DB,
My scans are overwhelmingly bearish these days, with sector breakdowns:breakouts of 8:1, 10:1 and 8:1. So I will note a few bearish tickers and then go through a possible play.
Here are 5 bearish stocks which offer speculators a chance to play either shorts or puts on relatively high priced, optionable stocks which are breaking down (in this case, making 20 period lows to the downside):
MHP GDT WYNN BEC ROP
There are many more of these, in fact, 183 on this scan, but these seemed particularly attractive among the highest priced.
Staying bearish, here are some more names, optionable, which are in significant downtrends, that is, continuing to track below major ma's:
OSIP CRDN AMLN UCI OSTK FNM PRAA
My preference for entering these trades is to judge where they are in their particular channel, purchase an itm put (the main asset) with a comfortable period of time, and try to close the put spread within 3-5 days with an attractive reward:risk ratio of 3:1 or better. Sometimes I like the position of the price so much that I will complete the put spread as a single transaction, but it is much more attractive to leg into these, if you can. For example, if you believed CRDN's chart would continue to erode to the $20 level and below in the next 2 months, you could control the position by buying the Jun 25 puts for about $3.90 each. A fall to $20 in the underlying would take the Jun 20 puts to about 2.30, where you would sell an equal number of puts and have the position for a total cost of $1.60. CRDN stays at $20 or below and you receive $5 for your trouble. Your risk once you complete the spread is capped at $1.60 and your gain at $5.00, but as noted before with FNM and OSIP (I think I analyzed that one here as well), at the time you complete the spread you are already $5.00 in the money; the stock can now flatline, drift or plunge and you retain the 212.5% return on capital for a 3 month period.
Comparing the risk:reward of this play to a straight equity play (with a short) on 1,000 shares, you find that the straight short play has a theoretically infinite capital risk, although a realistic capital risk would probably be about $1,600 (based on a 1.5 x ATR stop). The capital cost would be the cost of shorting a $22,500 position, and you would add to this the slippage of shorting on an uptick, the availability of shares and the risk (low, but there) of having your borrowed shares called back. The reward would be a reasonable target of, say $20, so about $2,500, although if the stock plummeted a trailing stop could keep you in for larger profits.
With the puts, both your initial capital risk and capital cost are the same: $3,900. On completion of the spread that cost drops to $1,600; and, as noted, reward is capped at a profit of $3,400. (Note that, in the original capital cost + capital at risk of $3,900, you would only lose $1,600 of value in the puts if they somehow rocketed up to $26, whereas you lose the $1600 in value on the equity play when the stock goes to 24.10 and your stop is hit. At 24.10, the put options have only degraded about $900.)
In both cases the stock has to drop to $20, the target, you lose time flexibility with the options.
(I don't think that CRDN is, in fact, an excellent candidate for this strategy at this time; but on a rally to the 20 dma it could set up nicely).
Kb |
