Options Trading News

February 22, 2013  Fri 4:14 AM CT

SanDisk has been running, and one investor thinks it still has gas in the tank.

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. 
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The covered call and unhedged risk

I have written a few things on the Covered Call Strategy over the last two weeks. Please understand that those two previous articles plus this one do not constitute a proper, fully in-depth lesson on the Covered Call Strategy like we have in our classes at Option Monster Education. I have picked out a few topics that I believe were worth noting and today I am going to add the final one.

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