Option Investor
New Plays

Index ETFs and Retail

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Play Editor's Note:
One of our readers asked about buying options and the list of options I provide when we publish new candidates. I detail a few suggested options when we list new plays. It is not a suggestion to buy all of them. I would only buy the one strike price that best suits your risk profile. It is always up to the individual trader to decide on which month and which strike price to trade. More aggressive traders tend to prefer front month (or next month) options and maybe more out of the money options. More conservative traders might want more time and choose options farther out. Buying deeper in the money options might be considered more conservative and more of a proxy for buying the stock since they have a higher delta. In simple terms a higher delta reflects a higher dollar-for-dollar move in the option compared to the underlying equity.


NEW DIRECTIONAL CALL PLAYS

iShares Russell 2000 - IWM - close: 46.48 change: +0.51 stop: 44.85

Why We Like It:
The market is bouncing from oversold conditions. I expect the rebound to continue for a few days. We're going to try and capture some of the move with bullish plays on the small caps (IWM) and the S&P 500 ETFs (SPY & SSO). Pick one you like best. Out of the three the IWM looks the strongest.

I'm suggesting call positions now with a stop loss under Friday's low. Our target is $49.50.

Suggested Options:
We are suggesting the February calls. Pick the strike that best suits your trading style and risk.

BUY CALL FEB 45.00 IWM-BS open interest=19557 current ask $3.65
BUY CALL FEB 47.00 IWM-BU open interest= 9727 current ask $2.48
BUY CALL FEB 49.00 IWM-BW open interest=21067 current ask $1.56

Annotated Chart:
IWM

Picked on January 17 at $ 46.48
Change since picked:     + 0.00
Earnings Date          00/00/00
Average Daily Volume =       62 million  


Sears - SHLD - close: 49.21 change: +1.98 stop: 45.95

Why We Like It:
I know it sounds crazy but shares of SHLD actually look bullish. Retailers are struggling during this recession and we're still in the thick of it. So why is SHLD moving higher? I think it's all a short squeeze. The stock got squeezed on January 8th when investors reacted to SHLD's earnings guidance. The stock bounced sharply and has been out performing the market the last two days. There is so much short interest that stock is hard to borrow. Currently SHLD has resistance at $50.00. If the stock can break $50.00 it could see another violent squeeze higher.

I'm suggesting readers buy calls if SHLD trades at $50.50 or higher. The mid January highs stalled around $50.35. We are starting the play with a very wide stop loss but will try to cinch it up as the play progresses. Our first target is $54.85. Our second target is $59.00. The $60.00 level and the 100-dma are probably resistance.

Suggested Options:
Our trigger is $50.50. We're suggesting the February calls.

BUY CALL FEB 45.00 KTQ-BI open interest=2206 current ask $5.40
BUY CALL FEB 50.00 KTQ-BJ open interest=6962 current ask $2.50
BUY CALL FEB 55.00 KTQ-BK open interest=2491 current ask $0.90

Annotated Chart:
SHLD

Picked on January xx at $ xx.xx <-- see TRIGGER
Change since picked:     + 0.00
Earnings Date          02/26/09 (unconfirmed)
Average Daily Volume =      1.7 million  


S&P500 SPDRs - SPY - close: 85.06 change: +0.66 stop: 83.95

Why We Like It:
The market looks poised for a short-term oversold bounce. We want to ride it. The S&P 500 (and SPY) has broken the two-week trend of lower highs but has not yet broken resistance around 860 (86.00). I am suggesting readers buy calls on the SPY at $86.05. If triggered our target is $89.50.

If you want more oomph from this play then consider the SSO instead.

Suggested Options:
We are suggesting the February calls. Our trigger is 86.05. Strikes are available at $1.00 increments.

BUY CALL FEB 83.00 SZC-BE open interest= 7714 current ask $5.80
BUY CALL FEB 85.00 SZC-BG open interest=16113 current ask $4.50
BUY CALL FEB 87.00 SZC-BI open interest=12062 current ask $3.40

Annotated Chart:
SPY

Picked on January xx at $ xx.xx <-- trigger
Change since picked:     + 0.00
Earnings Date          00/00/00
Average Daily Volume =      259 million  


Ultra(long) S&P500 ProShares - SSO - cls: 23.35 chg: +0.30 stop: 22.85

Why We Like It:
The SSO is the 2x or double-long ETF on the S&P 500. It's supposed to deliver twice the daily return of the S&P 500 index. Our plan is to buy calls at $24.05. If triggered our target is $25.95. That doesn't sound like much but we're only trying to get a 35% to 50% gain in the option price.

Suggested Options:
We're suggesting the February calls. Strikes are available at $1.00 increments.

BUY CALL FEB 21.00 SOJ-BU open interest= 284 current ask $3.70
BUY CALL FEB 23.00 SOJ-BW open interest=1536 current ask $2.50
BUY CALL FEB 26.00 SOJ-BZ open interest=1846 current ask $1.05

Annotated Chart:
SSO

Picked on January xx at $ xx.xx <-- see TRIGGER
Change since picked:     + 0.00
Earnings Date          00/00/00
Average Daily Volume =       56 million  

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