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How trader is using puts to buy Avanir

By: optionMONSTER
Posted: 2/13/2012 11:19:00 AM
Referenced Stocks: AVNR

Avanir has pulled back after rallying, and one investor wants to get long.

Instead of buying shares, however, the trader is writing puts. optionMONSTER's tracking systems detected a transaction in the June 3 contracts, with a block of 5,000 trading for $0.45. That was the asking price at the time, which indicates that they were sold.

AVNR is down 2.73 percent to $2.85 in morning trading but is up more than 40 percent in the last two months. The company's revenue is expected to double next year as sales increase for its Neudexta neurological drug.

The strike price of the puts is below the current price of the shares, meaning that options are at the money . If AVNR rallies above $3, the trader will keep the premium and the contracts will expire worthless. Otherwise, he or she will have to buy stock for $3 but, including the income from the put sale, the effective entry price would be $2.55.

Selling puts allows them to manage an entry price into the stock and eliminates the need to time a purchase. It also lets traders make some money if AVNR runs away from them. (See related column by Chris McKhann)

The trade pushed overall volume in the stock to 6 times greater than average so far today.