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Trader expects cap on gains in Eli Lilly

David Russell (david.russell@optionmonster.com)

Eli Lilly is trying to advance, but one investor doesn't expect a lot of upside.

optionMONSTER's tracking systems detected the purchase of 5,000 October 34 puts for $0.53. An equal number of October 42 calls were sold at the same time for $1.58, resulting in a net credit of $1.05.

Known as a collar , the trade was probably the work of an investor who owns shares in the drug maker. It sets a maximum selling price of $42 and establishes protection against a sharp drop.

The investor chose $34 as the threshold to the downside, roughly the same level where LLY bottomed last summer. That might be the level where the original position was opened, and he or she wants to ensure a selling price at least that high.

The $42 upside target is also important because that's roughly the same level were LLY made a multi-year high early this year before pulling back. Including the credit earned, their exit price would be $43.05--above that peak. (See our Education section for more on how selling calls can be used to pad returns.)

LLY is flat on the session at $40.32 in afternoon trading. Earnings results will come out before the bell on April 25, so today's collar trade will also provide a hedge against a weak report. The expiration month is also noteworthy because if the investor bought shares last October, the options would time the exit one year after the entry, reducing tax liabilities.

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