Options Brief: Medifast, Inc.

MED – Medifast, Inc. – The weight management and disease management products maker popped up on our ‘hot by options volume’ market scanner in the first half of the trading session after one wary investor purchased a put spread in the January 2011 contract. Shares of the distributor of consumable health and diet products inched up 0.80% in the first half of the trading session to arrive at $26.87 by 11:40 am ET. The put player could be long the stock and seeking to lock in gains by establishing the protective spread. Alternatively, the spread may be an outright bearish bet that Medifast’s shares are set to decline ahead of expiration day next year. The investor purchased 1,000 in-the-money puts at the January 2011 $28 strike for an average premium of $4.85 each, and sold the same number of puts at the lower January 2011 $20 strike at an average premium of $1.33 apiece. Net premium paid to initiate the trade amounts to $3.52 per contract. Thus, the investor starts to make money – or realizes downside protection – if MED’s shares fall 8.9% from the current price of $26.87 to breach the effective breakeven point to the downside at $24.48 by expiration day. Maximum potential profits of $4.48 per contract are available to the investor if Medifast’s shares plunge 25.5% lower to trade below $20.00 by January expiration.

About Andrew Wilkinson 1023 Articles

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.

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