Big hedges used in two hospital trades

optionMONSTER

Hospital operators have rallied hard this year, and one big investor wants to lock in profits.

optionMONSTER's Depth Charge monitoring system detected the purchase of 3,000 May 41 puts on Tenet Healthcare for $1.07 and the sale of an equal number of May 46 calls for $1.12.

Minutes later, a similar trade appeared in Community Health Systems, where some 2,000 May 42 puts were bought for $1.045 and 2,000 May 47 calls sold for $0.87.  There was barely any open interest in either the THC or CYH contracts, indicating that new positions were implemented.

Given the timing and similarity of the transactions, it appears that a large institutional trader is opening collar positions to hedge winning bets in the two stocks. The strategy surrenders gains above a certain level in return for limiting potential losses. (See our Education section for other hedging strategies.)

The trader will be forced to sell THC for $46 if it closes above that level on expiration, while the least that will be received is $41. He or she also collected a credit of $0.05.

In CYH, $47 is the top of the range and $42 is the bottom. The trader also received $0.175.

THC fell 1.16 percent to $43.52 yesterday, and CYH declined 1.94 percent to $43.91. Both surged more than 45 percent in the first quarter but have been pulling back this month.

Total option volume was almost 7 times greater than average in CYH and 4 times normal amounts in THC, according to the Depth Charge.


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