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June 5, 2012  Tue 2:32 AM CT

AGO: SEE CHART GET CHAIN FIND STRATEGIES
Shares of Assured Guaranty continue to slide, but a large trade is looking for a bounce in the mortgage insurer.

AGO has been falling since hitting a 52-week high of $19.04 in mid-March, closing above its 10-day moving average only once since then. The stock dropped another 4.2 percent to finish yesterday at $11.26, its lowest close since Dec. 2.
 
More than 67,000 AGO options traded on the day, compared to a daily average of 3,707. The volume was dominated by a single call spread, optionMONSTER's Heat Seeker shows.

A trader bought 20,000 July 14 calls through the middle of the day in large institution-size blocks, mostly for $0.28. At corresponding times 40,000 July 18 calls were sold for $0.03. The volume at each strike was more than the previous open interest, indicating that this is a new call ratio spread.

The spread takes a maximum profit if AGO is just at or below $18 at expiration. The trader risks only $0.22 if shares remain below $14, but he or she would be effectively short shares above $18. (See our Education section)
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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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