3 Options Trades on Volatile Stocks

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Beta is more than just a fraternity word or a phase in software or web development that happens before the official launch. In investing vernacular, it’s a way of measuring how volatile an individual stock is relative to the broader market.

With greater risk of volatility comes the potential for greater reward — if the market moves 3% higher, for example, a stock with a beta of 2.0 theoretically should advance 6%. But of course, this also is true if the market declines 3%. Ouch.

Beta can theoretically be positive or negative, too; if positive, the stock trends with the market and if negative, it trends against it. In other words, a stock with a beta of -2.0 would lose 6% when the broader market gains 3%, and vice versa.

Below is a screen of 10 optionable U.S. stocks that currently have the highest beta rankings. The list was filtered to exclude stocks that had an average daily volume below 1 million shares and/or an average market cap below 1 billion. Data is courtesy of Chris Johnson with Johnson Research Group. Some of the names are more familiar than others:

Ticker Company Price Beta Market Cap Volume
DAN Dana Holding Corp. $16.17 4.40 $2.4B 2.9M
PIR Pier 1 Imports $18.76 4.34 $2.06B 4.0M
MGM MGM Resorts International $13.93 3.65 $6.8B 9.9M
LVS Las Vegas Sands $58.69 3.61 $43.1B 6.6M
GGP General Growth Properties $16.74 3.54 $15.7B 3.0M
TRW TRW Automotive Holdings $47.12 3.43 $5.8B 1.6M
AIG American International Group $30.87 3.42 $58.6B 13.9M
CBL CBL & Associates Properties $19.09 3.34 $2.8B 1.5M
KOG Kodiak Oil & Gas $10.11 3.34 $2.7B 8.3M
TEN Tenneco $38.52 3.27 $2.3B 1.2M

Note that none of the names have negative beta. Currently the only securities with negative beta readings are two Treasury Bond ETFs and the Direxion Daily Financial Bear 3X Shares (NYSE:FAZ), which is designed with an inverse (and leveraged) relationship to the market. As such, its beta is currently 3.78.

So how can you use this information to your advantage? If you think the broader market’s rally still has legs, then chances are these high-beta stocks could continue to see some upside as well.

Here are three ways you could play them using bullish options strategies.

NEXT: 3 Trades to Make Now >>

Las Vegas Sands

Las Vegas Sands (NYSE:LVS) has enjoyed a steady uptrend in 2012, gaining more than 37% to approach the $60 region for the first time since mid-2008. The stock has short-term technical support in the form of its 20-day moving average, from which it just bounced higher.

Traders bullish on the casino name could consider the May 57.50/55 bull put spread, selling the 57.50-strike put and buying the 55-strike put and collecting a net credit of at least 90 cents per spread. If LVS still is trading above $57.50 when these options expire, investors keep this credit as profit. The maximum risk is $1.60, should LVS be trading below $55 at expiration. Breakeven for this spread is $56.60, or the short put strike less the credit collected. LVS currently is trading 3.5% higher than this level.

Pier 1 Imports

Pier 1 Imports (NYSE:PIR) shares have been enjoying their uptrend since October and now are trading at a seven-year high. (I guess the company has finally broken whatever broken-mirror curse befell them in 2005.) Last month, PIR said fourth-quarter same-store sales jumped 10.3% from 2010. And short-covering could help keep the stock moving higher, as the number of shares shorted represents nearly 6% of the stock’s float.

A bull call spread could be a good choice for PIR bulls. Investors could buy the May 19-strike call and sell the May 20-strike call, paying a net debit of 55 cents or less. If the stock is trading north of $20 when the spread expires, the spread yields a profit of 45 cents. On the flip side, if PIR is trading below $19, the investor will lose 100% of the debit paid. Breakeven for this spread is $19.55. This is a more aggressive trade than the LVS bull put spread, as it does require the stock to move higher (rather than just not move lower).

American International Group

American International Group (NYSE:AIG) was popular among bullish option traders last week after Deutsche Bank said the company could repurchase an additional $20 billion of its own stock over the next year. The stock’s Relative Strength Index reading has just edged back out of overbought territory, and the shares are looking strong from a technical perspective as well. In fact, AIG’s 10-day moving average recently crossed back above the stock’s 20-day MA, which is a bullish sign.

Bulls can join in the fun with a near-the-money May 31-strike call, which currently can be purchased for $1.35 (or better, if you can get it). Gains are theoretically unlimited as long as the stock continues to rally, and the most you risk is the premium paid. Breakeven at expiration is $32.35, which is 4.8% away from the stock’s current price. This is the most aggressive of these three option plays, but after all, reward is potentially unlimited.

If you are good at predicting when the market’s rally will top, first of all, congratulations. Second, you might then consider long puts or bear put spreads (selling one higher-strike put and buying one lower-strike put) on any of these names to try and capitalize on expected downside. 

As of this writing, Beth Gaston Moon did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2012/04/3-option-plays-on-volatile-stocks-lvs-pir-aig/.

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