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April 25, 2013  Thu 12:20 PM CT

TLM: SEE CHART GET CHAIN FIND STRATEGIES
One big investor apparently thinks that Talisman Energy is finally ready to turn around.

optionMONSTER's Heat Seeker monitoring system detected the purchase of some 20,000 October 13 calls for $0.615 and the sale of a matching number of October 10 puts for $0.475. Volume surpassed open interest at each strike, indicating that new positions were initiated.

The position cost $0.14 to open and is similar to owning shares in the Canadian oil driller. The calls will appreciate and the puts will lose value if TLM pushes higher, while the opposite will happen to the downside. Investors use the combination strategy because it allows them to control the equivalent of 2 million shares at a fraction of the cost. It essentially prevents them from missing a strong rally while also programming a buy order at the same $10 level where the stock bounced last year. (See our Education section for more on how options can be used to manage trades.)

TLM is up 1.64 percent to $11.81 in afternoon trading and has been moving sideways for more than a year. Energy stocks have mostly lagged in the last quarter but have been the strongest sector in the last week as investors bet on stronger economic growth in the second half.

Total option volume is more than 11 times greater than average in TLM so far today. First-quarter earnings come out on May 1.
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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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