Three Options for You

12/01/2006 12:00 am EST


Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

Options expert Bernie Schaeffer weighs in with three potential profit opportunities in the options markets. His analysis of three varied but established companies offers investors the possibility of profiting outside the realm of simple equity purchases.

"Harley-Davidson (HOG NYSE) had a positive earnings surprise last month. Its stock has surged more than 50% from its June low, recently consolidated into its 10-day moving average and launched to a new all-time high. Short interest could continue to be a factor; it would currently take nine days at the stock's average daily volume to eradicate all shorted positions on the shares. Zacks indicates that 10 of the 11 analysts following HOG have named it a "hold." Should any of them upgrade, the shares could enjoy additional upside. The stock's solid price action in the face of skeptical sentiment earns it a Schaeffer's Equity Scorecard rating of 8.0 out of a possible 10, suggesting that the path of least resistance points higher. Sell the December 70 put (HOGXN).

"The housing sector has been maligned throughout 2006, but is showing signs of bouncing back. Ryland Group (RYL NYSE) has been slowly gaining ground during the past few months since testing support in the area of its 80-month moving average. This week, RYL broke free of a trading range that had kept the shares shackled between the 43 and 47 levels for nearly two months. We now expect former resistance in the 47 region to serve as a layer of support against any pullbacks. Meanwhile, the speculative options crowd remains leery, as puts currently outweigh calls by a 3-to-2 margin in the front three-months' options series. RYL's SOIR of 1.52 is higher than 92% of the past year's readings. Short interest represents more than 19% of RYL's float, laying the foundation for a potential short-covering support. Sell the December 45 put (RYLXI).

"Before the open on Tuesday, American Eagle Outfitters (AEOS NASDAQ GS) announced a record third quarter profit of 66 cents per share, a 13% rise in same-store sales, and a 3-for-2 stock split. The shares have been in an uptrend along their 10-day and 20-day trendlines since August 3, gaining more than 49%. Meanwhile, nearly 7% of AEOS's float is sold short, which could fuel a short-covering rally. Elsewhere, 16 of its 17 analysts rate it a "hold" or worse, indicating that upgrades could boost the security. However, the stock has met with some resistance in the 48-49 area that could create some trouble. A rejection at this level could spur some profit-taking following the stock's strong rally. Buy the February 45 call (AQUBI) and 45 put (AQUNI) straddle."

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