Call Buyers in Aetna: Options

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

Aetna ( AET) did not announce significant news today, but at least one investor is taking a bullish stance on the health insurance name and boosting call volume.

The slightly out-of-the-money Nov. 31 calls have changed hands more than 20,000 times so far today and are home to current open interest of 311 contracts. The bulk of these calls traded at a price near 95 cents around 11:10 a.m. EST, when the stock was around $28. That computes to an implied volatility of approximately 47, compared to the 63-day realized volatility of 42.

Given the premium of 95 cents, the buyer needs AET shares to expire higher than $31.95 to make money, unless of course, the calls rise prior to expiration following a rise in the shares and the investor chooses to sell them to take profit.

Shares of Aetna have slid along with other HMO stocks like Cigna ( CI) and WellPoint ( WLP) over the last week and a half. AET and other stocks in the sector are down approximately 10% since the close on Sept. 21.

One catalyst this call buyer could be banking on to get the shares moving upward again is AET's earnings report. The company is currently scheduled to announce results for its fiscal third quarter before the market opens on Oct. 29. Analysts are anticipating the company will make 66 cents per share, down from $1.12 in the same quarter 2008.

Normal daily option volume in AET is approximately 5,000 contracts, and the call-buying action we've seen already far trumps this figure. So far, more than 30,000 contracts across all strikes have hit the tape today, the bulk of which changed hands in the Nov. 31 call series.

It is noteworthy that in a time when many companies are pressing toward 52-week highs as the old highs of last summer are now more than 52 weeks away, AET shares are still nearly 20% below their levels of late-January and early-February. One justification for the decline is obviously the continued fear by investors that health care reform in Washington will prove detrimental to the bottom lines of insurers. But for today, at least one call buyer is betting the stock could see a slight rebound.

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.

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."

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