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October 5, 2012  Fri 11:24 AM CT

OCN: SEE CHART GET CHAIN FIND STRATEGIES
Ocwen Financial has been going straight up, and traders apparently think that it will continue to rally.

optionMONSTER's Heat Seeker tracking system detected a surge of call volume in the mortgage-servicing company, which has more than doubled since June. Activity focused on the January 25, 37.50, and 40 calls.

It appears that the investor previously owned the January 25s and was sitting on huge profits from the stock's recent run. He or she then closed that position for about $12.10 and rolled some of the money to the higher strikes. This time the trader bought the January 37.50 calls for about $4.40 and sold the January 40s for $3.20.

This bullish call spread cost about $1.20 and will generate an additional $2.50 of upside if the stock closes at or above $40 on expiration. (See our Education section)

OCN is down 0.52 percent to $36.85 this afternoon. Shares had steadily climbed for months as investors discovered the company's growth story, driven by banks outsourcing tasks that follow after a mortgage is originated. These often include messy jobs like collecting late payments and foreclosing on delinquent borrowers.

Then the shares spiked higher by another 25 percent this week after Ocwen announced a deal to add more than 400,000 loans by purchasing Homeward Residential from WL Ross.

Overall option volume in OCN is almost 7 times greater than average today, according to the Heat Seeker. Calls outnumber puts by more than 6 to 1.
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Sweet Spot Exceptions

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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