Markets

Calendar spread sees rocky road for Cerner

Cerner is hovering after a big rally, and now one investor expects a rocky road going forward.

optionMONSTER's tracking systems detected the purchase of about 10,000 June 100 puts for $4.30 and the sale of an equal number of April 100 puts for $1.70. Volume was more than 50 times open interest in both strikes.

The strategy was known as a calendar spread and cost $2.60. It will profit from higher implied volatility, which will increase the value of the longer-date contracts more than that of the shorter ones sold short. That's because the June puts have a vega of 0.20 versus 0.11 for April. (See our Education section)

CERN rose 0.56 percent to $103.78 in morning trading and has roughly tripled since the market bottomed in March 2009, fueled by strong demand for its medical IT services. Implied volatility has drifted lower over that time but is starting to climb as realized volatility increases.

Shares of the health-care information systems company are also close to an all-time high of $104.99 established earlier in the month. Bears often hunt for stocks trading at such levels when the broader sentiment turns negative, hoping for increased volatility.

The option trade will also make money if CERN remains above $100 through April expiration but then falls below that level. The main risk to the position is that the shares drop too soon.

Overall option volume in the name is 51 times greater than average so far today.

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

Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.


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

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