With the major indices trading mixed Thursday, there were several stocks which broke out to the upside on BIG volume. To reiterate previous blog posts like this, the first thing I do is scan the list for familiar names, such as stocks I am quite familiar with or ones 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). 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. The list in this post is quite large and includes 17 stocks, all of which traded higher on heavy volume Thursday. However I will only write about one stock in detail which I'll be adding to my watch list, 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 heres..
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|
|Ulta Salon, Cosmetics & Fragrance||(NASDAQ:ULTA)||8.53%||470.91%|
|Sociedad Quimica y Minera||(NYSE:SQM)||5.42%||144.25%|
|Clean Energy Fuels Corp.||(NASDAQ:CLNE)||4.62%||114.78%|
|M.D.C. Holdings, Inc.||(NYSE:MDC)||4.60%||106.75%|
|The Stanley Works||(NYSE:SWK)||3.52%||92.24%|
|The Dress Barn, Inc.||(DBRN)||2.15%||67.55%|
|Community Health Systems||(NYSE:CYH)||1.72%||67.43%|
|Liberty Global Inc.||(NASDAQ:LBTYA)||0.00%||59.03%|
|The Talbots, Inc.||(NYSE:TLB)||3.65%||46.14%|
|World Acceptance Corp.||(NASDAQ:WRLD)||2.29%||45.18%|
|Westport Innovations Inc. (NYSE:USA)||(NASDAQ:WPRT)||-0.66%||32.45%|
|NII Holdings, Inc.||(NASDAQ:NIHD)||4.25%||25.98%|
|WellCare Health Plans, Inc.||(NYSE:WCG)||1.39%||24.45%|
From the list above there are two stocks which I have noticed appearing on similar lists lately, one is Valeant Pharmaceuticals (VRX) and the other is Ulta Salon, Cosmetics & Fragrance (ULTA), and I am bullish on both. ULTA was red hot in Q4 of 2009 and looks like it could continue, but currently there aren't any options offered on this stock, so by default I will be writing about Valeant.
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Click to enlarge
Valeant Option Trade: VRX broke out Wednesday and continued the trend Thursday. I believe VRX is a little overbought short term, so I would like to see some consolidation before jumping in. Friday's unemployment data will likely influence this stock as it will have a major impact on the overall market, so if this stock shows weakness on the back of that data, I believe it could be a good opportunity to get in. It is also important to note that Valeant will be hosting a conference call at 9 AM Friday to announce 2010 financial guidance, this may also affect the stock during trade Friday. If a sell off does occur, I would need to see this stock hold support near 31. My ideal entry point is below 32 a share, and I would look to structure a Vertical Call Spread position for the February expiration if it neared that price. Using current market data I could open a 32.50/35 February vertical call spread for roughly $140 per spread. This position would make time my friend, as this spread would put me into VRX for 33.90 a share (64 cents below Thursday's close). Of course if I waited until my entry point near 32 a share I would be paying a premium on the shares, but my potential return would increase, and my risk would also decrease. If I become more conservative on VRX, I would likely look to structure a 30/32.50 vertical call spread for February; this would give me a near 30% gain in 43 days as long as the stock holds above 32.50 (5.9% lower than Thursday's close).
Profit & Loss: The maximum loss per spread using current data is $140 per vertical call spread, even if the stock trades to zero. If the stock continues higher and closes on February options expiration above 35 a share, this strategy will return maximum profitability or $110 (a gain of 73.3%). The break even point for this strategy would be shares of VRX at 33.90 on February options expiration.
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: Long SQM