Stocks the Market Loves to Hate

I will settle for a stock that makes gobs of money, but no one likes, and craft an options strategy around the name to counteract the malaise that surrounds it.
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Call me crazy, but I like buying stocks when they are cheap. I like buying anything cheap, especially option volatility, but I always thought (and was trained) to buy things low and sell things high. And I hear the laughing and it is very loud...that is what I learned. But, there is size on the bid in

(AMZN) - Get Report

most days with the name trading $156.00+, and none to be had when it was a $6.00 in 2001 (I was there).

My point is, things change. By mid-2003, AMZN was a $50.00 name and now enjoys its lofty heights. I even have AMZN in a retirement account (although questioning). Right now, I will settle for a stock that makes gobs of money but no one likes. Next, is to craft the options strategy around the name to counteract the malaise that surrounds it.

I have had some luck lately picking tech stocks that I call "unloved" (see my posts on both Adobe Systems (ADBE) - Get Report and Microsoft (MSFT) - Get Report, pull the marks and confirm for yourself). The MSFT trade is up 100% (albeit from $0.20 to $0.40 as of the closing marks on October 12) and I have no intention of unwinding it yet. The ADBE trade is up nicely as well. I want another one, mostly because market conditions have not changed much for these names.

Of course, I will use Aqumin's AlphaVision Landscape to find one. Even as the VIX settles (see "Every Ship at the Bottom of the Ocean had a Chartroom") implied volatilities in names move around. Let's look at the change in 2nd Month Volatility and P/E ratio to find something that is "unloved" by the market. The reason being is I want some interest in the options. Even a slight interest and uptick in 2nd Month volatility means that there are buyers and a cheapie P/E screams "unloved".

Xyratex (XRTX) Volatility

Source: Aqumin

View Chart

In the Computers and Peripherals GICS Industry sector, I looked at two names. Xyratex (XRTX) , (based in Bermuda) and Seagate Technology (STX) - Get Report. Both showed up as the lowest positive P/E with slightly increasing Implied Volatility (those are the green names on the far left side). The height of my little buildings is the second-month call implied volatility yesterday. XRTX has some of the higher implied volatility (and higher trending historical volatility, I do see the earnings in there) of the group and trades at a 4.4 P/E with earnings just announced (note the drop off in 30-day implied volatiity after earnings in the old school chart on the lower right). Just give me $1.00 higher in the name between now and November expiration for a nice, leveraged win, or if XRTX does nothing, you make the entire credit on the trade (less commission).

For anyone new to selling puts, you must be comfortable with buying 300 shares of XRTX below $14.70, if the market thinks XRTX is still not cheap enough.

Trades: Buy to open 3 XRTX November 17.5 calls for $0.55 (56v) and sell to open 3 XRTX November 15 Puts at $0.85 (60v) for a net credit of $0.30 on a 67 delta with XRTX trading at $15.59.

At the time of publication, Andrew Giovinazzi held no positions in the stocks or issues mentioned.

Andrew is the Executive Vice President of Business Development for Aqumin, where he participated in the design team to apply AlphaVision to the financial markets. For 15 years he was a member of the Pacific Exchange and the Chicago Board Options Exchange, where he actively made markets and traded in both equity and index options.

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