First and foremost, I hope everyone had a wonderful year end to 2009. I am finally back to writing after an extremely busy year end, and I must say it feels good! So on with my first post of 2010...
With the major indices trading flat Wednesday, there were a ton of stocks which hit my screener trading higher on heavy volume. As always, 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, especially with larger lists like this one). 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 take a look at the chart(s) to see if I can structure a potential option trade. The list in this post is huge and includes 50 stocks, all of which traded higher on heavy volume Wednesday. However I will only write about one stock in detail which I'll be adding to my watch list, and outline an option trade I may look at opening in the near future.
This method is just one of the ways I use to find stocks for potential option trades. The first part of this post will show the list of stocks which traded higher on above average volume. The second part of this post requires the knowledge of stock options.
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|
|T A S E R International||(NASDAQ:TASR)||24.26%||1639.31%|
|China Education Alliance||(CEU)||10.91%||481.63%|
|Solarfun Pwr Hldgs||(SOLF)||13.39%||373.16%|
|China Transinfo Tech||(NASDAQ:CTFO)||12.08%||339.20%|
|Clean Energy Fuels||(NASDAQ:CLNE)||7.99%||308.79%|
|China Marine Food Group||(OTCPK:CMFO)||9.47%||242.62%|
|Aixtron A G||(NASDAQ:AIXG)||4.71%||213.73%|
|Provid Energy Trust||(PVX)||6.12%||197.43%|
|Aine Glbl Premier Ppty||(NYSE:AWP)||2.19%||194.70%|
|Kulicke & Soffa Ind||(NASDAQ:KLIC)||10.95%||191.60%|
|U S Energy Wyoming||(NASDAQ:USEG)||9.56%||161.40%|
|M D C Holdings||(NYSE:MDC)||3.31%||119.78%|
|Dr Reddys Labs||(NYSE:RDY)||3.40%||106.54%|
|Smart Modular Tech||(NASDAQ:SMOD)||8.51%||69.75%|
|Steven Madden Limited||(NASDAQ:SHOO)||2.31%||35.25%|
|M & F Worldwide||(NYSE:MFW)||2.38%||28.81%|
There are quite a few familiar stocks from the list above which isn't unusual because there are so many listed, but the one which I will be writing a detailed option strategy about today is Palm (PALM). It was a year ago when Palm revealed the Palm Pre smartphone and WebOS at the Consumer Electronics Show and took the near $3 stock to well over $15 a share by the its release in June. It is very unlikely that Palm's stock will have the same reaction, but with shares of Palm breaking above some minor resistance levels the past couple days and some positive notes (such as Palm phones coming soon to the Verizon (NYSE:VZ) network) from CES 21010, I believe Palm could continue rallying until resistance near the 12.50 level.
Click to enlarge
Click to enlarge
Palm Option Trade: I would like to see Palm fill the gap from mid December (roughly 11.50) before I jump in, but with CES 2010 starting today it may be a good time to take advantage of increased levels of volatility and sell some premium in the options market. I would do this by opening January Vertical Put Spreads. This is a rather simple trade to open and only requires the use of two separate option contracts. I would be a seller of the January 11 put options and a buyer of the January 10 put options (1 for 1). This spread would put me in the market for just 9 days, and time would certainly be my friend. Using current market data the spread could be opened for a net credit of $27 per spread or 27% return taking into account maintenance requirements.
Profit & Loss: The maximum loss per spread using current data is $63, even if the stock trades to zero. If the stock continues higher, sideways, or even as much as 2% lower, this strategy will return maximum profitability or the credit received of $27 per spread. The break even point for this strategy would be shares of PALM at 10.63 at January options expiration.
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.
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. Keep in mind when using this strategy it is essential that broker commissions are low enough to profit from the position.
Disclosure: No Positions