The ways of a Novartis (NVS) risk reversal

By Jud Pyle, CFA,

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During the trading session on Wednesday, a Novartis AG ( NVS ) investor sold off the upside of the stock to decrease the cost of downside protection in a three-month risk reversal spread.

At 10:58 a.m. EST, an investor paid a premium of 80 cents per spread for 11,000 October 45-55 risk reversals. The October 45 puts, home to current open interest of 20,000 contracts, changed hands for $1.25 per contract, while the October 55 calls crossed the tape for 45 cents per contract and are home to current open interest of 20,000 contracts. This options action suggests the investor bought the 45-strike puts and helped finance this purchase by selling the 55-strike calls, possibly to close. The implied volatility of the October 45 puts is roughly 27% while the October 55 calls have an implied volatility of 21% compared to the stock's 30-day historical volatility of 22%.

NVS shares are currently trading up 61 cents, or more than 1%, to $49.25 on the day Wednesday, and the stock is slightly underperforming the broad-market gains. This type of options activity is not necessarily all bearish. Remember, this could be an investor who is already long the shares. NVS has rallied strongly from its May low below $44, so the investor could just be hedging that position after the run in the stock. If that is the case, then this investor makes the most money if the stock rallies because they are long the shares against the collar.

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

This article appears in: Investing Options
Referenced Stocks: NVS

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