Options Trading News

November 21, 2012  Wed 2:14 AM CT

Western Refining has paused after a rally, and one investor is looking for the next leg higher.

optionMONSTER's Heat Seeker monitoring program detected the purchase of 3,500 March 29 calls for $1.55 and the sale of equal-sized blocks in the March 22 puts for $0.75 and the March 31 calls for $0.85. Volume was more than 20 times open interest at all three strikes, indicating that new positions were implemented.

The trade generated a credit of $0.05 and will earn $2 if the El Paso-based refiner closes at or above $31 on expiration. It won't lose money as long as the stock remains above $22.

WNR rose 4.18 percent to $27.15 yesterday. The stock more than doubled between November 2011 and August but has been pulling back since then. It's been finding support at its 100-day moving average in the last month and working its way higher despite weakness in the broader market. That could make some chart watchers think that it will continue to rally.

Yesterday's strategy stands out because the trader sold twice as many contracts as the number bought. That generates additional income but has two other consequences. One is that the trader faces downside risk on the short puts, and the other is that gains are capped if the stock makes a huge move. (See our Education section for more on how options can be used to manage trades.)

More than 12,000 contracts traded on in the session, almost 23 times greater than average.
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As I stated in last week's article, a break out or a break down needs to have a couple things happen before it is considered a confirmed break out or break down. The only problem is that in today's market where things move much more quicker than they did just a few years ago, two days could wind up being the majority of the expected movement, if not the whole movement.

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