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June 27, 2014  Fri 4:45 AM CT

SM: SEE CHART GET CHAIN FIND STRATEGIES
SM Energy has been rallying, but traders braced for a pullback yesterday.

optionMONSTER's Depth Charge monitoring program detected the purchase of some 8,000 August 75 puts for $1.30 to $1.40. Volume was more than 20 times the previous open interest in the strike, which indicates that new positions were initiated.

Puts lock in the price where a stock can be sold no matter how far it might fall, so they move in the opposite direction as the share price. They can be used as insurance on long bets or to speculate on a drop. (See our Education section)

SM fell 2.34 percent to $82.97 yesterday but is up 19 percent in the last three months. The Denver-based oil driller has been fighting back from a big selloff in February, when it reported worse-than-expected quarterly profit.

The next release on April 29 beat forecasts, and Moody's raised its credit rating one month later because growing production and reserves.

Total option volume was 34 times greater than average in the session, according to the Depth Charge. Overall puts outnumbered calls by a bearish 69-to-1 ratio.
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Market Level Making You Nervous, Huh? Part 3

In last week's article, we discussed how important the extra cash you save by using the Stock Replacement Strategy over buying the actual stock is! That extra cash in our account instead of being unnecessarily tied up in a stock position allows us to buy the puts we would need to protect our downside in the case of a major sell-off.

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