Order Of Magnitude

The third week of the month is usually crazy, when short term pressures overwhelm logic and reason.  Our weekly scan produced an interesting gem: ProLogis.  Being as options expire this week, we found the bid/ask spread for the in-the-money $12.50 calls to be a bit out of the ordinary.  Examining the Equivolume:

It would appear that this REIT has been going for a bit of a run and big volume appears on the right kind of days.

Now for the 50-50.  We have an upward moving stock, that is due for a pullback, and in 5 trading days the options expire.  PLD has a 15 trading session average true range of $1.75, which is pretty large for a stock holding the Friday's end of day price of: $14.12. Yes, 12% of current trading price.

Now, if a covered call position could be entered under these conditions, you would lay out $1412 for 100 PLD shares, and then sell a single covered call at $12.50 strike for $2.50 a share, or $250 total.  If the price falls below the strike in the next 5 days, your cost basis is $10/share to offload, so we'll have a still profitable stop at $11.75 to exit the position.  If the equity remains above $12.50 until Friday, you'll get called away, along with all the fees that produces.  The only thing you get to take home is the premium.

So let's say your broker lets has a $10/transaction fee (hopefully you can do better).  Your initial outlay is $1412 (equity) + $10 (commision) - $250 (option premium) + $10 (another commision) = $1182 (total expenses).  You get called away, so you sell your stock for $1250 (minus $10 again, that broker!), and take home $1240.  That mean $68 dollars in your pocket, after fees, on an outlay of cash equal to $1182 (you'll lose way more in buying power) in 5 days, if the shares stay above $12.50. If they go under, get out, and keep whatever premium erosion you have accumulated at that point. So on the upside you can get 5.7% on your money in 5 days, and there is safety net down to $10 before you start to lose money.

If your greedy, or want to take on more risk.  The February call options have high volatility priced in.  Have a look at our premium chart:

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The following have large relative divergences from their Volume Weighted Average Price:

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The following equities are trading above their volume weighted average
closing price:

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Recently Under Armour triggered a watch when it dipped below the bottom bollinger bands calculated using a 19 day period. This indicator is an excellent measure of volatility of a stock, and this particular instance shows that Under Armour may be oversold at the moment.

Digging up as much information as can be found, we noticed that the Under Armour at Yahoo Finance chart showed different high and low values than the Under Armour at StockCharts.com chart. Yahoo was claiming that the bound was 39.879 to 44.2736 and StockCharts had calculated 37.68 to 46.47. The discrepancy on the lower end is almost 6% of the closing price.

We can't except this kind of difference, and immediately wanted to know which popular free charting solution is more 'correct' so we opened the hood of our monitoring system and had a look at what it thought the bounds were. Our system showed that the Bollinger Bands for UA as of the close on the 28th of February were: 32.76 and 41.54.

The difference, we believe, is in how the period for each is defined. Our system uses a 19 trading day sample, which includes 19 samples going back to February 1st. If instead you calculated the bounds based on all trading days within the last 19 days you would instead only have 13 samples of data which misses the swing from below 40 to almost 45 dollars.

The approach taken by StockCharts and Yahoo are not incorrect, but you need to be aware of the difference. This example goes to show that unless you are painfully aware of how the tools you are using work, you can't rely to heavily on the signals they produce

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