Footwear manufacturer Skechers (SKX) is sprinting higher today and staging a key five-week breakout from a pullback pattern to fresh one-year highs through its 200-Week SMA. The action looks to confirm an existing EW4 EBOT signal generated earlier this week which estimates a mid-TAPP of 21 by early July.
With a void on the news front and earnings not until late July, Friday’s catalyst appears to be of the technical variety. The accompanying heavier-than-normal volume also suggests SKX bulls could be enjoying some assistance from bears looking to cover as shares maintain short interest of about 21% according to Yahoo Finance.
Figure 1: Skechers (SKX) Daily Chart
Option activity is above-normal but not over-the-top with about 3,900 contracts trading compared to its 50-SMA of 900 and calls are favored by a margin of about 5-to-1. As discussed a bit earlier today in our daily “WSLO” column, the most concentrated volume of about 2,000 contracts lies in the June 18 call, but it remains a bit of question mark with regards to opening or closing due to much larger open interest of 4,500.
Nonetheless and also presented, for bulls that do want to play a breakout and maintain the exposure of a stock trader but with much lesser dollar risk, the June 18 call is one to consider as a decent stock substitute strategy. With its 85 to 90 delta and priced just $0.05 to $0.10 over parity at $1.15 to $1.20 versus shares at 19.10; the June 18 is an effective way to position in Friday’s breakout with just one-sixth the risk of the underlying.
For instance, if you would consider positioning with 200 shares to be acceptable risk (after doing the homework of course); instead, a purchase of 2 contracts could serve as a stock substitute. This trader would be risking about $230 versus bankruptcy style risk, however unlikely, of $3,820 while nearly matching the stock position point-for-point on the upside. In the end, while we can only observe and don’t make recommendations, we can’t blame would-be fast-money bulls for looking to slip into some gear with better traction than stock in case conditions make a turn for the worse.
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
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The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.