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March 25, 2014  Tue 1:53 AM CT

LINE: SEE CHART GET CHAIN FIND STRATEGIES

Linn Energy has been falling for the last year, and the bears aren't quitting yet.

optionMONSTER's Depth Charge monitoring program detected the purchase of about 27,000 April 26 puts, most of which priced for $0.60. Some 13,700 April 28 puts were sold around the same time for $1.30 but volume was below open interest in those. That suggests an existing position was closed, rolled to the lower strike and increased in size.

Puts move in the opposite direction as a stock because they lock in the price where shares can be sold. Traders often use them rather than shorting because they have no upside risk. (See our Education section.)

That appears to have been the case yesterday. The investor rolled his or her position to the lower strike, using some of their profits to increase the size of their downside bet in the ailing energy stock. That will enhance their leverage if the shares continue to fall.

LINE dropped 4.17 percent to $27.78 yesterday and has been under pressure since receiving a negative write-up in Barron's last May. It rebounded in the second half of 2013, but has been weak since hitting resistance at $33 five weeks ago.

The bears also targeted LinnCo, a related company that owns LINE shares, buying the April 26 puts for $0.85. (See this story for more.)

Overall option volume in LINE was 10 times greater than average in the session, according to Depth Charge, with puts accounting for a bearish 86 percent of the total.

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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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