Exco trade targets key level for bounce

One investor is targeting a key level on Exco Resources' chart in looking for a limited bounce.

optionMONSTER's Heat Seeker tracking program detected the purchase of 5,000 March 8 calls for $0.785 and the sale of twice as many March 10 calls for $0.23. Volume was more than triple the open interest in both strikes.

The call spread cost $0.325 and will earn a maximum profit of more than 500 percent if XCO closes at exactly at $10 on expiration. The gains will erode above that level and turn to losses over $12.

This trade is also known as a ratio spread because twice as many contracts were sold than were bought. That reduces the cost basis and therefore increases leverage, but it also creates risk if the stock moves too much in the intended direction.

XCO fell 3.91 percent to $7.86 yesterday and has lost more than half its value since May 2011. The oil and natural-gas company found support around $10 in October and December, which could be leading some chart watchers believe that area will now become resistance. (See related story )

On a longer-term view, XCO is also attempting to hold roughly the same level where it based out in March 2009. Traders might now expect a bounce around that price.

Overall option volume in the name was 7 times greater than average yesterday, according to the Heat Seeker, and calls outnumbered puts by more than 3 to 1. The company is scheduled to release earnings results on Feb. 23 after the bell.

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