One investor is playing the calendar in Teva Pharmaceutical Industries.
optionMONSTER's monitoring systems detected the purchase of about 10,000 December 40 puts for $1.89 and the sale of a matching number of October 40 puts for $1.05. Volume was more than triple open interest at both strikes.
Known as a calendar spread, the trade cost $0.84 to open and is designed to exploit the quick pace of time decay in the shorter-dated contracts. If the Israeli pharmaceutical giant remains above $40 through October expiration, those puts sold short will become worthless and the value of the spread will increase.
The investor could then exit the position or hold the December contracts in hope of a subsequent drop. He or she will lose the initial outlay of $0.84 if the stock closes below $40 on Oct. 19. They can also lose money if the shares rally because that would reduce the value of the December puts. Therefore, the maximum profit occurs just above $40 two months from now.
(See our Education Section for more on market-neutral strategies that make money from the passage of time rather than a directional move.)
TEVA rose 0.12 percent to $40.43 yesterday, and has traded between about $38 and $42 for the last three months.
Overall option volume was almost triple the daily average, with puts outnumbering calls by 9 to 1.
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