3 Hot Stocks for the Opportunistic Option Trader

Volatility expectations are rather muted on Northrop Grumman Corporation (NYSE:NOC), SYSCO Corporation (NYSE:SYY), and Xcel Energy Inc (NYSE:XEL)

by Josh Selway

Published on Feb 3, 2016 at 11:27 AM

Being the middle of earnings season, premium on many stocks' near-term options is rather elevated, since volatility expectations are heightened surrounding companies' quarterly events. However, based on data compiled by Schaeffer's Quantitative Analyst Chris Prybal, we were able to locate three outperforming stocks with relatively cheap options, using Schaeffer's Volatility Index (SVI) as our guide. 

First up is defense stock Northrop Grumman Corporation (NYSE:NOC), which has weathered the 2016 market downturn rather well. Over the past three months, in fact, the shares have outperformed the S&P 500 Index (SPX) by almost 10 percentage points. Furthermore, the stock hit an all-time high of $193.99 in late October, while last month's pullback was contained at the $175 mark -- a level that roughly coincides with the stock's late-summer highs. Today, NOC is up 0.2% at $187.82. 

For those looking to capitalize on this promising technical backdrop, the defense stock's near-term options are enticingly cheap, with NOC's SVI coming in at just 20% -- lower than four-fifths of all readings from the past year. Adding to the stock's promising prospects is its contrarian value. 

For example, half of the analysts covering the stock say it's just a "hold," and short interest has been on the rise, increasing by over 8% in the latest reporting period. However, it appears some on Wall Street are starting to see the bigger picture, since BofA-Merrill Lynch just upgraded Northrop Grumman Corporation yesterday to "buy" from "neutral," while setting its price target in record-high territory at $210. As such, NOC could continue to benefit as the Street's pessimism unwinds

Next is food distributor SYSCO Corporation (NYSE:SYY) -- which just announced superb fiscal second-quarter earnings that boosted the shares 8.4% on Monday, and above the $42 level that had been acting as resistance in the latter half of 2015. The stock carried this momentum into today, where it earlier hit an all-time high of $43.37, and was last seen 0.2% higher at $42.86. 

Compared to NOC's SVI, SYY's options are even cheaper. The stock's SVI of 17% lands in the 8th annual percentile, meaning volatility expectations are extremely low. Making the situation that much more intriguing is the overwhelming emphasis SYY speculators have placed on put buying.

Specifically, the stock's 10-day put/call volume ratio at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) stands at 3.86, which tops 86% of similar readings over the previous 12 months. This tells us that put buying has been unusually popular of late, realtive to call buying, and SYSCO Corporation shares could feel tailwinds if options bears begin to flee the scene. 

Last is Xcel Energy Inc (NYSE:XEL). Shares of the utility firm have outperformed the SPX by over 18 percentage points in the past two months, with these gains mostly coming thanks to a strong earnings report issued last week. XEL touched an all-time peak of $39.22 this morning -- but was last seen down 0.2% at $38.91, after UBS lowered its outlook to "sell" from "neutral" this morning, and cut its price target by $1 to $36.

Not that this downgrade should be of huge concern; XEL's positive price action has only accelerated lately, despite two-thirds of covering brokerage firms calling it just a "hold." Traders share this pessimistic outlook, too, since short interest popped by over 30% during the last two-week reporting period. 

Regardless, those looking to buy premium on Xcel Energy Inc won't have to break the bank. The stock's SVI of 24% sits in just the 14th annual percentile, as front-month options are pricing in exceptionally low volatility expectations. 

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