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July 3, 2013  Wed 9:30 AM CT

ELX: SEE CHART GET CHAIN FIND STRATEGIES
Emulex is higher on deal speculation today, and traders are using options to manage risk.

A rumor circulated today that the maker of networking gear had hired an investment bank to pursue strategic alternatives. ELX shot up as much as 35 percent on the speculation and is currently 13 percent higher to $7.55 in morning trading.

The options paper hit early as well, with optionMONSTER's Heat Seeker system showing purchases of the July 8 calls for $0.05 within the opening minutes of today's session. The stock quickly pushed higher and those contracts at one point had shot up 600 percent to $0.35. They're now offered for $0.20.

Long calls lock in the price where shares can be purchased, providing investors with cheap exposure to the upside. They can be used to limit the cost of getting long or to generate leverage. (See our Education section)

ELX has been moribund for years, making lower highs since the tech bubble burst in 2000. But it's been holding support around $6 and beat expectations the last time it reported earnings on May 2.

Total option volume is 33 times greater than average so far today, according to the Heat Seeker. Calls outnumber puts by 13 to 1.
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Education & Strategy

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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