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April 4, 2014  Fri 12:22 PM CT

CTRX: SEE CHART GET CHAIN FIND STRATEGIES
Catamaran has gotten hammered for the last year, but traders are looking for a rebound in the provider of pharmacy benefits.

optionMONSTER's Heat Seeker monitoring program detected the purchase of 4,000 October 50 calls for $1.55 and the sale of an equal number of October 60 calls for $0.15. There was barely any open interest at either strike before the trade appeared, which indicates that new positions were initiated.

Known as a bullish call spread, the trade cost $1.40 and will inflate to $10 if Catamaran's stock closes at $60 or higher upon expiration in mid-October. That would represent profit of 614 percent from the shares climbing about 40 percent. (See our Education section for more on the leveraging potential of options.)

CTRX is down 2.24 percent to $42.78 in afternoon trading, its lowest level since September 2012. The stock has been falling since last summer amid concerns about the rise of private health-care exchanges, cratering on Feb. 27 after issuing a weak profit outlook.

The advantage of today's call spread is that it lets the investor position for a rebound cheaply, while limiting the amount of capital at risk if it breaks support and heads lower. He or she is spared the difficulty of buying protection or deciding where to exit.

Total option volume in Catamaran is already 13 times its full-session average so far today, with calls outnumbering puts by 11 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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