IB Options Brief: Express Scripts, Inc. (ESRX) & Quest Diagnostics, Inc. (DGX)

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ESRX ñ Express Scripts, Inc.
Shares in the Saint Louis, Missouri-based pharmacy benefits manager shed 3.0% in early-afternoon trade to stand at $41.48 after a number of analysts lowered share price estimates and third-quarter earnings guidance for Express Scripts. Comments from the companyís CFO at a conference on Wednesday preceded a more than 6.7% drop in the price of the underlying to the lowest since the flash crash on Thursday. The stock is well of its lowest point of the day, and options trading patterns on the stock suggest some strategists are positioning for the recovery to continue in the near term.

Traders itching for an immediate bounce this week picked up roughly 1,350 calls at the September $40 strike for an average premium of $0.92 this morning. The intraday rebound in ESRX shares now sees these options trading comfortably in-the-money at a far richer premium of $1.60 each. These calls expire at the end of this week.

Like-minded optimists snapped up in- and out-of-the-money call options in the October contract, as well. Trading traffic is heaviest out at the October $45 strike, where more than 5,000 contracts changed hands by 12:30 pm ET. Early movers were buying more of the $45 strike call than selling, and paid an average premium of $0.85 apiece. Investors long the calls at $0.85, on average, stand prepared to profit should Express Scripts shares surge 10.5% in the next five weeks to October expiration.

Meanwhile, traders seeking immediate-term downside protection paid an average premium of $0.36 for some 2,000 puts at the Sept. $40 strike this morning, but the rebound in ESRX shares in the hours since saw put premium more than halve to $0.15 per contract this afternoon. Options implied volatility on the stock is off its highest points of the session, but remains elevated, up 9.9% at 40.97% as of 12:35 pm in New York.

 

DGX ñ Quest Diagnostics, Inc.
The provider of diagnostic testing, information and services popped up on our ëhot by options volumeí market scanner after a sizable bear put spread was initiated in the Jan. 2012 contract. Shares in DGX slipped 3.3% to $47.70 this afternoon. The company presented at the Morgan Stanley Global Healthcare Conference in New York City on Tuesday.

It looks like one trader purchased the 2,500-lot Jan. 2012 $30/$40 put spread at a net premium of $2.10 per contract to position for additional downside moves in the months ahead. The investor responsible for the spread profits if shares in Quest Diagnostics plunge 20.5% to breach the effective breakeven price of $37.90 by expiration next year.

Maximum potential profits of $7.90 per contract are available to the trader should shares in DGX tumble 37.1% from the current price of $47.70 to trade below $30.00 by expiration day. DGX shares came within $0.80 of $40.00 on the May 6 flash crash, but havenít been anywhere near $30.00 since 2003.

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