Biogen Idec Inc. (BIIB) garnered unusually heavy option volume on Thursday. Roughly 10,000 calls crossed the tape, well outpacing expected volume of fewer than 3,700 contracts. However, puts were also active, with nearly 9,600 of these bearishly oriented options changing hands. By contrast, only about 1,260 puts were expected to trade on BIIB yesterday.
Taking a closer look at the day's activity, it appears that one trader was responsible for a healthy dose of BIIB's call and put volume. Shortly after the open, a spread strategist opened an iron condor play on the biotech issue.
The iron condor was constructed by selling 2,950 contracts of BIIB's April 60 call, and simultaneously selling 2,950 contracts of the stock's April 55 put. With BIIB trading around $58 at the time of the transaction, both options were out of the money.
Next, the "wings" of the condor were added by purchasing 2,950 contracts apiece of the deeper out-of-the-money April 65 call and April 50 put.
In an iron condor, the ultimate goal is for the stock to remain pinned between the two sold strikes through expiration. In this best-case scenario, all of the options involved will expire worthless, and the trader can retain the initial upfront premium as his maximum potential profit.
However, even if BIIB moves outside this pre-determined trading range, the speculator's losses will be limited. That's because the "wings," or purchased options, act as built-in hedges.
So, how likely is it that BIIB will remain stagnant between the $55 and $60 levels through April expiration? The shares have recently embarked on a breakout rally, thanks to a little help from their 10-day and 20-day moving averages. The shares have now established a solid foothold north of the formerly resistant $55 area, so the iron condor player may be expecting this level to switch roles and act as support.
As for that sold call at $60 -- BIIB has been consolidating just shy of $59 during the past several sessions, which may have piqued the spread trader's interest. Plus, it's worth noting that BIIB's Relative Strength Index (RSI) is currently docked at an overbought reading of 70, so the equity could be due for a period of consolidation during the near term. Overall, the technical prospects look solid for this iron condor on BIIB.
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