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Up Big, High Volume, No News - What Do You Do?

March 26, 2013 | About:
Trading a high volume, big percentage move sans news...

Nothing is more unsettling than seeing one of your stocks surge higher, on strong volume, absent any headlines. This is especially true if the uptick comes during a general market sell-off.

What does someone else know that you don’t? Is this a suckers’ rally to be sold or is it a harbinger of a much bigger advance? Why are normally sleepy call options trading actively on out-of-the-money strikes?

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The March 13 gap-down opening on Calamos Asset Management (CLMS) was clearly due to a brokerage firm’s downgrade. Clients who sold into that advice got the worst prices of the past two weeks. The shares rebounded 4% to 5% within a couple of days, then marked time until March 25.

On Monday, CLMS opened quietly then took off on high volume, rising 7.44% from $11.41 to $12.26 in just minutes. The shares then sold off slightly, rebounded to near the high, then tapered off to close at $12.03. Trading totaled about three times normal. At 4 p.m. EST, the DJIA was down 0.43%. CLMS had gained 5.25%.

There were no headlines on Calamos and no rumors circulating. CLMS call options, which rarely trade at all, changed hands for the April, May, June, August and November expiration months. Contracts moved on the August $12.50 strikes totaled 1,570, and 41 of the November $15 strikes were bought.

August $12.50s went as high as $0.85 per share. The November $15s touched $0.37 per share. Those are significant numbers considering the 52-week range for CLMS has been $9.24 to $13.35.

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I lacked any information on why the stock and options were moving. I owned a large position. What did I do? When the shares were at $12.08 I sold some August $12.50 covered calls for $0.75 /share on about 22% of my position. This commits me to selling at $13.25 per share net if CLMS is above $12.50 on expiration date. It also provided me with a 6.2% downside cushion from today’s elevated quote if the stock cooled off again or simply remained around current levels.

What went into my decision? If I could have sold at $13.25 today I would have been satisfied to let some shares go. Why not get paid a couple of grand upfront on part of my holdings? If CLMS continues higher I’ll be happy for my other 78%. I won’t have missed anything on the covered 22% until it passes $13.25.

Will I regret today’s move later? Perhaps. Taking a partial hedge was the best I could figure to do without additional knowledge of why CLMS was on the move.

In real-world investing we all face uncertainty every day. There are worse fates than capping part of a position at what would be a very nice gain. Time will tell if I made a bonehead move by writing calls or simply by not selling into strength. If I hadn’t been paying attention intra-day I wouldn’t have even seen the opportunity.

Disclosure: Long CLMS shares, short CLMS calls

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.gurufocus.com/peter_lynch.php
http://www.TalkMarkets.com
http://www.MutualFunds.com

Visit Dr. Paul Price's Website


Rating: 3.0/5 (7 votes)

Comments

batbeer2
Batbeer2 premium member - 1 year ago
>> If I hadn’t been paying attention intra-day I wouldn’t have even seen the opportunity.

Yes. Playing the intra-day swings properly will make you rich. That's good.

Be warned though, here's my attitude when I place my order:

I don't care how intelligent you are or what strategy you employ. If you are trading the daily fluctuations and I'm on the other end of the that trade, you will get what you deserve.

I act on the assumption that I'm up against the stock market equivalent of Gary Kasparov. The only advantage I've got is that he's in a hurry and I have all the time in the world. I trade about once a quarter. The rest of the time I read, analyze, write and think.

Ducking and weaving on a daily basis for months or years (locking in profits) is not going to do you any good if and when we finally do find ourselves at opposite sides of a trade.

The point here is that there are people in the market with that attitude. I know. I'm one of them.

If you think this is a fairly accurate description of your worst stock market nightmare...... be one.

Have you ever met a (former) day trader who was wondering why his/her brilliant system worked so well for so long and then one day it didn't?

Now you can explain to them what happened.


Just some thoughts.
Dr. Paul Price
Dr. Paul Price premium member - 1 year ago


Batbeer2 [url=http://www.gurufocus.com/membership/?ref=avt][/url],

I am not now, nor have I ever been, a day trader or even a short-term trader. I bought CLMS as low as $9.50 and have been holding a pretty good -sized position.

The article detailed my thinking when a stock jumped more than 7% intra-day with no public news. I made the decision to sell out-of-the-money calls on a portion of my position because I was willing to let some go for about 42% above my purchase price (plus dividends).

The calls were richly priced and liquid due to the fact that the intra-day move was so exaggerated. I didn't sell any shares outright at all. I left even the covered shares with another 10% upside (over just the next 5-months) from yesterday's already elevated price.

Immediate guaranteed income and a decent risk reduction

seemed like a pretty conservative and long-term strategy to me.

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