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Watchlist ideas and an option play setup

April 5, 2007
tags: ,

Here is a list of some stocks I think might be appropriate for our watchlist. Some I know better than others and I haven’t gone through them all with a fine toothed comb, but they fit the basic criteria. Kick the tires and see what you think.
(click it to make it grow)

One that is of great interest on the immediate horizon is SPN. Check out the resistance level just overhead. Well established and if it breaks through that with volume, I’d say there’s a lot of pent up buying potential here. Many of the Oil Services have similar resistance lines, like GSF, for example. SPN has a PEG of .38 which is shockingly low, but many of the stocks in that group have similar PEG values, so I guess it’s not that abnormal. The only thing I can think of as to why is that maybe they’re at great risk down there in the Gulf with hurricanes blowing through every year.

This part goes out to Al. The flag setup on WFR from my last post triggered yesterday. The semiconductors group got an upgrade today and many of them jumped including WFR and VSEA. I placed a paper trade on it and thought I’d show you choices and plan.
The previous day’s candle was a hammer or you could call it a dragonfly doji. With heavy volume on the day, it indicates a likely reversal. Yesterday’s gap up and bullish candle confirm the previous day and you could look at the whole three day formation as a morning doji star pattern (very fancy stuff!). This is a bullish reversal pattern which fits nicely in the context of the flag already in place. The stock sold off from the highs of the day more than I’d like, but my judgement call was that the flag and the candle pattern and accompanying volume are good enough reasons to take the trade.

Setting up the trade:
It is a judgement call to say just how long the flag pole is, but I’m saying 6-8 pts. is in the ballpark. I’ll have a target of 69 but look to take profits at 67 if it hesitates around there.
For my stop I didn’t want to go all the way below the bottom of the previous day’s low, but I wanted to give it some wiggle room below the low of the entry day. I chose 58.83 as the level for a contingent order to sell. That was $3 below the price at the time I bought the option.
So I am allowing for $3 of risk to the downside in the stock’s movement.
I wanted to buy a call option, but nothing too slick or clever. I wanted enough time so I could sit back and let it work without stressing about time decay for a while and a strike price deep in the money so there was a high Delta. Look at the options chain below. Nice open interest out ’til Jan 08 and some even in Jan 09. Plenty of choices.
I liked the Oct 50 calls. Tight spread, good open interest and a delta of .80. Got a fill for $16.
My risk allotment for this paper account is $1000. I did this in a very simple way. 1000(risk allotment)/3(risk in the trade)=333. Rounded to the nearest 100, that makes 300. 3 contracts are equivalent to 300 shares. So if I get stopped out at the contingent sell level of 58.83, I’ll lose no more than my acceptable $1000. In this case, I’ll most likely lose less than that because of rounding down to 300 and because the delta is smaller than 1 and will decrease with each dollar the stock falls. If the stock takes all the way until October expiration to reach $69, the trade will show profit of 18%. But somehow I think the trade will run its course one way or another before then.

So to sum it up:
I bought 3 contracts of the Oct 50 call for $16 a piece.
I set a GTC(good ’til canceled) Market sell order contingent on the stock price trading at 58.83. I will watch for the target of 67-69. If the stock moves up quickly from here. I will put a hard stop at breakeven for the option.
Is that all confusing enough? (It’s late.)

One last little thing to watch. CMG ascending triangle. Break of resistance with volume calls for a move of about 6 pts. This is what an ascending triangle is supposed to look like. A continuation pattern in the context of a bullish trend. The resistance level forms as a temporary blockade for the bullish momentum which eventually plows through it.
Very low IV on this stock.

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