3 Options Trades to Start 2014 Off With a Bang
These short-term trades should provide some early oomph to your portfolio
The nature of the short-term trading system I’ve developed in my four decades as a professional options trader means I don’t need to wait months or years for ideas to yield a profit … options traders can make the kinds of gains in just a few weeks’ time that everyone else makes in a year.
While my colleagues have invaluable insight into longer-dated themes, I can give you three of my best opportunities to start 2014 off with a bang:
Options Trade 1: Louisiana-Pacific (LPX)
As a building materials wholesaler for home construction, Louisiana Pacific (LPX) is a direct beneficiary of any positive news coming from the housing sector. With the latest report showing that U.S. construction spending grew at the strongest pace in more than four years, LPX is set to climb.
My aim is always to find stocks with high volatility levels that are geared up for a short-term move, then to play that move with undervalued options. Usually this means playing near-term out-of-the-money options, but my system uncovered a longer-dated LPX call that’s going cheap.
Buy the LPX May 20 Call options at $1.00 or less. After entry, take profits if the LPX stock price hits $20 or the option price hits $1.70. Exit if the stock price closes below $17.50 or the option price closes below 70 cents.
A few words of caution, though: While my system has rated LPX a very solid buy in the near- to mid-term (call it April 2014), the stock’s long-term prospects drop off a cliff. Don’t be too cute about exiting the calls and taking profits when they come to you.
Options Trade 2: Avnet (AVT)
Avnet (AVT) might be one of those stocks you’ve never heard of, but you’re going to be glad for the introduction.
AVT is a distributor in the electronics space, and it just completed an acquisition of the MSC Group, a German electronic distributor that makes components for embedded computing technology and display solutions. AVT sold off slightly on the news, which is setting options traders up for an attractive entry in the calls.
The best way to trade this is to buy the AVT May 47 Call options at $1.20 or less. After entry, take profits if the stock price hits $45.90 or the option price hits $2.40 (a nice 100% gain). Exit if the stock price closes below $41.30 or the option price closes below 80 cents.
While AVT has strong support at $41, I always advocate using stop-losses. Because technical analysis is the major factor, my scans use to determine trading opportunities — and technical analysis is essentially the study of historical prices — where AVT stock closes matters, so keep an eye on a close below the $41.30 level as a signal that it’s time to exit.
Options Trade 3: McDermott (MDR)
Houston-based McDermott (MDR) is an oil and gas services stock that shows up in my scans almost every week because it’s among one of the more volatile stocks I track, which is exactly what an options trader wants. Stocks that are both volatile and liquid tend to make for the most profitable options trading.
Buy the MDR May 9 Call options at $1 or less. After entry, take profits if the stock price hits $9.90 or the option price hits $1.50. Exit if the stock price closes below $8.40 or the option price closes below 70 cents.
My system rates MDR stock as an excellent near- and mid-term buy, but the longer-term outlook isn’t as healthy. Therefore, an option with expiration date that’s six months or less is the best way to trade MDR.
Also, be mindful that MDR reports earnings on Feb. 24, and the company has a history of pretty severe misses. So, I’d recommend you use any optimism going into earnings to exit on strength and avoid any potential aftermath of a negative surprise.
Ken Trester may hold (or hold options in) some of the aforementioned securities in his Maximum Options portfolio.