Healthcare services company Cardinal Health (CAH) has been trending higher in the past few months, and even recently set a new 52-week high. One trader sees shares pulling back by the start of next year.
That’s based on the January 2024 $55 puts. With 260 days until expiration, 4,000 contracts traded compared to a prior open interest of 135, for a 30-fold rise in volume on the trade. The buyer of the puts paid $0.68 to make the bearish bet.
Shares recently traded just over $82. So shares would need to lose $27, or fall by about one-third, by the end of the year for the options to move in-the-money. The move would also take shares close to their 52-week low of $49.70.
The stock’s 40 percent rally in the past year has outpaced the company’s operating strength. Revenue rose just 13 percent, and Cardinal Health lost money overall on a net earnings basis. Shares look inexpensive at 13 times forward earnings, but those earnings may not materialize.
Action to take: Investors interested in the space can look elsewhere for a long-term investment, at least until a pullback. Shares pay a 2.4 percent dividend at current prices, but the company hasn’t increased the dividend lately, and it could be at risk for a cut if Cardinal continues to lose money.
For traders, the January puts offer downside protection against the company after its big move higher, and in case of an overall market selloff as well.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.