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Bulls want to get a jolt from Dynegy

David Russell (david.russell@optionmonster.com)

Dynegy emerged from bankruptcy in October, and now the bulls are looking for a springtime rally.

optionMONSTER's Heat Seeker tracking program detected the purchase of 5,000 June 20 calls for $1.60 and the sale of 7,500 June 17.50 puts for $0.90. Volume was more than 68 times open interest at both strikes.

The strategy is similar to owning shares in the power-generation company. The calls owned will appreciate in value and the puts sold short will dwindle if DYN goes higher, while the opposite will be true to the downside. The benefit is that it controls the equivalent of 500,000 to $750,000 shares for just $125,000, or $0.25 per share.

DYN is up 1.46 percent to $19.41 in early afternoon trading. The company sought Chapter 11 bankruptcy protection in July after a legal squabble between creditors. It's mostly traded between $17 and $19 since emerging from the process three months ago.

One unusual aspect of today's strategy is that the investor sold more puts than the number of contracts bought. That brought in more income to reduce cost but also increases downside risk in the event of a major collapse.

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