Put seller views Elan on solid ground

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Elan fell hard last week, but one big investor apparently doesn't think that it will go much lower.

optionMONSTER's monitoring programs detected the sale of about 50,000 January 11 puts against open interest of just 384 contracts. They initially priced for $1.65, but premiums fell to $1.50 as the trades crossed. That reflects strong selling pressure, especially because the stock inched lower at the same time. (Puts and stock normally move in opposite directions.)

The trader is now obligated to buy shares in the Irish drug maker for $11 if they close below that level on expiration. Including the credit earned, the entry price would be $9.35 to $9.50.

ELN rose 0.17 percent to $11.99 on Friday. It gapped down by 15 percent last Tuesday after reporting that its Bapineuzumab compound failed to improve memory loss in a subset of patients genetically predisposed to Alzheimer's disease. Tests for other groups will continue.

Investors often sell puts when they like a company but don't want to spend money buying shares. If their bullish sentiment is correct and the stock remains above the key level, the contracts will expire worthless and the traders keep the premium as profit. (See our Education section for other strategies that make money from the passage of time .)

Overall option volume was more than triple the daily average in the session.



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: ELN

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