How bulls are leveraging SanDisk
David Russell | [email protected]
optionMONSTER's Heat Seeker monitoring system detected the purchase of 3,600 January 52.50 calls for $5.20 and the sale of 7,200 January 60 calls for $2.51. Volume was more than 16 times the previous open interest at each strike, indicating that new money was put to work.
The strategy is known as a ratio spread because twice as many contracts were sold as the number bought. That generates additional income, thereby lowering the trade's cost basis and increasing leverage. But it also creates risk of the shares moving too much in the hoped-for direction. (See our Education section)
Yesterday's trade cost just $0.18 to open and will start making money above $52.68. It will then expand in value all the way up to $60, netting a massive 4,066 percent on a move to that level. Gains erode at higher prices and turn to losses over $67.50.
SNDK fell 1.98 percent to $49.07 yesterday but is up 24 percent in the last three months. The maker of memory chips has been benefiting from higher selling prices while investors return to the semiconductor space.
Shares peaked around $60 in mid-2007, so the ratio spread is apparently targeting that level as resistance.
Total option volume was quadruple the daily average in the session, according to the Heat Seeker. Calls outnumbered puts by more than 5 to 1.