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How trader is managing Flotek position

David Russell (david.russell@optionmonster.com)

Flotek Industries is a highly volatile stock, and traders are using options to manage exposure.

Our screening programs detected the sale of 1,200 September 17.50 calls for $0.85 and the purchase of an equal number of June 15 calls for $1.50. Volume was below open interest in the 15s, indicating that an existing short position was closed and rolled to the higher strike.

The investor probably has a covered-call trade in the energy-fracking company. The trader would have been forced to sell FTK for $15, so he or she adjusted the strategy to give the stock more room to run. The adjustment cost an incremental $0.65 but gives the investor a chance to make an additional $2.50 on the shares.

Covered calls also make sense in FTK because its implied volatility is about 47 percent, compared with its 33 percent historical volatility . Selling the contracts lets the investor convert that into income while reducing the pain if shares fall. (See our Education section)

The shares surged 8.47 percent to $15.63 yesterday and has returned to its highest level since the market was crashing in September 2008. The rally followed a strong earnings report, with profit margins improving and the company's products gaining market share.

optionMONSTER's proprietary researchLAB tool shows capital flowing into fracking stocks in recent weeks as natural-gas prices rise and attention focuses on domestic energy production. Other companies such as C&J Energy Services and Heckmann have also been gaining momentum.

Total option volume in FTK was 15 times greater than average in yesterday's session.

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