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Why This Trader May Be Selling Rite Aid Corporation (RAD) Calls

A sweep of 1,500 September 9 calls traded in Rite Aid Corporation's options pits earlier

by 7/25/2014 2:08 PM
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Rite Aid Corporation (NYSE:RAD) is sinking this afternoon, off 3.6% at $7.12. Elsewhere, options volume has picked up slightly, with calls holding a decisive advantage over puts, and the stock's 30-day at-the-money implied volatility has popped 3.3% to 36.4%, indicating elevated demand for short-term options.

Although RAD calls are popular today, not all of these traders are of the traditional bullish variety -- unlike what we observed yesterday in sector peer Walgreen Company (NYSE:WAG). The biggest sweep to cross the tape centered on the deep out-of-the-money September 9 call. Specifically, just after 10:40 a.m. ET, it appears 1,500 contracts at this strike were sold to open, with one individual expressing skepticism in RAD's ability to rally north of $9 by September options expiration. This theory is upheld by data from the International Securities Exchange (ISE).

In terms of profit and loss potential, if the shares are sitting below the strike at the close on Friday, Sept. 19 -- when the back-month contracts cease trading -- the calls will expire worthless, allowing the seller to retain the initial premium collected as his reward. However, if the drugstore stock topples the strike between now and then, the call writer risks assignment, and faces theoretically unlimited losses.

On the charts, Rite Aid Corporation (NYSE:RAD) has been a long-term outperformer, adding roughly 150% year-over-year. However, the shares have been trapped in the $7.00-$7.40 area since early June. That said, it's possible this morning's trader is employing a covered call strategy to generate some additional income on a RAD stock position. Looking ahead, the company is scheduled to release July sales data next Thursday.


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