Human Genome Sciences (HGSI) is up 12 cents to $3.46 and 22K calls traded today, which represents 5X the expected for midday trading. January 2010 calls at the $10 line are the most actives. More than 10K traded and nearly all traded bid-side. In addition, a block of 220K HGSI shares at $3.55 also traded in recent action. So, some investors might be selling premium (Jan 10 calls for 50 cents) against HGSI shares as part of a buy-write strategy.
Recall that, in a buy-write, the strategist normally sells 1 call for every 100 shares. In this case, the investor is selling a call for 50 cents ($50 because the multiplier is 100) and buying shares for $3.55. The cost basis, per share, falls to $3.05; which becomes the downside breakeven through the expiration. The upside is to $10 (228 percent). If shares, move beyond that level, the calls will be assigned and the strategist must deliver HGSI at $10 per share.
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About the Author (Author Profile)
Frederic Ruffy is a well-known trader, writer, and strategist who has spent years educating investors and creating intelligent, insightful, unbiased market observations that are frequently cited by the Wall Street Journal and other financial publications. As senior analyst, Fred provides frequent and regular notes and daily updates for activity of interest.