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September 5, 2013  Thu 3:16 AM CT

CBI: SEE CHART GET CHAIN FIND STRATEGIES
Someone is hedging a bet in Chicago Bridge & Iron with the shares on the verge of a historic breakout.

optionMONSTER's Depth Charge monitoring system detected the purchase of 2,000 January 55 puts for $1.95. Equal numbers of contracts were sold at the same time in the January 50 puts for $0.75 and the January 70 calls for $0.70, translating to a cost of $0.50.

The trader probably owns shares in the engineering company and is using the options as a hedge. He or she now stands to collect $5 if the stock falls to $50 by expiration in mid-January but has also agreed to sell the position for $70 if it goes to that level. The strategy combines elements of a covered call with a vertical spread. (See our Education section)

CBI fell 0.89 percent to $59.91 yesterday but is up more than 60 percent in the last year. It has rallied back to its previous all-time highs from late 2007 and early 2008, which could leave some chart watchers concerned about a pullback. Yesterday's three-way strategy provides protection against a decline while holding out the potential for $10 in profit.

Total option volume in the name was 7 times greater than average in the session, according to the Depth Charge.
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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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