RHB – RehabCare Group, Inc. – The implementation of a three-legged bullish options combination strategy on the provider of program management services for inpatient rehabilitation and skilled nursing units, outpatient therapy programs and other long-term care facilities in the U.S. indicates one investor is positioning for a rebound in the price of RehabCare’s shares by December expiration. RHB’s shares took a severe beating recently after The Centers for Medicare & Medicaid Services issued proposed rules late on Friday June 25 that would reduce rehab therapy rates by 12%. RehabCare’s shares plunged 22.8% from Monday’s high of $26.75 to yesterday’s low of $20.65 on news the proposed rules could result in a $17 to $18 million annual impact on operating earnings in RHB’s Skilled Nursing Rehabilitation Services division. However, shares of the underlying stock rebounded slightly in the first half of the current session, rising 0.90% to $20.88 by 11:30 am (ET), after earlier rallying 2.5% to briefly touch an intraday high of $21.21. One investor expecting the firm’s shares to continue to strengthen over the next six months essentially sold short put options in order to offset the cost of buying a debit call spread in the December contract. The bullish player purchased 2,500 calls at the December $22.5 strike for a premium of $2.40 each, sold 2,500 calls at the higher December $25 strike for a premium of $1.40 apiece, and sold 2,500 puts at the December $17.5 strike for a premium of $1.50 a-pop. The three-legged spread yields a net credit of $0.50 per contract, which the investor keeps in full if RHB’s shares exceed $17.50 through December expiration day. Additional profits are attainable should the price of the underlying stock rally 7.75% over the current price of $20.88 to surpass the effective breakeven point on the call spread at $22.50 by expiration. The investor walks away with maximum potential profits – including the credit received today – of $3.00 per contract if RehabCare’s shares jump 19.7% to trade above $25.00 ahead of expiration day in December. The short stance taken in December $17.5 strike puts implies the options player is willing to have shares of the underlying stock put to him at an effective price of $17.00 apiece should the puts land in-the-money at expiration.
Affiliation: Interactive Brokers
Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.
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