Options Trade Assumes Limited Upside for Baxter Intl. (BAX)

With earnings out of the way, Baxter International Inc. (BAX) shares edged up on Monday, relatively in line with the broad market strength. Options action out of the gate suggested an investor expects less than 22% of upside during the long term and chose to express that bet by selling calls.

At 10:54 am ET, a block of roughly 8,200 out-of-the-money (OTM) LEAPS January 2012 52.5 calls changed hands for $2.73 per contract. This premium was below the bid price at the time of the trade. These LEAPS calls are home to current open interest of just 81 contracts compared to the total 8,564 contracts on the tape so far on the day, indicating the investor most likely sold these options to open.

Investors who sold these calls will make money if BAX shares are still trading lower than the strike price at expiration. Short call trades such as this one cap maximum profits at the premium collected, or a total of $2,238,600 in this trade. If the stock is trading above the strike price but remains below the breakeven price of $55.23 at expiration, the investor gives back some of the premium collected. Once the stock climbs higher than the breakeven price, this short call position loses money, and could continue to do so if the stock continues to the upside. The ideal situation in a short call trade is for the price of the options to depreciate and expire worthless, allowing the investor to retain the entire premium collected.

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BAX shares gained 14 cents to $45.27 during morning trading on Monday without any news from the company. The stock is trading roughly 11% higher than its 52-week low of around $40.25. On July 22, BAX announced earnings of 93 cents per share and beat estimates by one cent.