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Gilead Sciences, Inc. (GILD) Trader Sets a Short-Term Top

One short-term call writer doesn't expect to see Gilead Sciences, Inc. north of $115

by 8/25/2014 11:20 AM
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Gilead Sciences, Inc. (NASDAQ:GILD) charged higher out of the gate today, and hit another fresh record high of $107.40 within the first 10 minutes of trading. At last check, the shares were still 2.7% higher at $106.72. Not surprisingly, calls are the options of choice, with volume running at three times the usual intraday pace. Short-term contracts are in demand, too, based on GILD's 30-day at-the-money implied volatility, which has popped 10.9% to 27.3%.

Digging deeper, the stock's most active strike is the September 95 call, where it appears traders are selling to close the in-the-money contracts. Meanwhile, opening activity is occurring at the out-of-the-money October 115 call, led by one speculator who apparently sold to open 4,395 contracts at the bid price of $1.59 each. This individual is expressing confidence that GILD will not topple $115 between now and October options expiration. If he's right, the contracts will expire worthless, and he'll retain the initial premium collected -- or $698,805 (premium * number of contracts *100 shares per contract) -- as his maximum potential reward. However, if the shares rally north of the strike, the call writer will be at risk of assignment, and face potentially unlimited losses.

As alluded to earlier, Gilead Sciences, Inc. (NASDAQ:GILD) has been on a technical tear, up more than 42% year-to-date. Nevertheless, the options market is giving the October 115 call a little better than 1-in-4 chance of an in-the-money finish, as the contract's delta rests at a slim 0.27.


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