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November 19, 2012  Mon 12:18 PM CT

AOL: SEE CHART GET CHAIN FIND STRATEGIES
AOL has been rallying hard, and investors are betting on another explosive move.

optionMONSTER's market scanners detected the purchase of 4,000 December 35 puts for $1.60 and an equal number of December 36 calls for $1.50. Volume was more than triple open interest at both strikes.

The strategy cost $3.10 and is designed to profit from a spike in volatility. Sharp movements in the near term would drive up premiums and cause the position to appreciate. It will also make money if AOL closes below $31.90 or above $39.10 on expiration five weeks from now. (See our Education section for more on the trade, which is known as a strangle.)

The Internet stock began rallying in September 2011 and quadrupled through early this month when it peaked near $44. Shares are currently up 1.82 percent to $35.75 in afternoon trading.

AOL's last three earnings reports have beaten expectations amid improving advertising sales, but it's been pulling back since the most recent set of numbers on Nov. 6. Some traders may now expect another big rally or a collapse if it fails to hold those gains.

The strangle trade pushed total option volume to more than triple average amounts in today's session.
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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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