Sin Stocks With A Pharma ChaserSin Stocks With A Pharma Chaser
Bernie Schaeffer, Option Advisor
06.17.06, 12:00 PM ET
Cincinnati, OH - Traders are always looking for that one bit of data that will give them an edge over the market. One key indicator that is frequently overlooked by speculators is unusual option activity. While this isn’t the holy grail of trading, it will often give an investor a strong starting point from which to begin his or her search.
During the past week, several stocks caught my attention due to some interesting option trading. However, with June options expiring on Friday, investors must keep in mind that a solid chunk of this activity has been geared toward the liquidation of June (or front-month) positions and rolling out to the July (or back-month) strikes.
With that said, I want to kick things off with Altria Group (nyse: MO - news - people ). A member of the so-called “sin sector,” the equity has seen some heavy trading in its June series last week, with most of the action proving to be the liquidation of existing positions. However, the stock’s July 75 call has seen a steady increase in open interest since late May. As of Friday morning, open interest at this strike numbered more than 36,100 contracts. Furthermore, the implied volatility for this option has also steadily increased, indicating that the most of these new positions have been purchases. This building of what appears to be long bullish positions indicates that speculators expect the shares to finally bust through resistance at the 75 level.
From a technical perspective, the 75 region has capped Altria Group since October 2005, with the exception of a brief stint above this area from mid-December through mid-January. What’s more, the shares have clung to support at 70 since September. In other words, the stock has been range-bound between 70 and 75.
While shareholders of Altria Group are probably grateful that the stock has managed to weather the market’s recent pullback, they probably aren’t too encouraged by the equity’s failure to rally when the broad market bounced back. Altria Group shareholders may want to consider selling (writing) calls against their shares to generate income until the equity finally breaks out of its trading range. This covered-call strategy allows investors to collect premium on a stock that is stuck in a trading range, although the investor is usually bullish on the stock, believing that the stock’s long-term direction is higher.
With the stock struggling with resistance at the 75 level, investors should consider writing a July or August call. (The August series will begin trading next week after the June series expires.) However, investors should remember that if Altria begins trading above 75, there is a very good chance that the sold call will be exercised and the shares will be called away.