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May 21, 2012  Mon 10:28 AM CT

BZH: SEE CHART GET CHAIN FIND STRATEGIES
Someone wants to own Beazer Homes and is using options to create a highly leveraged position.

Our Heat Seeker tracking system detected the purchase of 10,000 June 2.50 calls in the debt-laden homebuilder for $0.20. An equal number of June 2.50 puts were sold in the following seconds for an average premium of $0.18. There was barely any open interest in either contract before the activity appeared.

The position cost just $0.02 to open and will double in value for every $0.02 that BZH trades over $2.52. It will also lose money below $2.50, which makes it very similar to owning the stock.

The main difference is in cost: Today's trade allows the investor to control the equivalent of 1 million shares for less than one-hundredth of the price. (See our Education section for more on how options can be used to generate leverage.)

BZH is off 3.52 percent to $2.47 today. It more than doubled between October and February but has been pulling back since then. Now the stock is attempting to hold its ground at its 200-day moving average and the same level where it peaked twice in December, which could be leading some chart watchers to believe that it's at an attractive entry point.

Overall option volume is 39 times greater than average so far today, according to the Heat Seeker.
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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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