In Monday’s sometimes accurate heat-seeking option markets, shares of Merck (MRK) are on a tide-bucking tear of 1.60% to fresh multi-year highs from a three day simple pullback pattern which has broken above key monthly chart resistance.
On the option side, volume is running heavy at about 200% above normal on roughly 50,000 contracts with calls dominating the action by a margin of 10-to-1. With premiums bid up slightly the action looks to reflect net bullish option buying aligning itself with today’s move in the underlying.
Of notice, one rather large trader appears to be in the enviable position of adjusting a likely profitable long call position. The fresh positioning appears to have its sights on further upside in shares of MRK into August using a diagonal roll in which the contracts have been rolled out and up for a credit.
Specifically and after digging for prints, a block print of 10,571 spreads in the July 41 and August 42 call was put up for $0.35 with the credit going to the buyer of the longer-dated contract. For an existing long call position, the credit would allow our hypothesized bull to reduce their initial dollar risk on the original long July call position by the credit and enjoy the benefits of an extra 28 calendar days to see shares potentially improve upon their current levels.
Figure 1: Merck (MRK) Monthly View
Without carnal knowledge of the position, hypothetically if the trader originally purchased the July 41s for an assumed price of $0.75 per contract, today’s diagonal spread to close out July and roll into the current at the money August contract allows the dollar risk to drop to $0.45 or by a net dollar amount of nearly $370,000. As mentioned, the additional time to expiration is a substantial benefit. This type of roll also maintains a bit more than a week’s time before theta or time decay becomes an increasingly important consideration; beyond risk control measures already smartly improved upon of course.
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.