Schaeffer's Tool Box: Three Myriad Genetics Inc. Options Strategies

              

This column is designed to introduce you to some of the valuable trading tools available on the SchaeffersResearch.com Web site. Today, we're going to use the Schaeffer's stock screener to look for bearish trading ideas by sifting through stocks with low Schaeffer's put/call open interest ratios (SOIR). For more on why monitoring near-term options activity can help guide your trading, please click here.

One of the easiest ways to find a potential bearish trade using the Schaeffer's stock screener is via the "Stocks with a low put/call ratio" filter option. By selecting this option, the filter will return only those securities with poor price action and an unusually high degree of call open interest. With the basics out of the way, there are a few more settings to tweak. Below are my personal favorites:

• Stocks with a low put/call ratio
• A minimum stock price of $10 per share
• Minimum put & call open interest of 10,000 contracts
• Minimum average daily stock volume of 100,000
• Trading below its 20-day moving average
• Stocks near an annual low
• Total analysts rankings greater than 10

If you haven't familiarized yourself with the Stock Screener on the Schaeffer's Quotes & Tools page, you might want to preface today's article by reading this primer on how to use this set of stock-filtering tools.

The Sentiment Rundown

After sorting the results in ascending order according to their performance versus the S&P 500 Index, Myriad Genetics Inc. (MYGN: sentiment, chart, options) rises to the top. According to the table above, MYGN has underperformed the SPX by nearly 30% on a relative-strength basis during the prior 60 trading days. Yet, despite this poor technical performance, traders remain extremely bullish toward the security.

For instance, MYGN's SOIR rests below 87% of those taken during the past year. Furthermore, the equity has attracted considerably bullish attention from the analyst community. Specifically, six of the 12 brokerage firms following the shares rate them a "buy" or better, compared to only one "sell" rating.

The key takeaway for those not familiar with contrarian methodology, or the indicators discussed above, is that investors have yet to fully capitulate to the shares' poor technical performance. The idea is that should these securities extend their poor price action and continue lower, we could see the remaining bullish investors exit their positions, thus increasing selling pressure on the group.

Getting Technical

With our sentiment drivers in place, we turn to technical performance. While all of our stocks are pre-screened to be underperformers, not all declines are created equal. As such, it is important to take a look at your filter results a bit more closely from a technical perspective to determine if the selections are in a well-defined downtrend. Below is the technical analysis for today's results.

Myriad Genetics Inc. (MYGN)

From a technical standpoint, Myriad Genetics Inc. (MYGN: sentiment, chart, options) is either on the cusp of a potentially sharp drop, or locked in a trading range. The shares have trended steadily lower since setting a near-term peak in late March. This pullback has taken MYGN to potential support at its rising 50-month moving average. However, the security is also staring up at resistance from its 10-week and 20-week moving averages and formerly key technical support in the 24 area. These intermediate-term trendlines have helped usher MYGN steadily lower since March, while the 24 level contained pullbacks in the shares from July through early November.

The Bullish Option

The MYGN bulls might see the stock's pullback to its 50-month trendline as a potential entry point for a long position. What's more, the shares have had a tendency of rallying sharply into overhead resistance at their 20-week moving average before ultimately turning lower once again. A rebound to this trendline would necessitate a nearly 12% jump in the equity, which options traders could take advantage of by entering a January 2010 22.50 call. With this option currently asked at $2.20, or $220 per contract, the trader could bank a 59% profit should MYGN rally to the 26 level by expiration. Keep in mind, however, that the stock's sentiment backdrop offers little in the way of potential sideline money to support such a move.

The Bearish Option

The MYGN bears, meanwhile, might be looking to jump on the shares before they are rejected by overhead resistance in the 24 area. In fact, a failure to reclaim this former support level could have sent bullish investors scrambling for the exits. Options traders looking to take advantage of a continued decline from MYGN shares should consider a January 2010 25 put. With this option currently asked at $2.10, or $210 per contract, the trader could double their investment if MYGN falls to the 19.50 level on expiration. Profits could be even higher if unwinding sentiment sends the shares down for a retest of their March lows near $17 per share.

The Neutral Option

Let's say you aren't convinced that MYGN is going to go anywhere. The shares are currently trading between potential support at their 50-month moving average (near 22.50) and stiff overhead resistance at their declining 20-week trendline (near 26.50), and you expect them to remain trapped for at least the next several weeks. One strategy to take advantage of this would be to enter an iron condor. In this play, the trader would basically enter two credit spreads, one with puts and one with calls. The trader would also be looking at December options in order shorten the time period that MYGN has to move outside this range.

For the first half, the trader would purchase a December 17.50 put, currently asked at $0.10, and sell a December 22.50 put, currently bid at $0.30, resulting in a credit of $0.20, or $20 per contract. Meanwhile, the trader would also buy a December 30 call, currently asked at $0.05, and sell a December 25 call, currently bid at $0.45, resulting in a credit of $0.40, or $40 per contract.

The total premium received would be $0.60, or $60 per contract, which the trader would keep as long as MYGN closes between $22.50 and $25 per share on Dec. 18, when these options expire. For more on iron condors, please click here.

Remember, your risk tolerance may be different from my own, and I encourage you to expand on the research I've done here to arrive at your own conclusions.