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November 9, 2012  Fri 12:09 PM CT

VVUS: SEE CHART GET CHAIN FIND STRATEGIES
Vivus has gotten cut down, and now one investor is looking for a bounce.

optionMONSTER's Heat Seeker monitoring program detected the purchase of 1,000 June 12 calls for $2.17 and the sale of an equal number of June 17 calls for $1. Volume is more than twice open interest at both strikes, indicating that new positions were initiated.

The strategy is known as a ratio spread because twice as many contracts were sold as the number bought. That generates additional income, thereby lowering the cost and increasing leverage, but it also creates the risk of losing money if the shares move too far in the intended direction.

Today's position, for instance, cost just $0.17 to open and will earn a profit of 2,841 percent if the drug maker closes at $17 on expiration. Because of the bigger position in the short calls, gains will erode above that level and turn to losses over $22. (See our Education section)

VVUS is up 5.08 percent to $10.76 in afternoon trading. The developer of weight-loss drugs more than quadrupled between August 2011 and July 2012 but then rolled over and has fallen by more than half. That selloff brought the stock back to the same $10 level that marked a top in recent years, which could be leading some traders to believe that it will now become support.

Calls outnumber puts in VVUS by a bullish 2-to-1 ratio so far today, according to the Heat Seeker.
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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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