Wednesday, March 16, 2011

Trade of the Day: Medco Health Solutions July $60/$65/$70 butterfly

The Trade
A trader bought 24,000 July $60 calls at $2.50, sold 48,000 July $65 calls at $0.95, and bought 24,000 July $70 calls at $0.40 for a debit of $1 or $2,400,000.

As you can see from the graph above, the long butterfly has limited risk and limited profit potential. The max risk is the debit and the max profit is the difference between the strikes minus the debit, which is $4, or $9,600,000. The max profit would occur if the underlying stock pins to the middle strike price at expiration. The lower and upper break even price levels at expiration are $61 and $69.

The lines shown are the lower and upper break even price levels. MHS closed today at $56.23. MHS trade 116,641 contracts today compared to average daily volume of 5,387. The 52-week range is a low of $43.45 and a high of $66.70.

Medco Health Solutions, Inc. is a healthcare company. It provides a clinically-driven pharmacy services designed for private and public employers, health plans, labor unions and government agencies of all sizes, and for individuals served by Medicare Part D Prescription Drug Plans.

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