Downside play on Brookdale Senior

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Brookdale Senior Living reports earnings after the bell today, and one investor is hedging against a potential selloff.

BKD Chart 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)



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

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This article appears in: Investing , Options

Referenced Stocks: BKD

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