Saturday, June 2, 2007

Novastar (NFI)

The two charts above are for comparative purposes - Novastar (NFI) and Freemont (FMT). Fremont soared last month after snagging a deal to sell its commercial lending division. Is the same thing about to happen with Novastar? On Friday, Dr. Jon Najarian from briefly mentioned the possibility that NFI could be a takeover candidate on CBOE TV for as much as $12.50 a share. Dr. J mentioned that trading volume in NFI was not reflecting institutional participation. But one thing you'll notice in the chart above, is prior to the FMT deal, volume was also muted. Fremont was actually down in regular trading prior to the news that sent the stock through the roof, indicating to me that institutions can sometimes be caught off guard. On Friday, NFI call options volume swamped put options volume by more than 10 to 1 with especially heavy volume of 12,450 in the deep in the money June 2.5 calls vs open interest of 6,225. The 2.5 call volume appeared to be just below the offer and a single transaction. Hmmm! The June 7.5 calls were also active with volume of just over 3-thousand contracts. I am long NFI, though only a few weeks remaining in these high volatility June calls makes me uncomfortable, but this is one to keep an eye on in the coming trading days.

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