Using Friday's Options Activity to Get Ready for Monday's Market

Includes: AAPL, DTEGY, F, GT, KODK, S, T
by: SA Editor Rocco Pendola

In addition to my own scans and watch lists, I use two main sources to follow options-related news: Daily Seeking Alpha columns by Frederic Ruffy and Andrew Wilkinson. While I get great use out of these sources and have even made money thanks to them, you have to be careful not to chase the stocks or options they mention. Often, by the time you receive an alert or summary, contracts have already had too much volatility and upside priced into the premium. Nevertheless, occasionally, you can find examples to capitalize on. Below I detail options brought to my attention by these sources and how investors might consider playing them - or the underlying security - if at all, during the trading week.

Two stocks in today's options' report populated a previous week's look at Friday options' activity. Both merit another look today.

Sprint-Nextel (NYSE:S): In late March, S got hit quite hard on the AT&T (NYSE:T) and T-Mobile (OTCQX:DTEGY) merger news. At the time, Wilkinson highlighted bullish options activity as Sprint began bouncing off of its lows. In reaction to that news, and with Sprint's share price under $5.00, I noted that I would be "comfortable" buying in- or at-the-money calls with May and June expiration dates. As it turns out, that type of play would have worked out well for you. The S May $4.50 calls, for instance, traded at roughly $0.37 each one month ago. As of late in the trading session this Friday, the bid sits at $0.70.

Once again, with Sprint hitting a new 52-week high of $5.35 during the day on Friday, Wilkinson points out optimistic options trades in Sprint. While I have been known to trade the same stock or option several times, even during the same day, I also do my best not to go to the well one too many times. After a strong earnings report and somewhat persistent takeover chatter, something's happening at Sprint. If you believe in the bull case for Sprint, I see no reason not to go long the stock directly or through writing put options. The S June $5 puts, for example, last traded for $0.21 on Friday. The stock closed the day at $5.18. If you think Sprint has more long-term upside and would not mind owning the company for the effective price of $4.79 per share (roughly, depending on the timing of your trade), the put selling option looks attractive in terms of generating modest income.

Eastman Kodak (EK): In his column Friday, Ruffy discusses the purchase of an EK May-Oct $3.50 call spread. When Wilkinson wrote about Kodak last month, the company surged on news of a small court victory against Apple (NASDAQ:AAPL). At the time, I noted that upticks like that in suspect companies tend not to last long. I advised staying away from the shares and options. Since then the stock has dropped from its March 25th close of $3.40 to its Friday close of $2.78.

I see no reason to change course. If you go by Kodak's just-released earnings numbers, a bet on the company could mean a bet against silver. I am not prepared to go there.

Goodyear Tire & Rubber (NYSE:GT): If being bullish on Kodak means a bearish play on silver, a bull call on Goodyear equates to bullishness on the automakers, at least to some extent. On the heels of a better-than-expected earnings report, Wilkinson cites bullish activity, particularly in GT May $19 calls. GT closed Friday's session up over 12% at $18.15.

I prefer honesty over suggesting a play for the mere exercise of suggesting one. I have not paid much attention to Goodyear until I read Wilkinson's column and glanced at the chart. It piqued my interest, however, because the company apparently sold more tires in the first quarter than it did in its fourth quarter. This continues an emerging trend of solid results from auto suppliers. The increased activity can only bode well for a domestic auto industry that was relatively unaffected by the Japan tragedies.

I have been bullish on Ford (NYSE:F) for quite a while. I first suggested going long in a March 11th Seeking Alpha article. On that day, F closed at $14.36. As I was writing this article, I thought I would be reporting that call as a losing one. To my surprise, it's up over a dollar with F closing Friday's session at $15.47. Depsite bullish news across the auto industry over the last several months, I had the perception that F has stagnated. I have spent many frustrating days watching it trade sideways, defy technical patterns, and go down when I thought it should go up. Maybe it's a good sign when a stock that bores or frustrates you to death is actually up from the time you considered buying it? I think this might be the case for F.

While I cannot argue with somebody who wants to play Goodyear's apparent turnaround, I would rather put my money directly on Ford. I suggest studying at-, in-, or slightly out-of-the-money F Jan 2012 options.

(Pricing, as of Friday, 4/29 market close, courtest of Schwab's StreetSmart Edge.)

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Often, I prefer simply making suggestions in lieu of offering outright specific plays. Each investor, particularly with options, needs to let his/her own sentiment toward a stock and risk profile dictate the direction they take. Personally, I think F could be a $20 stock before the end of the year. I definitely think it will be in the 20s come 2012. As such, I would be comfortable laying what I could afford to lose part of on the F Jan 2012 $17.50 and a smaller bit on the F Jan 2012 $20.00 calls. Looking ahead to F Jan 2013 LEAPS, I might take shots on out-of-the-money calls as well. This, however, represents a pretty bullish and relatively high-risk/sweet reward strategy. Typically, you'll have better luck playing it closer to the vest with in- or at-the-money calls, no matter how bullish you are.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in F over the next 72 hours.