How one trader is hedging Impax

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Impax Laboratories has bounced hard, and one investor thinks the next move could be lower.

optionMONSTER's Depth Charge tracking program detected the purchase of 2,547 December 20 puts for $0.70 and the sale of an equal number of October 25 calls for $0.70. Volume was more than 7 times open interest at both strikes.

The investor is probably using the options to hedge a long position in the Silicon Valley-based drug maker. He or she now stands to profit from a drop in the share price but will also be forced to sell their stock if it goes above $25 during the next two months.

IPXL dropped 0.58 percent to $23.83 yesterday, but is up 21 percent in the last month. Most of that move came after earnings and revenue beat expectations on July 31. The shares then stalled around the same level where they peaked in April, which could make some traders expect they will remain range bound for the time being.

Thursday's option trade was a variation of a so-called collar strategy, which typically entails contracts of the same month. Using the different expirations provided the investor with protection for a longer period of time, and more quickly removes the level at which they must sell shares in the event of a rally.

Some 5,200 contracts traded in total during the session, almost 19 times the average daily volume.




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.

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


This article appears in: Investing , Options

Referenced Stocks: IPXL

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