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August 1, 2012  Wed 2:14 AM CT

AFFY: SEE CHART GET CHAIN FIND STRATEGIES
Affymax has been wavering after a rally, and one investor remains cautious.

optionMONSTER's Depth Charge monitoring program detected the purchase of 2,737 January 15 puts for $2.15 and the sale of an equal number of October 12 puts for $0.50. Volume was below open interest in the October options, indicating that an existing position was rolled from one contract to the other.

The investor probably owns shares in the drug developer and is using the puts as a hedge. Adjusting the trade cost him or her $1.65 and provides an additional three months of downside protection. It also raised by $3 the level at which the trader has insurance. (See our Education section)

AFFY fell 1.81 percent to $16.23 yesterday but is up 25 percent in the last month. Most of that move occurred after the company announced a contract to distribute its anemia drug. Since then the shares have been drifting sideways, which could be making some traders worry that a pullback is next.

Another consideration in the put roll is that the October contracts they previously owned will lose value at quicker pace than the January options because they have less time until expiration, so unloading them sooner rather than later made sense. While bearish on the surface, the trade is actually bullish because it reflects a willingness to own AFFY over the longer term in the hope that it will keep rallying. 

Overall option volume was 9 times greater than average yesterday, with puts outnumbering calls by more than 100 to 1.
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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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