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September 17, 2013  Tue 12:20 PM CT

RSH: SEE CHART GET CHAIN FIND STRATEGIES
Traders continue looking for upside in RadioShack.

Just yesterday, optionMONSTER's Heat Seeker system detected a bullish call roll in the beaten-down retailer as an investor swapped a winning position in the January 4 contracts for the January 5.50s. There was also a hugely profitable trade in August, when an investor paid just $0.27 for the October 3 calls. Those October contracts have since tripled to $1.04.

The option paper is flowing again today. This time, the Heat Seeker shows the purchase of 10,000 April 5 calls for $0.725 and the sale of an equal number of January 6 calls for $0.24. Volume was more than twice the previous open interest at each strike, indicating that new positions were initiated in both.

The trade is known as a diagonal spread because it uses two different expiration months to leverage a rally. It cost $0.485 to open and will roughly double in value if the stock closes at or above $6 on January expiration. But if it remains below that level, the investor will own the April 5 calls outright with unlimited upside potential. At that point, he or she could sell more calls or simply ride the rally. (See our Education section.)

Another benefit of the strategy is that it reduces the cost of getting long, limiting losses if management fails to revive its ailing business. RSH has been trending steadily lower since the late 1990s and hit $1.90 in November before rebounding. It's down 0.86 percent to $4.05 in afternoon trading today.

Total option volume is about 2-1/2 times greater than the daily average so far today, according to the Heat Seeker. Calls outnumber puts by a bullish 53-to-1 ratio.
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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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