Options Trading News

March 14, 2013  Thu 2:45 AM CT

One investor is using options to position for a breakout in Cardinal Health.

Our Heat Seeker monitoring system detected the purchase of 5,000 April 48 calls for $0.40. A matching number of April 45 puts was sold at the same for $0.475.

The trader collected a credit of $0.075 and now stands to earn huge profits if CAH breaks above $48 in the next five weeks. They also will be forced to buy shares for $45 if they drop to that level.

The benefit of the strategy is that the investor is assured of not missing a rally in the share price, without paying anything upfront. (See our Education section for more on how options can be used to manage trades.)

CAH closed a penny higher at $46.84 yesterday and is up 24 percent in the last six months. The supplier of medical products has been consolidating at its highest levels in more than five years. That could make some traders expect a big rally if it breaks resistance, helping explain yesterday's transaction.

Total option volume was 6 times greater than average in the session, according to the Heat Seeker.
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As I stated in last week's article, a break out or a break down needs to have a couple things happen before it is considered a confirmed break out or break down. The only problem is that in today's market where things move much more quicker than they did just a few years ago, two days could wind up being the majority of the expected movement, if not the whole movement.

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