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December 5, 2012  Wed 4:25 AM CT

MPEL: SEE CHART GET CHAIN FIND STRATEGIES
Melco Crown Entertainment gapped lower yesterday, and bullish option traders piled in.

optionMONSTER's Heat Seeker monitoring program detected the purchase of more than 19,000 January 15 calls, most of which priced for $0.55. Volume was almost quadruple previous open interest at the strike.

Those long calls lock in a price of $15 on the Macau-based casino company in the next 1-1/2 months, no matter how high the stock goes. They could generate tremendous leverage in a rally but will expire worthless if shares don't reach the strike price. (See our Education section)

MPEL declined 7.71 percent to $14.19 yesterday but is up 20 percent in the last three months. Yesterday's drop brought the shares back to their 50-day moving average, which could have led traders believe that the price was at a good entry point.

Total option volume was 16 times greater than average in the session, according to the Heat Seeker. Calls outnumbering puts by a bullish 9-to-1 ratio.
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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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