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April 15, 2013  Mon 12:21 PM CT

SNDK: SEE CHART GET CHAIN FIND STRATEGIES
One investor is bullish on SanDisk ahead of the memory-chip maker's earnings report this week.

optionMONSTER's Heat Seeker monitoring program detected the purchase of 2,500 May 60 calls for $1.74 and the sale of an equal number of May 65 calls for $0.50. Volume was more than twice open interest at both strikes, indicating that new positions were initiated.

The trade cost $1.24 and will earn a maximum profit of 303 percent if SNDK closes above $60 on expiration. Known as a bullish call spread because it leverages a move between two strikes, the strategy is commonly used to play for a rally at low cost.

SNDK is down 1.32 percent to $56.95 in afternoon trading but is up 31 percent so far this year. The shares are parked around the same level where they peaked in mid-2007 before crashing along with the rest of the market.

Today's trader probably thinks that the stock will make a sustained move if it breaks resistance but also knows that a decline is possible. The spread lets him or her wager on the upside while jeopardizing much less capital than would be used in owning shares. (See our Education section for other risk-management techniques.)

First-quarter earnings will be released after the closing bell on Wednesday.

Total option volume is about twice the daily average in SNDK so far today, according to Heat Seeker. Calls outnumber puts by more than 3 to 1.
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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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