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January 29, 2013  Tue 3:47 AM CT

ELGX: SEE CHART GET CHAIN FIND STRATEGIES
Medical company Endologix drew bullish option activity while trading at 12-years high yesterday after announcing positive test data on its treatment for abdominal aortic aneurysms.

optionMONSTER's Heat Seeker system shows that 3,000 ELGX May 17.50 calls traded in a strong buying pattern for $0.75 and $0.80 in less than 30 seconds yesterday afternoon. The volume was well above the strike's open interest of 1,147 contracts at the start of the day, indicating that this is a new purchase.

ELGX reached a high of rose 0.32 percent yesterday to close at $15.68 after management released the encouraging trial results. Earlier in the session the stock hit $16, its highest intraday price since August 2000. Shares have been trending higher since hitting a 52-week low of $11.15 at the beginning of last August.

The long calls, which lock in the price at which traders can buy the stock, are looking for ELGX to gain roughly 17 percent by mid-May. The options could be sold at a profit earlier if their premiums rise with any rally before then, but the contracts will expire worthless if the stock is below that strike price. (See our Education section)

The trade was responsible for all but 4 options in the name yesterday. Its average daily volume has been just 99 contracts in the last month.
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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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