High Options Volume Calling For A Move?

by: Brian Gorban

There are many indicators I use when analyzing a stock. One indicator I look for are relatively cheap dividend stocks. Another strong indicator is insider activity in stocks, such as the ones described here. Finally, another indicator is looking at unusual option activity, as I recently brought up here, while some on Oct. 26 caught my eye.

Silver Standard Resources (NASDAQ:SSRI) engages in the exploration, development, and production of mineral resource properties in Argentina, Australia, Canada, Chile, Mexico, Peru, and the United States. There was abnormally strong Dec 21 call buying indicating bullishness in the coming months. The company has some attractive valuations at trailing 4x P/E and forward 12x P/E, very small .04x PEG, 1.5x P/B, and great net cash position of just over $280M. I think with this favorable balance sheet and aggressive call buying, I'd put this as a buy.

Microsoft (NASDAQ:MSFT) develops, licenses, and supports a range of software products and services for various computing devices worldwide. There was very strong Nov 27 call buying indicating bullishness in the month ahead. I recently wrote about my bullish case regarding MSFT here, and feel this just gives another great reason to buy as it still is just under trailing 10x P/E and 9x forward P/E, 1x PEG, 6x EV/EBITDA, and very respectable and growing 3% dividend yield.

MF Global Holdings (MF), together with its subsidiaries, operates as a broker of commodities and listed derivatives. The stock was extremely volatile on Oct. 26 and investors piled into the Nov 1 puts indicating extreme bearishness. On the surface, the stock looks real cheap at just 3x forward P/E, .2x P/B, and .1x P/S, however, this reminds me a lot of the Washington Mutual, Lehman Brothers, and other failed financial stocks which looked so cheap on the surface, but their book value essentially vanished as they were so levered. In this case, MF has some large exposure to debt in Europe, which much like subprime mortgage debt, nobody really has a true value. I see this as a value trap for now, so I'd follow the options market and avoid and even go short for the aggressive investor.

eBay (NASDAQ:EBAY) provides online marketplaces for the sale of goods and services, as well as other online commerce, platforms, and online payment solutions to individuals and businesses in the United States and internationally. Nov 28 put volume surged higher, indicating bearishness as they were aggressively bought. The company already reported a quarter that had a somewhat disappointing forecast, but that should've already been priced in and the company isn't expensive at a trailing 23x P/E, forward 14x P/E, 1.3x PEG, and strong net cash position of approximately $1.5B while they churned about $2B in FCF this past year. I don't necessarily see the bearish case here, so I'd refrain from selling or shorting EBAY.

CBRE Group (CBG) operates as a commercial real estate services company worldwide. Investors bought heavily the Nov 16 and 14 puts indicating bearishness. It looks to be a play on their earnings after the market close on Oct. 27. The stock is sitting near their 52-week low and getting into value territory at trailing 21x P/E and forward 13x P/E, .9x P/S, and 1x PEG. I would hold off on buying after the earnings though since I don't see this as extremely cheap, but wouldn't short this either, as it has already moved lower pretty significantly.

Alcoa (NYSE:AA) engages in the production and management of aluminum, fabricated aluminum, and alumina. A big block of 10,000 Dec 10 puts were sold at the bid indicating the seller was confident that it would hold at that price and be fine buying 1M shares if it were to fall below $10/share. The stock looks cheap at trailing 11.5x P/E, forward 10.5x P/E, .3x PEG, .45x P/S, .8x EV/S, and .7x P/B. I'd follow suit and look to buy AA or for the more sophisticated investor sell these same Dec 10 puts, as AA is a high-quality holding.

The Western Union Company (NYSE:WU) provides money transfer and payment services worldwide. There was over 3,000 Nov 17 puts sold at the bid price indicating bearishness among investors that they'd be fine to buy the stock if it were to drop below that strike price come Nov. 19. The company just reported a nice quarter and has nice fundamentals at trailing 12x P/E, forward 10x P/E, .9x PEG, strong FCF of over $900M this past year, and a growing 1.9% dividend yield. I'd follow suit and be bullish on this well-run company.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MSFT, WU over the next 72 hours.