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Bulls return for dose of Warner Chilcott

David Russell (david.russell@optionmonster.com)

Irish drug maker Warner Chilcott rallied earlier this month, and the bulls are back today.

optionMONSTER's Heat Seeker monitoring program detected the purchase of 6,000 July 19 calls for $1.82 and the sale of an equal number of October 16 puts for $0.82. Volume was more than 4 times open interest at each strike, indicating new activity.

Owning calls locks in the price where shares can be purchased, so they track movements in the stock price. The short puts obligate the investor to buy on a drop, so selling them also benefits from a move higher. Combining the two strategies produces a highly leveraged long position.

The unusual aspect of today's trade is that it uses longer-dated puts that were further out of the money . That generated additional income, offsetting the cost of buying the calls. (See our Education section for more on ways options can be used to take long, short, and neutral positions.)

WCRX is up 2.02 percent to $19.67 this morning and 36 percent so far this month. Most of that move occurred on May 10 when the company disclosed that it was in talks with Actavis for a potential combination.

Total option volume is triple the daily average in the company so far today, according to the Heat Seeker.

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