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April 30, 2013  Tue 2:14 AM CT

BKX: SEE CHART GET CHAIN FIND STRATEGIES
A large trade sees limited upside for the KBW Bank Index.

optionMONSTER systems show that a trader sold 8,000 June 58 calls for $0.85 yesterday. This is clearly a new position, as the open interest at that strike was just 50 contracts before the trade appeared.

The call selling is a bet that the index will stay below $58 through expiration in mid-June. Like most indexes, the BKX is cash-settled and has no single underlying but can be used to sell calls against its basket of stocks. (See our Education section)

The BKX was up fractionally yesterday to finish at $56.78. The index bounced off support at $54 last week but remains below its high of $57.60 reached in the middle of March.

The index saw 8,010 options change hands yesterday, compared to the daily average of just 43 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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