Market Dip Attracts Bargain Hunters

As the stock market fell sharply this week, some option traders stepped in to buy the dip.

While the overall tone was bearish, OptionMonster's tracking systems detected bullish option activity in several stocks that had been rallying before the drop.

The first was cruise-ship operator Carnival, which opened the session down 5.7 percent. Undeterred investors purchased about 4,000 July 47 calls. Most of the trades priced early for $1.90, but the shares fell further and another large block changed hands for $1.45 late in the session. The stock ended the day down 7.90 percent at $42.09.

Cheniere Energy has also been a favorite of the bulls, more than tripling between October and mid-February. Some 5,550 June 13 calls traded in the natural-gas tanker stock, with the large blocks pricing for $0.70. At one point the shares were down as much 8.5 percent but tested a support level from earlier in the month and rebounded to close at $8.94, a drop of 3.97 percent.

Avis Budget Group climbed for 11 straight days but fell 1.94 percent on Friday and another 2.41 percent yesterday. This time buyers stepped in at the March 16 strike, snapping up more than 4,000 contracts for $0.60. The stock closed at $15.81, so that trade will make money from a quick rebound in the shares.

Aerospace stock Goodrich also fell and was sitting near a two-month low near $86 when the March 90 calls lit up our systems. The stock quickly pushed back to the upside and closed at $87.57, still down 4.1 percent but more than $1 off its lows for the session.

All four stocks had been climbing before the activity occurred and, aside from Carnival, traded above their 50-day moving averages. That suggests that investors wanted to own those stocks and thought it was worth taking a shot on yesterday's pullback.

It's also noteworthy that the traders used options to enter their positions rather than buying shares, thereby reducing the amount of money they had to commit. Buying calls essentially allowed them lock in entry levels without having to pay the full price.


Russell has no positions in any of the stocks mentioned.

Options Trading School:



David Russell is a reporter and writer for OptionMonster.