon news release could trigger the price decline. If BB10 cannot meet the expectation, the long-term sustainability of RIMM could be in doubt.
The most active call was Apr. 19, 2013 call at the strike price of $21.00 with a volume of 10,458 and an open interest of 11,743. The implied volatility is 80.9, and the chance of breakeven is 21.13. The historical volatility for RIMM Is 72.93 for 1 month, 85.53 for 3 months, and 64.49 for 1 year.
For bullish options traders, the credit put spread can be reviewed to capture the upside potentials. The credit put spread can reduce the effect of time decay and volatility collapse as compared to the simple call options.
Note: All numbers/prices are quoted from the closing of January 22, 2013 with the data provided from Barron's, Morningstar, Schaeffer's Investment Research, Inc., Google Finance, and Yahoo! Finance. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.