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Vertex attracts unusual time strategy

David Russell (david.russell@optionmonster.com)

One investor is bending time to manage a trade in Vertex Pharmaceuticals.

optionMONSTER's tracking programs detected the purchase of 5,000 January 2014 calls for $5.81 and the sale of 5,000 January 2015 calls for $10.06. There was barely any open in either strike before the trade appeared, so these are new positions.

The trader collected a credit of $4.25 and now stands to benefit from a gradual move in the drug developer. If VRTX closes above $50 one year from now, he or she will get long shares at that price, but the cost basis would be $45.75 including the income received yesterday.

The trader will then be on the hook to sell their shares for $50 if it remains above that level through January 2015, representing a 9 percent profit over cost. While it may not seem like a big gain in a two-year period, it's pretty good considering that this calendar spread cost nothing to open.

The main risk is that the drug developer remains below $50 through next year. In that case, the trader will be naked short the 2015 contracts but will still have the original $4.25 left over to defray the cost of buying them back. The trade could also benefit from volatility increasing in the shorter term because it would inflate the value of the 2014 calls owned. (See our Education section)

Shortly before the calendar spread appeared, an investor bought the April 48 puts and sold the April 42 puts for a net cost of $2.50. That position will profit from a decline over the next three months and may be tied to the longer-term trade in the calls.

VRTX fell 0.52 percent to $48.25 yesterday but is up 21 percent since the beginning of last month. The calendar spread pushed total option volume to 12 times greater than average in the session.

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