Contrarian Takes Advantage of Volcano Meltdown, Positions for Recovery

VOLC – Volcano Corporation – One contrarian options investor is positioning for a rebound in the medical equipment maker’s shares today by initiating a three-legged bullish combination play in the January 2011 contract. San Diego, CA-based Volcano’s shares fell as much as 13.2% this morning to touch down to an intraday low of $22.27, but are currently down 8.00% to stand at $23.59 as of 11:20 am ET. The optimistic options player is preparing for Volcano’s shares to reverse course, selling 2,500 puts at the January 2011 $20 strike for premium of $1.45 each, buying the same number of in-the-money calls at the January 2011 $22.5 strike for a premium of $3.10 apiece, and shedding 2,500 calls at the higher January 2011 $30 strike at a premium of $0.40 a-pop. The net cost of the transaction amounts to $1.25 per contract. Thus, the investor stands ready to accumulate profits should VOLC’s shares rally 1.5% over the current price of $23.59 to trade above the effective breakeven price of $23.95 by expiration day. Maximum available profits of $6.05 per contract pad the investor’s wallet should shares surge 27.2% to first surpass Volcano’s current 52-week high of $25.75, and ultimately exceed $30.00 by expiration in January. The overall reading of options implied volatility on Volcano Corp. jumped 17.7% to 50.23% in the first half of the trading session.

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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