Bear with Butterfly Wings Targets Teva Pharmaceutical

TEVA – Teva Pharmaceutical Industries Ltd. – Long-term bearish options activity ensued as shares of Israel-based generic drug company, Teva Pharmaceutical Industries Ltd., slipped 1.95% lower to $52.27 in the first half of the trading day. One pessimistic options strategist purchased a bearish put butterfly spread in the January 2011 contract to brace for continued erosion in the price of the underlying stock. Perhaps expecting Teva’s shares to fall down around the current 52-week low of $45.46, the investor purchased 2,000 puts at the January 2011 $50 strike for an average premium of $3.83 apiece [wing 1] and picked up 2,000 puts at the lower January 2011 $40 strike for an average premium of $1.18 each [wing 2]. The trader sold 4,000 puts at the central January 2011 $45 strike to receive an average premium of $2.13 a-pop to establish the body of the butterfly spread. The net cost of the transaction amounts to an average premium of just $0.75 per contract. The trade positions the investor to accrue maximum potential profits of $4.25 per contract should TEVA’s shares plummet 13.90% from the current price of $52.27 to settle at $45.00 at expiration in January. The trader starts to make money as long as shares decline 5.77% to breach the upper breakeven point at $49.25. The investor is well positioned to profit from bearish movement in the price of Teva’s shares, but may only ever lose the $0.75 per contract in premium paid to establish the spread.

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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