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March 20, 2013  Wed 2:45 AM CT

HUM: SEE CHART GET CHAIN FIND STRATEGIES
Humana fell last month, but one investor apparently thinks that it's ready to bounce.

optionMONSTER's Heat Seeker monitoring system detected the purchase of 3,000 April 72.50 calls for an average premium of $1.725 and the sale of an equal number of April 77.50 calls for $0.45. Volume was below open interest at the higher strike, so there are two possible
explanations of the activity.

One is that a new bullish call spread was initiated. Alternatively, the trader may have previously owned the 77.50 calls and rolled the position down to the 72.50s. That would more than triple their delta to 0.39 from 0.12, increasing gains in the event of a rally. (See our Education section for more on option greeks.)

Either way, the trader paid $1.275 for the trade and is looking for a push above the $73 area by expiration in mid-April.

HUM fell 0.13 percent to $70.27 yesterday. It gapped down on Feb. 19 after the federal government proposed cutting payments on Medicare Advantage insurance programs it administers. The shares made a higher low early this month despite the drop, which could make some traders bullish over the longer term.

Total option volume was more than twice the daily average in the session, according to the Heat Seeker. Calls outnumbered puts by about 3 to 1.
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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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