Markets

Medco calls pop despite stock selloff

Medco Health Solutions plunged on a less-than-perfect earnings report, but some traders are buying on the dip.

optionMONSTER's Heat Seeker tracking system detected the purchase of about 1,500 August 50 calls, mostly for $1.20 to $1.30, and more than 1,700 August 55 calls for $0.25 to $0.40. Volume was above open interest in both strikes.

MHS Chart

MHS fell 6.09 percent to $50.08. At one point the stock fell as low as $47.96 before stabilizing at a key support level from last year. Once they found their footing, the call buyers stepped in and quickly saw gains as the shares rebounded.

The premium on the August 55 calls had popped as high as $0.85, and the August 50 contracts traded as high as $2.50, according to our systems.

The pharmacy-benefits stock fell after second-quarter earnings narrowly exceeded consensus, despite revenue beating by $200 million--a trend that seems raises questions about margins going forward. Management also forecast 2010 earnings of $3.34 to $3.39 a share, the midpoint of which is below the $3.37 analyst estimate.

Overall option volume in MHS is six times greater than average so far today, with calls accounting for 69 percent of the activity.

(Chart courtesy of tradeMONSTER)

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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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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