Brookdale Senior Living reports earnings after the bell today,
and one investor is hedging against a potential selloff.
optionMONSTER's Depth Charge tracking system detected the purchase
of 2,000 October 20 puts for $1.80, matched against the sale of
4,000 October 17.50 puts for $0.85 and 2,000 October 30 calls for
$0.35. The three-way strategy includes elements of a ratio spread
and a bearish combination trade to reduce cost and earn a net $0.25
for each put contract purchased.
The retirement-home operator is up 0.7 percent to $21.65 so far
today. BKD rallied more than eightfold between March and September
2009 but have been consolidating since then and spent the last
seven weeks below $22.
Today's option trade was probably implemented by a shareholder
wishing to protect against a big drop. While the transaction
generated income, it will surrender any move above $30 the stock
makes by October expiration, and the trader would be forced to buy
more shares if it drops below $17.50.
If the position was implemented by itself, it would earn infinite
profits below $20. The gains would erode below $17.50 because of
the larger short position in the downside puts and turn to losses
if the stock falls through $15. It would also lose money if BKD
climbs above $30.
The transaction pushed overall options volume in the stock to 25
times greater than average.
(Chart courtesy of tradeMONSTER)
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