Options Report: Buying Opportunities Among Internet Retailers

The holiday shopping season is just around the corner, with the promise of yet another Black Friday looming next week following Thanksgiving. While Black Friday gets its name from the fact that it puts many retailers in the black for the year, it's also known as a dark day for shoppers, as they run from store to store, spend countless minutes trapped in traffic jams, and quite literally fight for the best deal on the shelves.

But many people have learned there is an easier, calmer, and less stressful way of completing those shopping chores without fighting for a parking spot or dodging an elbow from another overzealous shopper. Internet retailers have blossomed during the past several years as a practical alternative to the brick-and-mortar retailer, and, just like everyone else, they are getting ready for the shopping season.

Amazon.com (AMZN)

What was once the Earth's biggest bookstore has quickly become the Earth's biggest anything store, according to Hoover's. Expansion has propelled Amazon.com Inc. (AMZN: sentiment, chart, options) in innumerable directions. Its main Web site offers millions of books, music, and movies (which still account for most of its sales), not to mention auto parts, toys, electronics, home furnishings, apparel, health and beauty aids, prescription drugs, and groceries. Also, shoppers can download books, games, MP3s, and films to their computers or handheld devices, including Amazon's own portable reader, the Kindle.

From a technical perspective, the stock has skyrocketed more than 130% since the beginning of 2009. The equity has been locked in a strong uptrend along the support of its 10-week moving average since mid-December. The security is currently hovering around round-number support in the 130 region as it consolidates its recent gains.

Meanwhile, short sellers are attempting to call a top to the stock's uptrend. During the past month, the number of AMZN shares sold short increased by 13% to 21.4 million. This accumulation of bearish bets accounts for more than 6% of the company's total float. An unwinding of these pessimistic positions could help propel the shares higher.

Options players haven't exactly jumped on the stock's bandwagon, as the Schaeffer's put/call open interest ratio for AMZN stands at 1.08. This ratio indicates that put open interest outnumbers call open interest among options slated to expire in less than three months. In addition, this ratio is in the middle of its annual range, indicating a degree of complacency toward the shares. Considering the stock's impressive uptrend, I would expect to see a higher degree of optimism among options players.

Even Wall Street is holding back in its optimism toward the mega-retailer. According to Zacks, nine of the 21 analysts following AMZN rate it a "hold" or worse. Any upgrades could help to boost the shares. Furthermore, the average 12-month price target for AMZN stands at $126.88, according to Thomson Reuters. This estimate implies that analysts are expecting the shares to fall more than 2% from their current trading price. Price-target increases from this group could attract fresh buying pressure to the shares.

To take advantage of a rally in the shares of AMZN following a strong holiday shopping season, traders should look to the equity's April 120 call.

Blue Nile

Blue Nile Inc. (NILE: sentiment, chart, options) offers luxury-grade jewelry online at bluenile.com, according to Hoover's. The company sells loose diamonds, settings, engagement rings, and other jewelry made of gold, platinum, and silver, set with diamonds, pearls, emeralds, rubies, and sapphires. It is the leader in online jewelry sales, offering more than 1,000 styles of jewelry, watches, and accessories. Blue Nile also operates Canadian and U.K. Web sites.

From a technical perspective, the equity has put in a respectable performance this year, as the shares have soared more than 136% since the beginning of 2009. The security has skipped higher along the support of its 10-week and 20-week moving averages since March. The shares of NILE are currently in the process of pulling back to support at their 20-week moving average, which could be used as a springboard for the next leg of its uptrend.

From a short-term perspective, the stock is consolidating along former support/resistance in the 56 area.

Not surprisingly, we find that call trading has been heavy on the shares. The Schaeffer's put/call open interest ratio for NILE stands at 0.89, which is lower than 94% of all those taken during the past year. In other words, short-term options players have been more optimistically aligned toward the shares only 6% of the time during the past 12 months.

However, a large number of those calls could be hedges against the heavy position short sellers have created. During the past two weeks, the number of NILE shares sold short increased by nearly 4% to 2.8 million shares. This accumulation of bearish bets is 16 times the stock's average daily trading volume and accounts for 20% of the company's total float. This pile of short positions represents potential sideline money that could fuel the shares higher.

Yet, pessimism could be on the rise, as the International Securities Exchange (ISE) has seen an increase in put trading. During the past 10 trading sessions, 10 puts have been purchased to open for every one call purchased to open. This ratio of puts to calls is higher than 77% of all those taken during the past year.

Meanwhile, Wall Street is giving NILE the cold shoulder. The stock has earned one "strong buy" rating, seven "holds," and one "sell," according to Zacks. Furthermore, the average 12-month price target for NILE stands at $56.55, according to Thomson Reuters. This estimate is just below the stock's current trading price, implying that analysts don't expect the shares to rally much higher during the next 12 months. Any price-target increases and/or upgrades from this group could add some buying pressure.

An unwinding of this lingering skepticism on this outperforming stock could create a fresh wave of buying pressure for NILE. A January 2010 55 call would allow a trader to lock in some gains on a rally.

Overstock.com (OSTK)

Overstock.com Inc. (OSTK: sentiment, chart, options) allows you to shop a Persian bazaar of clothes, housewares, music, books, and more, Hoover's reports. The online retailer sells discount brand-name merchandise, including sporting goods, bed and bath items, electronics, and jewelry. Most of its inventory comes from manufacturers stuck with overproduction, older models, or some color that wasn't as popular as the designer had envisioned. Brand names include Bissell, Hewlett-Packard, Movado, and Steve Madden, among others. In addition to its main Web site, Overstock.com manages an online auction site and provides car and real estate listings.

While OSTK has lagged behind its peers in terms of technical performance, the security has still rallied a solid 48% since the beginning of 2009, outpacing the broad market. The stock has been in an uptrend since its March low of $6.71, wracking up a gain of more than 129%. The equity has been guided higher by its 10-week and 20-week moving averages.

Considering the stock's stellar technical performance, it should come as no surprise that traders have flocked to the equity's calls. The International Securities Exchange (ISE)/Chicago Board Options Exchange (CBOE) 50-day call/put volume ratio comes in at 3.02, as call volume triples put volume. This ratio is also higher than 87% of all those taken during the past year.

Elsewhere, we find that the Schaeffer's put/call open interest ratio for OSTK stands at 0.45, as call open interest more than doubles put open interest among options slated to expire in less than three months. This reading is lower than 97% of all those taken during the past year.

However, not everyone is quite so optimistic, as short sellers have jumped on this security. During the past month, the number of OSTK shares sold short increased by 7% to 3 million shares. This buildup of bearish bets is nearly 19 times the equity's average daily trading volume and accounts for 14% of the company's total float. Should the bears begin to buy back their pessimistic positions, it could supply the stock with fresh buying pressure.

The stock has been largely ignored by Wall Street, as just three analysts offer up ratings on the shares, giving it one "buy" and two "holds." Any fresh coverage could also add some lift to the shares.

To take advantage of a rally in the shares of OSTK, traders should consider the equity's March 15 call as a way to lock in some gains.