Using Friday's Options Activity to Get Ready for Monday's Market (Part Two)

by: SA Editor Rocco Pendola

>> Return to Part One (NASDAQ:PCLN): Over at its website, optionMONSTER notes a bullish chart pattern forming in PCLN ahead of its Thursday earnings report:

If earnings news is good, the trigger level to watch for the flag is at $542.50. The potential upside for the pattern, if it were to remain active and complete, would be to the $625 area.

One very important aspect to the chart to keep in mind is a potential double top. The current peak was well below the previous high at the $560 area, giving the chart's most recent price action since the April low a classic "M" shape. If earnings or outlook are weak, that formation might well complete down to the midpoint of the "M," as the June low of $450.

While few guarantees exist in this business, on the basis of history and optionMONSTER's up and downside estimates, I guarantee a sharp move to one side or the other in PCLN post-earnings. I don't want to get caught on the wrong side of that line. Therefore, an options strangle or straddle around PCLN makes sense.

PCLN represents one of those stocks, like Apple (NASDAQ:AAPL), that you could probably make a habit out of strangling because of the wide range between its intraday highs and lows.

Debt Ceiling Watch

AAPL, Research in Motion (RIMM), Bank of America (NYSE:BAC) and SPDR S&P 500 Trust ETF (NYSEARCA:SPY) Weekly Options:

Frederic Ruffy includes the following observation in his Friday options column:

Interesting flow in the weekly options that expire next Friday and therefore include the potential U.S. default event. On the stock side call buyers appear to dominate, with BAC 10 and 11 strike calls trading actively and AAPL and RIMM upside calls busy in offer-side flow with increasing IV. On the ETF side the volume is in the puts, with SPY 128 strike puts for 8/5 expiration leading the list and an early buyer paying 1.95 for nearly 8000 contracts on the CBOE.

Weekly options intrigue me, but I have yet to take the plunge. Other than using them as a way to generate additional covered call income, I am not sure they represent the best way to go for most traders and investors. And I definitely would not make wagers with weekly calls that hinge on the whims of politicians. I don't pay much attention to political "discourse." Frankly, I think most of us with a pulse are above the dog and pony show that it is. I only watch how politics influences the market. In doing so, I have learned things change on a dime. This only reinforces the (needless) risky nature of playing political events with weeklies.

As I have noted elsewhere, I would prefer to use monthly options to strangle AAPL, LEAPS to play an eventual turnaround in BAC and puts to profit from the continued decline in RIMM.

American Axle (NYSE:AXL):. Ruffy also highlighted bullish put selling activity in AXL after it blew out earnings. The first thing I thought about was (a) who are American Axle's customers and (b) what's the distribution of revenue look like among them? I went to the company's 10-Q from the March quarter for the answer:

Click to enlarge
Click to enlarge
What's good for General Motors (NYSE:GM) is obviously good for American Axle. As I am generally bullish on the auto industry, I am not sure this is a bad thing. That said, I do not have a suggestion in this case. I bring the activity up for two reasons.

One, I think looking into SEC filings (more than one) is a key part of the due diligence process.

And, two, a trader selling a block of several thousand puts does not indicate widespread bullish sentiment. Instead, it reflects the feeling of one particular person and/or firm. Outside of the 6,500 put Ruffy reported being sold in one transaction, only about 700 more changed hands on Friday. Plus that trader could be looking to lock in a smaller profit than the original premium collected by buying the position back to close way ahead of options expiration day.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.