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Strategy looks for upside in LabCorp

David Russell (david.russell@optionmonster.com)

Good weather or bad, one trader likes Laboratory Corp. of America.

The diagnostic-testing company reported mixed results last week, blaming weak fourth-quarter profit on Hurricane Sandy. Revenue, however, beat estimates by a narrow margin and management said volumes have improved since then.

Yesterday's option action was dominated by a strategy designed mimic owning LH shares. Some 2,000 May 100 calls were purchased for $0.85 and an equal number of May 80 puts were sold for $0.60. Volume was more than 5 times open interest at each strike, indicating that these are new positions.

If LH rallies, the calls owned will appreciate in value and the puts sold short will dwindle; the opposite will occur if the stock falls. The advantage of the trade versus owning stock is the relatively low cost of $0.25, but it will track the shares less closely over time and become worthless if they remain between $80 and $100 on expiration. (See our Education section)

LH fell 0.72 percent to $89.41 yesterday. The bullish combination strategy pushed total option volume to almost 5 times greater than average in the session.

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