Put Spread Targets Popular Biotech

08/11/2011 6:00 am EST


Elizabeth Harrow

Director of Digital Content, Schaeffer's Investment Research, Inc.

Human Genome Sciences (HGSI) has cratered lower since May, and one option trader has opened a bearish put spread position that will achieve max profit if the shares continue to fall this summer.

Earlier this week, Human Genome Sciences (HGSI) was heavily targeted by put players, with volume rising to 1.52 times the norm. About 4,470 put contracts were exchanged during the course of the Tuesday (August 9) session, as compared to HGSI's average daily put volume of 2,943 contracts.

The chart picture isn’t pretty on this one:

Click to Enlarge

Data from the International Securities Exchange (ISE) confirms a strong skew toward bearishly oriented options. Traders on this exchange bought to open 1,015 puts on HGSI Tuesday, as compared to just 67 calls, netting the biotech issue a single-day ISE put/call volume ratio of 15.15.

Taking a closer look at Tuesday's major block trades, one bearish bettor opened a long put spread by purchasing 990 September 15 puts and simultaneously selling 990 September 12 puts.

The ultimate goal of this debit spread is for HGSI to settle at or below $12 upon September expiration. This will allow the trader to collect the maximum potential profit on the play, which is limited to the difference between the two strikes, less the initial net debit.

After checking out the charts, it seems Tuesday's spread strategist is simply betting on HGSI to continue its decline during the near term. The stock has shed 35.5% year-to-date, with HGSI staggering dramatically lower after a rejection at the $30 level in early May.

However, the candles seem to be consolidating here around $14.50, so there is a risk it may be finding a base and will begin to turn higher, although that is purely from a technical standpoint.

By Elizabeth Harrow, contributor, Schaeffer’s Trading Floor Blog

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