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November 13, 2012  Tue 3:16 AM CT

SD: SEE CHART GET CHAIN FIND STRATEGIES
SandRidge Energy got slammed last week, but one investor is positioning for a rebound.

optionMONSTER's market scanners yesterday detected a surge of activity in the Oklahoma-based oil and gas company: Some 2,000 January 2014 10 calls were sold for $0.30 against previous open interest, which indicates that an existing position was closed. At the same time, the trader bought 5,100 June 6 calls for $0.71 and sold 2,000 June 3 puts for $0.15. Volume was below open interest in those strikes, so they were new trades.

The overall position cost about $272,000 and increases leverage to a rally in the next eight months. It also reduces the time in the trade and is therefore looking for a move sooner rather than later. The trader faces the potential of losing money to the downside because of the short puts. (See our Education section)

SD fell 2.18 percent to $5.39 yesterday, following a 10 percent drop on Friday. That decline came after third-quarter revenue missed expectations and a large stakeholder lambasted the company's governance. Management said it's open to suggestions on how to improve.

Overall option volume was triple the daily average in the name during yesterday's session.
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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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