Options Trading News

March 20, 2013  Wed 3:16 AM CT

Cardinal Health got hammered yesterday, but one investor is braving the selloff.

optionMONSTER's Heat Seeker monitoring system detected the purchase of 5,000 May 44 calls for $0.80 and the sale of an equal number of May 50 puts for $0.55. There was no open interest at either strike before the trade occurred, indicating that a new trade was initiated.

The resulting position will make money if CAH rallies and lose money if it drops. While similar to owning shares, it differs because it will track movements in the stock price less closely as time passes and become worthless if the stock remains between the two strike prices on expiration two months from now.

Its cheap $0.25 entry price is its main advantage, letting the investor place a low-cost upside bet. That reduces the capital at risk while also programming a buy order should it drop to $40--a level the drug distributor hasn't seen since early December. (See our Education section for more on how options can help you manage risk.)

CAH plunged 8.19 percent to $42.35 yesterday after losing a major contract to Walgreen. WAG accounted for more than one-fifth of the company's revenues last year.

Nonetheless, CAH is now back to a level where it consolidated heavily last year, which could be leading some chart watchers to expect a bounce. In a separate trade, an investor sold more than 10,000 April 45 puts for $2.55, looking for the shares to hold their ground.

Total option volume in CAH was 13 times greater than average in yesterday's session, according to the Heat Seeker.

Disclosure: I own CAH shares.
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