Options Brief: Hospira (HSP)

HSP – Hospira Inc. – The specialty pharmaceutical firm appeared on our ‘hot by options volume’ market scanner in afternoon trading after one options investor purchased a long strangle in the August contract. Hospira’s shares are up 1.25% to arrive at $58.96 just minutes before the closing bell. The strangle-strategist purchased 1,350 calls at the August $65 strike for a premium of $0.30 each and picked up the same number of puts at the lower August $55 strike for a premium of $0.80 apiece. The net cost of the transaction amounts to $1.10 per contract. The nature of the long strangle indicates the responsible party expects a dramatic shift in the price of the underlying shares by August expiration. Perhaps the trader is eyeing the company’s upcoming second-quarter earnings report scheduled for July 28, 2010, and thusly positioning for a big shift in share price following those results. Regardless of the motivation behind the trade, the investor is prepared to profit should Hospira’s shares rally 12.1% over the current price to surpass the upper breakeven point on the trade at $66.10, or if HSP’s shares plummet 8.6% to breach the lower breakeven price of $53.90, ahead of August expiration day. The strangler may also benefit from increases in premium on the options, which typically accompany large upward shifts in the overall reading of options implied volatility on the stock. We note Hospira’s shares haven’t come close to reaching $66.10 in the past 5 years, but have traded as low as $36.58 in the past 52-weeks. Shares breached the lower breakeven price of $53.90 as recently as June 11, 2010.

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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