How the bulls are playing Headwaters

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Traders are looking for a pop when Headwaters reports results tomorrow morning.

optionMONSTER's Heat Seeker monitoring program detected the purchase of 1,000 November 9 calls for $0.28 and the sale of an equal number of November 8 puts for $0.13. Volume exceeded open interest at both strikes, indicating that new positions were initiated.

Owning calls locks in the price where shares can be purchased in the maker of building products, while selling puts generates income but creates an obligation to get long shares if the stock falls. Combining the two strategies is highly bullish, resulting in a low-cost bet to the upside.

The trader paid just $0.15 to open the position and will earn huge profits on a move toward $9. But he or she will face big losses if shares drop below $8. (See our Education section for more on the leveraging power of options.)

HW is up 3.4 percent to $8.81 in morning trading and has been shuffling in a range for the last four months. Its earnings have mostly trailed estimates, but the stock has managed to hold support at $8.50, which could make today's trader comfortable selling puts below that level.

Total option volume in the stock is 12 times greater than average so far today, according to the Heat Seeker.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.


This article appears in: Investing , Options

Referenced Stocks: HW

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