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This morning Abbott Laboratories (ABT) reported its earnings for the first quarter. The equity's per-share profits of $0.84 surpassed analysts' expectations for profits of $0.80 per share. However, this good news was eclipsed by ABT trimming its 2010 forecast, citing the skyrocketing cost of healthcare reforms.
With this morning's earnings report on option players' minds, activity on ABT was rampant on Tuesday, with volume of 38,000 contracts traded -- three times the health care concern's usual option volume.
Zeroing in on Tuesday's activity, it appears one trader expected ABT to make a dramatic move in the wake of this morning's report. Late yesterday morning, a block of 3,500 May 52.50 puts, marked "spread," traded at the ask price, suggesting they were bought. At the same time, a symmetrical block of 3,500 May 52.50 calls, also marked "spread," traded at the ask price, implying they were bought. Assuming both blocks were newly added, it seems this trader initiated a long straddle.
This play is generally initiated ahead of an event -- such as an earnings report -- which could potentially cause the stock to make a monstrous move. For the long straddle to be profitable, the trader needs the stock to swing signifantly above or below the strike of the options, rendering one of the contracts in the money.
Following this morning's report, ABT fell 2%, and is now trading around $51.95.