There are many indicators one can look at when choosing whether or not to buy a stock. I've found historically that looking at options volume is a great indicator for one simple reason: options provide fantastic leverage for investors and the stronger the volume the stronger the conviction. Moreover, if the volume is much stronger than usual as was the case with these stocks below on December 19, the market may be telling us that something big is in store for that respective company and that maybe we should jump in as well.
Janus Capital Group, Inc. (JNS) is a publicly owned asset management holding company with approximately $167.7 billion in assets under management. There was particularly strong volume in the Jan 6 calls with 4,185 changing hands against only 285 in open interest. This looks to be more of a covered call strategy as they weren't being bought or sold aggressively. JNS does look attractive though at just a 6x trailing P/E, 9x forward P/E, .9x P/B, 1x P/S and EV/S, 3x EV/EBITDA, and 3.5% dividend yield. I'd look to use JNS as a nice covered call position as it looks to have formed a strong technical base at current levels and pays a nice dividend while waiting for it to rebound.
St. Jude Medical, Inc. (STJ) develops, manufactures, and distributes cardiovascular and implantable neurostimulation medical devices worldwide. We spoke recently of STJ here and it looks as though there was very bullish options activity with just over 1,500 Jan 2013 calls being bought aggressively against only 87 in open interest. STJ continues to look attractive at just an 11x trailing P/E, 9x forward P/E, .9x PEG, approximately $1B in FCF this past year, and 2.5% dividend yield. I would instead rather own the stock though and be able to collect the generous dividend, but this bullish options activity is encouraging.
The Home Depot Inc. (HD), together with its subsidiaries, operates as a home improvement retailer. There was very strong volume in the weekly Dec 40 puts with over 5,000 changing hands against only 67 in open interest. These were being bought aggressively at the ask, indicating that investors feel HD will drop below $39 by Thursday's close. I don't particularly see such strong reason for the pessimism, especially by week's end, as there are no earnings or major reports expected to come out from HD this week. I wouldn't follow this options move.
ARIAD Pharmaceuticals, Inc. (ARIA), a biopharmaceutical company, focuses on the discovery, development, and commercialization of small-molecule drugs for the treatment of cancer. There was very strong volume particularly in the May 8 puts with 5,027 trading hands against only 157 in open interest. These looked to be sold at the bid price, indicating strong bullishness that this investor feels ARIA is either a great buy at $8 or won't move lower than that price. ARIA just had a successful follow-on offering this past week and looks to have a promising pipeline, specifically with its ponatinib leukemia treatment, making this put position a nice way to go long and collect a nice premium if the shares so happen do not drop below $8 by May.
Bank of America Corporation (BAC), through its subsidiaries, provides banking and financial services to individuals, small- and middle-market businesses, corporations, and governments primarily in the United States and internationally. The stock closed to a new 52-week low down over 4%, however, there was particularly bullish options activity with over 20,500 Aug 6 calls being bought aggressively at the asking price against only 7,032 in open interest. I still find BAC speculative as it's anybody's guess what BAC's true book value is and the financial turmoil in Europe continues to depress all financials. I'd continue to stay away from BAC for now.
Research in Motion Limited (RIMM) designs, manufactures, and markets wireless solutions for the worldwide mobile communications market. The stock fell to another 52-week low and there was strong options activity on the Mar 13 puts with close to 3,300 being bought at the ask against only 2,211 in open interest. These look like new position of people feeling that RIMM will continue to move lower and based on its last lousy earnings report, they have good reason. However, RIMM has been rumored many times to be a takeover target and now is just trading at .3x P/S and EV/S, .7x P/B, 1.1x EV/EBITDA, and a debt-free balance sheet with well over $2/share in net cash. Its technology is definitely inferior to Apple's (AAPL) and Google's (GOOG) smart phones, however, any hint of good news can send RIMM screaming higher and move these puts sharply lower. I'd only recommend this put buy for the most experienced trader with a short holding period.
Freeport-McMoRan Copper & Gold Inc. (FCX) engages in the exploration, mining, and production of mineral resources. There was very strong volume in the weekly Dec 35 puts with 3,225 trading hands against only 180 in open interest. FCX has moved lower lately as gold, silver, and other precious metals continue to decline in price, however FCX looks too cheap now at just a 7x forward and trailing P/E, 3x EV/EBITDA, approximately $5B in FCF this past year, and attractive 2.7% dividend yield. I wouldn't follow the options activity here.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.