Short-Term Option Buyers Circle Rite Aid Corporation (RAD)

Rite Aid Corporation (RAD) traders are gambling on the stock's near-term trajectory

Oct 27, 2014 at 10:43 AM
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The shares of Rite Aid Corporation (NYSE:RAD) are fractionally higher at $4.80 this morning, as traders weigh reports that the company -- along with peer CVS Health Corp (NYSE:CVS) -- recently disabled Apple Inc.'s (NASDAQ:AAPL) Apple Pay system. In the options pits, speculators are scrambling to bet on RAD's short-term trajectory.

Specifically, RAD's 30-day at-the-money implied volatility (IV) has jumped 5.4% to 44.8%, underscoring the growing demand for short-term contracts. Calls have outnumbered puts by a margin of more than 2-to-1.

Digging deeper, it looks like bulls are buying to open the weekly 11/7 5-strike call, where IV rocketed 14.2 percentage points higher at the time of the biggest trade, and nearly all the contracts have crossed on the ask side. By purchasing the calls at a volume-weighted average price (VWAP) of $0.10, the speculators will reap a reward if RAD topples $5.10 (strike plus VWAP) by the close on Friday, Nov. 7, when the weekly series expires -- which also encompasses Rite Aid's monthly sales release on Thursday, Oct. 30. Risk is limited to the initial premium paid for the calls, should RAD remain south of the strike through the option's lifetime.

Bears, meanwhile, are buying to open the weekly 11/28 4.50-strike put, at a VWAP of $0.15. In order to profit on the play, the buyers need RAD to breach $4.35 -- which would mark a new annual low -- by the closing bell on Friday, Nov. 28. Again, risk is capped at the VWAP, should the equity stay north of the strike through expiration.

On the charts, Rite Aid Corporation (NYSE:RAD) has shed more than 44% since touching a decade-plus peak of $8.61 in June. Nevertheless, ISI Group this morning launched coverage with a "buy" recommendation. However, RAD is no stranger to upbeat analyst attention; half the brokerage firms following the beleaguered equity maintain "buy" or better opinions, and the consensus 12-month price target of $6.75 represents expected upside of 41% to RAD's current price. Should the security continue to struggle, a flood of downbeat analyst attention could exacerbate selling pressure on the shares.

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