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February 26, 2013  Tue 10:10 AM CT

SLXP: SEE CHART GET CHAIN FIND STRATEGIES
Salix Pharmaceuticals reports earnings this week, and traders are cautious.

optionMONSTER's Depth Charge monitoring system detected the purchase of about 1,500 March 47 puts for $1.15 and the sale of a similar number of March 50 calls for $0.60. Volume was more than 9 times open interest at both strikes, indicating that new positions were initiated.

The trade cost $0.55 and is similar to selling shares in the Raleigh-based drug company. The investor has now locked in a minimum selling price of $46.50 and a maximum of $49.50 in the next three weeks. He or she may own shares, in which case the strategy is known as a collar. (See our Education section for other hedging techniques.)

SLXP is off 0.29 percent to $48.60 today. The stock rallied 18 percent in January but has barely moved since then as it stalled around the same level where it gapped lower last July. That could be leading some chart watchers to think that it may be at resistance.

Fourth-quarter results will be announced after the market close on Thursday.

Total option volume is 14 times greater than average so far today, according to the Depth Charge.
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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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