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October 2, 2013  Wed 12:04 PM CT

SWI: SEE CHART GET CHAIN FIND STRATEGIES
SolarWinds has fallen hard, and one big investor is getting long.

optionMONSTER's Heat Seeker monitoring system detected the purchase of 1,000 December 37.50 calls for $2.72 and the sale of an equal number of December 47.50 calls for $0.47. Volume was more than triple the previous open interest at each strike, indicating that this is a new vertical spread.

The investor now has the right to buy shares in the software company for $37.50 and must sell them for $47.50 if it reaches that level on expiration. It cost him or her $2.25 to control that $10 spread, implying profit of 344 percent from the stock moving less than 40 percent. (See our Education section for more on how to generate leverage with options.)

SWI is up 3.33 percent to $36.26 in afternoon trading. It rallied about 400 percent between July 2010 and early 2013 but has fallen about 40 percent since then. The stock has been trying to stay above $35 in the last two months.

Investors also sold about 1,000 October 35 puts for $0.80, betting on support around that level.

Total option volume in ODP is more than 9 times its daily average for the last month, according to the Heat Seeker.
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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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