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Tuesday August 31, 2010
Bernie Schaeffer: Trader goes long and short
by Bernie Schaeffer, editor Schaeffer's Investment Research  My long and short positions are selected based on a combination of fundamental, technical and sentiment-based metrics.My latest long positions are in Aruba Networks (ARUN) and Advance Auto Parts (AAP), while my most recent short position is in NVIDIA (NVDA). Price action for Aruba Networks has been strong, with the equity up 53 percent year-to-date and 98 percent in the past 52 weeks. Since making a 52 week high in July, the shares have pulled back to their 50-day moving average, a trendline that has provided support for ARUN since May. This pullback could provide an excellent buying opportunity. There is heavy put open interest at the 15 and 16 strikes in the September options series. This heavy open interest could provide additional support for ARUN. The Schaeffer's put/call open interest ratio stands at 4.59, placing it in the 100th percentile of all readings taken during the past year, and indicating a strong preference for puts. 
Continued strength by ARUN could cause an unwinding of these bearish bets, driving the shares even higher. I initiated a long position in Advance Auto Parts. Price action for AAP has been strong, with the equity gaining more than 34 percent year-to-date. Recently, the stock pulled back to support from its 20-day trendline, presenting a potential call-buying opportunity. On August 11, the company reported earnings that beat analysts estimates by 13 cents per share, while raising guidance for its earnings per share for the 2010 fiscal year. Despite the company's strong earnings report, option speculators are pessimistic toward AAP. The stock's gamma-weighted Schaeffer's put/call open interest ratio is 4.95, indicating a preference for puts. An unwinding of the short positions related to this open interest could provide a tailwind for the shares. Short interest for AAP has been declining since reaching a peak in late 2009. A continuation of this short-covering on the heels of the positive earnings report could drive AAP higher. Upgrades are possible for AAP, as only 12 of the 21 analysts covering the stock rate it a 'buy.' I also initiated a short position in NVIDIA. Price action on NVDA has been weak, with the equity down 46 percent year-to-date. Despite this weak action, sentiment toward NVDA remains bullish. The Schaeffer's open interest put/call ratio stands at 0.26, indicating a strong preference for calls. Continued weakness by NVDA could cause an unwinding of these bullish bets, driving the equity even lower. Shares of NVDA have rallied back to the 10 level, site of an earnings gap down on July 28. This gap, coupled with the psychological 10 level, could provide resistance toward the shares. Learn more about this financial newsletter at Bernie Schaeffer's Schaeffer's Investment Research. |
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