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May 8, 2013  Wed 4:45 AM CT

HBC: SEE CHART GET CHAIN FIND STRATEGIES
HSBC has been explosive, and the bulls are playing with the house's money.

On April 24, an investor bought 3,800 of the September 55 calls for $1.37 and $1.38. By yesterday they had more than doubled to $3, so the investor sold them and used the money to buy about 5,000 September 60 calls for $0.89.

The trader received $695,000 from the transaction and is up roughly $172,000 from the initial entry. He or she also stands to profit from continued upside in the name because even more calls are owned at the September 60 strike. (See our Education section for more on how to manage trades with options.)

HBC rose 2.15 percent to $57 yesterday and is up more than 7 percent since the initial call buying. The stock has been climbing along with other European lenders as confidence in the financial sector spreads beyond the United States. Banks in the most distressed countries, such as Greece and Spain, have been doing even better.

The trend resembles a pattern that emerged in the United States last year as financial guarantors such as Radian, with heavy exposure to home mortgages, exploded higher. That was a harbinger of improvement in the broader sector.

Yesterday also saw unusual activity in Brazilian lender Itau Unibanco, which has spent the last two weeks consolidating above its 200-day moving average. In ITUB, activity focused on the September 19 calls, with almost 4,000 purchased for $0.35 and $0.40. The stock rose 3.73 percent to $17.25.
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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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