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The following is a list of stock rallies that options traders and short sellers expect to continue.

We started with a universe of stocks that had the following characteristics:

  • Trading above 20-day, 50-day and 200-day MA (i.e. in a solid uptrend)
  • Market cap above $300M
  • Up more than 20% over the last year
  • ROE, ROI, ROA above 10% (TTM)

That resulted in a universe of about 200 stocks…

We then evaluated option market sentiment on this universe, and only focused on stocks with a large call option open interest relative to put option open interest (i.e. options traders expect these rallies to continue). By only focusing on stocks with Put/Call ratios below 0.75, we narrowed the screen down to about 60 stocks.

And finally, we used trends in shares shorted to come up with this list of 10 stocks. All of the stocks here have seen a decrease in the number of shares shorted between the end of May and August.

Yes, short-covering may have contributed to some of the recent gains, but it's interesting to note that the shorts have given up on these names.

Short float data sourced from AOL Money, options data sourced from Schaeffer's, and moving average data sourced from Finviz.

click for expanded image

The list has been sorted by Put/Call ratios.

1. Suburban Propane Partners LP (SPH): Specialty Retail Industry. Market cap of $1,863B. The stock has gained 37.3% over the last year. Call open interest at 3,212 contracts vs. put open interest at 1,099 contracts (Put/Call ratio at 0.34). Shares shorted have decreased from 241,484 to 193,119 between the end of May and the end of August.

2. Hasbro Inc. (HAS): Toys & Games Industry. Market cap of $6,250B. The stock has gained 59.59% over the last year. Call open interest at 8,980 contracts vs. put open interest at 3,418 contracts (Put/Call ratio at 0.38). Shares shorted have decreased from 5.16M to 2.49M between the end of May and the end of August.

3. New Oriental Education & Technology Group (EDU): Education & Training Services Industry. Market cap of $4,055B. The stock has gained 37.55% over the last year. Call open interest at 8,391 contracts vs. put open interest at 3,397 contracts (Put/Call ratio at 0.4). Shares shorted have decreased from 1.70M to 1.37M between the end of May and the end of August.

4. IMAX Corporation (IMAX): Photographic Equipment & Supplies Industry. Market cap of $964M. The stock has gained 59.26% over the last year. Call open interest at 15,883 contracts vs. put open interest at 6,683 contracts (Put/Call ratio at 0.42). Shares shorted have decreased from 9.95M to 6.98M between the end of May and the end of August.

5. Sina Corp. (SINA): Internet Software & Services Industry. Market cap of $2,936B. The stock has gained 34.94% over the last year. Call open interest at 22,627 contracts vs. put open interest at 9,869 contracts (Put/Call ratio at 0.44). Shares shorted have decreased from 6.18M to 4.73M between the end of May and the end of August.

6. Rayonier Inc. (RYN): REIT. Market cap of $4B. The stock has gained 20.44% over the last year. Call open interest at 5,306 contracts vs. put open interest at 2,447 contracts (Put/Call ratio at 0.46). Shares shorted have decreased from 2.31M to 1.83 M between the end of May and the end of August.

7. NBTY, Inc. (NTY): Drug Related Products Industry. Market cap of $3,477B. The stock has gained 38.36% over the last year. Call open interest at 10,460 contracts vs. put open interest at 5,610 contracts (Put/Call ratio at 0.54). Shares shorted have decreased from 3.27M to 298,332 between the end of May and the end of August.

8. Tractor Supply Company (TSCO): Specialty Retail Industry. Market cap of $2,736B. The stock has gained 57.3% over the last year. Call open interest at 10,148 contracts vs. put open interest at 5,654 contracts (Put/Call ratio at 0.56). Shares shorted have decreased from 4.27M to 3.06M between the end of May and the end of August.

9. GT Solar International, Inc. (SOLR): Semiconductor Industry. Market cap of $1,173B. The stock has gained 37.92% over the last year. Call open interest at 5,404 contracts vs. put open interest at 3,038 contracts (Put/Call ratio at 0.56). Shares shorted have decreased from 11.51M to 10.02M between the end of May and the end of August.

10. Skyworks Solutions Inc. (SWKS): Semiconductor Industry. Market cap of $3,519B. The stock has gained 44.96% over the last year. Call open interest at 73,454 contracts vs. put open interest at 41,416 contracts (Put/Call ratio at 0.56). Shares shorted have decreased from 19.25M to 16.92M between the end of May and the end of August.

Disclosure: No positions

Source: 10 Rallies That Investors Expect Will Continue