MDCO – Medicines Co. – Global pharmaceutical company, Medicines Co., popped onto our ‘hot by options volume’ market scanner in the first half of the trading session after one investor utilized both call and put options to establish a bullish stance on the stock. Medicines’ shares increased 0.40% today to arrive at $7.47 by 12:38 pm (ET). It looks like the optimistic options player sold 5,000 puts at the October $5.0 strike for a premium of $0.35 apiece in order to halve the cost of buying 5,000 calls at the nearer-term July $10 strike for a premium of $0.70 each. The net cost of getting long the out-of-the-money calls is reduced to $0.35 per contract, thus positioning the investor to make money if shares of the underlying stock surge 38.55% over the current price to exceed the effective breakeven point on the calls at $10.35 by July expiration. The short sale of the puts implies the investor does not expect MDCO shares to plummet through $5.00 by October expiration. But, if the stock were to plunge 33% from the current price to push the puts in-the-money, the trader is obliged to have Medicines’ shares put to him at an effective price of $4.65 each. We note that shares of the pharmaceutical company have not traded under $5.00 in the last five years, but shares did rally above $10.35 as recently as March 17, 2010.
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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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