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September 25, 2013  Wed 4:14 AM CT

EXP: SEE CHART GET CHAIN FIND STRATEGIES
Eagle Materials is near all-time highs, and the bulls are looking for a breakout.

optionMONSTER's Heat Seeker monitoring system detected the purchase of 3,000 January 72.50 calls for $5.50. Equal-sized blocks were sold at the same time in the January 62.50 puts for $2.25 and the January 82.50 calls for $1.80. Volume was more than 24 times open interest at all three strikes, indicating that new positions were initiated.

The overall trade cost $1.45 and will expand to $10 if the maker of wallboard and cement closes at or above $82.50 on expiration--a potential profit of some 590 percent. The trader also faces potential losses to the downside because of the sold puts.

EXP rose 3.10 percent to $71.84 yesterday. It more than tripled between late 2011 and early this year but has been churning in a range since. The stock bounced near its 200-day moving average at the start of August and is now sitting near its previous record highs from 2005.

Yesterday's option strategy combines short puts with a bullish call spread to enhance leverage. The fact the trader wrote puts at $62.50 also reflects a belief that there isn't much risk of a drop below that level. (See our Education section for more.)

Some 11,000 contracts changed hands in the session, more than 50 times average amounts.
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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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