Youku traders tune in for breakout

optionMONSTER

The China bulls are tuning in for more upside in Youku Tudou.

optionMONSTER's Heat Seeker monitoring program detected the purchase of 2,000 December 25 calls in the provider of streaming-television services for $2.24, while an equal number of December 30 calls were sold at the same time for $0.89. Volume exceeded open interest at both strikes, indicating that new positions were initiated.

Owning calls locks where a stock can be purchased, while writing them creates an obligation to sell if a certain level is reached. Combining the two lets investors control a move between two prices. In the case of today's trade, they will collect $5 if YOKU closes at or above $30 on expiration. He or she paid $1.35 to open the strategy, implying profit of 270 percent.

Known as a vertical spread , the strategy is commonly used to generate leverage. (See our Education section)

YOKU is off 0.3 percent to $23.60 in afternoon trading but is up 27 in the last two months. While other Chinese Internet stocks have been red-hot all year, as shown on our researchLAB analysis tool, YOKU only started rallying in July. Its moving averages are lining up bullishly, and today's trader is positioning for a break above long-term resistance around $25.

Total option volume is twice the daily average so far in the session, with calls outnumbering puts by a bullish 57-to-1 ratio.


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