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Brian Gorban has been an active investor for almost twenty years. Mr. Gorban is a graduate from the University of California, Berkeley in 2005 with a degree in Economics and minor in Business Administration from the Haas School of Business (Finance Focus). Upon his graduation, he worked as an... More
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  • Heavy Option Activity In These 7 stocks 0 comments
    Sep 29, 2011 5:11 PM | about stocks: ZIOP, CNP, O, FMCN, FDO, AET, IPG
    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)  Ziopharm Oncology (ZIOP) had option volume surge almost 2,500 percent above average.  Looks like an investor sold the Jan 5 calls and bought the O$5 calls, apparently rolling his either short or covered call position and heavy Oct $4 puts buying signifying a bearish position.  With the company losing almost $75 million in net income over the last year, trading at over 3.5x price/book (p/b), and a negative return on equity in excess of 100%, I can see why one would be bearish on the stock.  However, the company actually has a clean balance sheet with no debt and almost $2/share in net cash. However, this is a still a very speculative biotechnology name and if somebody is interested in one of those, I'd go with Opko Health as I recently discussed here.

    2)  CenterPoint Energy (CNP) had option volume explode over 2,000 percent above average.   The Oct $20 calls and Nov $20 and $22.50 calls traded heavily indicating a bullish trade in these slightly out of the money calls. The company looks fairly priced at 17x price/earnings (p/e), 1x price/sales (p/s), and respectable 4% dividend yield.  I think this is a solid dividend holding for the long-term or you can find even more here.

    3)  Realty Income had option volume explode 1,654 percent above average.  There was heavy volume specifically in the 
    Dec 2011 $30 puts and the Dec 2011 $35 calls.  Looks like there were investors with opposing views of this REIT with one side buying these out of the money calls aggressively while the others buying out of the puts aggressively.  The company doesn't look particularly cheap trading at a 32x p/e, over 11x p/s, and almost 2.5x p/b.  However, it does sport a consistent 5.1% dividend yield with strong free cash flow, so I'd neither be short or long this stock at this price level.

    4)  Focus Media (FMCN) had option volume increase 1,164 percent above average.  The stock got slammed today and there was bearish option activity with investors buying predominately the Oct 2011 $20 puts and selling the Oct 2011 $24 calls.  This stock doesn't seem too cheap even with today's fall as it trades over 3x p/tangible book value and 5x p/s. However, with analyst's expecting this company to grow approximately 20% over the next year, a 13x p/e is reasonably cheap and the company has no debt and almost $4.5/share in net cash.  I'd rate this stock a hold here at $20/share and wait to buy for the long-term if it falls closer to the mid-teens.

    5)  Family Dollar (FDO) had Option volume rise almost 800 percent above average.  There was particularly strong volume in the Oct 2011 $49 calls and Nov 2011 $49 puts.  The stock fell today largely due to Trian Partners ending their buyout attempt after receiving a board seat.  The stock doesn't look particularly cheap at 17x p/e, almost 5.5x p/b, and mediocre 1.4% dividend yield.  However it does trade under .8x p/s and showing strong margins as buyers look to shop here more in these tough economic times.  I think its a hold at this price.

    6)  Coventry Health (CVH) had option volume skyrocket almost 750 percent above average.  The managed healthcare company had heavy Oct 2011 $29 and $30 put buying along with heavy volume all the way with the Aug 2012 $35 calls and puts. The stock looks cheap trading at 6.5x p/e, under .4x p/s and just under 1x p/b.  I don't see a particular reason to be short this stock as the option activity suggests.

    7)  Interpublic Group (IPG) had option volume increase 737 percent above average.  There was strong volume particularly with the Oct, Nov 2011 and Jan 2012 $6 puts, along with the Apr 2012 $8 calls and puts.  The stock looks reasonably priced at 13x p/e, .5x p/s and respectable 3% dividend yield.  I don't see a reason to follow the options and go so bearish buying deep out of the money puts. I think this stock is a hold at these depressed levels.

















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

    Additional disclosure: I provide my fundamental analysis and thoughts so not looking for a trade, but just using these options trade as a screening tool.
    Themes: Long Short Ideas, Options Stocks: ZIOP, CNP, O, FMCN, FDO, AET, IPG
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