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May 19, 2014  Mon 12:22 PM CT

WAG: SEE CHART GET CHAIN FIND STRATEGIES
Walgreens is rallying with bullish option activity today after speculation that the drugstore chain might purchase U.K.-based Alliance Boots.

optionMONSTER's Heat Seeker system detected the purchase of more than  5,500 Weekly 69 calls that expire at the end of this month. Premiums have risen from $0.77 to $2.02, including one print of 3,777 that went for $1.04. Open interest in the strike was a mere 55 contracts before the trades appeared, showing that this is fresh buying.

These long calls lock in the price where the stock can be purchased no matter how far it might climb through the end of next week. They could be sold earlier at a profit if premiums rise with a rally before then, but the contracts could quickly lose value if shares stall or pull back. (See our Education section)

WAG is up 2.81 percent to $69.35 in afternoon trading, off its session peak of $70.43. The stock has faced resistance at the $70 level since late February, though it did spike to an all-time high of $71.02 on May 8.

Shares rose early this morning after news reports that the Walgreens might purchase the remaining portion of Alliance Boots that the company does not already own. WAG already holds a 45 percent stake in Boots, with the option to buy the rest Europe's largest pharmacy chain next year. Analysts say an acquisition would allow Walgreens to be domiciled overseas for tax advantages.

Overall option volume in WAG tops 52,000 contracts, quadruple its daily average for the last month. Calls make up 60 percent of that total.
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As discussed last week, when using the Stock Replacement Strategy to replace a stock position to trade direction, we want to use an option that has very similar characteristics to the stock. We talked about using the deep in-the-money, 80 to 85 delta option that is similar in the Greeks and has relatively little extrinsic value which tends to work against us in stock directional trading.

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