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American Home Options Attract Interest

Yes, there actually is something going on today in the market besides the Fed announcement.

Drug maker American Home Products (AHP), often mentioned in takeover chatter, was seeing some interesting options activity.

Volatility Index
Today % Change
27.76 +2.17
Source: ILX

In quiet trading ahead of the Fed announcement, some investors were chasing after the American Home out-of-the-money call options. (A call option is a right but not an obligation to buy a stock.) The May 60 calls traded about 5,400 contracts on an open interest of 3,956, with the premium most recently listed at 45 cents. According to one floor trader at the Chicago Board Options Exchange, the bulk of the volume on those calls was the result of two fairly large institutional trades coming from two separate houses.

Nasdaq Volatility Index
Today % Change
65.13 -1.5%
Source: ILX

This is a somewhat speculative bet considering that the stock is trading at $58.70 with just three days until expiration. So the investor is betting on a quick move up in the stock. American Home has seen three merger attempts fail in recent years. But today there was no takeover talk to accompany the options activity, so the investors could be betting on some other news to fuel the stock.

The trader noted that he hasn't seen the stock at $60 in some time. Indeed, it last hit that level on March 12. If the stock doesn't move in the next three days, the option most likely won't be exercised, expiring worthless while the holder will be forced to eat the cost of the premium.

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