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December 6, 2012  Thu 4:14 AM CT

JOY: SEE CHART GET CHAIN FIND STRATEGIES
Coal stocks have been hot, and now the bulls are turning to mining-equipment maker Joy Global.

optionMONSTER's tracking systems detected the purchase of 3,000 January 60 calls for $2.32 and the sale of an equal-sized block of January 62.50s for $1.46. Volume was more than twice the open interest at each strike, indicating that these are new positions.

Owning calls confers the right to buy a stock at a certain level, while selling them obligates the trader to unload shares if they reach the strike price. In the case of yesterday's trade, the investor can buy JOY for $60 and then sell the stock for $62.50, translating into a spread of $2.50.

He or she paid $0.86 for that right and will realize a profit of 190 percent if the shares close at $62.50 or higher on expiration. That's just 10 percent above yesterday's closing price, which shows the kind of leverage that can be achieved with options.

JOY rose 1.91 percent to $56.63 and has been slowly working its way higher since the summer. Based on yesterday's call vertical spread, traders are looking for the gains to accelerate into the New Year. (See our Education section)

Total option volume was triple the daily average in the session, with calls dominating the action.

(A version of this post appeared on InsideOptions Pro yesterday.)
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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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