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February 6, 2013  Wed 9:52 AM CT

EFA: SEE CHART GET CHAIN FIND STRATEGIES
Heavy option volume in the iShares MSCI EAFE Index Fund today is led by what seems to be a large hedging strategy.

A trader bought 129,550 April 57 puts for the ask price of $1.08 and sold the same number of the December 68 calls for the bid price of $0.36, according to optionMONSTER systems. Open interest at each strike was fewer than 8,000 contracts at the start of the session, so this is clearly a new position.

This combination trade is very likely a type of collar to protect long stock, using the sale of the longer-term calls to help offset some of the cost of the puts. It is still bullish if it is done against shares of the EFA, but only up to the $57 strike price. (See our Education section)

The EFA is down 0.4 percent to $58.42 after hitting a 52-week high of $59.59 last week. The exchanage-traded fund, which tracks stocks in Europe, Asia, and Australia, has been trending higher from support at $47 in early June.

More than 260,000 EFA options have traded overall so far, compared to a daily average of 45,000 over the last month.
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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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