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October 5, 2012  Fri 9:14 AM CT

VRNG: SEE CHART GET CHAIN FIND STRATEGIES
An unusual trade tops the option activity in Vringo as shares drop sharply this morning, giving up yesterday's gains.

VRNG is down 12.76 percent to trade at $4.58. The company, which makes multimedia phone technology, has seen wild volatility in the last couple of days. Shares traded at $3 early Wednesday and climbed to an intraday peak of $5.55 yesterday, an all-time high.

The stock had been popping on the fact that it took a step closer to a trial in its suit against Google and others over a patent dispute. But the price dropped this morning after an announcement that it has raised an additional $45 million in a private stock offering.

optionMONSTER's systems show that a trader bought 6,000 November 4 puts for the ask price of $1.25 and, at the same time, sold 6,000 November 5.50 calls for $1.20. The volume was well above open interest of about 2,000 in each strike at the start of the session, indicating that this is a new position. The trader risks only $0.05 if the stock stays between the two strikes.

But further investigation shows that 567,271 VRNG shares was bought for $4.70 just a minute before the options traded. That was the largest block of the stock by a factor of 10.

So it appears that the trader bought 600,000 shares on today's pullback and immediately collared that position with the options. The result is an overall strategy that is bullish up to $5.50 with protection down at $4. The profit/loss profile is essentially the same as a long call spread using the same strikes. (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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