Options Trading News

December 27, 2012  Thu 10:08 AM CT

One investor expects a rebound in Teva Pharmaceutical as the Israeli drug maker attempts to hold long-term lows.

optionMONSTER's Heat Seeker tracking program detected the purchase of 3,000 January 2014 40 calls for $1.93. An equal number of January 2014 32.50 puts were sold at the same time for $1.75.

The position cost $0.18 to open and is similar to owning shares: If TEVA climbs, the calls owned will appreciate and the puts sold short will lose value, resulting in profit, while the opposite will happen to the downside. The main difference is that the option strategy will track movements in the stock price less closely over time and expire worthless if it remains between the two strike prices.

TEVA is down 1.1 percent to $37.01 in morning trading and has lost 13 percent of its value since Dec. 11. The company's results have been poor since at least the summer, and the stock fell especially hard after investment firm Leerink Swann issued a downgrade earlier in the month.

But now it's back to a price area that was support in late 2008 and earlier this year, and today's trader apparently thinks it will hold these levels. Even if it doesn't, the strategy effectively programs a long-term buy order way down at $32.50. (See our Education Section for more on selling puts.)
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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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