A Spread Trade in Cerner Options

Here we are on the last day of the year, but someone is still hard at work getting a Cerner(CERN Quote) position ready for the new year. Today, a customer bought 10,000 of the June 42.50 calls for $3.30 and sold 10,000 of the June 32.50 puts for an average price of $2.575.

That means that the customer paid 72.5 cents net to buy the call and sell the put. Open interest at the time was 21 and 30, respectively, for the call and the put. The customer also sold 700,000 shares of stock at $39.

The sale of the stock made the spread what we call "delta neutral," meaning that that was the number of shares that the option market makers would have needed to buy to hedge the spread. A look at the merits of this trade gives us some insights into CERN, as well as its options at this time.

First, let's take a look at why the customer might have sold shares as a part of this trade. One possible reason is that this option trade is a stock-replacement strategy for the investor. That means he is taking shares he had and replacing them with the options. At expiration, the investor needs the stock to be above $43.225 (call strike plus the premium) for the trade to be profitable.

Because the investor sold shares on a 70 delta, that means that they are giving up $2.957 (0.7 times 4.225) for the move in CERN from $39 to $43.225.