Shares of pharmaceutical giant Merck & Co (MRK) are up about 21 percent over the past year, and shares are close to 52-week highs. One trader sees the possibility for a pullback in the coming weeks.
That’s based on the September $82.50 puts. With 79 days until expiration, 3,289 contracts traded compared to a prior open interest of 122, for a 27-fold rise in volume on the trade. The buyer of the puts paid $1.04 to get into the short position.
The stock recently traded around $94.50, so the stock would need to drop about 13 percent in the coming months for the trade to move in-the-money. The strike price is still well off the stock’s 52-week low near $71.
The pharma company has performed well in the past year, with revenues up nearly 50 percent, and earnings up nearly 35 percent.
Action to take: The company is an industry leader, but is a bit overpriced for potential buyers right now. Shares can likely be bought on a drop, grabbing a dividend yield north of 3 percent, rather than the current yield under 3 percent.
For traders, the puts are well positioned for high double-digit gains or higher in the coming months. Traders should look for a quick downdraft in shares to take profits rather than try and hold the option near expiration.
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.