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March 17, 2011  Thu 12:14 AM CT

MHS: SEE CHART GET CHAIN FIND STRATEGIES
Shares of Medco Health Solutions fell sharply as talks collapsed over a large contract yesterday, but a big spread is looking for a bounce in the pharmacy-services company.

MHS fell 4.9 percent to close at $56.23. Shares were above $64 at the beginning of the month and are now trading at its lowest level since earnings in early November. Yesterday California's public-employee pension system withdrew from negotiations to renew a Medco contract to manage prescriptions for the organization, which has represents 1.6 million people.

Medco sees an average daily option volume of 4,000 contracts traded 116,647 yesterday, almost all of it in a July call spread. A trader sold 48,000 July 65 calls for $0.95 and, at the same time, bought 24,000 each of the July 60 calls for $2.50 and the July 70 calls for $0.40.

The volume at all three strikes was 24 times the previous open interest, so this was a new butterfly spread. The trade cost just $1 to open, which would be lost if shares are below $60 or above $70.

If shares are right at $65 at expiration, the trade can make $4. So this is a cheap way to bet on a bounce in a limited range.
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