ONP Pounded to Pulp

Another negative report, from someone with a disclosed short position, further perpetuating the fraud rumor concerning ONP was published today the the stock reacted and finished down just over 11%. This tug of war between people publishing negative stories while shorting the stock and those taking long positions and publishing counter reports is making ONP a volatile stock to own.

I have made enough trading ONP's ups and downs for the past year that remaining invested in the long and short end of ONP is still worthwhile for me as an investor. If you are in the same boat as me you should keep playing along on this one as the volatility can create huge profits for us on the way up as well as the way down. If you are not in the same position, have just started a position, or have only lost money with ONP with the huge volatility I suggest that you stay clear of this stock in all forms until the smoke clears. Investing in this one with only hope will cost you.

So with all this said if you are still on the same boat with me playing the volatility of ONP to make huge gains read on.

It has been very simple with options to keep churning money out of this one. A day like today we sell OTM puts, buy a small portion of shares and when we get a pop upwards we cover the puts, sell covered calls against the stock we bought, and OTM calls. Going forward I think we need to be a little more cautious until the fraud situation is cleared up. Since we have already made money on this one it is prudent to limit our losses on selling puts by selling small OTM spreads. We also should refrain from adding any more shares for now on the huge dips.

What if this fraud report has some truth to it? The shares will get slaughtered and return to the $2-$3 level that I started buying and selling at about a year ago.

What if the fraud report is found to be false and they report blow out numbers again? The shares will climb back to the $10-$12 level.

With this valuation in mind we are looking at 50% gain or loss potential. This stock once considered a great earnings growth play has been reduced to a pure speculative play by these reports and should be treated as such. If you have other speculative plays in your portfolio, particularly Chinese, it is time to cut the cord on one of them.

ADY Buy Write

Last week presented a perfect opportunity to start building a position in ADY using the buy write strategy. On Wednesday night I placed orders for shares at $14.05, sell Jan $12.50 puts for $1.50, and sell Jan $17.50 calls for $1.20. These orders were all filled Thursday as the stock went below $14 a share, reaching a low of $13.71 around lunch time, and then recovering to above the $14.40 level by the end of the day, on huge volume buying! This buy write of ADY lowered my per share price to $11.35 per share or a 20% discount.

ADY remains a great value and should see more recovery in the stock price going forward as the market begins it climb back towards the top of it's range. The huge volume buying that helped the stock recover from the $13.70 level on Thursday is a good indication that there is some big money committed to this stock at this level.

Did anyone else start or add to their position last week?

得到了牛奶吗？ (got milk?)

American Dairy (ADY)

I mentioned this one back in February as a stock that I would like to start a position in again at around the $20 or less range. Back in 2008 when the Chinese milk scare annihilated every milk producing company in China ADY, a stock I owned at the time, quadrupled in price due to being the only major producer of milk products unaffected by the scare. It has retreated big time since then due in part to a bad quarter at the end of 2009 and even though the company has returned to it's profitable ways, and financial quarter, the stock has not.

My fellow investor and options specialist alerted me to the fact it is now below it's 52 week low and a prime candidate for selling a put spread. The only question now is do we play conservative with a 12.5/10 spread or play confident and put our money where our mouth is with a 15/12.50 spread? If you want to try and build an actual stock position than the Jan $12.5 put for $1.30 looks nice.

The Paper Airplane Soars!

ONP rebounded just as we suspected today to the tune of 43% which has to be the biggest one day percentage gain I have ever made on a single stock and produced over $1200 in gain for me! This gain was spurred by huge volume again coupled with news calling the muddy waters research a fraud. We saw this coming yesterday after reviewing the information that came from the muddy waters report, the rebuttal from ONP, and information from other analysts that have previously done research on the company. This is why we need to constantly monitor our positions on a daily basis and review our reasons for owning the stock at least weekly.

This plane still hasn't reached cruising altitude yet so don't be afraid to book your ticket to fly the second leg of the flight. ONP is still down from the point the shady fellows at muddy waters began laying their short assault on the stock which I believe to be in the $8-$8.50 range. Couple this with the other two analysts target prices of $15 and $16/share respectively and I expect it to return to the $8-$10 range again.

The orders for Tuesday:
Sell Feb 11 $10 calls for $1.15/contract
Sell Feb 11 $12.5 calls for $.70/contract
Sell more Nov $5 puts for $.70/contact

If you don't yet have a position in ONP I would consider selling the Nov $7.5 puts for $1.75

Anyone else have origami paper plays?

Orient Paper Torn to Shreds!

Today Orient Paper (ONP) finished down almost 24% and was down over 30% for a period of time this morning. As you may remember I managed to book over 20% profit in this stock and also sold $12.50 calls for $1.15 per contract on my remaining shares back in April. ONP getting torn to shreds today allowed me to buy back all my $12.50 calls and $15 calls for .05 each booking $1.10 in profit for the $12.50 calls and .90 for the $15 contracts. I also sold $5 puts at $1.10 per contract. It would have been possible to get more, however I was greedy and placed a limit order at $1.50 and it didn't fill so I ended up chasing it down to $1.10.

This really shows the advantage an options seller has when investing in stocks. The shares I have remaining in ONP cost me $8.28/share at the end of March quickly went up 20+%, Which enabled me to sell a portion of shares for a quick profit, but more importantly sell OTM calls at a good premium. The $8.28/shares now are discounted by the $1.10/share I made for the $12.50 calls, .90/share made for the $15 calls and now $1.10/ share more for the $5 puts sold today. This brings my cost basis down to $5.18/share reducing my exposure to today's big plunge down to $5.09 and more importantly protecting the profit I made off of the portion of shares I sold after the 20% move up back in April!

Now for the even better stuff! The reason ONP went up in flames today was unsubstantiated claims made about the company by a couple of investors who bought heavy short positions just prior to making the claims. They preyed on a fear that most people investing in Chinese stocks area afraid of, inaccurate reporting of numbers in financial statements. You can read more about the story here . Looks to me that they succeeded and made a lot of money in doing so, but the large amount of volume as the stock started to recover from it's lows just before lunch time shows they are booking profits and the stock will recover. This will be a great opportunity for us to make even bigger profits when news that the claims made were unsubstantiated and the short positions are covered.

The Trade:
Sell the NOV $5 put for $1.00 or initiate a position at around the $5 level and wait for this paper airplane to soar!


Update: Might be too late if you didn't take advantage today! Just found this on a site posted 1hr ago, Orient Paper Inc (NYSE:ONP) shares jumped 19.65% in after hours trading on volume of 11,942 shares traded.
Anyone know how to verify the after hours pricing?
Verified by Yahoo finance:

Orient Paper, Inc. NEW Common S

(AMEX: ONP)

After Hours: 6.09 1.00 (19.65%) 7:59PM EDT