Joe Kunkle's  Instablog

Options Hawk's Options Radar has been buzzing lately as the options market continues to explode on a volume basis. Recent action in low dollar stocks has proven ultra-profitable with E-Trade (ETFC), Regions Financial (RF), Synovus (SNV), and countless other names rebounding as this rally gets legs.

However, 2 relatively unknown names in the medical equipment industry showed up on Friday with very bullish action, and the technical patterns and high short interest make it evident that these 2 stocks could bounce signicantly before May options expiration.  

Conceptus (CPTS) and Patterson Companies (PDCO) traded 15X and 13X average call volume on Friday, respectively.

Conceptus has 21.5% of it's float short, or nearly 20 days to cover, and buyers came in aggressively on wide spreads to pay the offer, with May $12.50 calls garnering the most interest among traders.  Shares of the company broke out of a symmetrical triangle today that would imply a move to $16.40, or around 30% higher is underway, especially as stock volume also traded nearly 2x the norm.  Implied volatility remained elevated near 105%, but a far cry from the 151% seen in mid-February when shares fell nearly 20% in 2 days after earnings.  Conceptus make minimally invasive medical devices for the reproduction system, such as permanant birth control for women, and earnings are scheduled for April 21st which will likely cause another 3+ standard devaition spike that will raise send option prices soaring, and this time traders are betting on a move higher in shares, which could be exacerbated by the shorts running for cover.

Patterson Companies (PDCO) saw a steep drop in implied volatility Friday from 50% to 39% near levels from last July.  This had call buyers step in and trade 13X the average call volume, but also 9x the average put volume, with 37,000+ calls trading and just 1,182 puts, a day after 6,500 calls and 1,900 puts traded..  Shares broke out past a key $21 resistance level on one of the largest volume days in recent times for the company.  There is no announced earnings date for the dental and rehab medical supplier, but shares trade just 11.6x forward earnings, and have a short ratio of 5.32.  A lot of the action came from profitable April $17.5 and $20 call holders rolling positions to the same May strikes, but some new traders began taking notice and bought 639 May $22.50 calls versus open interest of 220.  

Both of these stocks had very unusual call activity trading in multiple large lots, have bullish chart patterns, a high short interest, and upcoming catalysts for an explosive move.  

Stryker (SYK) was another medical equipment stock that traded unusual call volume on Friday due to continued rumors that Johnson and Johnson (JNJ) is looking to pay $50 cash per share for the company. On April 9th, Varian Medical (VAR) call activity exploded on rumors that Siemens was looking to buy the company for at least $45 per share to help Siemen's new oncology platform.  Becton Dickinson (BDX) and Cooper Companies (COO) have also recently been me

We could see mergers and acquisitions pick up across the sector, with both Conceptus and Patterson looking to be attractive targets as each company operates in a niche business that coul add top-line growth the a larger player in the industry, another reason to own the shares of these two companies.

Disclosure: No positions at time of writing, but considering buying calls in each