3 Option Strategies for 3 Top Stocks

07/15/2011 12:30 pm EST


Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

In this kind of dynamic market, options can be a great way to play particular stock trends without having to hold the underlying issues, notes Bernie Schaeffer in Option Advisor.

Discovery consists of seeing what everybody has seen, and thinking what nobody else has thought.
—Jonathan Swift, Anglo-Irish essayist, poet, and cleric (1667-1745)

While we don’t generally look to early 18th-century sages to assist us in our trading activities, I’d suggest we can use Swift’s observation on discovery as a template for our trading inspiration.

Because what I call “inspired trading”—trading that comes from a place of insight that, while not necessarily unique to the trader, is at the very least not born of a standard set of technical tools or of the conventional wisdom that bombards us each day in the media—is, in my opinion, the key to success in this extremely challenging endeavor.

Adobe Systems (ADBE)
Adobe took quite a hit on June 22, falling more than 6%, after the software concern unveiled a lackluster growth forecast and cautioned of weak demand for its products in Europe. As a result, the stock was on pace to finish the month beneath both its ten-month and 20-month moving averages for the first time this year.

This duo of trendlines served as double-barreled resistance during most of 2010, and could once again resume their role as a technical ceiling. Plus, the overhead July 33 and 34 strikes are home to roughly 18,600 calls combined, which could translate into an additional layer of options-related resistance in the short term.

Nevertheless, 15 out of 28 analysts maintain “buy” or better endorsements, Zacks reports, leaving the door wide open for a round of downgrades to pressure the shares even lower. My recommendation: Buy the August 20, 2011 $33 strike put.

CROX has been a broad-market standout lately, outperforming the S&P 500 by 44%, on a relative strength basis, during the past 60 sessions. On June 23, the equity tagged a new multi-year high of $25.25, bringing its year-to-date gain to an impressive 47.3%. [Incidentally, for alliteration purposes, the stock has since reached a high of $28.28—Editor.]

Despite CROX’s technical proficiency, Zacks reports that only five analysts are currently following the stock, and Thomson Reuters places the average 12-month price target at a mere $27.17. Going forward, bullish initiations or price-target boosts could draw a new wave of buyers to the table.

Elsewhere, short interest rocketed higher by 29.6% during the past month, and now accounts for more than 12.2% of CROX’s float. In fact, at the stock’s average pace of trading, it would take over seven sessions for all of these bearish bets to be repurchased.

As the security continues its uptrend, an unwinding of short interest should boost CROX even higher on the charts. My recommendation: Buy the September 17, 2011 $22 strike call.

Amazon.com (AMZN)
The E-tailer has outperformed the broader S&P 500 by 12.5% during the past 60 sessions, extending its 52-week climb of nearly 60%.

Ushering the stock higher have been its ten-week and 20-week trendlines, which have contained all but a handful of the equity’s pullbacks since early August 2010. However, not everyone on the Street is convinced of AMZN’s strength. The security’s Schaeffer’s put/call open interest ratio (SOIR) of 1.36 indicates that puts outnumber calls among options slated to expire within three months.

Plus, this ratio ranks in the 71st annual percentile, implying that near-term speculators are more put-heavy than usual on the stock. Likewise, 13 brokerage firms maintain “hold” or worse opinions of the outperformer, according to Zacks.

As AMZN extends its long-term uptrend, an unwinding of pessimism in the options pits, or a flood of fresh upgrades, could fuel the Internet issue’s fire. My recommendation: Buy the August 20, 2011 $180 strike call.

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