NASDAQ 100 constituent and pharmacy benefit management services specialist Express Scripts (ESRX) is bucking the broader market Friday with its gain of 1.50% despite a less-than-impressive sounding corporate confessional. By the numbers, the company reported a profit miss of four cents on earnings of $0.73 per share. Revenues did come in higher than forecast with year-over-year growth of 9.4%, but its bearish-bracketing FY12 EPS outlook of $3.36 - $3.66 versus Street views of $3.65 seems to leave something to be desired.
Technically and by the looks of investors reaction in shares, which are developing a handle set within a year-long corrective, first-stage cup base; it appears bulls are willing to take the bad along with the good and run with it. One large option trader might also see it that way as well.
Earlier in the session and with shares near 56.25, two prints of 680 contracts in the June 52.5 put and June 57.5 call were put up for $0.60 and $1.31 respectively. With no stock tied to the print and a bullish-leaning bias with the calls closer to the money; the trade could be the work of an investor positioning with a risk reversal.
In this instance, buying the call and selling the put nearly halves the cost of an outright call purchase. The downside or potential increased risk comes with the shorted put which opens up assignment risk below 52.50 and an effective purchase price of 53.21. For traders familiar with dynamic collars and methods of opening up the synthetic vertical position, this type of risk reversal could fall into that category of entry.
Figure 1: Express Scripts (ESRX) Daily Bull vs. Bear
Of course, today’s assumed risk reversal could always be a hedge for the likes of an existing long stock position. This means a collar would now be established, but the question of at what price, still unknown. Likewise, the initiating trader, and barring the possibility of a strangle, might have positioned bearishly by selling the call and buying the put. It appears our technical assistant Elliott who sees a W5 top in place, might agree with that option; pardon the pun.
While the positioning of the strikes might have some seeing the latter trade as the more risky, a bear risk reversal does have the benefit of a credit which would be received come June expiration if shares failed to move above 57.5. And should this week’s low of 52.53 get tested; the position is looking all but in-the-money in more than one way.
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
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The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.