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Alkermes faces bearish strategy

Posted
5/17/2010 2:12:00 AM
By: optionMONSTER
Referenced Stocks:ALKS;JNJ

Alkermes seems to be rolling over, and one trader is positioning for more downside.

optionMONSTER's Depth Charge tracking system detected the purchase of 1,000 August 12.50 puts for $1.92 on Friday. At the same time, 1,000 August 10 puts were sold for $0.60 and 2,000 August 12.50 calls were written for $0.85. The transaction resulted in a net credit of $0.38 per put contract bought.

ALKS Chart ALKS fell 8.01 percent to $11.60 on Friday and is down 15 percent in the last month. The drug-delivery stock gapped lower on a wider-than-expected loss and weak revenue number after making less money producing the Risperdal Consta schizophrenia treatment for Johnson & Johnson.

The stock had been rallying on optimism about Bydureon, a breakthrough diabetes treatment under review by the Food and Drug Administration. ALKS gapped higher on March 15 after the FDA said it wouldn't require further tests, but the stock was then unable to sustain its upward momentum through $14.

Friday's option trade, a combination of a bearish put spread and a bearish synthetic short, will deliver highly leveraged returns from ALKS pushing lower. The investor will keep the $0.38 as long as the stock remains below $12.50 and earn as much as $2.50 more if it closes at or below $10 on expiration.

The strategy also creates the risk of unlimited losses if the stock rallies above $12.50, so it may have been implemented by a shareholder looking to hedge a long position in the equity.

The transaction pushed total options volume in the name to almost 5 times the daily average in Friday's session.

(Chart courtesy of tradeMONSTER)