Marco Hickey's  Instablog

Today is Wednesday November 25, 2009 and I am in a selling mood, not because I am extremely bearish but because I see a potential profit play. I am looking to sell covered calls on some of my holdings. If you're thinking about selling covered calls like me, today may be the day to do it! This won't make anyone rich but it's simple, safe, and may give a couple extra dollars to spend over the holiday's.

In this article I will outline five covered call ideas for Wednesday's trade. The reason I plan on selling covered calls today, is because I am taking advantage of time decay. The amount an option contract decays each day (holding everything else constant) is known as Theta, and is your friend when you're the seller. With the market being open three and a half hours (market closes at 1 PM Friday) over the next four days, option contracts should decay. Premiums should be higher going into the close Wednesday than they will be Friday morning, likewise premiums should be less Monday morning than they were at close Friday. I don't expect too much action Friday, so I am choosing to write my shares out Wednesday.

Since I plan on writing covered calls on my positions anyway, I believe it may be beneficial to get short theta Wednesday versus next week. With some of my positions such as Apple and Google, I may look to purchase back the call if profitable when trade resumes Monday, and wait to write it out again on strength in the underlying. It is very important to take into account brokerage commissions as the margins may be very thin. It is also important to note the strike prices I have chosen are prices I am willing to sell my stock at in case a significant move higher occurs in the market.

The five ideas are listed below using data as of market close Tuesday. The table below shows the company, ticker, call option strike price, current theta (or decrease in the call option contract holding everything else constant), and potential return if stock is assigned at expiration.

Company	Ticker	Strike	Theta	Return %	Protection %
Apple	AAPL	210	-0.115	4.4	1.7
Bank of America	BAC	16	-0.013	3.4	4.0
Goldman Sachs	GS	175	-0.092	4.0	1.2
Google	GOOG	590	-0.245	2.8	1.6
MasterCard	MA	240	-0.142	3.4	2.4

To better understand options in general, including this strategy, these percentage calculations, and other option strategies please check out my Simplified Stock Option Trading E-Books. As a shareholder of Bank of America, I use this strategy to sell calls on strength and buy them back on weakness. This allows me to generate income off my shares and lower my cost basis, as the volatility of the underlying stock gives a very nice premium, even on out of the money options.

The list above are stocks which I wouldn't mind holding in my portfolio if they do not get exercised at expiration. These are just examples and are not recommendations to buy or sell any security; if you're more bullish/bearish, you’ll want to adjust the strike price and expiration accordingly.

This strategy allows for some profits to be taken off the table. This is ideal especially when the market has rallied as much as it has. This strategy will give some protection if the market sells off, as well as provide a return if the market continues to rally. If the stock is not assigned, this strategy is a great way to create additional income for your portfolio. The reason option volumes have surged in the last 5 years is because they are a great way to hedge your portfolio as well as create income off of your shares (see chart here). Keep in mind when using this strategy it is essential that broker commissions are low enough to profit from the position.

Disclosure: Long AAPL December 200 Calls, BAC, GOOG January LEAP 300 Calls

With the NYSE trading almost 1.5% higher Monday, it's no surprise that there were 21 breakout stocks on big volume that made my post. As always, the first thing I do is scan the list for familiar names, such as stocks which have appeared on similar scans multiple times in the past week or two (most of these names are unfamiliar so it saves a lot of time, especially with larger lists). This indicates there may be some real momentum behind the stock, and that it could trade higher in following sessions as well. Then (if and when any of the stocks I find are familiar to me), I take a look at the chart(s) to see if I can structure a potential option trade. As stated, in this post I will name 21 stocks, but only write about one in detail and outline an option trade I may look at opening in the near future.

This method is just one of the ways I use to find stocks for potential option trades. The first part of this post will show the list of stocks which traded higher on above average volume. The second part of this post requires the knowledge of stock options. To learn more about the option strategies outlined in this post, risks, pricing, calculations, other strategies, and options in general, click here.

The table below shows the company, ticker, per share % increase, and volume increase (% increased compared to 50 day average). For your convenience I have ranked the stocks in order from greatest to least volume % change.

Company	Ticker	Price Change	Volume Change
Origin Agritech Ltd.	(SEED)	100.58%	23598.99%
ARCA biopharma, Inc.	(ABIO)	92.00%	11377.85%
Network Engines, Inc.	(NENG)	29.69%	3621.94%
Casella Waste Systems Inc.	(CWST)	23.85%	1832.04%
Agria Corporation ADR	(GRO)	24.48%	843.72%
Dillard's, Inc.	(DDS)	4.85%	143.41%
Jinpan International Limited	(JST)	3.21%	127.30%
Kirkland's, Inc.	(KIRK)	3.18%	104.44%
Tech Data Corporation	(TECD)	1.66%	92.76%
MercadoLibre, Inc.	(MELI)	7.09%	86.18%
Gafisa SA ADR	(GFA)	4.97%	67.70%
Par Pharmaceutical Companies, Inc.	(PRX)	2.30%	61.67%
M & F Worldwide Corp.	(MFW)	4.10%	59.12%
RehabCare Group, Inc.	(RHB)	3.40%	54.86%
priceline.com Incorporated	(PCLN)	1.50%	42.04%
Nu Skin Enterprises, Inc.	(NUS)	4.85%	35.59%
CIGNA Corporation	(CI)	7.56%	24.39%
Alliance Data Systems Corporation	(ADS)	4.97%	21.46%
Health Net, Inc.	(HNT)	2.93%	18.55%
Lihir Gold Limited ADR)	(LIHR)	3.66%	17.64%
World Acceptance Corp.	(WRLD)	6.87%	17.48%

One stock from the list above which has appeared a number of times lately is MercadoLibre, Inc. (MELI). This stock has been on a tear since they reported earnings on November 4, 2009. First I will give a company profile from Google (GOOG) Finance below.

MercadoLibre, Inc. hosts an online platform in Latin America, called MercadoLibre and located at mercadolibre.com. The Company has e-commerce operations in Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Peru, Uruguay and Venezuela. In addition, it also operates online trading platforms in Costa Rica, the Dominican Republic and Panama. MercadoLibre has two principal services: The MercadoLibre marketplace and The MercadoPago online payments solution. The MercadoLibre marketplace is a fully automated, topically arranged online trading service. The MercadoPago online payments solution is an integrated online payments solution. During the year ended December 31, 2008, visitors to its Website were able to browse an average of over 2.5 million total listings on any given day in over 2,000 different product categories. At December 31, 2008, the Company had over 33.7 million confirmed registered MercadoLibre users.

MercadoLibre is a lot like Ebay (EBAY), but they are much smaller which means they can grow much bigger. It is clear this stock has momentum behind it, so I certainly wouldn't mind getting long. Therefore, I will be writing a detailed option strategy about MercadoLibre, Inc. in this post today. Note that many of the stocks listed above will be good plays and many will be bad plays, I list them all to show possible breakout stocks and write about a few of the ones I am interested in trading.

Click to enlarge

I believe this stock is a bit overbought short-term, so before I jump in, I would like to see it pull back a bit on lighter volume. The 20, 50, and 100 day moving averages come in near 47.50, 46.75, and 46 respectively, but I believe this stock could trade down to levels of support near 45 a share; note it is critical that it holds support otherwise it may head even lower. If I see this stock bounce off any of the moving averages, I may also use that as my entry point. I would look to open Vertical Call Spreads on MELI when I am ready to get long.

MercadoLibre, Inc. Vertical Call Spread Option Trade: This is a fairly simple trade to open and only requires the use of two separate option contracts, the December 50 & 55 Call options. I would simply purchase December 50 strike call contracts and sell the December 55 strike call options against them. The theoretical price for this spread as of close Monday is roughly $130 per option spread. This will give me both limited risk and limited gains, but considering the stock has added value this fast, I am more than willing to pay some premium. It is also important to highlight that both contracts look as if they have gaining interest, on Monday the December 50 calls traded over 2 times the number of contracts open, and volume for the December 55 calls traded about 80% of open interest.

Profit and Loss: Let's say I opened just one spread. If MELI sells off significantly, this strategy would lose a maximum of $130 per option spread. Now let's assume the stock continues to rally and closes at December option expiration at or above $55, this position would return maximum profitability, $370 per option spread or 285%. It is worth noting the break even point for this strategy, it is $51.30 a share of MELI, therefore anything below this level in the underlying will result in a loss, and anything above at December options expiration would result in a profitable option trade.

This is a bullish strategy and should not be considered if you think the stock will sell off in the near future. However if you feel the stock could move higher in the near future, this strategy could yield a nice gain. To get a better understanding of stock options and different option strategies please check out my Simplified Stock Option Trading E-Books. These are just examples and are not recommendations to buy or sell any security; if you're more bullish/bearish, you’ll want to adjust the strike price and expiration accordingly.

The reason option volumes have surged in the last five years is because they are a great way to hedge your portfolio as well as create income off of your shares (see chart here). Keep in mind when using this strategy it is essential that broker commissions are low enough to profit from the position.

Disclosure: No Positions

With the market trading relatively flat on November options expiration Friday, there were several stocks that hit my radar which traded higher on BIG volume. In this post, I will name 11 stocks which traded higher Friday November 20, 2009. I will be checking these stocks frequently to see if there is continued buying pushing the stocks higher. This method is just one of the ways I use to pick stocks to structure particular option trades. The second part of this post requires the knowledge of stock options. To learn more about the option strategies outlined in this post, risks, pricing, calculations, other strategies, and options in general, click here.

The table below shows the company, ticker, per share % increase, and volume increase (% increased compared to 50 day average). For your convenience I have ranked the stocks in order from greatest to least volume % change.

Company	Ticker	Price Change	Volume Change
TTI Team Telecom International Ltd.	(TTIL)	22.73%	6333.63%
Dataram Corporation	(DRAM)	40.12%	1504.37%
GeoGlobal Resources Inc.	(GGR)	51.11%	1026.89%
Kirkland's, Inc.	(KIRK)	18.37%	648.69%
CytRx Corporation	(CYTR)	25.27%	622.86%
The J.M. Smucker Company	(SJM)	5.37%	320.19%
SkillSoft Public Limited Company	(SKIL)	8.58%	273.53%
America's Car-Mart, Inc.	(CRMT)	3.72%	216.18%
Jinpan International Limited	(JST)	7.14%	100.90%
Longtop Financial Technologies Limited	(LFT)	4.44%	78.10%
Tech Data Corporation	(TECD)	3.16%	49.56%

One stock from the list above which has appeared quite a few times on my daily breakout stocks on big volume screen is the software company Longtop Financial Technologies (LFT). This stock has been on an absolute tear lately. Therefore, I will be writing a detailed option strategy about Longtop Financial Technologies (LFT) in this post today. Note that many of the stocks listed above will be good plays and many will be bad plays, I list them all to show possible breakout stocks and write about a few of the ones I am interested in trading.

Click chart to enlarge

Looking at the chart above, we can see this stock moved sideways until recent. We can see there is some serious support around the 30 per share range, and resistance around 35. This stock set a new 52 week high at 35.40 on Wednesday November 18, and on Friday it came within six cents of making a new 52 week high, before it traded off its highs to close the day at 35.07. This stock has some serious momentum behind it and could make for a nice trade, however I need to see it make a new 52 week high on above average volume to really give it my blessing. If this stock fails to make a new 52 week high I believe it could trade lower to support and would look at purchasing Vertical Put Spreads, however if this stock trades higher to a new 52 week high on above average volume I would look to purchase Vertical Call Spreads.

BEARISH SCENARIO

Longtop Financial Technologies Vertical Put Spread Option Trade: As stated I am expecting a slight sell off if this stock fails to make a new 52 week high on above average volume. I would become a buyer of Vertical Put Spreads if the stock traded below 34 a share (minor support level) on above average volume. First I would look to purchase December 35 strike put options on LFT, and then I would choose to lower my cost by selling the December 30 strike put options (support level) against them (1 for 1). Using market data as of close Friday, each vertical put spread would result in a net debit of $145 (paying $145 cash).

Profit & Loss: If Longtop Financial trades down near support levels (assuming this position is opened), and closes on December options expiration at or below 30 a share this strategy will return $355 or 245%. If Longtop Financial trades higher after this position is opened and closes at or above 35 a share at December options expiration, this strategy will lose 100% of the premium paid or $145. The break even point for this option strategy is Longtop financial at 33.55 a share at December options expiration.

BULLISH SCENARIO

Longtop Financial Technologies Vertical Call Spread Option Trade: If however LFT makes a new 52 week high on above average volume, I may be convinced to open vertical call spreads on this stock. Using this strategy, first I would look to purchase December 35 strike call options on LFT, and then I would choose to lower my cost by selling the December 40 strike call options against them (1 for 1). Using market data as of close Friday, each vertical call spread would result in a net debit of $150 (paying $150 cash).

Profit & Loss: If Longtop Financial trades higher (assuming this position is opened), and closes on December options expiration at or above 40 a share this strategy will return $350 or 233%. However if Longtop Financial trades lower after this position is opened and closes at or below 35 a share at December options expiration, this strategy will lose 100% of the premium paid or $150. The break even point for this option strategy is Longtop financial at 36.50 a share at December options expiration.

Both of the strategies outlined above require the underlying stock to move in the indicated direction and should not be considered if you think the stock will move sideways in the near future. However if you feel the stock could move to the higher call strike price or to the lower put strike price in the near future, either strategy could yield a nice gain. To get a better understanding of stock options and different option strategies please check out my Simplified Stock Option Trading E-Books. These are just examples and are not recommendations to buy or sell any security; if you're more bullish/bearish, you’ll want to adjust the strike price and expiration accordingly.

The reason option volumes have surged in the last five years is because they are a great way to hedge your portfolio as well as create income off of your shares (see chart here). Keep in mind when using this strategy it is essential that broker commissions are low enough to profit from the position.

Disclosure: No Positions

In a previous OptionMaestro.com post, I outlined 30 stocks which I wouldn't mind going long at these levels. I wrote about getting long the stocks by using the buy-write option strategy. This is an updated post to that one, adjusting the strikes and prices accordingly for options expiration today. It is very important to write the shares out as early as possible as volatility rushes into the market in the morning, and not wait for it to start decreasing rapidly in the afternoon. It's not too late to get premium out of many of these stocks, and writing them for just a day decreases risk greatly. I will look to be purchasing some of the stocks mentioned below during pre-market or near market open to write out within an hour of the opening bell. As I've stated, I don't mind holding any of these stocks long which is why I'll be using this strategy today. If I get called out I won't mind because I'll still make money. Below is the list of stocks, the potential return if exercised, and downside protection if they do not get exercised. To learn more about the buy/write option strategy, risks, pricing, calculations, other strategies, and options in general, click here.

Note that higher beta securities return higher percentages due to their levels of implied volatility, and because they are riskier.

To understand the table, I will give a detailed example of Option Maestro favorite Suntech Power (STP) below.

Sell the at-the-money STP November 16 strike call option. The premium received from the call option would give a downside protection of 1.56%. If the stock closes above 16 (it will get assigned) today the total return from this position would be 1.63% in just 6.5 trading hours.

I have ranked the stocks in the table below in order from greatest to least protection (note that most of these stocks with greater protection have less return, as they are deeper in the money or have less volatility than others listed). I have also calculated the group average return and protection which is the very bottom row of the table. The data in bold represents greater than the group average.

Company	Ticker	Strike	Potential Return %	Protection %
Ford	F	8	0.23	8.59
Citigroup	C	4	1.64	7.75
A123 Systems	AONE	15	1.77	3.28
Rambus	RMBS	18	0.65	2.56
Alcoa	AA	13	0.45	2.12
Textron	TXT	20	1.09	1.98
Goldman Sachs	GS	170	0.20	1.83
First Solar	FSLR	120	0.88	1.81
Suntech Power	STP	16	1.63	1.56
Las Vegas Sands	LVS	17	1.71	1.42
Dendreon	DNDN	28	1.11	1.28
Dow Chemical	DOW	28	0.93	1.21
Bank of America	BAC	16	0.62	1.12
Brocade	BRCD	8	0.62	1.12
Walter Energy	WLT	70	1.55	1.05
American Express	AXP	41	0.70	1.05
Visa	V	80	0.67	0.90
Goldcorp	GG	44	0.86	0.89
Apple	AAPL	200	0.50	0.76
Google	GOOG	570	0.16	0.68
Potash	POT	115	2.27	0.65
MasterCard	MA	230	0.56	0.60
Baidu	BIDU	430	0.98	0.51
Amazon	AMZN	130	1.22	0.43
Palm	PALM	12.5	7.91	0.43
Baxter	BAX	55	0.49	0.40
JP Morgan	JPM	43	1.41	0.35
Research in Motion	RIMM	60	2.28	0.31
Cisco	CSCO	24	1.56	0.21
Caterpillar	CAT	60	2.53	0.15
Group Average			1.31	1.57

From the table above I will be looking to pick up shares of Suntech Power (STP) for a one day option write. If these shares close below 16, I won't mind as I would like to add to my position anyhow. Individual stocks may not return as much as some of the double and triple leveraged ETF's. For example If I was bullish on the financial sector, I may not mind holding the Direxion Daily 3X Bull (FAS) (short-term of course as these shares don't make good investment vehicles), I would choose to purchase the stock pre-market and write out call options at open. If I was more bearish on the financials I may look at purchasing the Direxion Daily 3X Bear (FAZ) and write at-the-money calls out on it. For an example, we'll assume the FAS opens today at the close price Thursday. Therefore I would look to purchase shares at around 76 pre-market and write calls for the 76. As of Thursday's close this position would yield 2.1% and would also protect my shares to the downside 2.1%. Be sure to check out other shares of Direxion ETF's for similar strategy such as: TNA, TZA, BGU, BGZ, ERX, ERY, and others.

To better understand options in general, including this strategy, these percentage calculations, and other option strategies please check out my Simplified Stock Option Trading E-Books. As a shareholder of Bank of America, Las Vegas Sands, Palm and Suntech Power, I've written them out for a variety of strikes for the November options expiration, as the volatility of the underlying stock gives a very nice premium, even on out of the money options.

The list above are stocks which I wouldn't mind holding in my portfolio if they did not get exercised at expiration. These are just examples and are not recommendations to buy or sell any security; if you're more bullish/bearish, you’ll want to adjust the strike price and expiration accordingly.

This is an ideal strategy to open long positions when the market has rallied as much as it has. This strategy will give protection if the market sells off, as well as provide a return if the market continues to rally. If the stock is not assigned, this strategy is a great way to create additional income for your portfolio. The reason option volumes have surged in the last 5 years is because they are a great way to hedge your portfolio as well as create income off of your shares (see chart here). Keep in mind when using this strategy it is essential that broker commissions are low enough to profit from the position.

Disclosure: Long AAPL December 200 Calls, AXP, BAC, GOOG January LEAP 300 Calls, LVS, PALM, STP, V November 60 Calls, Short AXP November 38 & 41 Calls, GOOG November 580 Calls, V November 80 Calls

With the market selling off Thursday, there were several stocks that hit my radar which traded higher on abnormal volume. In this post, I will name 12 stocks which fought the trend Thursday November 19, 2009. I will be checking these stocks frequently to see if there is continued buying pushing the stocks higher. This method is just one of the ways I use to pick stocks to structure particular option trades. The second part of this post requires the knowledge of stock options. To learn more about the option strategies outlined in this post, risks, pricing, calculations, other strategies, and options in general, click here.

The table below shows the company, ticker, per share % increase, and volume increase (% increased compared to 50 day average). For your convenience I have ranked the stocks in order from greatest to least volume % change.

Company	Ticker	Price Change	Volume Change
TTI Team Telecom International Ltd.	(TTIL)	49.15%	14947.18%
Solarfun Power Holdings Co., Ltd. ADR	(SOLF)	5.09%	582.96%
The Bon-Ton Stores, Inc.	(BONT)	18.13%	574.24%
The DIRECTV Group, Inc.	(DTV)	1.48%	449.64%
Donaldson Company, Inc.	(DCI)	7.89%	348.78%
Trina Solar Limited ADR	(TSL)	6.04%	295.09%
Suntech Power Holdings Co., Ltd. ADR	(STP)	5.96%	253.52%
CNA Financial Corporation	(CNA)	3.43%	139.40%
Canadian Solar Inc.	(CSIQ)	3.88%	131.10%
NetApp Inc.	(NTAP)	4.09%	114.49%
American Superconductor Corporation	(AMSC)	1.63%	57.05%
Longtop Financial Technologies Limited	(LFT)	2.97%	47.76%

There certainly seemed to be a trend among the solar stocks Thursday. As much as I like Suntech Power (STP), I will not be writing a detailed option strategy in this post, as I've already covered one in a previous post. The stock which I find most attractive from the list above is Canadian Solar (CSIQ), so I will outline an option play I would like to use on this stock. Note that many of the stocks listed above will be good plays and many will be bad plays, I list them all to show possible breakout stocks and write about a few of the ones I am interested in.

Click to enlarge

Looking at the chart above, we can see a bullish ascending triangle pattern has emerged, however my gut is telling me solar is just a bit overheated (pun intended) and that a healthy consolidation may occur in the near term. I am expecting up to a 15% correction on shares of CSIQ near term, but I believe once this stock consolidates, it will trade much higher. I would become a buyer of this stock if it trades down to and holds above support levels of 19.50 - 20, near term. Therefore I would look to be selling Ratio Put Spreads on this stock for a net credit. I would structure this option trade using the December 21 and 19 strike put options. At current levels of option Delta a 2:1 ratio put spread would be optimal.

Canadian Solar Ratio Put Spread Option Trade: As stated I am expecting a slight sell off and I would become a buyer of this stock roughly 10% below current share value, so the following trade is what I would look at doing. First I would look to purchase December 21 strike put options on CSIQ, and then I would choose to finance them by selling two December 19 strike put option contracts for every one December 21 strike put purchased. Using market data as of close Thursday, each ratio put spread would result in a net credit of $10 (receiving $10 cash).

Profit & Loss: If and when Canadian Solar trades down near support levels (assuming this position is opened), I will be monitoring the chart very closely to spot a potential reversal. If I am convinced of the reversal, I will likely choose to take profits in the long side of the trade (December 21 strike puts), and hold the remaining short put options, as they will be out of the money and if CSIQ indeed reversed, they should lose time value relatively quickly. The previous case is the optimal trade for this strategy, but even if CSIQ continues higher and all contracts expire worthless, this strategy would still be profitable by the amount of the credit received when opened. It is almost like a free trade, especially if I am willing to take shares of CSIQ into my portfolio. Now let's assume CSIQ sells off with no convincing reversal in the chart, I would choose to keep the entire position open. With all three contracts left open until expiration, this trade would be profitable as long as CSIQ is at or above 16.90 a share.
In the optimal case, the first part of this trade is bearish and the second part is bullish. This is a great way to create cash flow especially when wanting to own shares of a stock. If timed right and the opportunity approaches, this strategy could yield even more. The negative with this strategy is that it limits the upside. To get a better understanding of stock options and different option strategies please check out my Simplified Stock Option Trading E-Books.

These are just examples and are not recommendations to buy or sell any security; if you're more bullish/bearish, you’ll want to adjust the strike price and expiration accordingly.

The reason option volumes have surged in the last five years is because they are a great way to hedge your portfolio as well as create income off of your shares (see chart here). Keep in mind when using this strategy it is essential that broker commissions are low enough to profit from the position.

Disclosure: Long STP

In this post, I will name 25 stocks which traded higher Wednesday November 18, 2009 on unusually higher volume. As always, I will keep an eye on these stocks Thursday to see if there is continued buying pushing the stocks higher. This method is just one of the ways I use to pick stocks to structure particular option trades. The second part of this post requires the knowledge of stock options. To learn more about the option strategies outlined in this post, risks, pricing, calculations, other strategies, and options in general, click here.

The table below shows the company, ticker, per share % increase, and volume increase (% increased compared to 50 day average). For your convenience I have ranked the stocks in order from greatest to least volume % change.

Company	Ticker	Price Change	Volume Change
Chromcraft Revington Inc	(CRC)	43.88%	1632.04%
Techwell Inc	(TWLL)	15.54%	1212.05%
Compellent Technologies	(CML)	12.26%	751.20%
China Green Agriculture	(CGA)	26.75%	430.87%
Colgate Palmolive Co	(CL)	3.66%	406.54%
Charles & Colvard Ltd	(CTHR)	18.48%	316.83%
Excel Maritime Carriers	(EXM)	14.29%	291.50%
Euroseas Ltd	(ESEA)	12.30%	272.88%
N F J Div Int & Prem Fd	(NFJ)	1.21%	194.09%
Navios Maritime Holdings	(NM)	2.86%	169.05%
Trex Company Inc	(TWP)	8.36%	166.98%
Deer Consumer Products	(DEER)	6.77%	145.34%
Paragon Shipping Inc	(PRGN)	4.44%	132.53%
Advanced Micro Devices	(AMD)	10.57%	132.52%
A-Power Engy Generation	(APWR)	2.14%	120.68%
M & F Worldwide Corp	(MFW)	2.92%	106.60%
City Telecom Hk Ltd Adr	(CTEL)	2.98%	89.29%
Virgin Mobile Usa Inc	(VM)	8.03%	79.45%
Telekomunikasi Indo Ads	(TLK)	1.55%	65.91%
Canadian Solar Inc	(CSIQ)	2.54%	61.00%
D C P Midstream Partners	(DPM)	2.31%	34.38%
Wimm Bill Dann Foods Adr	(WBD)	7.25%	28.27%
Mercadolibre Inc	(MELI)	1.47%	24.60%
Sirona Dental Systems	(SIRO)	2.34%	19.87%
Cheesecake Factory Inc	(CAKE)	4.12%	18.96%

The list above contains many stocks which I have seen appear multiple times while screening for these stocks. This list is also packed full of stocks I have been keeping an eye on and would like to own as I think they will trade higher. Out of the stocks listed above, I will write about Sirona Dental Systems (SIRO). With the help of the market, I believe this stock will continue to outperform. I believe it will be worth describing a detailed option play I am interested in below. Note that many of the stocks listed above will be good plays and many will be bad plays, I list them all to show possible breakout stocks and write about a few of the ones I am interested in.

Click chart to enlarge

I would become a buyer of this stock if it can trade above 30.50 a share, and would like to see it continue trend past 31. However with earnings for this stock scheduled to be released December 4, 2009, I may wait and use a different method of playing this stock. I would structure an option trade that would capture the increased levels of implied volatility in the option contracts leading up to the earnings report.

Earnings Option Trade: Although the recent chart and a break above 31 would be bullish for the stock, it could all change after the earnings report. I would look at opening the following strategy to get cash up front, cap my losses, and still get unlimited gains. As earnings approach the options will factor in a bit more volatility, causing the premiums to be a bit overpriced, therefore I would look to be a seller of Vertical Put Spreads and a buyer of Out of the Money Call options. Although this stock reports earnings in just over two weeks, I will give this example using current market data.

I would first open the vertical put spreads by selling the December 30 strike put options and purchasing the December 25 strike put options against them (1 for 1). This would give me a credit of $115 per option spread (putting $115 into my portfolio), as well as limiting my downside risk to $3.85 a share (after taking into account the credit). I would then look to purchase out of the money calls with the cash received (1 call per option spread). If I were to purchase the December 35 strike call options, this would cost $20 (at the ask price) per option contract. The strategy now has unlimited upside potential and also limits the loss to $4.05 per share, even if the stock sells off significantly and closes below 25 a share at the December options expiration. The break even for this strategy is $29.05 a share, which is 3.9% lower than the current share price, so if the stock moves sideways after the earnings announcement this strategy will also be profitable.

Note that depending on the share price as earnings approach will determine the strikes used to structure this trade. One negative about this stock is that volume is light meaning it may be tough to fill option orders. I will likely wait until December 3 to open this position, as it will take advantage of the increased option premium due to earnings the following day.

This is a bullish strategy and should not be considered if you think the stock will sell off after earnings. However if you feel you've missed the stock and think it could move sideways or up after the report, this strategy could yield a nice gain. To get a better understanding of stock options and different option strategies please check out my Simplified Stock Option Trading E-Books. These are just examples and are not recommendations to buy or sell any security; if you're more bullish/bearish, you’ll want to adjust the strike price and expiration accordingly.

The reason option volumes have surged in the last five years is because they are a great way to hedge your portfolio as well as create income off of your shares (see chart here). Keep in mind when using this strategy it is essential that broker commissions are low enough to profit from the position.

Disclosure: No Positions