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Options Trading News

April 2, 2013  Tue 4:45 AM CT

OCR: SEE CHART GET CHAIN FIND STRATEGIES
Omnicare has been grinding higher, and one investor is using options to turn time into money.

Our tracking systems detected the purchase of 2,000 June 38 calls for $3 and the sale of an equal number of September 41 calls for $2.60. Volume was below open interest in the 39s, indicating that an existing position was closed and rolled to the 41s.

This was probably done by an investor who own shares and had sold the contracts as part of a covered call trade, which generates income from the passage of time. It also defers gains and lets an investor generate losses for tax purposes even when they're riding a stock higher. (See our Education section)

In the case of yesterday's trade, he or she paid $0.40 and now has the right to sell shares of the health-care company for $2 more. The time in the position was also extended by three months.

OCR rose 0.47 percent to $40.91 yesterday and is up 20 percent in the last six months. In addition to benefiting from the stock price going up, the investor collects a 1.4 percent dividend.

Total option volume was almost quadruple the daily average in the name yesterday, with the short-call roll accounting for almost all the activity.
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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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