Options Update: Ariad Pharmaceuticals, Inc. (ARIA) & WellPoint, Inc. (WLP)

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ARIA ñ Ariad Pharmaceuticals, Inc. ñ Shares of the pharmaceutical company are down nearly 3% today to $2.07, but one investor initiated a bullish strategy on the stock using short- and long-dated option contracts. The trader sold 9,900 calls at the January 2012 3.0 strike for a premium of 1.05 apiece in order to offset the cost of purchasing the same number of calls at the near-term January 2.5 strike for 20 cents premium each.

The investor pockets a net credit of 85 cents per contract on the transaction. The parameters of the spread allow the investor to take delivery of the underlying shares of the stock trades above $2.50 by expiration next month. The 85 cent credit received today reduces the price paid per share to $1.65 apiece in the event that the trader exercises the call options ahead of expiration.

In this case, the investor is positioned to bank 82% gains on the rise in ARIA shares ñ from $1.65 to $3.00 ñ by expiration in January 2012. The short calls in the January 2012 contract serve as an effective exit strategy for the trader if shares of ARIA rally above $3.00 in the next two years to expiration.

 


WLP ñ WellPoint, Inc. ñ Investors placed bullish bets on the health benefits company today despite the 1% decline in the value of its shares to $58.50 during the first half of the trading day. Plain-vanilla call buying was initiated at the January 65 strike where 10,000 lots were purchased for an average premium of 80 cents apiece. Call-buyers at this strike profit if shares jump 12.5% to breach the breakeven price of $65.80 by next monthís expiration day.

A more conservative bullish strategy was implemented in the March 2010 contract. One investor established a call spread on the stock by purchasing 10,000 calls at the in-the-money March 55 strike for a premium of 6.70 apiece, marked against the sale of 10,000 calls at the higher March 60 strike for 4.00 each. The net cost of the transaction amounts to 2.70 per contract. The investor is rewarded with maximum available profits of 2.30 per contract if WLPís shares rise 2.5% from the current price to $60.00 by expiration day in March 2010.

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