7 Stocks Experiencing Abnormal Options Volume

|
Includes: AABA, CTSH, CVC, FAST, MSFT, SNBR, TGT
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. 31 caught my eye below. Again, unusual option activity always catches my attention since options are generally a strong indicator to future movement as they provide great leverage for an investor.

Microsoft (NASDAQ:MSFT) develops, licenses, and supports a range of software products and services for various computing devices worldwide. Looks like a big investor placed a vertical call on the Feb 29 and 30 calls as they had very similar unusual volume at approximately 18,000 contracts and another big investor was very bullish this past week as I brought up here. This investor is clearly bullish on MSFT and I have to say I am as well when it's trading under a trailing 10x P/E, forward 8.5x P/E, 1x PEG, over $40B in net cash, and 3% dividend yield. I think a vertical call spread on the same options make sense or a covered call position and be able to collect the 3% dividend while you wait.

Yahoo! (YHOO), together with its subsidiaries, operates as a digital media company that delivers personalized digital content and experiences through various devices worldwide. There was some abnormally strong volume in the Apr 17 and 21 calls, but weren't being bought aggressively so I wouldn't look too much into it. YHOO on a valuation basis is decently priced at a trailing 19x P/E, forward 18x P/E, 1.6x PEG, and very little debt with close to $1.5/share in net cash. The 21 strike price is for the more aggressive investor as that'll provide much more leverage, but I like the Apr 17 calls more as the time value is less costly and provides more than enough leverage for me.

Target (NYSE:TGT) operates general merchandise stores in the United States. There was particularly strong volume in the Apr 48 puts with over 11,000 contracts changing hands. They weren't bought aggressively though, so I wouldn't see it as too bearish. Moreover, TGT has some nice fundamentals at a 13x trailing P/E, 12.5x forward P/E, .5x P/S, .8x EV/S, and 2.2% dividend yield. I wouldn't buy the puts at this time.

Select Comfort (SCSS) develops, manufactures, markets, distributes, and retails adjustable-firmness beds and other sleep-related accessory products. There was more than 3,000 Nov 20 put contracts changing hands, but looked to be a naked put as they plunged over 25% in value. The company just reported a stellar quarter this past week and valuations look decent at a trailing 22x P/E, forward 16.5x P/E, 1.4x PEG, 1.5x EV/S, and no debt with over $2/share in net cash. I'd follow the options activity here and be bullish on SCSS. I'd follow suit and be bullish by selling these Nov 20 puts and being happy if they expire worthless and collect the $.80 premium or if the stock closes below it and own a quality stock.

Cablevision Systems (NYSE:CVC), through its subsidiaries, operates as a telecommunications, media, and entertainment company. There was a very heavy 3,528 contracts that changed hands against only 3 contracts of open interest and the value of the puts almost doubled signally extreme bearishness. The company just reported a lousy quarter this past Friday and warned about rising costs which is most likely the cause for the continued negativity. On a valuation basis, the stock looks rather cheap though a trailing 10x P/E, forward 9.5x P/E, .9x PEG, .6x P/S, and 4% dividend yield. The approximately $11B debt load though is worrisome to me along with how capital intensive the business is. I wouldn't follow suit with the options and short quite yet, but I'd stay away from CVC for now.

Cognizant Technology Solutions (NASDAQ:CTSH) provides information technology (IT), consulting, and business process outsourcing services. There was heavy selling in the Nov 77.5 calls particularly with over 3,500 contracts changing hands and being sold aggressively indicating bearishness. The stock is pretty expensive at a trailing 27x P/E, forward 21x P/E, 4x EV/S, and 18x EV/EBITDA. The stock does have a nice balance sheet with no debt and approximately $7.5/share in cash. I'd follow the options activity and look to be bearish more by buying the Nov 70 puts to limit my downside whereas by selling naked calls, the downside is technically infinite.

Fastenal (NASDAQ:FAST) is engaged as a wholesaler and retailer of industrial and construction supplies. There was strong call activity in the Nov 37.5 and Jan 42.5, in particular, almost doubling in value, even though the stock moved 1.5% lower. This is very bullish and most likely a carry-on from the strong earnings report this past week. Fundamentally, the stock looks pricey though at 33x trailing P/E, 27x forward P/E, 4x EV/S, and 19x EV/EBITDA. It does however have no debt, a 1.5% dividend yield, and great ROA and ROE of 22% and 25% respectively. I'd have this as a buy for the aggressive investor with either the Nov 37.5 or Jan 42.5 dependent on your risk tolerance.

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