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Complex strategy used in Stryker hedge

Stryker is trying to rally, and one investor is using an unusual strategy to manage risk.

optionMONSTER's tracking systems detected the purchase of 1,370 June 50 puts for $4.40 and the sale of an equal number of June 55 calls for $1.35. He or she also sold 2,060 June 44 puts for $2. Volume was above open interest in all three strikes.

The trade cost $5,850 and has a very specific risk profile: If SYK falls to $44, the investor will receive about $822,000 on the June 50 puts. If SYK rallies above $55, he or she will have to sell stock at that level.

The activity was almost certainly the work of an investor who bought shares in the maker of orthopedic implants at a lower level. Now that they are up, the trader is using the options to hedge.

This way the investor is protected against a drop back down to $44 but will be forced to buy more shares below that level. Given that the trader already likes the name, he or she is probably willing to do that anyway.

SYK rose 2.3 percent to $49.72 yesterday and is up more than 8 percent in the last three sessions. The maker of artificial hips and knees has been attempting to lift itself after bouncing at support several times since August.

The complicated three-way strategy combines elements of a ratio spread with elements of a collar strategy . It appeared one day after our Heat Seeker program detected buying in the January in the January 48 calls, which have since appreciated by more than 50 percent. (See our Education section)

Overall option volume was more was 7 tunes greater than average in yesterday's session. It followed bullish call buying in the stock on Wednesday.

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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