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November 8, 2012  Thu 11:31 AM CT

HOV: SEE CHART GET CHAIN FIND STRATEGIES
Shares of Hovnanian have jumped to two-year highs and drew bullish option activity earlier this week, but today's option activity sees limited upside in the long term.

More than 15,000 options have traded in HOV today, about 3 three times the homebuilder's daily average. Topping the action are the January 2015 7 calls, according to optionMONSTER's systems.

A trader sold 5,000 of those calls for $0.75, the middle of a wide spread but definitely on the bid side. Open interest was just 224 contracts at the beginning of the day, so this is clearly a new position.

HOV is up 3.09 percent to $5.67 this afternoon, its highest level since April 2010. Shares have been on a tear lately, jumping through resistance at $4 less than a month ago as they climbed from a 52-week low of $1.20 nearly a year ago.

Today's option activity is not tied to any trading in the shares that we can see, so it could be naked call selling that is looking for HOV to remain below $7 in the long term. It could also be selling against an existing long position in the stock in a covered call strategy. The latter would be bullish up to the strike, as it takes a maximum gain at or above $7, but it does give up any upside in the shares above that. (See our Education section)

The trade follows bullish activity on Monday, when a trader bought 10,000 May 4.50 calls for $0.95. Those calls are now already trading for $1.50.
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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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