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How the bulls are trading Medivation

David Russell (david.russell@optionmonster.com)

One investor is adjusting a bullish position in Medivation, whose shares have been consolidating after a screaming rally last year.

optionMONSTER's Heat Seeker monitoring program detected the purchase of 3,750 June 55 calls for $4.25 and the sale of 2,500 May 50 calls for $5.10, resulting in a net cost of $318.750. Volume was below open interest in the May contracts, which suggests that an existing bullish wager was closed and rolled forward in time.

Adjusting the trade protects the investor from a near-term pullback and lets him or her remain exposed to a rally with long calls later in the spring. The 50s sold are in the money and have a delta of 0.80, which means they are more susceptible to lose value if the drug developer falls. Swapping them out for the June 55s maintains a similar delta equivalent of the overall position, while also reducing their sensitivity to the downside in the next few weeks. (See our Education section for more on how options can be used to manage risk.)

MDVN is down 1.33 percent to $54.33 in afternoon trading. It surged more than 500 percent between November 2011 and October 2012 after announcing positive Phase III results for its prostate-cancer drug under development but has been fluctuating in a range since.

It bounced sharply in the from under $43 earlier this month, and now appears to be stalling. That could be leading some traders to believe that it will pause or drop in the near term, helping to  explain today's activity.

Total option volume is 5 times greater than average so far today, according to the Heat Seeker. Calls outnumbered puts by 17 to 1.

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