Options Trading News

March 11, 2011  Fri 12:20 PM CT

Medco Health Solutions is in the midst of a long-term rally, and one trader is positioning for the next leg higher with a highly leveraged strategy.

optionMONSTER's Heat Seeker tracking system detected the purchase of 2,500 October 62.50 calls for $4.80. Equal-sized blocks were sold in the October 55 puts and the October 70 calls at the same time for $2.80 and $1.90, respectively.

The trade resulted in a cost of just $0.10 and will earn a maximum profit of 7,400 percent if the pharmacy-benefits stock closes at or above $70 on expiration. It won't lose money unless the shares drop below $55.

MHS rose 0.16 percent to $61.55 in afternoon trading and has more than quadrupled since getting spun off from Merck in 2003. It peaked around $64 a year ago before pulling back, and has been consolidating slightly below that level since.

Its last earnings report on Feb. 22 was roughly in line with estimates, and management is predicting that profits will continue to expand this year as more drugs go off patent. That's good news for MHS because the company helps health insurers reduce prescription costs by channeling patients into generics.

The bullish trade pushed total option volume in the stock to triple the daily average, according to the Heat Seeker.
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