Shares of pharmaceuticals concern Novartis AG (
) have fallen more than 10% in 2010, but the stock has settled into
a steady trading range between $47.50 and $49.50 per share. Despite
the problematic price action, analysts are still calling for a
rebound in the equity, with
reporting that eight of the nine brokerage firms following NVS rate
the shares a "buy" or better. Digging through today's options
activity, I uncovered a trade that makes me believe that at least
one investor has jumped on the bullish NVS bandwagon.
Specifically, the stock has seen considerable activity at its
October 45 put and October 55 call. The trader apparently sold
11,000 October 55 calls for the bid price of $0.45, and bought an
equal number of October 45 puts for the ask price of $1.25. Given
this information, it would appear that we are looking at either a
bullish collar (most likely), or an extremely bearish debit spread
For the uninitiated, a collar is an options trade established by
simultaneously buying a protective put and writing a covered call
on a stock already in the trader's portfolio. However, while the
premium received from the sold call will help to offset the cost of
the put (or even exceed it), the written call will also cap the
investor's upside in the wake of an extended rally.
Assuming that the strategy is indeed a collar on an existing
long NVS position, the trader has set his stop-loss at $45 per
share, and his target profit at $55 per share. Furthermore, he has
given NVS until October expiration to hit either level. Depending
on when the long NVS stock position was entered, the trader can
limit his losses to practically nothing, or a specific percentage.
For example, if the trader purchased NVS shares at the same time as
the collar position, his downside loss would be at about 7.9%,
while his gains would be capped at about 12.6% (nearly doubling his
On the other hand, if the trader does not own NVS shares, the
options strategy becomes an extremely bearish debit spread, with
unlimited upside exposure due to the sold out-of-the-money call.
With the October put bought for $1.25 and the October call sold for
$0.45, the trader would need NVS to fall to $44.20 per share, a
plunge of nearly 9.5%, in order to reach breakeven.
Looking at NVS from a technical perspective leads me to believe
that the collar strategy is the most likely. As mentioned above,
the shares are trading between support and resistance levels.
What's more, NVS appears to be in the process of rebounding from
short-term support near $48 per share, breaking out above
resistance at $49 per share in the process. A breach of the $48
area could send NVS down to test its next potential area of
technical support, near $45 per share, which is home to the
purchased October 45 put. A buy-and-hold stock trader may view a
trade below this area as a signal to cut his losses and exit the
Meanwhile, $55 has been an area of technical resistance for NVS,
capping the shares for most of February and March. Using the same
logic as above, a rally into this area could be seen as a reason to
take profits on a long stock position. As such, it would make sense
to sell a call at this level to set an exit point for the
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