Here is a list of stocks which traded higher Wednesday November 11, 2009 on unusually higher volume. I will keep an eye on these stocks Thursday to see if there is continued buying pushing the stocks higher. This method is just one of the ways I use to pick stocks to structure particular option trades. 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, 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|
|China Yuchai Intl Ltd||CYD||9.86%||625.51%|
|Toll Brothers Inc||TOL||16.42%||552.70%|
|Diana Shipping Inc||DSX||10.70%||248.62%|
|Aixtron A G Ads||AIXG||9.81%||234.11%|
|Smithfield Foods Inc||SFD||9.53%||136.78%|
|Inverness Med Innovatns||IMA||1.97%||66.36%|
|American Dairy Inc||ADY||5.49%||54.62%|
|Asiainfo Holdings Inc||ASIA||2.32%||49.32%|
|Comp De Bebidas Adr||ABV||0.86%||44.92%|
|Greenlight Capital Re||GLRE||3.00%||43.69%|
|Dollar Thrifty Automotve||DTG||3.59%||16.58%|
I really like ASIA, but I already outlined an option strategy in Monday's breakout report (see it here). I decided to detail an option strategy using Sonic Solutions for this article. Note that many of the stocks listed above will be good plays and many will be bad plays, I list them all to show possible breakout stocks and write about a few of the ones I am interested in.
(Click to enlarge)
Sonic Solutions Option Trade: As we can see from the 30 day (30 minute) chart this stock has been on a tear over the past week. We can also see it seems that the stock struggled with breaking up through $6, and when it did it traded higher for a few days but on low volume until it sold off with the rest of the stock market. When it broke below $6, it fell off a cliff, and it touched just below $4.70 a share. However that sell off was on light volume as well (each volume bar on the graph is a 30 minute interval over the past 30 days). Some bullish news was released on November 3, 2009 which sent shares gapping higher on a big volume spike, and we can see earnings also sent shares higher on a huge surge in volume (earnings indicated by green telephone on chart). Nothing that I could find was released on SNIC Wednesday, but it continued to gain strength throughout the trading day on MASSIVE volume, especially from 2:30 - 3:00 PM. It set a new 52-week high on this surge in volume and it closed the day near it.
One strategy I'm looking to use on this stock is the Vertical Call Option Spread. This will give me leverage on the stock, limit my downside risk, and return as much as 92%. I don't think the $10 range is out of the question, looking ahead to December. SNIC has almost doubled in the past 2 weeks so it wouldn't hurt to wait for some kind of profit taking to jump in these shares. I would like to get into this position if and when the stock trades near $8.00 - $8.50, however I will write about this trade as if I were to open it at close of Wednesday. This is a fairly simple trade that involves one expiration month and two separate option contracts. I would purchase December 7.50 strike call options and sell December 10 strike call options against them (1 for 1). The theoretical price for this spread is roughly $130 per option spread.
Profit and Loss: Let's say I opened just one spread. In the worst possible scenario, this strategy would lose a maximum of $130 per option spread. Now let's assume the stock moves sideways over the next 37 days and closes exactly at Wednesday's closing price which was $9.13, this strategy would return $33 per spread or 25.4% at expiration. Now let's assume the stock continues to rally and closes at December option expiration at or above $10, this position would return maximum profitability, $120 per option spread or 92.3%. It is worth noting the break even point for this strategy, it would be at $8.80 per share of SNIC. The stock is currently 33 cents above the break even point so a sideways move as stated above would be profitable, but a move higher of 87 cents in the underlying would return maximum profitability.
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 you've missed the stock and think it 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