With the major indices trading higher Monday, there were many stocks which broke out to the upside on BIG 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 14 stocks, all of which traded higher on heavy volume Monday February 1, 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|
|Valassis Communications, Inc.||(NYSE:VCI)||17.44%||756.14%|
|Sirius XM Radio Inc.||(NASDAQ:SIRI)||4.64%||182.10%|
|Tech Data Corporation||(NASDAQ:TECD)||1.87%||95.57%|
|Panera Bread Company||(NASDAQ:PNRA)||2.83%||67.42%|
|The Cheesecake Factory||(NASDAQ:CAKE)||4.30%||58.00%|
|The Talbots, Inc.||(NYSE:TLB)||8.70%||36.45%|
A stock that has been on a serious tear is Sirius XM Radio (SIRI). Over the past few sessions I have watched extremely high activity move into the $1 strike call options for March, June, September, and even February with just 19 days until expiration. Most of us know about Sirius XM, but as always before we get into the chart details, I will give a company profile from Google Finance below.
Sirius XM Radio Inc. has two principal wholly owned subsidiaries, XM Satellite Radio Holdings Inc. and Satellite CD Radio Inc. The Company is engaged in broadcasting in the United States, its music, sports, news, talk, entertainment, traffic and weather channels for a subscription fee through its satellite radio systems, the SIRIUS system and the XM system. On July 28, 2008, its wholly owned subsidiary, Vernon Merger Corporation, merged (the Merger) with and into XM Satellite Radio Holdings Inc. and, as a result, XM Satellite Radio Holdings Inc. became its wholly owned subsidiary. The SIRIUS system consists of three in-orbit satellites, approximately 120 terrestrial repeaters that receive and retransmit signals, satellite uplink facilities and studios. The XM system consists of four in-orbit satellites, over 700 terrestrial repeaters that receive and retransmit signals, satellite uplink facilities and studios.
Looking at the chart below, we can see that both price and volume have exploded as earnings are approaching. Could this bullish activity be signaling the first profitable quarter for Sirius? That I cannot answer and soon we'll see, however I added to my position Monday using the Buy/Write Option Strategy.
Click Chart to Enlarge
Click to enlarge
Sirius Option Trade: I don't usually like buying stocks before an earnings report, I'll usually just sell out of the money put spreads or sell out of the money call spreads, however I purchased shares Monday because I noticed that I could receive a nice premium for the March $1 strike call option contracts. I purchased shares Monday and wrote out one contract for every one hundred shares purchased. This is the simplest option trade to place and it is known as a Covered Call, covered meaning I own the shares to write. I was able to fill my order of SIRI quite easily for $0.85 (85 cents) per share, however it took me a bit longer to sell the options on those shares. I went in at the ask which was a dime or $10 per contract and I was totally filled within two hours. One problem to be aware of is that Sirius options are not as liquid as other high volume stocks, so it may be tough to get the entire order filled for the ask price. Once these calls were completely sold against my shares the adjusted cost per share became 75 cents (plus any commissions), therefore my position is now protected by 11.9% to the downside, however it also caps my return to 29.4%. This return would be great in just 47 days, but if SIRI moves lower or sideways until March options expiration and closes below $1 per share on expiration, I would have the underlying shares to write again for a different option expiration, lowering my cost basis even more.
Many people criticize this strategy because it limits the gains, however I entered into this trade hoping these shares would get called away at March expiration. This may not be the best strategy for individuals who want to be in the stock for the long-term or those who are very bullish and think this stock will go much higher than $1.
Profit & Loss: My maximum loss using current data is 75 cents per share, and that is if the stock trades to zero. If the stock continues higher and come March options expiration shares of SIRI are at or above 1 per share, this strategy will return $25 per covered call contract (29.4%). It is also important to note that the break even point for this strategy would be shares of SIRI at 0.75 on March options expiration, anything less would result in an unrealized loss and anything more would result in an unrealized gain on the shares of Sirius.
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: Long SIRI, Short SIRI March 1 Call Options