Position keeps a tight leash on Eli Lilly

optionMONSTER

Eli Lilly has been steadily advancing, and one investor is keeping the shares on a tight leash.

optionMONSTER's Depth Charge monitoring system detected the purchase of 9,014 July 47 puts for $0.22 and the sale of an equal number of July 55 calls for $2.75. He or she also bought 9,014 April 52.50 calls for $4.33, but volume was below open interest. This suggests that an existing position was closed and rolled forward in time.

The investor probably owns shares in the drug maker and has been using a collar strategy to hedge the position. He or she would have closed their short position in the 52.50 calls and adjusted it to the higher strike. The trader now has the right to earn an additional $2.50 on the stock and have protection in place at $47. The net cost was $1.80.

LLY is down 0.35 percent to $56.98 in early afternoon trading but has appreciated 42 percent in the last year. It's now back around the same level where it peaked between 2004 and 2007, which could be leading some chart watchers to believe that it will struggle to advance further.

By adjusting the collar, the investor is expressing a belief that the shares are done going up for now and may be vulnerable to a pullback. Using the options lets him or her hold the position rather than selling it. (See our Education section for other risk-management techniques.)

Total option volume was 5 times greater than average so far today, according to the Depth Charge.


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