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Bulls like Red Hat before earnings

David Russell (david.russell@optionmonster.com)

One big investor is hoping for a strong earnings report from Red Hat next week.

optionMONSTER's Heat Seeker monitoring program detected the purchase of some 5,200 December 48 calls for $1.35 and the sale of a matching number of December 52.50 calls for $0.30. Volume exceeded hte previous open interest at each strike, indicating that new positions were initiated.

Owning calls locks in the price where a stock can be purchased, while selling them creates an obligation to sell shares at a certain level. Combining the two controls a defined move at a low cost. In this case, the trader paid $1.05 and will collect $4.50 if the software stock rallies to $52.50 by expiration in six days. (See our Education section for more on the strategy, known as a bullish call spread .)

RHT is down fractionally to $46.18 this afternoon and has been trading sideways for the last two years. It gapped lower in September after issuing a weak earnings outlook because of billings in Europe. The shares rebounded four weeks ago and have been holding their ground since.

The next earnings report is scheduled for after the closing bell next Thursday, Dec. 19.

Total option volume is 6.5 times greater than average in the name so far, according to Heat Seeker. Calls outnumber puts by a bullish 28-to-1 ratio.

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