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MIKE PHILLIPS Mike Phillips is a seven-year employee of Power Financial Group, Inc. He is involved in the support and development of PowerOptions, an award winning Internet site for searching for stock option strategies and PowerOptionsApplied, an Internet site providing an option-trading... More
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Iron Condor: Neutral Strategy for Uncommon Profit
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  • Short Squeeze on CoStar


    Previously

    In a couple of previous article, Short Squeeze and Stock Options and Short Squeeze and Stock Options part II, we discussed the concept of a short squeeze.  Basically, a short squeeze results when there is a large short interest in a stock, i.e. investors short a stock with the hopes the price of the stock goes down.  Sometimes there is so much shorting of a stock that it won't go down anymore, simply because the short investors start to cash in on their profits by repurchasing the stock they shorted.  If enough short investors start to cash in, the stock can actually increase in price, even though the company's fundamentals may not reflect a company whose stock price should increase. 

    Two Important Parameters
    Two important parameters to consider when determining whether a stock is in a short squeeze are the percent short interest and the number of days of short interest.  Percent short interest is simply calculated as the amount of shares shorted divided by the total outstanding number of shares.  For example, a stock with 100,000 shares of stock shorted and 1,000,000 shares outstanding would have a percent short interest of 10% (100,000/1,000,000).  Number of days of short interest is the number of days it would take all of the short investors at the current stock volume to close all of their short positions.  Number of days of short interest is calculated by dividing the number of shares shorted by the average daily stock volume.  For example, if 100,000 shares of a stock are shorted and the average daily volume is 10,000, then the number of days of short interest is ten (100,000/10,000), which means it would take ten days for all of the short investors to close their positions based on the average daily stock volume.

    Parameters Usefulness
    Using these two indicators together, percent short interest and days of short interest, gives investors the capability to find stocks which could be tangled up in a short squeeze.  An investor looking for short squeeze stocks would want both of these parameters to be significantly higher than is typically the case with a stock.

    Previous Example
    As we did with Bank of the Ozarks (NASDAQ:OZRK) in a previous article, we used PowerOptions' (www.poweropt.com) powerful search tools to find companies potentially in a short squeeze.  Once again this month, OZRK popped up as a candidate for short squeeze.  The value calculated for OZRK for percent short interest was 24.7% and for number of days of short interest was 36.  These parameters haven’t changed significantly since the previous article, as previously OZRK's percent short interest was 26.8% and its number of days of short interest was 36.  More importantly, the price of OZRK has increased about 30% since it was flagged in the previous article, and based on the short squeeze parameters may have a lot more room to run.

    Example
    Another company popping up on the short squeeze radar screen using PowerOptions is CoStar Group with a percent short interest of 18.3% and a number of days of short interest of 31.

     

    CSGP Logo

    CoStar Group (NASDAQ:CSGP) provides information and marketing services to the commercial real estate industry in the United States and also in the United Kingdom.  CoStar's services are highly sought out by commercial real estate agents, as it saves them time in researching potential properties for their clients and helps them "seal-the-deal".  CoStar Group has weathered the poor economic client rather well, especially considering they are in what has been a poor market segment over the last couple of years.  It's no surprise short investors jumped on this company, as its market segment has been in the gutter for a while and may remain in the gutter for a while.

    CoStar’s competition includes First American (NYSE:FAF), LoopNet (NASDAQ:LOOP) and PropertyInfo (private).

    CoStar’s stock price is up about 75% from its low in March of 2009 and well off of its two-year in the $60 range.  CoStar’s stock price is currently near the midpoint between the upper and lower Bollinger Bands.

     

    CSGP Chart

     
    What’s nice about companies in a short squeeze, is the short investors exiting the position creates support for the price of the stock.  While CoStar’s upside doesn’t look promising, it’s potential downside doesn’t look very bad either.  This type of scenario is perfect for the covered call strategy, selling a call option against a long position in a stock.  A covered call position can be entered for February expiration with a potential return of 2.7%.  The time frame for realizing the potential profit is only 38 days.  The call option of interest to sell would be the February 40 with a ticker symbol of CQYBH.

    To enter the covered call investing position an investor would purchase the stocks in multiples of 100 shares and sell one call option for each 100 shares of stock purchased.



    Disclosure: Have no positions in CSGP, FAF or LOOP

    Disclosure: Have no positions in CSGP, FAF or LOOP
    Jan 13 11:19 AM | Link | Comment!
  • Medifast’s Stock Options Tipping the Scale

    Medifast’s (NYSE:MED) stock option volume was significantly high last week.  Medifast is in the business of turning fat into dollars.  Medifast manufactures, markets and distributes weight management products.  Medifast receives the bulk of its revenues, 59%, from its Take Shape Life product followed by its direct marketing channel with 30% of revenues.  The remaining revenue is generated from its clinics and doctors at 10% and 1%, respectively.  Medifast’s Take Shape products include free physician-lead health coaches to aid customers with weight management through a variety of 70 different meal choices.  Medifast currently has twenty four corporate clinics in operation in the Austin, Dallas, Houston and Orlando areas.  Medifast also has twelve franchise locations.

    Medifast Meals
     

     

    Medifast’s competitors include Herbalife (NYSE:HLF), Weight Watcher’s (NYSE:WTW) and Jenny Craig (private).

    Medifast’s stock has been on a tear over the last year increasing about 600%.  Medifast has doubled is revenues over the last year and appears to be executing on all cylinders.  Medifast’s stock price is currently near its lower Bollinger Band after recently taking a significant hit.

     

    With the obesity rate continuing to increase in the U.S., Medifast looks like a business in the right place at the right time.

    Medifast’s call and put option volumes were both up last week.  The MED January 35 out-of-the-money call option had the most activity last week.   This stock has been a shooting star over the last year, so a good stock options play for this company might be a collar, as shooting stars sometimes fall to the earth.  A collar is a covered call which is protected by a put option.

    A collar of interest for MED would be selling a February 30 call option and purchasing a February 25 put option.  The potential return for this position is 3.3% with a timeframe for realizing the profit of only 47 days.  The maximum potential loss for this collar position is 14%.



    Disclosure: Do not have a position in MED, HLF or WTW
    Jan 04 2:14 PM | Link | Comment!
  • Spike in Bare Escentuals Call Option Volume

    Call option volumes for Bare Escentuals (BARE) were significantly elevated yesterday.

     

    Bare Escentuals develops and markets beauty products for women.  Bare Escentuals markets its products through boutiques, spas, salons, infomercials, online and distributors.  Bare Escentuals boutiques include ULTA, Sephora and Nordstrom.  Bare Escentuals has been very aggressive in opening 27 new boutiques year-to-date bringing the total number to 124.  Almost 20% of Bare Escentuals revenue is international with significant action in the U.K. and France and modest activity in Asia.

     

    Bare Escentuals positions its products as makeup that is actually good for your skin.  If you are going to put something on your skin it might as well do more than just enhance natural beauty.

    AU

    Bare Escentuals competitors include Elizabeth Arden (NASDAQ:RDEN) and Estee Lauder (private).

     

    Bare Escentuals stock price is up around 300% from its low in March, but well off of its two-year high around $30.  Its stock price is currently near the lower Bollinger Band and near its early October previous support level.



    The January 12.50 call option had the most significant volume yesterday.  This call option is at-the-money and a covered call for this call option has a potential return of about 6.5%.

     

    To enter the covered call investing position an investor would purchase the stocks in multiples of 100 shares for their trading portfolio and sell one call option for each 100 shares of stock purchased for their personal stock portfolio.

     



    Disclosure: No position in BARE or RDEN.
    Dec 15 10:34 AM | Link | Comment!
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