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Begin part 2 of 3
SUBSCRIBER QUESTIONS
Q: I have been a faithful reader of the daily newsletter for years. You've taught me a lot about trading. My question is about options. Do you set stop limits on your option trades or trailing stops? In the stock splits newsletter, when you highlight a stock, you mention a reasonable stop limit. How do you determine the stop limit for the option? Do you go through the delta calculation?
A: The stock price is the major influence on the underlying option's movement, so typically we use the stock's price to determine when we buy and sell. If a stock holds support, then that is good for the option because the stock typically rebounds from there and the option price does the same. Therefore, when the stock hits a stop point, that is generally a sell on the option position. That requires just watching the stock and then acting with the option accordingly, and, of course, the percentage loss on the option would be greater than the stock as the option's move is magnified compared to the stock. We are usually content to let our options work along with the stock price as long as we have sufficient time left before the option expires. Remember, 60 days out you are okay, but time starts to become a factor the closer you get to 30 days out from expiration. Thirty days or less, time becomes very important.
If you are more interested in putting a stop on the option itself as opposed to watching the stock, you can calculate the what the value of the option will be when the stock hits a certain price. You use the option's delta to do this. This way you can put in a stop order (stop loss or stop limit) directly on the option position as opposed to having to watch the stock. We will often do this when we have a good gain built into the option that we want to keep regardless of what the stock is doing. Many times we will have a 50+% gain on our option position even before the stock hits the target. With time value as our enemy on options we buy, we don't want to lose that gain if the stock decides to make a test.
To make the calculation with respect to a stop point, subtract the stock price that you bought at from the stock price that is the stop loss point. Multiply that result by the option's delta. The result of that calculation will tell you how far the option will move given the stock move to the stop point. Subtract that amount from the bid price at the time you entered the play and that will give you the bid price for the option at the stop point. To determine the target, you do the same calculation with respect to the target stock price, but you add the result to the bid price to get the figure out the dollar move the option will make by the time the stock hits the target.
Formula for calculating option target price on an upside play:
(Stock target price - Stock buy price) x option delta + option bid price = option bid price when stock hits target price.
Formula for calculating option stop loss price on upside play:
(Stock buy price - Stop loss price) x option delta + option bid price = option bid price when stock falls to stop loss point.
THE PLAYS
In each report we prepare full write-ups for those plays that look ready to move. Those that have made the move or are still setting up are discussed in the continuing play table. The purpose is to focus on those stocks that are set to move.
Good movers Friday: ABTL; AGN; BRL; CENT; IDXX; MBT; NMGA; NSIT; SEAC; SLAB
NEW PLAYS: This section includes plays from all sections other than pre-announcements. Those are contained in the pre-announcement section.
New Pre-Splits:
Play Date: 02/07/2004
NYB (New York Community Bancorp--$41.96; +1.46; optionable): Savings & loan. Splits 4:3 on 2-18-04
http://biz.yahoo.com/p/n/nyb.html
STATUS: Testing the breakout. NYB broke from a short 6 week cup base in mid January, its second base on this strong run since the March break higher. It has worked in a choppy pattern the past two weeks, holding the 18 day MVA (40.43) on the lows, managing to rebound and showing generally good price/volume action. Accumulation in the base was a solid 3 to 0 (3 up price weeks on rising volume to 0 down price weeks on rising volume. Friday NYB was surging off the 18 day after a Thursday test, volume remaining strong and moving up as it did. Relative strength broke out on the move, a signal that even with the strong market rally Friday NYB is one of the better performers.
Volume: 1.636M Avg Volume: 966.073K
BUY POINT: $42.15 Volume=1.5M Target=$46.15 Stop=$40.32
POSITION: NYB DH - Apr. $40c (80 delta)
http://www.investmenthouse.com/cs/nyb.html
Leader Plays: May not be ready for a split but can make us good money and some can grow into split candidates.
Play Date: 02/07/2004
BKHM (Bookham Technology--$3.18; +0.21; no options): Semiconductors
http://biz.yahoo.com/p/b/bkhm.html
STATUS: Breakout test. A similar pattern to NYB, BKHM broke out in mid January from an 8 week cup with handle base, but is now testing that move with a lower volume lateral move over the 18 day MVA (3.04). Accumulation in the base was a strong 4 to 1, setting a good foundation for the breakout along with the fact it formed the base right on the 50 day MVA (2.75). It looked to be on some trouble Wednesday, but righted itself and was up off the 18 day MVA Friday on rising though still below average volume. Money flow is surging ahead of price still and relative strength is set to breakout with the price. Want to see a good, above average volume surge as it moves through the buy point.
Volume: 1.572M Avg Volume: 1.974M
BUY POINT: $3.32 Volume=2.5M Target=$4.15 Stop=$3.09
POSITION: - Stock (no option chain)
http://www.investmenthouse.com/cs/bkhm.html
Play Date: 02/07/2004
PWAV (Powerwave Technologies--$9.88; +0.37; optionable): Telecom equipment
http://biz.yahoo.com/p/p/pwav.html
STATUS: Cup w/handle. As the market sold PWAV more or less went about its business, continuing to work on the handle to its 21 week base sporting strong 6 to 3 accumulation. Other good attributes in clued the formation of the base at the 200 day MVA (7.31) and the handle the past four weeks holding at the 18 day MVA (9.51). Money flow is strong and is moving up ahead of price as it moved laterally and slightly lower the past two weeks. Looks good and we just wait for a high volume move; given the low volume the past week that move should be rather conspicuous.
Volume: 1.337M Avg Volume: 3.579M
BUY POINT: $10.32 Volume=5M Target=$12.62 Stop=$9.61
POSITION: VFQ EB - May $10c (52 delta) &/or Stock
http://www.investmenthouse.com/cs/pwav.html
Play Date: 02/07/2004
ZGEN (Zymogenetics--$18.25; 0.00; optionable): Biotechnology
http://biz.yahoo.com/p/z/zgen.html
STATUS: Double bottom w/handle. ZGEN is working through a very tight handle to its 8 month base that formed over the 200 day MVA (14.19). Accumulation in the base is excellent at 11 to 3. That tells us that during the base money was moving into the stock, accumulating positions, not selling out. This is a very tight handle that acts to shakeout the last sellers. When they are gone the stock is free of overhead supply and can continue the upward move.
Volume: 230.968K Avg Volume: 121.204K
BUY POINT: $18.48 Volume=200K Target=$22.22 Stop=$17.82
POSITION: GZU EW - May $17.50c (62 delta) &/or Stock
http://www.investmenthouse.com/cs/zgen.html
Continuing Leader Plays
Play Date: 01/31/2004
ABTL (Autobytel--$12.93; +0.71; optionable): Internet auto services
http://biz.yahoo.com/p/a/abtl.html
STATUS: Test breakout. After a rough Tuesday and Wednesday, ABTL found its footing and jumped off support at 11 on strong volume. It continued the move Friday on even better volume, running up to the prior high at 13. Even with this late week move, money flow is still surging up ahead of the price. We are looking to add to positions on a big volume break over 13 as that will show it has overcome a selling attempt and buyers have poured back in.
Volume: 1.079M Avg Volume: 497.954K
BUY POINT: New: $13.12 (orig. $12.83) Volume=775K Target=$15.45 Stop=$11.89
POSITION: BCU EV - May $12.50c (57 delta) &/or Stock
http://www.investmenthouse.com/cs/abtl.html
Play Date: 01/22/2004
CHT (Chunghwa Telecom--$15.95; +0.05; optionable): Chinese wireless telecom
http://biz.yahoo.com/p/c/cht.html
STATUS: Cup w/handle. While many of the Chinese stocks that surged in 2003 have faltered, CHT, a new issue in July, has held up very well, moving laterally and lower on low volume to test the 18 day MVA (15.65) last week during the market selling. A very nice 14 with money flow rallying up ahead of price. Looking for the stock to follow and to do so on a nice, big volume surge.
Volume: 299.7K Avg Volume: 414.363K
BUY POINT: New: $16.28 (orig. $15.75) Volume=1.1M Target=$18.92 Stop=$15.55
POSITION: CHT FC - June $15c (70 delta) &/or Stock
http://www.investmenthouse.com/cs/cht.html
Play Date: 01/31/2004
JNPR (Juniper Networks--$29.47; +1.25; optionable): Networking
http://biz.yahoo.com/p/j/jnpr.html
STATUS: Flying plateau. Continues to show its strength, moving laterally, holding over the 10 day MVA (28.33) on the close as the market sold off. JNPR is showing it is a reborn market leader here, doing something that many stocks find difficult, i.e., showing sharply increasing sales and revenues after a major economic and market collapse. Just being patient and letting it move laterally until the break higher.
Volume: 11.188M Avg Volume: 10.827M
BUY POINT: Aggressive: $29.55 Breakout: $30.12 Volume=15M Target=$35.45 Stop=$27.48
POSITION: JUX GF - July $30c (50 delta) &/or Stock
http://www.investmenthouse.com/cs/jnpr.html
Downside:
Play Date: 02/05/2004
AVID (Avid Technology--$44.11; +1.11; optionable): Electronic equipment
http://biz.yahoo.com/p/a/avid.html
STATUS: Put. Friday AVID continued the low volume bounce back toward the 200 day MVA (45.24), ready to test the break below that level. AVID collapsed at the end of January, tanking through the 200 day as volume surged. It held at 42 and is bouncing back toward the 200 day. Still may move a bit higher to fully test the 200 day. When it hits near that level and starts to turn over on rising trade we will move in.
Volume: 417.29K Avg Volume: 600.454K
BUY POINT: Test 45, then $44.45 on the way back down. Volume=600K Target=$40.35 Stop=$45.25
POSITION: AQI OI - Mar. $45p (-62 delta)
http://www.investmenthouse.com/cs/avid.html
Play Date: 02/04/2004
HUM (Humana--$22.44; +0.65; optionable): Health care plans
http://biz.yahoo.com/p/h/hum.html
STATUS: Put. Friday HUM managed to rally and tap the 18 day MVA (22.62) on the high, but volume continued to fall off the table, dropping below average and sharply off the early February selling volume. Looks like a low volume test of a breakdown as HUM works on forming a base after a long run from April to December.
Volume: 973.4K Avg Volume: 1.359M
BUY POINT: New: $22.08 (orig. $21.65) Volume=1.9M Target=$20 Stop=$22.26
POSITION: HUM OX - Mar. $2.50p (-50 delta)
http://www.investmenthouse.com/cs/hum.html
PRE-ANNOUNCEMENT PLAYS
Current Pre-Announcement Plays: In each report we look at the candidates that are in the best patterns ahead of their potential announcements. This focus on leaders in good patterns allows us to make good money even if companies do not announce the split, something that they are still gun-shy of as the market and economy recovers.
AGN: No split announced with 2-2-04 in conjunction with its shareholder meeting. Starting back up.
APOL: Forecast 3-24-04 or with the 2-27-04 board meeting.
BCR: Forecast 1-28-04. No split but a solid move continues.
BRL: No split 2-5, but super earnings gapped it higher.
DE: Forecast 2-14-04. Continues to struggle below the 50 day. Don't like moving in unless the pattern is good.
DNA: Forecast 1-14-04. No split announced but we want to stay in this one as it gives opportunities.
ELAB: Forecast 2-19-04
IDXX: Researching next date, but making a super move for us in the interim.
IRM: Forecast 2-27-04
LXK: No split announced 1-26-04. Nice surge and now testing it with a low volume, lateral move.
MBG: Researching new date.
MBT: Researching date. Looks ready to make the next move as volume surged Friday in its flying plateau.
NMGA: Forecast 3-3-04 after the close.
NSIT: No split announced on 2-5-04 after the close. Nice earnings gapped it higher on strong volume.
OSI: Forecast 2-11-04.
SHFL: Forecast 2-19-04 with earnings.
SONC: No split with 1-24 shareholder meeting but preparing for upside move.
STRA: Forecast 2-14-04 during the market.
UOPX: Forecast 3-24-03 with earnings.
VAR: Forecast 2-19 in conjunction with its shareholder meeting. Gapped lower Friday but recovered over the 10 day MVA. Providing a quick entry point here.
VIP: Forecast 3-26-04.
WFMI: Forecast 2-11-04.
XTO: Forecast 2-18-04 in conjunction with earnings. Still struggling below the 50 day MVA, and we don't like to move in on weak patterns.
Full Write-ups: We do not cover all candidates in full in each report, but focus on those ready to make a move or are right at their forecast announcement date. This way we are focused on those stocks ready to make moves.
New Pre-Announcement Plays:
Play Date: 02/07/2004
LM (Legg Mason--$89.25; +1.27; optionable): Investment brokerage. Still researching the next date but a nice pattern.
BACKGROUND: Last split (2:1) in September 1998 at $64. This is the first time it has cleared that level since that time.
http://biz.yahoo.com/p/l/lm.html
STATUS: Flying plateau. LM reported strong earning on January 21, and that helped break it out of an 11 week cup base. It did not have time to form a handle on this one as the earnings came while it was forming the right side of the cup. It gapped higher and rallied to 90, but now it is working on that handle or shakeout, holding over the 10 day MVA (88.01) the past three weeks as it moved laterally. Looking for it to continue the breakout move with a surge on above average volume off of the 10 day. That is when we move in.
Volume: 212.6K Avg Volume: 520.409K
BUY POINT: $90.32 Volume=550K Target=$100 Stop=$88
POSITION: LM QR - May $90c (50 delta) &/or Stock
http://www.investmenthouse.com/cs/lm.html
Play Date: 02/07/2004
OSI (Outback Steakhouse--$44.05; -0.08; optionable): Steak restaurants, corny commercials. Forecast February 12 in conjunction with earnings.
BACKGROUND: Last announced a 3 for 2 split in November 1991 at approximately $26. The annual shareholder meeting was on 4-23-03 at which time no additional shares were authorized. The company has sufficient shares for a 2 for 1 split.
http://biz.yahoo.com/p/o/osi.html
STATUS: Testing the 50 day MVA. OSI has corrected back into a cup base after the breakout from four month base in late October that saw OSI run up to 47.50. The current base is 8 weeks, and OSI just came off a 50 day MVA test (43.33) and Friday eased back to the 18 day MVA on low volume, showing a doji. That often indicates that a pullback is over. Solid 3 to 0 accumulation in the base even at this relatively early stage before it forms the right side of the cup. Looking for an above average volume break past the recent highs to start a position ahead of the forecast date.
Volume: 432.1K Avg Volume: 524.09K
BUY POINT: $45.12 Volume=650K Target=$51 Stop=$41.96
POSITION: OSI HI - Aug. $45c (46 delta) &/or Stock
http://www.investmenthouse.com/cs/osi.html
Continuing Pre-Announcement Plays:
Play Date: 01/13/2004
AGN (Allergan--$86.65; +1.59; optionable): Drugs. No split with 1-28-04 earnings or 2-2-04 annual shareholder meeting. Researching next date, but we are on the alert as AGN authorized additional shares at the board meeting..
BACKGROUND: Last announced a 3 for 2 split on 1-14-02 in conjunction with a board meeting. The stock price was $36.50.
http://biz.yahoo.com/p/a/agn.html
STATUS: Breakout test. AGN warned on the first quarter in late January, but that was just a minor blip to investors. It has since surged and tested. Friday it bounced up off of a 10 day MVA test, jumping once more on rising, above average volume. Money flow continues to shoot higher. Still a buy at this point as it breaks to a new 2.5 year high.
Volume: 1.077M Avg Volume: 830.727K
BUY POINT: New: 87.06 (orig. $84.46) Volume=1.2M Target=$94 Stop=$84.58
POSITION: AGN DQ - Apr. $85c (53 delta) &/or Stock
http://www.investmenthouse.com/cs/agn.html
Play Date: 12/17/2003
BCR (C.R. Bard--$92.90; -0.09; optionable): Medical instruments and supplies. No split announced with earnings on 1-28-04 but continues to rally and we continue to position ourselves to take advantage of the moves.
BACKGROUND: Last announced a 2 for 1 split around 1-22-00 at a stock price of $48. The annual shareholder meeting was on 4-16-03 at which time no additional shares were authorized. The company has sufficient shares for a 2 for 1 split.
http://biz.yahoo.com/p/b/bcr.html
STATUS: Testing 10 day MVA. Solid breakout in early January and run up to 95 on excellent volume. It has spent the past week drifting back toward the 10 day MVA (92.03), testing that strong move. Looking for new positions on a jump off of this level on continued strong volume. This is averaging up into a winner.
Volume: 522.1K Avg Volume: 353.227K
BUY POINT: New: $93.65 (orig. $80.93) Volume=500K Target=New positions: $100 (orig. $92.95) Stop=$91.92
POSITION: BCR GS - July $95c (42 delta) &/or Stock
http://www.investmenthouse.com/cs/bcr.html
Play Date: 01/06/2004
DGX (Quest Diagnostics--$84.89; +0.69; optionable): Medical labs. No announcement with earnings on 1-27-04. Researching next date, but we want to be in on a continued breakout.
BACKGROUND: Last split June 2001 at a price of $123.
http://biz.yahoo.com/p/d/dgx.html
STATUS: Flying plateau. DGX is one of our continuing winners, and thus we want to keep building positions as it gives us opportunity to do so. After a strong surge on a bug gain in earnings announced in late January, DGX is currently moving in a week-long lateral range on lower and lower volume. The 10 day MVA (83.16) is rising to meet it (tapped it on the Friday intraday low), and when it rises up to the stock that typically sends it running higher. We want to see volume jump up as it does. That is our next entry point.
Volume: 547.6K Avg Volume: 657.681K
BUY POINT: New: $85.88 (orig. $73.88) Volume=1.2M Target=New positions: $96 (orig. positions: $84.85) Stop=$82.48
POSITION: DGX EQ - May $85c (58 delta) &/or Stock
http://www.investmenthouse.com/cs/dgx.html
Play Date: 01/03/2004
DNA (Genentech--$96.52; +0.5; optionable): Biotechnology. Looking for the next potential date as did not announce on 1-14.
BACKGROUND: Last announced a split on 10-5-00 in conjunction with a board meeting. The stock price was $172. Things were a bit wilder then, and now near $100 DNA is ready for another split. The annual shareholder meeting was on 4-23-03 at which time no additional shares were authorized. The company has sufficient shares for a 2 for 1 split.
http://biz.yahoo.com/p/d/dna.html
STATUS: Testing the breakout. DNA is still working laterally along the 10 day MVA (95.83) on below average volume. Again, this is very quiet action as the market jumps up and down. Just waiting for the next volume break higher to enter new positions.
Volume: 1.314M Avg Volume: 2.1M
BUY POINT: New: $97.06 (orig. $95.44) Volume=3M Target=$102 Stop=$93.88
POSITION: DNA CS - Mar. $95c (52 delta)
http://www.investmenthouse.com/cs/dna.html
PRE-SPLITS
Play Date: 02/05/2004
APH (Amphenol Corp.--$66.04; +1.40; optionable): Electronics. Splits 2:1 on 3-30-04
http://biz.yahoo.com/p/a/aph.html
STATUS: 50 day MVA test. Up off the 50 day MVA on some rising though still below average volume, clearing the short term MVA (65.77, 65.69) on the move. Excellent money flow continues, and it is still a buy on this move.
Volume: 140.6K Avg Volume: 159.363K
BUY POINT: New: $66.22 (orig. $65.25) Volume=200K Target=$72 Stop=$63.68
POSITION: APH DM - Apr. $65c (48 delta)
http://www.investmenthouse.com/cs/aph.html
Play Date: 01/29/2004
CALM (Cal-Maine Foods--$37.80; +1.27; no options): Atkins diet foods. Splits 2:1 on a date to be determined.
http://biz.yahoo.com/p/c/calm.html
STATUS: Cup w/handle. Volume jumped Friday as CALM started to make its move, hitting 39.68 on the intraday high, but gave back most of the gain. Still a very nice 6 week base with solid 2 to 0 accumulation. Another volume move that sticks a bit better is another good entry point.
Volume: 801.024K Avg Volume: 570.136K
BUY POINT: New: $38.25 (orig. $35.65) Volume=650K Target=$42.75 Stop=$33.15
POSITION: - Stock (no option chain)
http://www.investmenthouse.com/cs/calm.html
End part 2 of 3
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