What's behind big upside play in GNC

optionMONSTER

GNC Holdings has been going straight up, and one investor apparently thinks that the move will continue.

optionMONSTER's Heat Seeker tracking program detected the purchase of 8,000 March 42.50 calls for $1.15 and the sale of 2,000 March 37.50 calls for $4.60. Volume was below open interest in the 37.50s, which indicates that an existing position was closed and rolled to the higher strike.

The unusual aspect of the trade is that the number of contracts owned was quadrupled in size. As a result, the investor received no credit back from selling the lower-strike calls but stands to generate even bigger profits if the vitamin company continues to rally.

An examination of the option Greeks shows how the trade works. The delta on the 37.50s was 0.93, while the 42.50s was 0.47. But because the investor now owns 4 times more contracts, he or she doubled the upside leverage . The trader also moved to a strike with 3 times more gamma , which means that leverage is now poised to increase more quickly if the stock moves higher through mid-March. (See our Education section)

GNC rose 3.92 percent to $42.19 yesterday and is up 17 percent in the last week. The rally came after earnings beat expectations for at least the fourth straight quarter, and management issued guidance above consensus estimates.

Total option volume was 11 times greater than average, according to the Heat Seeker. Calls outnumbered puts by 25 to 1.


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