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November 8, 2012  Thu 2:45 AM CT

GGB: SEE CHART GET CHAIN FIND STRATEGIES
Brazilian steel company Gerdau fell with the rest of the market yesterday, but one trader apparently believes that further losses will be limited.

A trader sold 3,000 March 7 puts for the bid price of $0.15, according to optionMONSTER's systems. There was no previous open interest at that strike, so this is a new position.

GGB lost 2.3 percent to close at $8.94 yesterday. It bounced at $8.51 on Nov. 1 after reporting third-quarter earnings but remains below its 52-week high of $10.82 reached in mid-September.

The put selling is a bet that GGB will hold above $7 in the coming months. While the position does have an initial bearish bias (positive delta), it can profit with the stock anywhere above $6.85 at that time. (See our Education section)
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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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