Options Trading News

January 16, 2013  Wed 9:27 AM CT

Watson Pharmaceuticals has been pulling back, but one investor apparently thinks that the move is just what the doctor ordered.

optionMONSTER's Heat Seeker tracking program detected the purchase of 2,000 May 90 calls, most of which priced for $2.20 to $2.40. Volume was more than 5 times the open interest at the strike before today's trading began, signaling that this is fresh buying.

The investor now has locked in a $90 price for buying shares in the drug maker over the next five months, no matter how high they go. That right will appreciate in value significantly in the event of a rally, producing significant leverage relative to the stock price.

For instance, if WPI climbs 17 percent to $100, the calls will more than triple in value. The benefit of the trade is that the investor has much less capital at risk versus buying shares. (See our Education section for more on how options can be used to minimize potential losses.)

WPI is down 0.83 percent to $84.54 in morning trading. The stock price more than quadrupled between late 2008 and late last year but has been falling since then.

Calls outnumber puts by a bullish 13-to-1 in the company so far today, 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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