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April 11, 2013  Thu 12:20 PM CT

NE: SEE CHART GET CHAIN FIND STRATEGIES
One investor is targeting a key level on Noble's chart, using a ratio spread to take advantage of the leverage provided by options.

optionMONSTER's Heat Seeker trade scanner detected the purchase of 24,000 September 38 calls for $3.15 and the sale of 36,000 September 45 calls for $0.97. Volume was more than 70 times open interest at each strike, indicating new activity.

This vertical spread cost about $4 million to open and will inflate to $16.8 million if the oil-service company closes at $45 on expiration in mid-September. That's roughly where it has peaked several time since the late-2008 market crash.

Gains will erode above that level because the trader sold more calls than were bought. Also known as a ratio spread because the number of contracts traded had a 2:3 proportion, the strategy is used to amplify a move of an expected magnitude. (See our Education section)

NE is down 1.27 percent to $37.45 in afternoon trading. The shares have fluctuated in a range for years but have been making higher lows more recently while finding support at their 200-day moving average. That could be leading some chart watchers to believe that a rally is coming.

Today's call spread has already pushed total option volume in NE to 10 times its full-day average, according to the Heat Seeker. Calls outnumber puts by 33 to 1.
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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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