Options Trading News

February 27, 2013  Wed 2:45 AM CT

Impax Laboratories is sitting at support, and one trader thinks it's ready to surge.

optionMONSTER's Heat Seeker tracking program detected the purchase of 2,500 June 22.50 calls for $0.83 and the sale of an equal number of June 17.50 puts for $0.63. Volume was more than twice open interest at both strikes.

The trade cost $0.20 to implement and gives the investor cheap exposure to a rally in the drug developer. The long calls will appreciate and the puts sold short will lose value if the stock pushes higher, while the opposite will happen to the downside.

While it's similar to owning shares, the strategy differs because it will track IPXL less closely as time passes and expire worthless if the stock remains between the strike prices. It also programs a buy order below $17.50, giving the investor more than one way to get long. (See our Education section)

IPXL declined 1.38 percent to $19.35 yesterday. It gapped lower in October following a weak earnings report and again last month after the regulators rejected the reformulation of a drug to treat Parkinson's disease. The shares have nonetheless stayed above the $19.50 level where they bounced in mid-2012, which could be leading some traders to believe that a bottom is in.

The bullish trade pushed overall option volume to 45 times greater than average in yesterday's session.
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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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