Though the H1N1 virus, formerly known as swine flu, has taken a back seat to economic news this week, pharmaceutical stocks are still benefiting from some heavy buying activity. Elan Corp. (ELN: sentiment, chart, options) has drawn some particularly heavy call volume today, as traders jump on the stock's more than 17% rally on the session. In fact, call volume has outpaced the stock's daily average by more than 14 to one, placing the shares on our Intraday Volume Explosion List.
Diving into ELN's options volume, more than 16,000 calls have traded at the stock's May 7 strike, which currently sports open interest of just 3,526 contracts. The next most active option is the May 6 call, which has seen some 5,600 contracts change hands on open interest of 5,077 contracts. In fact, nearly all of the security's option volume has traded at the May 7 call so far today, with most of the activity trading in blocks ranging from 100 to 415 contracts.
The Anatomy of an Elan Corp. Call Position
At 9:49 a.m. Eastern time, three blocks of ELN May 7 calls, totaling 1,178 contacts, traded on the International Securities Exchange for the ask price of $0.15, hinting that they were likely bought to open. The total outlay for this position would be $17,670 -- (0.15 * 100) * 1,178 = $17,670. In order for this position to reach breakeven at expiration, ELN would need to rally about 21% from Friday's close at $5.89. The maximum loss on this position is limited to initial outlay of $17,670.
Below is a chart for a visual representation of returns for a purchased ELN May 7call:
Implied Volatility
Rising implied volatility can be quite a boon to a purchased call. Specifically, the higher the implieds, the more premium a trader can expect to receive by selling (to close) the option. Currently, implieds for the ELN May 7 call arrive at 80%, versus the stock's one-month historical volatility of 47.87%. As such, these options are relatively expensive at the moment.
Technically Speaking
From a technical perspective, ELN may run into some trouble in the seven region. This area has long been a sticking point for the shares, with the shares closing only two months above the seven level since September 2008. Furthermore, the stock's 10-month moving average is descending into the region, and could provide an additional layer of overhead resistance. That said, if ELN can log a convincing close above the seven area, the shares have little in the way of technical resistance until they reach the 7.70 region, which is home to the stock's late-March peak.
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