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June 14, 2013  Fri 4:14 AM CT

TWO: SEE CHART GET CHAIN FIND STRATEGIES
As Two Harbors tries to recover from a steep decline last month, traders are betting that the real-estate investment trust will rally by the end of next week.

More than 6,100 June 11 calls traded in a strong buying pattern in the final 15 minutes of yesterday's session as premiums rose from $0.25 to $0.35, according to optionMONSTER's Heat Seeker tracking system. The volume was well above the strike's open interest of 1,780 contracts at the start of the day, indicating that this is new activity.

TWO gained 3.7 percent yesterday to close at $10.92. The financial firm gapped above $12 after reporting first-quarter results on May 8 but has been trending steadily lower along with other REITSs since then.

Yesterday's long calls, which lock in the price where traders can buy the stock, are looking for TWO to gain roughly 3.5 percent before the options expire a week from today. The trades followed bullish call buying in the September 12 strike on June 3. (See our Education section)

Total option volume in the name exceeded 8,200 contracts yesterday, more than 6.5 times its daily average for the last month. Calls outnumbered puts by nearly 12 to 1, further reflecting thes session's bullish sentiment.
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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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