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April 11, 2013  Thu 2:45 AM CT

FTK: SEE CHART GET CHAIN FIND STRATEGIES
One investor is apparently hedging a position in Flotek Industries with shares parked at a long-term high.

optionMONSTER's Depth Charge monitoring system detected the purchase of 10,000 September 15 puts for $1.05 and the sale of 15,000 September 12.50 puts for $0.375. Volume was more than 60 times open interest at both strikes.

This vertical spread cost $487,500 to open and will inflate to $2.5 million if the oil-service stock closes at $12.50 on expiration--a profit of 513 percent. Below that level the investor must buy 500,000 shares for $12.50, no matter how low they might go. (See our Education section for more on short puts.)

FTK rose 3.35 percent to $16.34 yesterday and is up 34 percent so far this year. It's back to levels last seen during the 2008 market crash, which could be making some chart watchers nervous about a pullback.

Yesterday's trade offers the benefit of protecting against a modest drop while programming a buy order at lower prices. Also known as a ratio spread because the number of contracts traded had a 2:3 ratio, the strategy is often used to guard profits after big rallies.

Total option volume was 18 times greater than average in the session, according to Depth Charge. Puts outnumbered calls by 120 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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