This article was originally published in The Option Strategist Newsletter Volume 12, No. 23 on December 11, 2003.
Probably too many traders treat options as pure speculation rather than the theoretically more profitable treatment as a hedging vehicle or as a way to take advantage of pricing discrepancies. Many of our articles deal with hedging or volatility trading (which is the generic term describing theoretical value trading), but in this article we’re going to change gears a little and talk about speculation – plain old vanilla option buying. Specifically, we’re going to talk about how option activity might denote a potential trade in a stock or its options, and then we’ll discuss how to follow up on the position – setting stops, and letting profits run if they develop.
We have written about Peabody Coal (BTUUQ) a couple of times previously – amazed at the rapid advance and short squeeze that occurred there. That stock had a second surge, post-election, as did many other coal stocks. But the action there pales in comparison to what’s happened in the “Water Transportation” stocks this week. These include the big oil tanker companies and the general shipping of things on the ocean. The whole sector has been very strong, but the “king” is Dry Ships (DRYS).
