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December 6, 2013  Fri 12:20 PM CT

ZTS: SEE CHART GET CHAIN FIND STRATEGIES
Zoetis was spun off from Pfizer early this year, and one big investor thinks the animal spirits are ready to take over.

optionMONSTER's Heat Seeker monitoring program detected the purchase of 3,000 July 33 calls for $1.90 and the sale of 3,000 July 27 puts for $0.95. A block of 3,000 January 32 calls were sold for $0.70, but volume was below open interest in those.

The investor apparently owned the January 32 calls in hopes of a rally and rolled the position into the July combination spread. Making the adjustment cost a net $0.25 and provides an additional six months of upside exposure. But the trader also carries the risk of having to buy shares if they fall under $27, which is more than $1.50 below the stock's 52-week low. (See our Education section for more on the benefits and perils of selling puts.)

ZTS is up 0.62 percent to $31.64 in afternoon trading. The maker of veterinary medicines went public for $26 in February but leapt higher and has traded between $29 and $34 since then. Its last three earnings reports have beaten estimates, and the shares are trying to consolidate above their 100-day moving average. That could make some chart watchers think that they're ready to run higher.

The Heat Seeker shows total option volume at 18 times greater than average so far today, with the bullish three-way trade accounting for almost all the activity.
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Education & Strategy

Sweet Spot Exceptions

As discussed last week, when using the Stock Replacement Strategy to replace a stock position to trade direction, we want to use an option that has very similar characteristics to the stock. We talked about using the deep in-the-money, 80 to 85 delta option that is similar in the Greeks and has relatively little extrinsic value which tends to work against us in stock directional trading.

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