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Is Magic Software ready to rally again?

By: optionMONSTER
Posted: 8/12/2011 4:38:00 AM
Referenced Stocks: MGIC

Magic Software has had a long pullback, and one investor apparently thinks that another rally is imminent.

optionMONSTER's Heat Seeker tracking system detected the purchase of 1,800 August 5 calls for $0.05 and the sale of an equal number of August 5 puts for $0.75. Volume was more than twice the open interest in both strikes.

The resulting position is highly leveraged to the upside for the maker of business software, whose net income surged 84 percent the last time it reported earnings on Aug. 3.

MGIC has been on a wild ride, tripling between last November and February, only to roll over and lose half its value as of yesterday's close. It ended the session up 8.78 percent at $4.46.

The option trade generated a credit of $0.70 and will initially make money from the short position in the puts losing value as MGIC climbs. Above $5, the calls move in the money and start earning profits as well.

The company's software allows big companies to run applications across multiple environments, including mobile platforms. It now seems to be reaching a size where profitability will improve because revenues are growing faster than operating costs.

Overall option volume in MGIC was 20 times greater than average in the session, according the to Heat Seeker.