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December 21, 2012  Fri 2:45 AM CT

MED: SEE CHART GET CHAIN FIND STRATEGIES
Shares of Medifast are at multi-year highs, but one trader is positioning for a possible pullback in the weight-management company.

optionMONSTER's Depth Charge system shows that 1,685 March 29 puts traded in a strong  buying pattern yesterday afternoon, with prices rising from $1.25 to $1.57. The strike showed no previous open interest, so this is all new activity.

MED rose 0.69 percent to close at $31.95. The company, which sells low-calorie meals and dietary supplements, began the year just above $14 and ran all the way to $33.29 on Wednesday, its highest intraday price since May 2010.

Yesterday's puts were not tied to any stock trading identified by our systems but could well have been bought to protect gains on a long position established earlier, given the huge run the shares have seen. Alternatively, these options could be making a straight bearish bet that MED will fall roughly 5 percent or more by expiration in mid-March.

Either way, these contracts will expire worthless if the stock is above the $29 strike price at that time. (See our Education section)

The trading pushed Medifast's total option volume to 20 times its daily average for the last month. Only 76 calls changed hands all day.
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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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