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October 5, 2012  Fri 11:36 AM CT

KRFT: SEE CHART GET CHAIN FIND STRATEGIES
Call selling tops the action in Kraft Foods as it adds to gains today.

KRFT trades at $47.37 today, up 1.59 percent in its fourth session since being spun off. It opened at $44.44 on Tuesday and hit an intraday high of $47.76 the next day after "erroneous" trades that went as high as $58.54 were canceled.

A trader sold 8,174 March 47.50 calls for $1.55, according to optionMONSTER's systems. That volume dwarfed the open interest of just 37 contracts in the strike at the beginning of the day, so it is a new position.

The calls may have been sold naked in a trade that has an initial bearish bias. However, given how close the stock is to the $47.50 strike price, it is far more likely that the calls were traded against an existing long position in the stock.

The latter strategy would be based on the thesis that KRFT doesn't gain much for the next several months. The maximum profit would come with shares at or above the strike, but the position gives up any gains beyond that. (See our Education section)
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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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