LLY – Eli Lilly & Co. – Options investors are celebrating the pharmaceutical maker’s better-than-expected second-quarter earnings report, released ahead of today’s opening bell, by initiating bullish transactions on the stock. LLY earned $1.24 per share in the second-quarter, easily surpassing average analyst expectations of $1.10 per share. The firm’s shares increased as much as 2.6% at the starting the session to secure an intraday high of $35.85, although the rally has cooled slightly by 11:05 am (ET), with the price of the underlying stock up 0.70% on the day to stand at $35.20. Significant increases in sales of a number of the company’s drugs, such as Zyprexa and Cymbalta, and the firm’s decision to raise its 2010 earnings forecast pushed Eli Lilly’s shares higher today. Optimistic options players populating LLY this morning employed diverse trading strategies. One investor appears to have initiated a credit put spread, selling 1,700 puts at the August $35 strike for an average premium of $0.72 each, and buying the same number of puts at the lower August $33 strike for an average premium of $0.22 apiece. The spread yields a net credit, or maximum profit, of $0.50 per contract. The trader keeps the full credit received as long as shares exceed $35.00 through expiration day next month. However, the responsible party is exposed to losses should shares slip beneath the effective breakeven price of $34.50, with maximum potential losses of $1.50 per contract if the price of the underlying stock settles below $33.00 at expiration day. It is possible the transaction represents an investor closing out a long debit put spread, rather than putting on a riskier credit spread, but both scenarios are bullish plays. Further along, in the September contract, it looks like one optimistic individual initiated a bullish risk reversal, selling approximately 1,500 puts at the September $33 strike for an average premium of $0.43 each in order to purchase the same number of calls at the higher September $36 strike for an average premium of $0.53 apiece. The average net cost of the transaction amounts to $0.10 per contract and positions the trader to make money if Eli Lilly’s shares surpass the effective breakeven price of $36.10 by expiration day in September.
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.
Interactive Brokers: Interactive Brokers offers direct market access to around 80 electronic global markets from a single account. Successful traders and investors understand that superior technology and lower trading costs can result in greater returns. For 32 years we have been building direct access trading technology that delivers real advantages to professionals worldwide. With consolidated equity capital of US $4.4 billion, IB and its affiliates exceed 1,000,000 trades per day. In addition, our prudent and conservative risk policies make Interactive Brokers a safe haven for your money. Discover some of the reasons why IB, the largest independent US broker/dealer, is the professional traders' and investors' choice.
Visit: Interactive Brokers