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January 16, 2013  Wed 3:47 AM CT

JPM: SEE CHART GET CHAIN FIND STRATEGIES
There was a feeding frenzy in the financials yesterday as investors prepare for earnings results from major players in the industry.

The options paper was especially noteworthy in JP Morgan, which is slated to issue results later this morning. More than 203,000 contracts traded in the iconic bank, compared with just 101,000 in an average session.

One of the largest early trades was definitely geared to the upside as an investor sold about 4,000 January 45 calls for $1.16 and bought an equal number of March 48 calls for $0.73. Volume was below open interest at the nearer-term strike, indicating that an existing position was closed and rolled forward in time.

As a result, the investor recovered $0.43 of their capital and remains positioned to keep making money if JPM continues to climb in coming months. He or she is also less at risk of volatility collapsing in the January contracts after the news is released.

Our Heat Seeker tracking program showed more than 944,000 contracts trading in the bank group yesterday, compared with just 760,000 in an average session. Of that total, calls outnumbered puts and were bought. The puts that did change hands, however, were mostly sold. (See our Education section for more on why selling puts can reflect confidence.)

Morgan Stanley was also active yesterday, with volume twice the normal amount. Early buyers paid $0.32 for the January 20.50 calls. MS then pushed higher into the close and those contracts would inflate by about 50 percent to $0.47. The company issues results Friday morning.
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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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