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.
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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