Option Activity Alert: Human Genome Sciences, Allscripts Healthcare Solutions

HGSI – Human Genome Sciences, Inc. – Shares in biotechnology company Human Genome Sciences are down 3.95% this afternoon at $25.23 as of 3:15 pm, but one options trader populating the December contract today is positioning for the stock to rebound ahead of a key FDA decision on its lupus drug treatment, Benlysta. A preliminary FDA review is set for release in one week, while an advisory panel with outside experts is scheduled to provide their input before the FDA provides a final ruling by December 9, 2010. The optimistic options player is well positioned to benefit from a strong rally in the biotech firm’s shares should approval of the lupus treatment become a reality. The trader purchased 5,000 calls at the December $26 strike for a premium of $4.30 each, and sold the same number of calls at the higher December $32 strike at a premium of $1.36 apiece. Net premium paid for the spread amounts to $2.94 per contract. Thus, the investor makes money if Human Genome’s shares reverse course and rally 14.7% over the current price of $25.23 to surpass the effective breakeven point to the upside at $28.94 by expiration day. The call-spreader stands ready to amass maximum potential profits of $3.06 per contract if shares jump 26.8% to trade above $32.00 by December expiration. Options implied volatility on the biotechnology company is up 12.1% at 141.59% as of 3:30 pm, and will likely continue to ascend ahead of the FDA’s critical ruling.

MDRX – Allscripts Healthcare Solutions – Call options on the provider of clinical software, services, information and connectivity solutions to physicians and other healthcare providers are in high demand today ahead of the firm’s third-quarter earnings report, which is scheduled for release after the market closes on Monday. Shares in Allscripts are currently up 1.3% at $19.44 as of 2:15 pm. Plain-vanilla call buyers were the first to arrive on the scene, but the majority of the options volume generated on MDRX today was the work of one trader. The investor appears to have enacted a debit call spread, buying more than 7,000 calls at the November $20 strike for an average premium of $0.43 each and selling about the same number of calls up at the November $21 strike at an average premium of $0.13 apiece. The net cost of the transaction amounts to $0.30 per contract, thus preparing the responsible party to profit should MDRX shares rally another 4.4% over the current price of $19.44 to surpass the effective breakeven price of $20.30 by November expiration. The trader could walk away with maximum potential profits of $0.70 per contract if Allscripts’ shares surge 8.025% in the next couple of weeks to trade above $21.00 by expiration day. More than 28,500 option contracts have changed hands on MDRX this afternoon versus total previously existing open interest of 10,172 lots on the stock. Impending third-quarter earnings and the sharp rise in demand for options on the software company boosted the stock’s overall reading of options implied volatility 35.1% to 43.91% by 2:25 pm in New York trading.

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.

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