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Options were unusually active on Walgreen Company (NYSE:WAG) yesterday, with volume of roughly 97,000 contracts more than doubling the stock's daily average of about 44,000. This influx of speculation sent 30-day at-the-money implied volatility on WAG options up 1.4% to 36.6% -- its highest closing level of the past 52 weeks.
A significant portion of the day's volume consisted of a long call spread at WAG's August 80 and August 85 strikes. In afternoon trading, a bullish speculator bought to open a block of 27,241 August 80 calls for the ask price of $0.60 each, while simultaneously selling to open an equivalent number of August 85 calls for $0.15 each (just south of the prevailing bid price at the time).
The ultimate goal of this strategy is for WAG to rally up to $85 or higher by the time front-month options expire. If the stock settles at or below $80 upon expiration, the maximum possible loss is limited to the net debit of $0.45 per spread. Meanwhile, the maximum gain of $4.55 per pair of contracts (difference between strikes, less net debit) can be collected if WAG closes at or above $85 on expiration Friday.
Wednesday's call spread buyer may have high hopes for WAG's July sales report, which is due out on Tuesday, Aug. 5. In today's session, the stock is fractionally higher at $73.08 -- so shares of Walgreen Company (NYSE:WAG) would need to rally nearly 10% before those purchased August 80 calls achieve in-the-money status. In the process, WAG would have to seamlessly surmount its current all-time high of $76.39.