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December 7, 2012  Fri 10:02 AM CT

SD: SEE CHART GET CHAIN FIND STRATEGIES
SandRidge Energy has been on a wild run higher recently, and a huge three-way spread is looking for even more gains.

More than 122,000 SD options have traded so far today, already about 6 times its daily average in the last month. A trader sold 12,000 June 6 calls for $1.59 against open interest of more than 28,000. At the same time, he or she bought 24,000 June 7 calls for $1.13 and sold two blocks of 12,000 June 9 calls for $0.50 and $0.49, with volume at each of those strikes above open interest.

The trader appears to be rolling June 6 calls, which are now in the money, up to the higher-strike vertical spread. The move doubles the size of the position while allowing the trader to take some money off the table in the process. (See our Education section)

SD is trading $7.24 this morning, up 6.6 percent on the day and on pace for its highest close since mid-October. Shares of the oil and natural-gas company were down at $5.50 on Nov. 28 and have gained very day since.
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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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