Market News

April 1, 2011  Fri 12:14 AM CT

CareFusion peaked around $30 last year, and one investor wants to leverage a retest of that level.

optionMONSTER's Heat Seeker tracking program detected the purchase of 2,800 May 28 calls for an average premium of $1.225 and the sale of 5,600 May 30 calls for $0.45. Volume was more than 40 times open interest in both strikes.

CFN fell 1.09 percent to $28.20 yesterday but is up 24 percent since the beginning of December. The company, which was spun off from Cardinal Health in 2009, sells medical equipment such as infusion devices, ventilators, and drug-dispensing machines.

Its last earnings report on Feb. 3 beat forecasts, and the shares have been pushing higher since. They found support at their 50-day moving average in mid-March and broke free of resistance at $28 on Wednesday.

The option trade is designed to maximize profits from a slight continuation higher. It cost $0.325 to implement and will earn a maximum profit of 515 percent at $30. Profits will erode above that level and turn to losses over $32.

The strategy is known as a ratio spread because twice as many calls were sold as bought. That reduces the cost basis and enhances leverage but also creates upside risk. The trade is generally suited when a stock is expected to make only a limited move.

Overall option volume in CFN was 44 times greater than average in the session.
News Archives

Education & Strategy

Election Sector Rotation

Sector rotation is the process where mutual funds, portfolio managers, and investors in general, shift their investments from one sector of the economy to another.

More education articles »