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Call volume spiked in Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA - 41.22) yesterday, running about five times heavier than normal. By the close, roughly 28,000 calls had changed hands compared to just 1,500 put options. Very few of these calls, however, were executed on the buy side.
About 26,000 call contracts traded at the out-of-the-money October 42.50 strike, more than half of which translated as new open interest this morning. More of these calls traded at the bid price than the ask, suggesting at least some of the action was led by call sellers -- a modest decline in implied volatility also supports this theory. The average per-contract price throughout the day was $0.13.
It looks as though traders sold the overhead 42.50 call in hopes of collecting a quick profit, should TEVA stay below this strike through October options expiration. If this is part of a covered call strategy, the sellers would likely be called away north of this strike and forced to deliver their shares of stock at $42.50 per share, no matter how much the equity may rally.
The shares have made very few moves above $42.50 since mid-May, and are also staring up at their declining 80-week moving average. This strike is now easily the site of peak call open interest in the front three-months' series, so options-related resistance could come into play. Call writers are hoping this region will continue to challenge the shares through the next 2-1/2 weeks, allowing the options to expire worthless.
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