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May 23, 2014  Fri 5:16 AM CT

DHR: SEE CHART GET CHAIN FIND STRATEGIES
Industrials saw heavy option activity yesterday, with Danaher and Tyco showing upside activity.

optionMONSTER systems show that a Danaher investor sold a winning position in 3,000 of the June 75 calls for $2.90 and purchased a new one with 4,000 July 77.50 calls for $2.05. So the trader took some profits and is still positioned to profit from gains for another month.

A similar trade hit in Tyco less than an hour later: This time, 3,000 July 44 calls were sold for $0.67 while July 46s were bought for $0.20. The investor is left with a credit of $0.47 and will make more money if the stock continues higher.

Long calls lock in the price where a stock can be purchased, allowing traders to profit from a rally without ever owning the shares. But if the stock stalls or drops, the contracts could quickly lose value. (See our Education section)

DHR popped 2.29 percent to $78.03 yesterday, and TYC advanced 0.33 percent to $42.77. Both stocks are within striking distance of their 52-week highs, and industrials as a sector gained 0.19 percent in the session.

Option volume was 4 times the daily average in Danaher and 8 times the normal turnover in Tyco. Overall calls outnumbered puts by a wide margin in both names.

Disclosure: I own DHR calls.

(A version of this post appeared on InsideOptions Pro yesterday.)

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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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