By Jud Pyle, CFA, chief investment strategist for the Options News Network
NEW YORK (
) -- Shares
of Forest Laboratories
are on the decline during afternoon trading without any company-specific news on the wires today. With just two trading sessions left until May options expire, one FRX options investor decided to roll out a long call position out to the back-month.
Shares of this drug manufacturer have dropped 57 cents, or more than 2%, to $27.09 so far during today's session the day after the company announced the FDA issued a complete response letter regarding its application for roflumilast, a drug that could reduce symptoms associated with chronic bronchitis. Additionally, FRX announced that its board approved a new share repurchase program from up to 50 million shares. The company has not announced its next earnings release date, but the market anticipates the report around July 21.
By 12 p.m. EST, more than 6,000 front-month near-the-money May 27.5 calls changed hands for 15 cents per contract, which was the bid price at the time of the trade, and the June 27.5 calls changed hands at the same time for the ask price of $1. Current open interest of the May 27.5 calls is more than 14,000 contracts while the June 27.5 calls are home to current open interest of just 2,300 contracts, indicating it's likely that the investor sold to close the front-month position and bought to open the June calls. It looks like this investor is not yet done with these calls and thinks FRX has more upside in store throughout the next month.
Rolling out this bullish call position means the investor will make money if FRX climbs higher than the breakeven price of $28.50 (if the stock continues to rally, maximum profit is theoretically unlimited to the upside). This long call trade caps maximum loss at the net premium paid, or 85 cents per contract for this rolled position.
The June 27.5 calls have an implied volatility of 38% compared to the stock's 30-day historical volatility of 53%.
Jud Pyle is the chief investment strategist for Options News Network 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.
Jud Pyle, CFA, is the chief investment strategist for Options News Network. Pyle started his career in finance in 1994 as a derivative analyst with SBC Warburg. After four years with Warburg, Pyle joined PEAK6 Investments, L.P., in 1998 as an equity options trader and as chief risk officer. A native of Minneapolis, Pyle received his bachelor's degree in economics and history from Colgate University in 1994. As a trader, Pyle traded on average over 5,000 contracts per day, and over 1.2 million contracts per year. He also built the stock group for all PEAK6 Investments, L.P. hedging, which currently trades on average over 5 million shares per day, and over 1 billion shares per year. Further, from 2004-06, he managed the trading and risk management for PEAK6 Investments L.P.'s lead market-maker operation on the former PCX exchange, which traded more than 10,000 contracts per day. Pyle is the "Mad About Options" resident expert. He is also a regular contributor to "Options Physics."