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May 9, 2014  Fri 12:20 PM CT

PHH: SEE CHART GET CHAIN FIND STRATEGIES
PHH has taken a beating, and now the bulls are stepping in.

optionMONSTER's Heat Seeker monitoring program detected the purchase of 4,000 August 25 calls for $0.45 and the sale of an equal number of August 20 puts for $0.65 today. That translates into a credit of $0.20.

The position is highly leveraged to a rally because higher prices for PHH will inflate the value of the calls they own and diminish the puts they sold short. The opposite would occur if the stock falls, so the trade is similar to owning shares. The main difference is that it will track movements in the underlying shares less closely as time passes and become worthless if the stock remains between $20 and $25 by the summer. (See our Education section)

PHH is up 1.52 percent to $21.98 in afternoon trading. The provider of mortgage services dropped 6 percent yesterday after earnings and revenue missed expectations, but Sterne Agee upgraded the shares to "buy" from "hold" this morning. The price target was lifted to $28 from $25.

The company also trades for less than book value, and management is considering actions to separate or divest its business lines.

Total option volume is 15 times greater than average in the name, according to the Heat Seeker, with that bullish trade accounting for almost all the activity.
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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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