Monday Options Update: SLXP, MDVN, PDCO & XLE

by: Interactive Brokers

Salix Pharmaceuticals, Ltd. (NASDAQ:SLXP) – Contrarian bullish options trading initiated on the specialty pharmaceuticals firm indicates one investor anticipates a rebound in Salix shares by March expiration even though the price of the stock slumped 7.50% to $23.66 during the first half of the trading session. It looks like the optimistic individual utilized a three-legged options combination strategy in order to assume a near-term bullish stance on the stock. The investor sold 3,500 puts at the March $17.5 strike for a premium of $1.10 apiece in order to partially finance a debit call spread. The trader purchased 3,500 calls at the March $25 strike for a premium of $3.10 each, marked against the sale of 3,500 calls at the higher March $30 strike for $1.05 apiece. The net cost of the combination play amounts to $0.95 per contract. Shares of Salix Pharmaceuticals must rally at least 9.65% from the current price before the investor breaks even on the transaction at $25.95. Maximum potential profits of $4.05 per contract are available to the trader if Salix’s shares surge 27% from the current day’s value to $30.00 by March expiration. Options implied volatility on the stock is up roughly 12.3% to 128.55% as of 12:30 pm (EDT).

Medivation, Inc. (NASDAQ:MDVN) – A bearish credit call spread was initiated in the March contract on biopharmaceutical company, Medication, Inc., today amid a 1.15% decline in the price of the underlying stock to $37.19. The spread suggests one investor expects Medivation’s share price to trade under $40.00 through expiration day. The trader sold 6,000 calls at the March $40 strike for a premium of $7.00 apiece, and purchased the same number of calls at the higher March $50 strike for $4.50 each. The investor keeps the full net credit of $2.50 per contract received on the spread if Medivation’s shares remain below $40.00 through expiration day. This position might be the work of a longer-term bullish investor concerned by the near-term outlook. Maximum potential loss exposure trumps the credit received in this case because the investor could lose up to $7.50 per contract if MDVN’s shares rally up to $50.00 in the next few weeks to expiration. Naturally, those losses wouldn’t stack up for an investor already holding the shares. But, the trader is willing to undertake such risk because he expects to keep the credit pocketed today. Shares of the biopharm-firm would need to surge 14.25% from the current price before the investor starts to accumulate losses above the effective breakeven share price of $42.50.

Patterson Companies, Inc. (NASDAQ:PDCO) – The distributor of dental supplies such as x-ray machines and dental chairs attracted a long-term bullish investor to the January 2012 contract today. Shares of the underlying stock increased 0.70% to $30.00 during the first half of the trading day to stand just $0.94 below its current 52-week high of 30.94. The PDCO-optimist initiated a risk reversal by selling roughly 2,775 puts at the January 2012 $25 strike for a premium of $2.00 apiece, spread against the purchase of 2,775 calls at the higher January 2012 $35 strike for $2.30 each. The net cost of the reversal amounts to $0.30 per contract. Profits amass for the trader if Patterson’s shares rally approximately 17.70% from the current value of the stock to surpass the breakeven point at $35.30 by expiration day in January 2012 although a rapid ongoing rise in the share price would immediately work in favor of this investor by damping put premium and increasing the worth of the calls.

Energy Select Sector SPDR ETF (NYSEARCA:XLE) – Shares of the energy exchange-traded fund, which reflects the total return of the Energy Select Sector of the S&P 500 Index, declined 1.30% to $56.60. Near-term options activity on the fund suggests shares of the underlying could remain range-bound through expiration in March. One trader initiated a sold strangle on the XLE by shedding 10,000 calls at the March $58 strike for a premium of $0.68 each in combination with the sale of 10,000 puts at the March $55 strike for $0.93 apiece. Gross premium pocketed by the investor amounts to $1.61 per contract. The trader keeps the full amount of premium if shares of the Energy fund trade within the range of the strike prices described through expiration day in March. The investor is vulnerable to potentially deleterious losses if shares of the underlying stock rally above the upper breakeven price of $59.61, or if the share price falls below the lower breakeven point at $53.39, ahead of expiration.