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October 4, 2012  Thu 3:47 AM CT

BBD: SEE CHART GET CHAIN FIND STRATEGIES
One investor is going against the herd by getting long Brazilian lender Banco Bradesco.

BBD has been staggering in a range since the spring, falling from $18 to below $14. Yesterday it closed in the midpoint at $16 even, down 2.14 percent on the session.

The option trade consisted of selling 1,500 December 14 puts for $0.30 and buying 3,000 December 18 calls for $0.21. Volume exceeded open interest at both strikes, indicating that new money was put to work.

Owning calls locks in the price where the investor can buy BBD while selling puts generated income to finance partially the calls. Selling puts also requires him or her on the hook to buy the stock for $14 if it closes below that price on expiration, so the trader is double-leveraged to the upside. (See our Education section)

Implied volatility was 52 percent in the puts versus 34 percent in the calls, indicating that the market sees much more downside risk than upside potential in the name. Yesterday's strategy took the other side of that perception, using the fear to pay for a long bet.

The trader now stands to generate major leverage on a push to the upside because he or she owns as many calls as the number of puts sold. The transaction pushed total option volume in BBD to almost triple the normal amount, according to our data systems.
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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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