Cigna trader bets on higher volatility

By David Russell,

Shutterstock photo

Cigna reports earnings in two weeks, and one trader is looking for volatility to ramp up into the release.

optionMONSTER's tracking systems detected the purchase of 5,000 January 33 calls for $2.40 against open interest of 107 contracts. A large block of shares was sold at about the same time, indicating the use of a so-called delta-neutral trade.

CI Chart Carrying a short position in the equity at the same time the calls are owned isolates the option, or volatility, component in the contracts. That allows the investor to make money if implied volatility increases while eliminating exposure to the stock moving up or down.

CI fell 0.45 percent to $31.11 in midday trading and is down 12 percent in the last month. The heath insurer beat forecasts the last time it reported earnings on May 6 and reaffirmed its full-year guidance.

Larger rival UnitedHealth beat expectations by a wide margin yesterday and raised its full-year guidance.

With CI's announcement scheduled for the pre-market on Aug. 5, today's trader apparently thinks that it's time to bet on a move. Implied volatility in the name has been climbing recently after bottoming around a 32 percent in April--its lowest level since shortly before the 2008 market panic.

The option trade will profit if premiums rise into the announcement or if the shares make a big move after the results come out. If he or she is wrong, the trade doesn't stand to lose much because the contracts don't expire until January. That means it's susceptible to minimal time decay in the next few weeks.

Overall option volume in CI is about six times greater than average so far today, according to our tracking systems.

(Chart courtesy of tradeMONSTER)

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.

This article appears in: Investing Options
Referenced Stocks: CI , UNH

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