Silver Offers Options Profits for the Savvy

It’s a silver world and we’re just living in it. Just last week, the spot price of silver was around $50 and investors were flocking to this precious metal in droves. This week, reality set in and silver sold down to the mid-$30s. Still, silver has caught the interest of opzions trading  investors, whether they are categorized as retail, day traders, market makers or something else again.

While institutional investors typically use futures contracts to gain exposure to silver, individual investors have a bevy of exchange traded funds to choose from. The one that has grabbed the most attention is the iShares Silver Trust (NYSE: SLV). Before April, SLV experienced average daily volume around 35 million shares, a pretty impressive number. Then volume exploded and over the course of April there were seven trading sessions with volume north of 89 million shares. On three of those days the volume trading was more than 150 million. If the Trading Gods held a popularity contest SLV would undoubtedly be crowned the victor.

In simple terms the SLV attempts to track silver prices. Those wishing to dive into the details of how the SLV is structured can check out the iShares Silver Trust page.

Unlike some of the other commodity ETFs plagued by contango issues — like the United States Oil Fund (NYSE: USO) – SLV does a pretty good job accomplishing its objective. It is an effective vehicle for the masses to gain exposure to silver prices without having to deal with the higher margin, leverage, and volatility issues inherent to silver futures contracts.

In addition, the vast majority of retail traders in SLV are not subject to the futures margin requirements that were implemented this week. Many analysts have said these tightened margins were a factor in the decline of silver futures.

Not only has SLV seen a huge rise in volume, volatility has also been on the move. One of the simpler indicators used by traders to measure the realized volatility of a stock is the Average True Range (ATR). Over the past month we’ve seen the ATR on SLV rise from $.90 to more than $2.00. Part of this rise comes from the fact that SLV is trading at higher prices, but part also comes from the expansion of SLV’s intraday range. This increasing volatility attracts day traders as volume and volatility are what day traders thrive on. These are the traders that shun a stock if it doesn’t provide adequate liquidity or price movement. And since SLV has been providing ample quantities of both you can bet your bottom dollar it’s currently a popular spot for these intraday players.

(Source:  MachTrader)

The volume surge has also occurred in the options traded on SLV, as seen in the graphic below. As a result of this increased speculative activity we’ve seen quite the rise in implied volatility (the gold line in the graphic) over the same time period. Given the elevated status of implied volatility traders desiring to enter the silver frenzy should consider using option selling strategies. Here are two ideas:

SLV Option Trades

The key to playing extended volatile names like SLV is using defined risk trades and position sizing properly. By doing so you will be able to stomach the volatile ride that this shiny metal may have in store. There has been quite a sell off in silver and some traders may be tempted to just buy calls believing a bounce upward is due. But with an underlying this volatile, other trading strategies make more sense.

Covered Calls — Traders owning shares of SLV willing to limit their profit potential may consider selling out-of-the-money covered calls. Since options on SLV are listed with strike prices in $1 increments traders have a variety of options to choose from. Which strike price a trader sells ultimately depends on their outlook on SLV and the desired amount of protection. Since implied volatility has risen to lofty levels, covered call sellers are able to capture more premium than normal.

Bull Call or Bull Put Spreads — The elevated implied volatility is also a reason why bullish traders should think twice about running out and purchasing call options on SLV. If volatility does fall from these lofty levels option buyers will face an uphill battle in making a profit. As an alternative consider entering a bull call or bull put spread. These trades, also known as vertical spreads, increase your probability of profit as well as lessen your exposure to an adverse move in volatility.

A typical bull call spread involves the simultaneous purchase of a call of one strike price and the sale of a call with the same expiration month at a higher strike price. Both are opening transactions and are of the same number of contracts. These spreads are considered moderately bullish which may be a good fit for the highly volatile SLV. Since sellers have come to the fore in this ETF a dramatic upward move may just not be in the cards right now.

I hesitate to offer specific strikes for these trades due to the moves that SLV has been making in the last week. Check the option chains on SLV before making any trade. The huge voulme of trading in SLV offers investors the opportunity to quickly open and close positions.

At the time of this writing Tyler Craig had no positions in SLV.

This Hot Stock Just Keeps Going Up and Up

 I knew one gift that would be a sure hit -- a new workout outfit from the popular yoga and fitness apparel store, Lululemon Athletica (NYSE: LULU).

When I went to the mall, I was struck by how busy the apparel store was. It was abuzz with women scouring the racks in search of appealing yoga and workout clothing and trendy spring jackets.

Lululemon's popularity reminds me Peter Lynch's famous dictum that says you can pick outstanding stocks by observing the busiest stores in the mall.
Lululemon is definitely one of them.

Much of the brand's success can be attributed to the fact that it serves an underrepresented market niche. The company markets itself as an exclusive, high-end fashion destination for sophisticated, educated women.

In contrast, fitness apparel companies like Under Armor (NYSE: UA) and Foot Locker (NYSE: FL)have only recently begun appealing more to sporty female audiences.

Driven by growing sales, the Canadian company, headquartered in Vancouver, also has a growing presence in the United States and Australia. By the end of 2011, the apparel store plans to build 35 new outlets. Lululemon is also growing its online presence. By the end of this year, it expects 15% of sales to come through e-commerce.

Such growth creates a bullish technical picture for the stock.

 
Lulelemon has been on Major uptrend for almost the past two years and is currently trading near its recent all-time high of $102.83, hit during the April 18 trading week.
The stock has been in an accelerated uptrend since late-August 2010 and remains well above it despite the recent pullback.

Between December 2010 and March 2011, Lulelemon tested a zone of support, around $72.69 and $74.60. But in mid-March, the stock broke through this resistance level, bullishly completing a small base. The stock has been rising steadily since.

Lulelemon shares are now on the verge of bullishly breaking out of a second small ascending triangle pattern, marked by resistance at the stock's recent high of $102.83 and the accelerated uptrend line.

If Lulelemon can break past this resistance level, the measuring principle for a triangle -- taken by adding the height of the triangle to the breakout level -- projects a price target of $131.06 ($102.83 - $74.60 = $28.23; $28.23 + $102.83 = $131.06), representing at least 28% growth in the share price.

It is also important to note that Lululemon has proposed a two-for-one stock split,set for June 8, 2011. The stock may run up in anticipation of this split.
Fundamentally, LULU looks strong.

In mid-March, the company announced upbeat fiscal fourth-quarter and full-year 2010 results. Due to strong demand for its clothing, fiscal fourth-quarter revenue soared 53% to $245.4 million, from $160.6 million in the year-ago period. Likewise, fiscal full-year 2010 revenue jumped 57% to $717.7 million, from $452.9 million in the previous fiscal year.

For the upcoming fiscal first-quarter, the company expects revenue to increase at least 26.5% to the range of $175-$180 million, from $138.3 million in the comparable period a year ago.

For the full 2011 fiscal year, the apparel company expects strong demand for its product to push revenue up at least 24.4% to $885-$900 million.
The earnings outlook is equally robust.

Fiscal fourth-quarter earnings increased 90% to $0.76, from $0.40 in the previous year. Full-year fiscal 2010 earnings rocketed up 106% to $1.69, from $0.82 in the year earlier period. The company projects fiscal first-quarter earnings will come in at least 33% higher than last year, in the range of $0.36-$0.38, up from $0.27.

For the full 2011 fiscal year, the company expects earnings to increase at least 12.4% to $1.90-$2.00.

With the goal of establishing itself as the world's top women's athletic wear brand, Lululemon is well on its way. Admittedly the stock's current valuation reflects its rapid growth, but the company has $316.3 million in available cash and no long-term debt. This liquidity gives it the financial freedom to continue to expand locations while developing fashion-forward clothing lines.

Action to take --> If Lululemon can break past nearby resistance at $102.83, it will bullishly complete an ascending triangle pattern. With no historical resistance in sight, and expected upbeat fiscal first-quarter results to be released in June, the stock should continue to move higher and net traders a nice profit. I anticipate the share price will also benefit from the early June split.

Weekly Top 10 List

 

1-Advanced Cell Technology Inc. (ACTC.OB) -.1979

ACTC has been very active lately. The stock is trading above its 50-day moving average. A weekly close above .215 could spark another round of momentum buying.  Money flow has been coming into the stock. If ACTC gets a weekly close below the 50-day moving average (.1781) this could  break the momentum.

Advanced Cell Technology, Inc., a biotechnology company, focuses on the development and commercialization of human embryonic and adult stem cell technology in the field of regenerative medicine.

2-Elysium Internet Inc. (EYSM.PK) -.0025

Traders and investors will be watching a very important resistance level this coming week. A weekly close above .003 could spark another serious run for EYSM.

Elysium Internet, Inc., doing business as TheDirectory.com, operates as a direct navigation Internet media company. It develops and markets local online destinations that assist its users in identifying local business and professional information. The company primarily serves financial and healthcare sectors.

3-Target Development Group, Inc. (TDGI.PK)-.0449

TDGI traded above the 50-day moving average closing strong on the week. If TDGI can maintain the critical .0425 support level, momentum could carry the stock higher.

Target Development Group, Inc., an entertainment media distributor, engages in the manufacture and release of pre-recorded movies and programs onto DVD and Blu-Ray video devices, and the publication of literary and non-fiction books.

4-3Power Energy Group, Inc. (PSPW.OB) -.706

PSPW has a forward looking event as the recently company announced they have made major progress on the preparation of the U.S. Securities & Exchange Commission Form 8-K (the "Super 8-K") setting forth comprehensive disclosures and audited financial statements regarding the prospective acquisition of Seawind Energy and Seawind Services by 3Power. The transaction is anticipated to close on Monday May 16, 2011. a weekly resistance level of .765 will be a critical area to watch.

3POWER is emerging as a world-wide independent major player in producing sustainable renewable energy. 3POWER plans to harness cutting-edge solar, wind, and hydro technologies to develop clean, sustainable power generation as trusted energy provider to utility companies and corporate entities around the world. 3POWER expects to establish its headquarters in London, with satellite offices and operations in North America, Latin America, Europe, and Asia.

5-Brazos International Exploration, Inc. (BRZL.PK) -.0109

TSW likes BRZL as long as the stock stays above .01. Achieving this goal could set the stock up for a very nice move higher.

Brazos International Exploration, Inc. engages in the acquisition and exploration of mineral properties in Canada. It primarily explores for uranium, gold, and silver ores. The company holds an option to acquire 100% interest in various mineral claims located in the Laurentides Region near Mont Laurier, Quebec. Brazos International Exploration, Inc.

6-FBC Holding, Inc. (FBCD.PK) -.04

Traders and investors will be watching FBCD very closely in the next few days analyzing the price action for a consolidation right underneath the 200-day moving average. If this scenario plays out, FBCD could be setting up for a very nice move to the upside.

FBC Holding Inc., through its interest in Super Rad Corporation, produces and sells collectibles and related products. It specializes in translating licensing, branding concepts, and intellectual property into tangible products, including toys, figures, housewares, and collectibles.

7-Baristas Coffee Company Inc. (BCCI.PK) -.093

Traders and investors will be watching BCCI very closely to see if  the stock will consolidate at these high levels. If BCCI can consolidate above .07 level for the coming week, there could be another round of momentum buying in the making. If the stock pulls back to the .04 support level, it could make for a good bounce play.

Baristas Coffee Company, Inc. operates drive-through beverage locations. The company offers hot and cold beverages, specializing in coffees, blended teas, and other custom drinks.

8-Cotton & Western Mining, Inc. (CWRN.PK) -.0088

The big question for CWRN this coming week is whether there is a technical double bottom in place for a nice rally? The stock is trading right at its long-term 200-day moving average starting to draw some attention. The stock looks attractive at these levels. IfCWRN gets a weekly close below .0068, this could negate the technical set up.

Cotton & Western Mining, Inc., an iron ore mining company, engages in the production and sale of iron ore. It provides raw crude iron ore products to Asia Pacific Steel Manufacturing Sector.

9-Lithium Corporation (LTUM.OB) -.569

TSW is watching for a bounce play at these levels. A daily close above .63 could spark a nice rally for some quick money.

Lithium Corporation is an exploration company based in Nevada devoted to the exploration for new lithium resources within the state of Nevada. The Company explores and develops potentially economic lithium-enriched brine fields, with an eye to becoming a long-term producer of this increasingly strategic and economically important commodity.

10-Viking Systems, Inc. (VKNG.OB) -.291

TSW is focused on the breakout above the 200-day moving average. A weekly close above this moving average will spark another round of momentum buying for VKNG. Appears to be a very low risk trade.

Viking Systems, Inc. develops, manufactures, and markets visualization solutions for minimally invasive surgery. The company offers two dimensional digital cameras to third-party companies who sell to end users through their original design manufacturer programs and original equipment manufacturer programs. It also provides 3Di Vision System under the Viking brand, an advanced three dimensional (3D) vision system used by surgeons for minimally invasive laparoscopic surgery with applications in urologic, gynecologic, bariatric, cardiac, neurologic, and general surgery.

Preventing the Most Common Form of Cancer

Right now, about 58 million Americans suffer from the most common form of skin pre-cancer - Actinic Kerotosis (AK). I say pre-cancer because with the right treatment, this relatively common skin condition can be prevented.

But, if not treated properly there is a possibility that the condition could get a lot worse - it could even become life threatening.

It is not my place to give you advice on which medical treatments you should choose for particular illnesses and conditions - I am not a doctor. However, I do specialize in finding opportunities to invest in small cap growth companies that have the opportunity to make significant returns.

I have found a tiny $110 million market cap biotech company that is helping to treat this condition, while providing significant growth potential for investors.

It specializes in skin-based products.

Its main product, Levulan Kerastick treats the common precancerous skin condition Actinic Kerotosis (AK) which are lesions caused by sun exposure. Last year over eight million people were treated for AK, up 52.5 percent from 2005.




The company is DUSA Pharmaceuticals (Nasdaq: DUSA)


and it is one the best growth stories I know of in the small cap biotech space. The company turned in its first profitable year during 2010 and has the potential to make generate significant returns in 2011.

Levulan is really the company's only product - it alone accounted for $10.2 million of the $11 million in revenue the company reported in the last quarter. Gross margins for the product also reached a record high at 89 percent. But currently, the product only makes up 5 percent of the market share for AK treatment, meaning there is still tremendous market growth potential. And it is quickly eating away at the competition due to the minimally invasive nature of the product.

Unlike its competitor's products, DUSA won't keep its customers from going to the beach while being treated with Levulan. Its competitors treat AK with topical creams, dermabrasion, chemical peels, laser removal, or cryotherapy (freezing with liquid nitrogen).

Unfortunately, topical creams, dermabrasion and chemical peels have a history of leaving scars or splotches while methods such as freezing with liquid nitrogen are oftentimes not covered by insurers. DUSA's product is far superior. It does not leave scars, is covered by insurers and can be treated with one visit to the dermatologist.

Dermatologists are taking notice. Investors are sure to follow. And sales are rapidly increasing.

With revenues surging by 25.6 percent in 2010, Levulan is clearly generating a loyal following. Gross margins have steadily increased over the past five years with the latest gross margin hitting 80 percent in 2010. Gross margin is expected to increase above 81 percent in 2011. And with DUSA's leading product eating away at market share I would expect to see the 25 percent growth rate continue for a few more years.

Like most small cap biotech companies DUSA is highly dependent on one product - a potential weakness. However, its rapid growth rate should lead to significant gains through share price appreciation.
As I write this, the stock is up approximately 25 percent. DUSA reported revenue growth of 27 percent in the first quarter of 2011, compared with the same quarter last year. It did experience a net loss on a GAAP basis of 0.02 per share for the first quarter. The loss can be attributed to the fair value accounting of the warrants  that were issued in 2007. This adjustment does not concern me so much since it is a paper transaction only, and it obviously does not concern the market with the share price advancing 25 percent after the earnings report was released.

With an annual sales growth rate of approximately 25 percent and a forward P/E  of 22.8 I would be a buyer up to the $6.50 to $6.75 level. The stock currently trades for $5.71 so you have around 13.8 percent upside from here before the stock looks too stretched to start a position. If the current growth trend continues, as I believe it will, I could easily see the share price reach $8.50 to $10 by the end of the year.

3 Booming Emerging Market Picks

Brazil, India, Africa offer ways to capitalize on surging demographics

The latest GDP estimates by the International Monetary Fund (IMF) indicate that emerging market economies will grow 6.5% in 2011 — compared to just 2.4% for developed nations. And China, the world’s fastest-growing major economy, is expected to expand at a rate of 9.5% this year.

So we have the emerging world growing at about 2.5 times the rate of the developed world, while China — the largest emerging market by population and total GDP — grows at nearly four times the rate of the developed world!

There are many reasons for that faster economic growth — lower overall economic indebtedness at the corporate and government level, improving business conditions, as well as favorable legislative and tax framework — but one of the most important remains positive demographics.

As the population of a vibrant emerging market grows, so do the number of consumers — creating a healthy rate of expansion for aggregate demand and GDP. But keep in mind that BRIC markets have very different demographic characteristics: Brazil has a fertility rate of 2.4 children per family, Russia comes in at 1.4, India is the highest at 2.7, and China’s rate is 1.8.

Buy Brazilian Bank BBD

Domestically oriented companies in countries with positive demographics will see a big tailwind behind their backs for years to come. For example, take Brazil-based Banco Bradesco (NYSE:BBD), the second largest non-government lender in the country.

The company is targeting credit growth of 15% to 20% a year, which means a much higher earnings growth rate. This year earnings are estimated to grow 22% while the shares sell at only 9.5 times forward earnings. The reason for the cheap valuation is the campaign by the Brazilian central bank to rein in inflation by hiking interest rates and increasing reserve requirements, guaranteeing a slower profit growth in 2012. The cheap valuation and positive demographics make this a stock to put on your watch list.

As for India, the central bank there again hiked interest rates this week, putting some pressure on the market. The Reserve Bank on India increased the repurchase rate to 7.25% from 6.75% and boosted the reverse repurchase rate to 6.25% from 5.75%. Those rates are still negative as inflation is forecasted to run at a 9% rate until September; that means more rate hikes and reserve requirement hikes are coming. Inflation in India is the highest after Russia among the BRICs economies, but the RBI is confident that is can lower it down to 6% by next year with the current course of action.

Buy India ETF SCIF

This monetary environment may create a trading range for Indian stocks in 2011, where interested investors should look to sell rallies and buy the dips generated by the aggressive actions of the Reserve Bank of India (RBI). Still, with the best demographics of any BRIC economy, long-term investors may be interested in building a position in the Market Vectors Indian Small-Cap ETF(NYSE: SCIF) on any RBI generated weakness. Although India is the poorest in GDP/capita from the BRIC counties, it is also the most domestically oriented, as its economy is shielded from export-driven shocks.

Buy Africa ETF AFK

Interestingly, the strongest surge in demographics in the developing world are actually in Africa. The continent is very undeveloped, and has seen plenty of turmoil in Egypt recently, one of its most promising economies, but the long-term potential is interesting considering the continent is rich in natural resources.

The only ETF that covers the frontier markers is the Market Vectors Africa Index ETF (NYSE: AFK). All the ETF’s constituents are either headquartered in Africa or generate the majority of their revenues there. South African companies comprise 28.6%, while offshore companies not domiciled in Africa, but doing most of their business there make up 19.1%. As for country-specific holdings, problematic Egypt makes up 19.1% of the portfolio, but is balanced out with the 18.5% allocation to Nigeria and the 12.3% allocation to Morocco.

The most heavily weighted sectors in the ETF are banks (31%), followed by basic resources (18.5%), telecommunications (12%), and oil and gas (9.2%). This is a unique way for long-term investors to play the group of least-developed emerging markets in Africa, yet one with the best demographic characteristics.

Why China is Still My Favorite

Of course, China remains my favorite way to play the current trends in global demographics, as they are further along in the cycle than Brazil, India and Africa, and are presenting more and better opportunities.

The Chinese baby boom generation was born in the 1960s and 1970s, putting them in their 30s and 40s.These Chinese came of age after the Cultural Revolution, had access to higher education and reaped the rewards of China’s economic boom.

Although China was a relatively poor country until just the last five to 10 years, there were plenty of opportunities in the 1990s for a generation of young, educated Chinese unencumbered by Marxist ideology. Countless fortunes have been made in the past decade — largely by Chinese born after 1960 — as a result of huge real estate and asset appreciation. It’s of little surprise that the average age of U.S.-dollar millionaires in China is only 38, compared with 54 in the United States.

And despite the institution of China’s “One-Child Policy” in the early 1980s, the country has more children relative to senior citizens than the economically more advanced neighbors such as Taiwan, Hong Kong and South Korea. China also has more than 900 million people under 45 years of age — more than the total population of Western Europe, Japan and the United States combined.

So as more Chinese than ever enter their peak spending years between 35 and 50, China’s domestic consumption is entering an era of unprecedented boom. That is one reason why Chinese domestic consumption has remained one of my most important investment themes.

Smart Money is Selling Gold – Should You?

George Soros one of many big names bearish on gold

All eyes are on gold and commodity prices, as the yellow metal has just dipped below the psychologically important $1,500 level. Major high-profile speculators — including George Soros — now appear to be taking some of their bets off the table.

Investors now have a choice: Should they use the recent weakness as an opportunity to buy more gold or, like Soros, should they take their profits and move on to greener pastures before gold prices plummet?

Long-time readers know that I’ve been bearish on gold for the past year . I held firm that the bull market in gold was supported by increasingly flimsy arguments about inflation (which has yet to surface outside of volatile food and fuel prices) and that gold’s primary traditional use–as jewelry–appeared to be in terminal decline.  Even in India, the biggest consumer of gold since time immemorial, gold use for jewelry has been in decline since 2005.  Rising prices in the face of faltering real-world use gave the look of an investment whose fundamentals were rotting from within.
Anecdotal evidence, such as gold-dispensing ATM machines and the prevalence of “We Buy Gold” billboards across the country, only strengthened my view that gold was in a bona fide bubble or, at a minimum, it had simply become too popular to offer decent long-term returns.

The one gaping hole in my argument was that some very smart money disagreed with me.

In taking a bearish view on gold, I was effectively betting against George Soros, David Einhorn, and some other very talented hedge fund managers.  As a general rule, it doesn’t pay to bet againt the smart money, and this time was no different.  I was early in turning bearish on gold, and I should have been more patient.

The question, of course, is what now? None of my arguments have changed.  Gold is not an investment.  It’s a speculation .  The bullish arguments for gold are based more on political ideology and cynicism towards the government than on sound fundamentals.  It’s real-world consumption as jewelry has been replaced by bullion for “investment.”  And now, we see the smart money starting to lose interest.

Gold might continue to fall, or this could simply be a bump in the road on the way to new highs. Only time will tell. But without a crystal ball, we investors have to make decisions based on the information we have. And right now, gold looks like a bad bet.

Investors might want to follow George Soros’s lead and get out while the getting is good.  I might suggest they follow Warren Buffett’s advice and move their attention to attractively priced stocks paying reliable dividends.