Volatility seller targets Forest Labs-11/04/2009

Implied volatility has been climbing in Forest Laboratories, but one trader doesn't expect the trend to last.

optionMONSTER's tracking systems detected unusual selling of the January 27.50 puts for $1.60 and the November 27.50 puts for $0.85. The longer-dated puts traded 4,272 times while volume in the November options reached 3,480 contracts, above open interest in both. About 3,400 November 30 calls were also sold for $0.25 to $0.30, though volume was below open interest.

FRX rose 0.15 percent to $27.52 yesterday. The drugmaker has been falling since Oct. 20, when it issued weak results and disappointing guidance for the year.

Implied volatility in the name rose to 34 percent from 29 percent during the same period. FRX reported positive Phase 3 results for its linaclotide constipation drug yesterday morning, which may have given the option trader confidence the shares will at least stabilize.

About one-third of the options trading consisted of "selling a strangle" at the 27.50 and 30 strikes. The strategy generated a credit of about $1.10 and will make money as long as FRX stays between $26.40 and $31 over the next three weeks. (See our Education section)

The January 27.50 puts were also written to earn premium. The investor wants volatility will decline and the shares to appreciate at least slightly, which would render the puts worthless by expiration.

Overall options volume in FRX was nine times greater than average yesterday, with sales accounting for the bulk of activity.

(Chart courtesy of tradeMONSTER)

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