Positive Option Activity In Au Optronics And Other Stocks

by: Brian Gorban

One of the best bullish indicators I've come across in my close to 15 years of investing is analyzing option activity as I recently wrote about here. The simplest reason is that these are some of the most leveraged derivatives which means that if somebody has a strong conviction of a stock going higher, buying calls allows him or her to maximize investment dollars. Moreover, selling puts is another bullish indicator as an investor is willing to pick up shares at that strike price since he sees value at that level. Let's analyze some stocks that have been experiencing positive option activity lately:

1) Tanzanian Royalty Exploration (NYSEMKT:TRX) had option volume rise over 1,300% above average with predominately the Oct $3 and $4 puts changing hands aggressively. This is a positive sign as investors are betting that TRX will hold above $3 and in fact rise considerably above its current $3.54 closing price over the next month to the $4 strike price. The Canadian gold miner is just barely above its 52-week low of $3.40, but still doesn't look cheap to me as it's trading over 8x price/book and has negative net income and profit margins. I'd avoid this stock.

2) Chelsea Therapeutics (NASDAQ:CHTP) is a development stage pharmaceutical company focusing on the acquisition, development and commercialization of pharmaceutical products for the treatment of various human diseases. Option volume soared over 1,000% above average with predominately the Oct $4 puts showing strong volume. The company doesn't strike me as cheap trading over 4x price/book and losing almost $50 million in net income over the last 12 months. While the balance sheet is clean with over $1/share in net cash and no debt, I'd rather buy Opko Health (NYSEMKT:OPK) if I want a speculative biotechnology holding, which is discussed here.

3) PowerShares DB Commodity Index (NYSEARCA:DBC) had option volume 650% above normal volume. This ETF that invests in a basket of pretty much all commodities including crude oil, heating oil, gold and wheat had big out of the money Jan 2012 $20 puts changing hands. This could be used as a market hedge which I wrote about recently here.

4) AU Optronics (NYSE:AUO) had option volume rise almost 600% above average with investors mainly buying the Jan 2012 $7.50 calls add selling the Apr 2012 $2.50 puts. This is the second day in a row that AUO is showing positive options activity as I mentioned here.

5) Ruby Tuesday (NYSE:RT) had option volume rise almost 500% above average with investors mainly selling the Oct 2011 $7.5 calls. This can look to be a covered call and a bullish play on the earnings they're set to report next week. The stock looks compelling trading under 10x price/earnings, .8x price/book, and .4x price/sales. I wouldn't be in a rush to buy this ahead of the earnings report as restaurants have been recently showing weakness caused by tough economic times.

6) Fairchild Semiconductor (NYSE:FCS) had option volume rise almost 500% above average with investors mainly trading the Nov 2011 $11 and $12 calls. This looks to be a vertical call spread based on the expectation of little volatility in the stock as it currently closed at $11.37. This one-time semiconductor king looks compelling trading under 8.5x price/earnings, .9x price/sales, and 1.2x price/book. The company doesn't pay a dividend though, while many other semiconductor stocks I've mentioned recently, including Intel (NASDAQ:INTC) and Applied Materials (NASDAQ:AMAT), pay well above the average S&P yield of approximately 2%. However, if the stock can move to $10 and trade at 1x price/book, I think it's a safe buy at that level.

7) Avago Technologies (NASDAQ:AVGO) had option volume rise over 300% above average with investors mainly trading the Oct 2011 $35 puts. This Singapore semiconductor maker seems richly priced at 4.5x price/book, 3.7x price/sales, and 10.6x enterprise value/EBITDA. However, it does have almost $3/share in net cash with very little debt, fantastic 35% return on equity, and decent 1.3% dividend yield. Either way, I'd rather own Intel or Applied Materials if want to own a semiconductor related company.

Sources: Yahoo and OptionMonster.

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