21 Breakout Stocks to Watch, And How to Generate Income with Apple LEAP Options

by: Option Maestro

Here is a list of 21 stocks which traded higher Thursday on unusually higher volume. I have added all 21 of these stocks to my watch list (and invite you to as well), but chose only one to write about in detail in this post. 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 here.

The table below shows the company, ticker, Thursday's per share % increase, and Thursday's 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
E C Tel Ltd ECTX 16.35% 12466.46%
Lucas Energy Inc LEI 24.10% 3259.18%
Chipotle Mexican Grill B CMGB 14.35% 1250.59%
Skechers U S A Inc Cl A SKX 14.34% 490.91%
F 5 Networks Inc FFIV 15.58% 469.94%
Alexion Pharmaceuticals ALXN 8.34% 430.12%
Terremark Worldwide Inc TMRK 6.72% 390.02%
New York Times Co Cl A NYT 22.51% 385.99%
J Crew Group Inc JCG 15.24% 339.98%
Oilsands Quest Inc BQI 6.29% 332.36%
P N C Financial Svcs Grp PNC 12.66% 328.76%
Edwards Lifesciences Cp EW 6.95% 307.47%
Goodrich Corporation GR 7.17% 275.39%
East West Bancorp Inc EWBC 19.14% 239.24%
Thomas & Betts Corp TNB 6.93% 237.30%
T N S Inc TNS 4.55% 198.84%
Lubrizol Corp LZ 7.26% 162.52%
Jefferies Group Inc JEF 2.07% 138.89%
Novellus Systems Inc NVLS-OLD 6.80% 94.77%
Apple Inc AAPL 0.14% 65.17%
Charming Shoppes Inc[[ CHRS 8.01% 51.57%
Click to enlarge

I have chosen Apple (NASDAQ:AAPL) to write about in this post. This is a bullish and income generating strategy I have been using on Apple.

Apple Option Trade: Apple beat the street expectations Monday and the stock has been in a steady up-tick ever since. The strategy is a Call spread using two different months (Diagonal call spread). Looking ahead to January 2011 I can purchase the Apple LEAP 100 strike call options for just under $109 a share or $10,900 per option contract - paying less than $4 in premium. The delta on this option is 96.1 (very close to 1 - which is as high as it can get), or for every $1 move in the underlying Apple share this contract moves the same direction by 96.1 cents a share $96 per option contract). I choose this over the stock, because it is like owning 100 shares of the stock for half the price, or using some leverage. Once I own this contract I can then choose to write a call option contract against it (preferable near term and out of the money).

I am looking to write out the December 230 strike options against this particular contract. I would receive $240 for this contract. If Apple continues to rally and expires in December at or above $230 a share this position would return 11.2% in less than 2 months. If Apple does not reach this price and expires below 230 at December options expiration It can be written for a similar strike for any of the following months. Writing the options out monthly will lower the contract cost of the LEAP 100 Apple contract which was purchased. The December contract would lower the cost of the LEAP by roughly 2.2%. I will continue this strategy until I either get called out or the contract exercises (assuming Apple shares will be at or above 100 at January 2011 expiration). It is essential to know when to close or roll this position when using this strategy.

I have used this exact strategy with American Express (NYSE:AXP), Bank of America (NYSE:BAC), Caterpillar (NYSE:CAT), General Electric (NYSE:GE), Google (NASDAQ:GOOG), Goldman Sachs (NYSE:GS), MasterCard (NYSE:MA), and Visa (NYSE:V) in the past, and I have found it has given me much greater gains than holding the stock and writing calls on the underlying. To understand how to create spreads using options and when the best time to close the position is check out my Simplified Stock Option Trading E-Books.

The ideas outlined above involve the use of stock options. 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 option volume chart).

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.

Disclosure: AAPL December 200 Call Options, AAPL January 2011 100 Call Options, AXP, BAC, GOOG January 2011 300 Call Options, Visa November 60 Call Options, Short AAPL November 220 Call Options, AXP November 38 Call Options, AXP November 32 Put Options