‘Calling’ for Investors

01/05/2007 12:00 am EST


Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

Tech-wiz Bernie Schaeffer closely follows companies whose shares are temporarily out-of-sync with their true values. In a recent report to his subscribers, he recommends three option plays that hold a significant amount of promise for investors...

"Bed Bath & Beyond (BBBY NASDAQ GS) recently reported quarterly earnings that were two cents shy of Wall Street's expectations. The stock was subsequently downgraded at Credit Suisse and closed down more than 3% on the session. We are taking advantage of the short-term pullback, as it stands to benefit from trendline support and heavy out-of-the-money put open interest. In recent intraday trading, BBBY bottomed out near the 38 level, the site of its 20-week moving average. This intermediate-term trendline could serve as a springboard to launch a quick rebound in the shares. Also notable are the heavy put options at the 37.50 and 35 strikes, serving up structural support that should hold through January options expiration. If the stock's recovery takes some time, this in-the-money, long-term position provides some insurance. Buy the January 2008 35 call (YBEAG).

"With the financial sector still woefully underloved despite impressive price action, International Securities Exchange (ISE NYSE) is one of my favorite stocks. The electronic stock exchange has maintained a long-term uptrend since late 2005, shortly after it debuted for public trading. The stock has enjoyed continued support from its ascending 10-month moving average. The shares are currently retesting this support and should find the strength to muscle higher. Meanwhile, options players are positioned against ISE, as the equity's Schaeffer's put/call open interest ratio (SOIR) of 0.68 ranks higher than 94% of the past year's ratings. According to Zacks, ISE has earned 10 "holds" and one "strong sell," paving the way for upgrades. Buy the July 40 call (ISEGH).

"Recent fundamental signs indicate the homebuilding sector's retreat may be bottoming out, setting up a broad recovery. LENNAR (LEN NYSE), a consistent relative-strength outperformer, should help lead its peers. The stock recently overtook former resistance at the 50 level and is holding above this region, which could reverse roles and serve as support. The 50 strike is home to peak open interest in the front-month series, with more than 16,000 out-of-the-money puts in residence. During the next few weeks, look for these bearishly slanted options to provide options-related support. LEN also stands to benefit from some short-covering attention. Nearly 9% of the equity's float is sold short, amounting to a short-interest ratio of 5.5 days to cover. If the sector continues its recovery, the bears may drift toward the exits, providing LEN with some additional rally fuel. Buy the August 50 call (LENHJ)."

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