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Traders hedge as Cephalon swings

Cephalon has been thrown back and forth by major headlines in the last two sessions, and investors are hedging their bets.

optionMONSTER's tracking systems detected the purchase of 2,000 November 50 puts for $1.12 and the sale of an equal number of November 70 calls for $0.70, costing a net $0.42. Volume was more than triple open interest in both strikes.

CEPH Chart

CEPH fell 0.56 percent to $60.67 yesterday, one day after the drug maker said in a preliminary statement that second-quarter sales were better than expected.

The stock leapt about 5 percent Wednesday morning but failed to hold those gains. Yesterday it sold off halfway through the session after European regulators limited use of its Provigil sleep-aid drug. While the drug accounts for about 45 percent of CEPH's revenue, the European market accounted for a small fraction of those sales.

The shares swung sharply amid heavy volume on the newss, apparently prompting yesterday's option trade. The strategy, known as a collar or a bearish combination trade, will simulate a short position in the stock. It may have been implemented by a shareholder looking to insure his or her position against a major collapse.

Thanks to the puts, he or she would be protected if CEPH falls below $50. The short position in the calls would also obligate the trader to sell shares for $70 if the stock climbs over that level.

In another noteworthy trade, 3,400 August 80 calls were purchased for $0.05 and $0.10, but volume came against existing open interest. Given the selling in the shares around the same time, the transaction probably resulted from an investor exiting a covered call position about the same time. (See our Education section)

CEPH will issue complete financial results after the bell on July 27.

Overall options volume was more than 15 times greater than average in the name yesterday.

Disclosures: I own CEPH shares.

(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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