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February 21, 2014  Fri 12:20 PM CT

KSU: SEE CHART GET CHAIN FIND STRATEGIES
Traders are turning bullish today on Kansas City Southern as the railroad operator tries to rebound from a steep selloff.

About 2,500 June 95 calls have been bought for $6 to $7.30 today, according to our Heat Seeker tracking system. Open interest was just 481 contracts before the session began, indicating that new positions were established.

These long calls lock in the price where the stock can be purchased through mid-June no matter how far it might climb. They could be sold earlier if premiums rise with a rally before then, but the contracts will lose value if shares stall or decline again. Either way, they will track the stock price closely because the calls are in the money. (See our Education section)

KSU is up 2.44 percent to $96.53 in afternoon trading. The stock gapped down from above $117 after quarterly results on Jan. 24 and fell again earlier this month, but it has bounced from the $90 level in recent days.

Total option volume in the name exceeds 7,200 contracts so far today, almost triple its full-session average for the last month. Overall calls are outpacing puts by 3 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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