Wednesday, May 4, 2011

Digging up Profits in Fossil Options

Watch stock is timely but first check Bid/Ask spreads

ith yesterday’s Intel (NASDAQ: INTC) induced rally and today’s Apple (NASDAQ: AAPL) based gap traders are once again reminded that earnings announcements are a force to be reckoned with. While the S&P Index Options (CBOE: SPX) was on the brink of breaching the pivotal 1300 level during Monday’s sell off, the positive reactions to these recent earnings releases has brought the broad market back to the upper end of its recent trading range — quite a change in character in two trading sessions.

Though yesterday’s surge helped lift stocks across the board, one sector that has provided particularly enticing options trading setups is the retail apparel space. The likes of Lululemon Athletica (NASDAQ: LULU), Under Armour (NYSE: UA), and Abercrombie & Fitch (NYSE: ANF) have recently experienced notable breakouts. Another stock in the retail space worth keeping an eye on is Fossil (NASDAQ: FOSL). During yesterday’s broad market surge FOSL was able to break above a base three weeks in the making.

Unfortunately FOSL options are somewhat illiquid. Currently theFOSL May 95 Calls are trading at $4.50 by $5.10. A $.60 bid/ask spread is enough to turn even the most brazen of traders off. The out-of-the-money FOSL June 100 Call looks a little better at $3.70 by $3.90. Though I’m not usually a fan of purchasing out-of-the-money call options (too aggressive for my taste), I’d probably make an exception in this case due to the superior liquidity. The other alternative is to stick to purchasing shares of stock.
On a cautionary note the SPX is coming into some overhead resistance in the 1340 area. Traders may consider waiting to see if the market is able to clear this level before aggressively entering new bullish plays. Following the strong two-day run we’ve had the market may be in need of some consolidation before continuing its march higher.


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