With the market taking a hit Tuesday on the back of a weak Alcoa (NYSE:AA) earnings report, there were several stocks which fought the trend and finished higher on heavy 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 and option strategy below it.
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 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 is quite large and includes 17 stocks, all of which traded higher on heavy volume Tuesday January 12, 2010. However I will only be writing 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. 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|
|Sorl Auto Parts, Inc||(NASDAQ:SORL)||17.31%||511.37%|
|The Cheesecake Factory||(NASDAQ:CAKE)||5.79%||220.00%|
|Charles River Laboratories||(NYSE:CRL)||3.63%||186.19%|
|Big Lots, Inc.||(NYSE:BIG)||1.75%||43.00%|
One stock from the list above which was also included in a similar list from January 5, 2010 is NBTY, Inc. (NTY) Before getting into the chart details, I will give a company profile from Google (NASDAQ:GOOG) Finance below.
NBTY, Inc. (NBTY) is a vertically integrated manufacturer, marketer and retailer of a line of nutritional supplements in the United States and throughout the world. The Company markets approximately 25,000 products under numerous brands, including Nature’s Bounty, Ester-C, Solgar, MET-Rx, American Health, Osteo Bi-Flex, Flex-A-Min, SISU, Knox, Sundown, Rexall, Pure Protein, Body Fortress, WORLDWIDE Sport Nutrition, Natural Wealth, Puritan's Pride, Holland & Barrett, GNC (UK), Physiologics, Le Naturiste, De Tuinen, Julian Graves and Vitamin World. The Company’s vertical integration includes the purchase of raw materials, formulating and manufacturing products, which it markets through the four channels of distribution: Wholesale/United States Nutrition, North American Retail, European Retail and Direct Response/E-Commerce. During the fiscal year ended September 30, 2009 (fiscal 2009), the Company manufactured approximately 90% of the nutritional supplements it sold.
By glancing at the chart we can see NTY closed at a new 52 week high on above average volume, a rather bullish sign. This stock broke and closed above levels of resistance around 44, so it looks as if shares of NTY could be poised for a move higher, or GET PUMPED UP (pun intended). I am considering opening the following option trade on NBTY below, but I'll first need to see it make a new closing high Wednesday.
Click to enlarge
NBTY Option Trade: As stated previously I will be monitoring the chart to see if the stock can continue and close higher. If it can hold these levels I would be a buyer of February Vertical Call Spreads. This is a rather simple trade to open and only requires the use of two separate option contracts. I would be a buyer of the February 45 call options and a seller of the February 50 call options (1 for 1). If the stock trades higher the call spread will become a bit more expensive to open but will have a higher probability of achieving maximum profitability. Using February options and current market data the spread could be opened for a net debit of $170 per option spread. I believe this stock has serious momentum and could set new 52 week highs in the coming month.
Profit & Loss: The maximum loss per spread using current data is $170, even if the stock trades to zero. If the stock continues higher and come February options expiration shares of NTY are at or above 50 per share, this strategy will return maximum profitability or $330 per option spread (194%). It is important to note that I will not be waiting for expiration to take profits if NTY moves higher, I will look to be taking profits at any point depending on share price and the number of days left until expiration. It is also very important to know that the break even point for this strategy would be shares of NTY at 46.70 on February 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. 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