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Call Options Plays
Put Options Plays
GDORLY
PPD 

New Calls

General Dynamics - GD - cls: 119.59 chg: +1.09 stop: n/a

Company Description:
General Dynamics, headquartered in Falls Church, Virginia, employs approximately 70,800 people worldwide and had 2004 revenue of $19.2 billion. The company has leading market positions in mission-critical information systems and technologies, land and amphibious combat systems, shipbuilding and marine systems, and business aviation. (source: company press release or website)

Why We Like It:
We like GD as a strangle play. We're putting it in the calls section because our bias is bullish. The stock did breakout from a multi-week trading range in late September and the long-term trend continues to look positive for GD. Yet instead of just buying calls on the stock we're choosing to play a strangle where we buy a call out of the money and a matching out of the money put. This way we don't care what direction GD moves as long as it moves enough to make one of these positions profitable. GD is an attractive candidate for a strangle because the stock has a history of producing sizeable moves following its earnings report. The company is due to report earnings on October 19th before the opening bell and Wall Street expects GD to turn in profits of $1.76 a share. The worst-case scenario is that GD does not react to earnings and churns sideways.

Suggested Options:
We are suggesting the following options for this strangle play.

BUY CALL NOV 125.00 GD-KE OI= 709 current ask $0.85
-and-
BUY PUT NOV 115.00 GD-WC OI= 589 current ask $1.15

Our total investment should be close to $2.00. Therefore it should not take a huge move following the October 19th earnings report to make this a profitable play. These options expire on November 18th. Our target is a $3.00 profit on this $2.00 investment. If either option hits $5.00 we'll exit.

FYI: you could try a $120.00 straddle play where you buy one call and one put at the same strike but the investment would be closer to $5.50 and GD would have to move even farther to make it profitable.

Picked on October 09 at $119.59
Change since picked: + 0.00
Earnings Date 10/19/05 (confirmed)
Average Daily Volume = 713 thousand

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Pre Paid Legal - PPD - close: 39.35 chg: +0.75 stop: 37.85

Company Description:
We believe our products are one of a kind, life events legal service plans. Our plans provide for legal service benefits provided through a network of more than 50 independent law firms across the U.S. and Canada, and include unlimited attorney consultation, will preparation, traffic violation defense, automobile-related criminal charges defense, letter writing, document preparation and review and a general trial defense benefit. We have an identity theft restoration product we think is also one of a kind because of the combination of outside vendors and our provider law firms. (source: company press release or website)

Why We Like It:
PPD is a short squeeze waiting to happen. The latest data puts short interest at 32.5 percent of its 15.4 million shares outstanding. What drew our attention to PPD was the rally on September 30th where the stock appeared to breakout over its three-month trendline of resistance. Yet at the same time PPD had not yet broken out over its simple 200-dma. The stock churned sideways under the 200-dma until this Friday with a 1.9% rally pushing PPD over technical resistance at the 200-dma. The 200-dma is a classic support/resistance level so the move higher on Friday has probably got the bears nervous. We suspect that if PPD can breakout over the $40.00 level a short squeeze may ensue. Our strategy is to use a trigger at $40.10. If PPD trades at or above $40.10 we'd suggest buying calls. Our target is the $44.00-45.00 range. We will plan to exit ahead of the October 24th (unconfirmed) earnings date. FYI: Normally we would not play a stock with daily average volume this low but the opportunity here looks too tempting.

Suggested Options:
We are suggesting the November calls.

BUY CALL NOV 37.50 PPD-KU OI= 81 current ask $3.40
BUY CALL NOV 40.00 PPD-KH OI= 50 current ask $1.85
BUY CALL NOV 42.50 PPD-KV OI= 0 current ask $1.00
BUY CALL NOV 45.00 PPD-KI OI= 21 current ask $0.75

Picked on October xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/24/05 (unconfirmed)
Average Daily Volume = 72 thousand
 

New Puts

O'Reilly Auto. - ORLY - close: 28.23 chg: +0.06 stop: n/a

Company Description:
O'Reilly Automotive, Inc. is one of the largest specialty retailers of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States, serving both the do-it-yourself and professional installer markets. Founded in 1957 by the O'Reilly family, the Company operated 1,399 stores within the states of Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Minnesota, Mississippi, Missouri, Montana, Nebraska, North Carolina, North Dakota, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Virginia, Wisconsin and Wyoming as of June 30, 2005. (source: company press release or website)

Why We Like It:
We like ORLY as another strangle candidate. We're putting it in the puts section because our bias is bearish. The MACD indicator for ORLY looks poised to turn lower but its short-term oscillators are churning sideways, which isn't a surprise since ORLY stock price has been coiling into a tighter and tighter pennant-type pattern. We do admit that ORLY has certainly out performed its peers like AutoZone (AZO) and Pep Boys (PBY). Yet odds are investors may respond negatively to earnings, which have probably been negatively impacted by hurricanes Katrina and Rita. As a strangle candidate we don't care what direction ORLY moves as long as it moves enough to make one-side of our investment profitable. The company is due to report earnings on October 26th. We are going to suggest the November options so we can hold over the earnings report and benefit from any reaction to the earnings news. FYI: competitor AAP has been consolidating in a similar pattern and could also be used as a strangle candidate.

Suggested Options:
This is a strangle play so we want to buy one out of the money call and one out of the money put. We're suggesting the November options.

BUY CALL NOV 30.00 OQR-KF OI= 335 current ask $0.50
-and-
BUY PUT NOV 25.00 OQR-WE OI= 71 current ask $0.25

Our investment here is $0.75. Our goal is for one of these options to trade for $2.50-2.75 before they expire.

Picked on October 09 at $ 28.23
Change since picked: + 0.00
Earnings Date 10/26/05 (unconfirmed)
Average Daily Volume = million
 

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