WAG – Walgreen Co. – Shares of the largest drugstore chain in the U.S. fell 2.35% to $29.13 today after Barclays cut WAG’s 2011 earnings estimate to $2.05 from $2.55 following CVS Caremark Corp.’s decision to speed up Walgreen’s exit from its retail pharmacy network. Additionally, Barclays reduced their share price estimate on WAG to $27.00 from $36.00. Bearish options investors burst right out of the gate this morning to populate Walgreen with pessimism. One investor enacted a bearish risk reversal, while other traders purchased plain-vanilla puts in the June contract. Put buyers picked up approximately 1,900 contracts at the June $29 strike for an average premium of $0.71 apiece. Investors long the puts make money if Walgreen’s shares decline another 2.9% to breach the average breakeven point to the downside at $28.29 by June expiration day. The risk reversal strategist appears to have sold 1,500 calls at the June $30 strike for a premium of $0.24 each in order to partially finance the purchase of the same number of puts at the lower June $28 strike for an average premium of $0.41 apiece. Net premium paid for the transaction amounts to $0.17 per contract. Thus, the investor responsible for the trade is prepared to profit should shares of the underlying stock fall another 4.5% from the current price of $29.13 to trade beneath the effective breakeven price of $27.83 by 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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