During the trading session on Wednesday, a Novartis AG (
) 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.