Call Action in CVS Caremark

By Jud Pyle, CFA, chief investment strategist for the Options News Network

CVS Caremark (CVS Quote) did not announce notable news today, but the amount of call action we saw hit the tape during morning trading suggests investors are looking for the stock to move in either direction throughout the next several months.

Last week, we covered an interesting straddle seller in the December 30 call series. With this strategy, an investor was banking on time decay and diminishing volatility throughout the next couple months in CVS. Today, however, nearly 6,000 of these calls crossed the tape vs. open interest of 10,000 contracts, indicating these contracts may have traded to close. At 10:30 a.m. EST, CVS shares were trading down 30 cents and the December 30 calls dropped 11 cents with a delta of 47, suggesting sellers were, in fact, afoot.

In addition, 4,000 December 39 calls traded for around 5 cents per contract. We saw this volume appear as a spread, which means an investor could have also sold the December 30-39 call spread to express continued bearishness on CVS.

Call volume also heated up in the November and May expiration months. More than 8,700 November 30 calls have hit the tape vs. current open interest of 31,000 contracts. Around 11:30 a.m. EST, we saw several large blocks trade at 40 cents, closer to the bid price, indicating that the action is mostly on the sell side. The May 34 calls have traded 5,700 times and are home to current open interest of just 925 contracts. The calls have dropped 4 cents and have a delta of 30, meaning we should have seen these calls drop around 7 cents this morning. It looks like buyers could be pushing up the prices of these longer-term calls.

CVS is not due to announce earnings until February, according to market estimates, but investors were taking a mixed stance on the company by trading near-the-money or out-of-the-money call options during the past few sessions. CVS shares are currently down 20 cents to $29.80.

Jud Pyle is the chief investment strategist for Options News Network (www.ONN.tv) and the portfolio manager of TheStreet.com Options Alerts. Click here for a free trial for Options Alerts. Mr. Pyle writes regularly about options investing for TheStreet.com.